<PAGE>
As filed with the Securities and Exchange Commission on February 16, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
SONIC INNOVATIONS, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 2834 87-0494518
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
2795 East Cottonwood Parkway, Suite 660
Salt Lake City, UT 84121-7036
(801) 365-2800
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
Stephen L. Wilson
Chief Financial Officer
Sonic Innovations, Inc.
2795 East Cottonwood Parkway, Suite 660
Salt Lake City, UT 84121-7036
(801) 365-2800
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copies to:
<TABLE>
<S> <C>
Mark Bonham, Esq. Edwin Williamson, Esq.
Craig Norris, Esq. Sullivan & Cromwell
Steven Liu, Esq. 1701 Pennsylvania Ave., N.W.
Touraj Parang, Esq. Washington, D.C. 20006-5805
Wilson Sonsini Goodrich & Rosati (202) 956-7505
Professional Corporation
650 Page Mill Road
Palo Alto, CA 94304
(650) 493-9300
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
<CAPTION>
Proposed Maximum
Title of Each Class Aggregate Offering Amount of
of Securities to be Registered Price(1) Registration Fee
- -----------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par
value(1)....................... $46,000,000 $12,144
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. These securities may not be sold until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell nor does it seek an offer to +
+buy these securities in any jurisdiction where the offer or sale is not +
+permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion. Dated February 16, 2000.
Shares
[SONIC INNOVATIONS, INC. LOGO]
[LOGO OF NUANCE]
Common Stock
-----------
This is an initial public offering of shares of common stock of Sonic
Innovations, Inc. All of the shares of common stock are being sold by
Sonic Innovations.
Prior to this offering, there has been no public market for the common stock.
It is currently estimated that the initial public offering price per share will
be between $ and $ . Application has been made for quotation of the common
stock on The Nasdaq National Market under the symbol "SNCI."
See "Risk Factors" beginning on page 8 to read about factors you should
consider before buying shares of the common stock.
-----------
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed on the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Initial public offering price................................... $ $
Underwriting discount........................................... $ $
Proceeds, before expenses, to Sonic Innovations................. $ $
</TABLE>
To the extent that the underwriters sell more than shares of
common stock, the underwriters have the option to purchase up to an additional
shares from Sonic Innovations at the initial public offering price
less the underwriting discount.
-----------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2000.
Goldman, Sachs & Co.
Deutsche Banc Alex. Brown
U.S. Bancorp Piper Jaffray
-----------
Prospectus dated , 2000.
<PAGE>
Artwork
Outside front gate
Photo rendition of man with his hands on his knees watching a picnic taking
place in front of him at a distance.
Sonic Innovations logo and name
Headline #1: When you can't hear life the way it really is, it's hard to
be a part of it.
Headline #2: To make a better hearing aid, it took a better understanding
of human hearing.
Inside front foldout
Side of page: ABOUT OUR COMPANY... Sonic Innovations designs, manufactures
and markets advanced digital hearing aids and hearing aid components.
Capitalizing on a new understanding of human hearing and using patented digital
signal processing (DSP) technologies, we have developed hearing aids which we
believe set a new standard in consumer satisfaction because they are smaller,
more comfortable and more reliable, and deliver more natural sound than
competing hearing aids. Accordingly, our mission is to be the best hearing aid
company in the world.
Left middle of page: TECHNOLOGY never sounded so good. [photo of
integrated circuit on finger] ... smallest, single-chip DSP platform available
in a hearing aid; advanced technology enables individual personalization; core
technology developed by world-renowned experts.
Middle of page: COMMUNICATION never sounded so good. [photo of couple at
dinner]. . . more natural, lifelike listening and communication; faster sound
processing allows localization of sound; improved ability to hear clearly and
comfortably in everyday settings.
Right of page: HEALTH never sounded so good. [photo of hearing aid and
dime and brand logos] . . . NATURA offers superior sound quality in the four
traditional hearing aid models; CONFORMA introduces a new, innovative hearing
aid configuration that delivers an instant, comfortable fit in the smallest
hearing aid available.
Bottom of page: SONIC innovations Life never sounded so good
Inside back cover
Headline: When someone you love says, "I need you" NATURA lets you say "I
hear you".
[photo rendition of man with his hands on his knees with a child with a
broken truck immediately in front of him and a picnic in the background. Photo
of hearing aid. NATURA logo]
Don't let hearing loss disconnect you from the people who need you. Not
when there's NATURA, a new patented digital hearing technology. NATURA uses a
tiny microchip to give you more natural, lifelike sound. NATURA is customized
and programmed to fit your particular hearing needs. Ask your hearing care
professional about NATURA, and stay connected to your world. Call 1-800-678-
HEAR. www.sonici.com
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information that you should consider
before investing in the common stock. You should read the entire prospectus,
including the more detailed information and the financial statements appearing
elsewhere in this prospectus.
Our Business
We design, manufacture and market advanced digital hearing aids and hearing
aid components designed to provide the highest levels of satisfaction for
hearing impaired consumers. Capitalizing on a new understanding of human
hearing, we have developed patented digital signal processing, or DSP,
technologies and embedded them in the smallest single-chip DSP platform ever
installed in a hearing aid. We believe our hearing aids set a new standard for
consumer satisfaction because they are smaller, more comfortable and more
reliable and deliver more natural sound than competing hearing aids.
We introduced our first branded line, NATURA, in the United States in
September 1998 and internationally in 1999. Since the NATURA introduction, we
have achieved five consecutive quarters of increasing revenues culminating in
net sales of $11.5 million in the fourth quarter of 1999. We began test
marketing our second brand, CONFORMA, in December 1999 and aim to launch this
product in the United States in March 2000. CONFORMA, using the same
proprietary DSP technologies as NATURA, achieves the same superior sound
quality but incorporates new materials technology to deliver instant-fit
capability. CONFORMA also makes advances in miniaturization, comfort and
reliability. We continue to invest in research and development to introduce new
products and product improvements. We sell our branded products directly to
more than 1,000 hearing care professionals in the United States and through a
network of established distributors throughout much of Europe, Japan, Australia
and Canada.
Digital hearing aids represent the fastest growing segment of the hearing aid
market. As digital technology replaces analog technology, we believe the market
will be increasingly segmented into companies that have digital hearing aids
and those that do not. We are capitalizing on this emerging market trend not
only by selling our branded products, but also by selling hearing aid
components consisting of our proprietary DSP platform to established hearing
aid companies that lack a satisfactory digital product line. This strategy
provides significant additional revenue and future opportunity while
accelerating the validation of our technology in the marketplace.
Our Target Market
The market for hearing aids is very large and has substantial unmet needs.
Industry sources estimate that there are approximately 300 million people
worldwide, including nearly 30 million in the United States, who have hearing
deficits sufficiently severe to interfere with their understanding of normal,
everyday speech. However, existing hearing aids have generally failed to
satisfy users, who typically complain that hearing aids have poor sound quality
and are too visible, uncomfortable, unreliable and expensive. As a result, only
20% of the hearing impaired have purchased hearing aids, and only half of these
hearing aid owners routinely wear their hearing aids. Some surveys indicate
that as many as two-thirds of hearing aid owners are dissatisfied with the
performance of their hearing aids in noisy environments.
Despite this low level of market penetration and high degree of
dissatisfaction, in 1998 worldwide retail sales of hearing aids were
approximately $4.6 billion and wholesale sales were approximately
3
<PAGE>
$1.8 billion. The number of hearing aids sold has grown over 5% annually during
the 1990's. We anticipate that demographic trends, such as the aging of "baby
boomers," will accelerate the growth in the size of the hearing impaired
population.
Our Technology
Our technology strategy is to combine a number of distinct technologies,
supported by over 30 patents and patent applications, to produce premium
digital products with the following attributes that address the principal
reasons that consumers are dissatisfied with most hearing aids:
. Superior Sound Quality. The core of our technology is our proprietary
digital signal processing, or DSP, technologies, which are based on a
significant advancement in the understanding of human hearing. Our DSP
technologies allow our hearing aids to be individually calibrated to the
unique needs of the wearer so that specific sounds are amplified
appropriately in the right contrast to other sounds, resulting in
improved speech recognition and more natural sound.
. Cosmetic Appeal. Using state-of-the-art chip design capabilities, we
have embedded our proprietary algorithms into the smallest single-chip
DSP platform available in a hearing aid today. As a result, our NATURA
products are among the smallest hearing aids available, and our CONFORMA
product is the smallest hearing aid available today. This makes our
products less conspicuous and allows certain models to be nearly hidden
from view, virtually eliminating the stigma of wearing a hearing aid.
. Comfort. Using proprietary advancements in materials technology, our
CONFORMA product utilizes a soft disposable tip that, when placed in a
wearer's ear canal, conforms quickly and precisely to the shape of the
canal, providing increased comfort for the wearer. This stands in
contrast to traditional hearing aids that utilize hard plastic shells.
. Superior Reliability. The disposable tip of our CONFORMA product also
addresses the leading cause of hearing aid failures--a natural build up
of earwax. In addition, we believe that the single-chip structure of our
DSP platform in our NATURA and CONFORMA products is less susceptible to
failure than the multi-chip structures in competing products.
. Ease of Fitting. Our proprietary EXPRESSfit software automates the
process of programming the DSP platform in our hearing aids to the
unique needs of the wearer, an efficiency benefit for both the hearing
care professional and the wearer. Moreover, the compressible foam tip of
our CONFORMA product enables a fast, custom fit of a new hearing aid in
a single visit, in contrast to the multiple visits required for custom-
molded hearing aids.
. Attractive Price/Value Relationship. We believe that we produce
significantly improved hearing aids that are competitively priced with
other premium hearing aids and provide an attractive price/value
proposition to the consumer.
Our Products
We offer the following products, built around our proprietary DSP platform,
each of which can be programmed to meet the specific auditory needs of the
individual wearing the hearing aid:
. Our NATURA products are superior programmable hearing aids that provide
wearers more natural, lifelike communication. NATURA products are
available in the three most common custom-molded plastic shell models--
completely-in-the-canal (CIC), in-the-canal (ITC) and in-the-ear (ITE)--
as well as in a behind-the-ear (BTE) model.
4
<PAGE>
. Our CONFORMA product introduces a new, innovative hearing aid
configuration that delivers a fast, comfortable fit in the smallest
hearing aid available, eliminating the need to custom mold a hard
plastic shell to fit the wearer's ear canal. CONFORMA is the first
product with the potential to address all of the major limitations of
traditional hearing aids and significantly alter the way hearing aids
are made and sold. CONFORMA is a CIC model that physically consists of
two parts: a tiny core about the size of a pencil eraser that contains
the product's electronics and a soft disposable tip that conforms
quickly and precisely to the shape of the ear canal. We expect CONFORMA
to eliminate the need to "remake" a hearing aid, reduce product returns,
improve reliability, provide increased comfort for the wearer and save
considerable time for both the wearer and the hearing care professional.
. We sell hearing aid components consisting of our DSP platform to
established hearing aid companies. These companies incorporate our DSP
platform into hearing aids of their own design that they then sell under
their own brand names.
Our Strategy
Our mission is to be the best hearing aid company in the world by delivering
superior products that appeal not only to those consumers who currently use or
have tried hearing aids, but also to the 80% of the hearing impaired population
that historically has chosen not to purchase hearing aids. Key elements of our
strategy include the following:
. Continue to Introduce Innovative Products. As a technological leader in
the industry, we intend to continue to invest significantly in research
and development in order to introduce new products and product
improvements more rapidly than is typical in our industry. For example,
in the first half of 2000, we plan to launch both our new CONFORMA
product and the next generation of NATURA, which will incorporate a new
integrated circuit with improved noise reduction technology.
. Expand Our Distribution. We currently sell our branded products to over
1,000 of the approximately 12,000 hearing care professionals in the
United States. We are expanding our sales force in the United States to
increase the penetration of our branded products with hearing care
professionals who dispense premium digital products. We believe that the
evolution of the current distribution channel, combined with the
characteristics of our branded products, will create new distribution
opportunities. We are exploring alternative and emerging retail
channels, including selling through large hearing care chains and other
chain-based retailers. Outside the United States, we are actively
pursuing additional distribution partners to increase our geographic
reach.
. Sell Our DSP Platform. We sell our DSP platform to selected established
hearing aid companies that have approached us seeking to benefit from
our superior technology. We believe that this strategy can accelerate
market acceptance of our technology and be a significant source of
revenue.
. Increase Brand Awareness. In order to differentiate our products and
reach a greater percentage of potential consumers, we have undertaken a
brand-oriented approach to our marketing and selling efforts. We are
targeting hearing care professionals and expanding our direct-to-
consumer advertising and promotion efforts.
. Achieve Economies of Scale. We expect that, as sales volumes increase,
per unit production costs of our products will decline. In addition,
CONFORMA offers an opportunity to standardize the production process and
avoid the custom-molding processes used by other hearing aid
manufacturers and in our NATURA line. We believe that this can enable us
to achieve further economies of scale.
5
<PAGE>
The Offering
<TABLE>
<C> <S>
Shares to be offered by Sonic Innovations..... shares
Shares outstanding after the offering......... shares
Proposed Nasdaq National Market Symbol........ SNCI
Use of proceeds............................... For general corporate
purposes, including product
development and
commercialization, research
and development, repayment of
outstanding indebtedness and
working capital and, possibly,
acquisitions.
</TABLE>
Except as otherwise indicated, whenever we present the number of shares of
common stock outstanding, we have assumed an initial public offering (IPO)
price of $ per share and given effect to the following issuances at the
closing of this offering of shares of our common stock upon:
. the conversion of all outstanding convertible preferred stock into
23,812,155 shares of our common stock;
. the conversion of $4.5 million of convertible promissory notes (plus
accrued interest) into shares of our common stock at a conversion
price equal to 100% of the IPO price;
. the conversion of $4.0 million of convertible promissory notes (plus
accrued interest) into shares of our common stock at a conversion
price equal to 93% of the IPO price;
. the conversion of an additional $3.0 million of convertible promissory
notes that will be issued on March 31, 2000 into shares of our
common stock at a conversion price equal to 93% of the IPO price;
. the conversion of an additional $3.0 million of convertible promissory
notes that will be issued on the closing of this offering into
shares of our common stock at a conversion price equal to 100% of the
IPO price; and
. the cash exercise of outstanding warrants to purchase 450,000 shares of
our common stock at an exercise price of $2.00 per share.
We calculated the number of shares outstanding after this offering on the
assumption that the underwriters do not exercise their over-allotment option,
and we excluded:
. 4,903,289 shares of our common stock issuable, at a weighted average
exercise price of $1.18 per share, upon exercise of stock options
outstanding on December 31, 1999;
. 32,789 shares of our common stock issuable, at an exercise price of
$1.60 per share, upon exercise of warrants outstanding on December 31,
1999;
. 59,009 shares (39,340 shares if this offering is completed by May 31,
2000) of our common stock issuable at an exercise price of $2.00 per
share upon exercise of warrants outstanding at December 31, 1999; and
. 5,137,795 shares of our common stock issuable upon exercise of options
that were granted after December 31, 1999, or that may be granted in the
future, under our existing and proposed stock plans.
----------------
Sonic Innovations, Inc. was formed as Sonix Technologies, Inc. in Utah in May
1991. We reincorporated in Delaware and changed our name in 1997. Our principal
executive offices are located at 2795 East Cottonwood Parkway, Suite 660, Salt
Lake City, Utah 84121-7036 and our telephone number is (801) 365-2800. Our
Internet address is www.sonici.com. Information on our web site does not
constitute part of this prospectus.
Our logo, "NATURA," "CONFORMA" and "EXPRESSfit " are trademarks of Sonic
Innovations. Each trademark, trade name or service mark of any other company
appearing in this prospectus belongs to its holder.
6
<PAGE>
Summary Consolidated Financial Data
The following table summarizes historical and pro forma consolidated
financial data for our business. You should read this data along with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our consolidated financial statements and related notes. In the
pro forma share and per share data below, we have assumed the conversion of the
convertible preferred stock and convertible promissory notes and the exercise
of the warrants as described in the first paragraph after the table under
"Summary--The Offering" on page 6 as if they had occurred on January 1, 1999 or
the date of issuance, if later. In the pro forma column in the balance sheet
data below, we have assumed such conversions and exercises occurred on December
31, 1999. In the pro forma as adjusted column, we have further adjusted the pro
forma column to give effect to this offering at the assumed IPO price, after
deducting the estimated underwriting discount and the offering expenses payable
by us, and our receipt and application of the net proceeds from this offering.
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1995 1996 1997 1998 1999
------- --------- --------- --------- ---------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales................ $ -- $ -- $ -- $ 2,143 $ 28,694
Gross profit............. -- -- -- 87 11,632
Operating loss........... (1,080) (1,545) (5,326) (14,189) (13,751)
Net loss................. (1,073) (1,584) (5,235) (13,878) (14,906)
Net loss applicable to
common stockholders..... (1,106) (1,732) (5,828) (15,439) (17,337)
Basic and diluted net
loss per common share... $ (1.19) $ (1.69) $ (4.33) $ (8.22) $ (6.69)
Weighted average number
of common shares
outstanding............. 926,904 1,024,766 1,345,937 1,878,765 2,590,055
Pro forma basic and
diluted net loss per
common share............ $
Pro forma weighted
average number of common
shares outstanding......
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents..................... $ 5,939
Working capital (deficit)..................... (5,119)
Total assets.................................. 18,462
Long-term obligations......................... 2,085
Convertible promissory notes.................. 8,064
Mandatorily redeemable convertible preferred
stock........................................ 36,130
Total stockholders' deficit................... (38,801)
</TABLE>
7
<PAGE>
RISK FACTORS
You should carefully consider the risks described below, together with all of
the other information included in this prospectus, before deciding whether to
invest in our common stock. If any of the following risks actually materialize,
our business, financial condition or results of operations could be harmed. In
such case, the trading price of our common stock could decline, and you may
lose all or a part of your investment.
Risks Relating to Our Company
We have a history of losses and negative cash flows from operating activities,
and we expect increases in our operating expenses for the foreseeable future
We have incurred net losses of $37.0 million for the period from inception
through December 31, 1999, including a net loss of $14.9 million in 1999. We
incurred negative cash flows of $14.0 million from operating activities in
1999. These losses and negative cash flows resulted primarily from expenses we
incurred while developing our initial hearing aid products and establishing an
infrastructure to support our business. We have not achieved profitability. We
may incur net losses and negative cash flows in the future. The size of our
losses and whether or not we achieve profitability will depend in part on the
rate of growth in our net sales.
We intend to increase our operating expenses as we continue to, among other
things:
. improve our current products;
. research and develop new products;
. increase the size of our sales force;
. undertake quality assurance and improvement initiatives;
. improve our manufacturing capability;
. increase our brand recognition; and
. increase our general and administrative functions to support our growing
operations.
As a result, we expect that our operating expenses will continue to increase
for the foreseeable future. With increased expenses, we will need to generate
additional revenues to achieve profitability. Consequently, it is possible that
we will not achieve profitability, and even if we do achieve profitability, we
may not sustain or increase profitability on a quarterly or annual basis in the
future.
We expect our financial results to fluctuate, and our early stage of
commercialization limits our ability to predict revenues and expenses
Our quarterly and annual operating results have fluctuated in the past and
are likely to fluctuate significantly in the future. These fluctuations could
cause our stock price to fluctuate significantly or decline. Factors that might
cause fluctuations in our operating results include the following:
. demand for and market acceptance of our products;
. changes in the timing of product orders, particularly significant orders
from other hearing aid manufacturers for our hearing aid components;
. competitive pressures resulting in lower selling prices or significant
promotional costs;
. changes in our product or customer mix;
. unanticipated delays or problems in the introduction of new products;
8
<PAGE>
. manufacturing problems;
. high levels of returns, remakes and repairs;
. inaccurate forecasting of revenues; and
. the announcement or introduction of new products or services by our
competitors.
To respond to these and other factors, we may need to make business decisions
that could adversely affect our operating results. Most of our expenses, such
as employee compensation and lease payment obligations, are relatively fixed in
the short term. Moreover, our expense levels are based, in part, on our
expectations regarding future revenue levels. As a result, if net sales for a
particular period were below our expectations, we may not be able to
proportionately reduce our operating expenses for that period. Therefore, any
revenue shortfall would have a disproportionately negative effect on our
operating results for the period.
Due to these and other factors, we believe that quarter-to-quarter
comparisons of our operating results may not be meaningful. You should not rely
on our results for any one quarter as an indication of our future performance.
In future quarters, our operating results may be below the expectations of
public market analysts or investors. If this occurs, the market price of our
common stock would likely decrease.
The loss of any large customer or any cancellation or delay of a significant
purchase by a large customer could significantly reduce our net sales and harm
our operating results
In addition to selling finished hearing aids to a large number of hearing
care professionals and distributors, we also sell hearing aid components to a
limited number of hearing aid manufacturers. These arrangements have accounted
for a significant portion of our net sales to date. The loss of any of these
large customers, or a significant reduction in sales to these customers, would
significantly reduce our net sales and have a negative effect on our operating
results. For example, sales of components to Starkey Laboratories, Inc.
accounted for approximately $7.3 million, or 26%, of net sales in 1999 and
approximately $4.7 million, or 41%, of net sales in the fourth quarter of 1999.
Although Starkey is contractually committed to purchase a minimum quantity of
components through 2001, if Starkey were to breach its agreement or were to not
buy components after 2001, our net sales would decline substantially, and we
may not be able to recover the lost revenue through other means. See
"Business--Customers" and "Competition." We anticipate that our operating
results in any given period will continue to depend to a significant extent
upon revenues from a small number of large customers.
Other than Starkey, our customers are not generally contractually obligated
to purchase any fixed quantities of products, and they may stop placing orders
with us at any time regardless of any forecast they may have previously
provided. If any of our larger customers were to stop or delay purchases, our
net sales and operating results would be adversely affected, which could cause
our stock price to decline. We cannot be certain that we will retain our
current customers or that we will be able to recruit replacement or additional
customers.
We rely on several important suppliers and manufacturers, and the loss of these
suppliers or the services of these manufacturers may harm our business
Certain key components used in our products are currently available only from
a single or limited number of suppliers. For example, our proprietary DSP chips
are manufactured by a single manufacturer. Our relationship with this
manufacturer is critical to our business because our proprietary DSP chip is
integral to our products and because only a small number of foundries would be
able or willing to produce our chip in the relatively small quantities and with
the exacting
9
<PAGE>
specifications we require. Under our agreement with this manufacturer, we are
required to make minimum annual purchases, which may be higher than our
requirements. In addition, the disposable tip used in our CONFORMA hearing aid
is produced by a single supplier and the receivers and microphones used in our
products are available from only two suppliers. We also rely on contract
manufacturers and are therefore subject to their performance, over which we
have little control. We may be forced to cease producing our products if we
experience significant shortages of critical components from these key
suppliers or lose the services of our contract manufacturers. Finding a
substitute part, process, supplier or manufacturer may be expensive, time-
consuming or impossible. In addition, we may also be required to stock higher
levels of inventories to avoid sudden shortages.
We have new products and a limited selling history, which makes it difficult to
evaluate our business
We launched NATURA, our first hearing aid product, in September 1998. We have
been generating revenue from selling hearing aid components for approximately
one year, and our CONFORMA product has not yet been commercially released.
Accordingly, we have a limited selling history on which investors can base an
evaluation of our products, business and prospects. Our revenue and income
potential are unproven, and our business model will continue to evolve. For
example, we are developing a new integrated circuit that we intend to introduce
in our products beginning in the second quarter of 2000. If our current and new
products do not gain market share as rapidly as we anticipate, our operating
results will be harmed.
We have high rates of product returns, remakes and repairs
The hearing aid industry experiences high rates of product returns, remakes
and repairs due to factors such as statutorily required liberal return policies
and product performance inconsistent with consumers' expectations. This has
been particularly true for companies like ours that sell premium-priced, high-
end devices. We offer a 90-day return policy in accordance with various state
laws and a minimum of a one-year warranty on our products. To date, we have
experienced high rates of returns, remakes and repairs. We experienced product
quality issues during the first half of 1999, which added to these high rates
of returns, remakes and repairs. Although we have taken measures to reduce the
rates of returns, remakes and repairs on our products, we may not be able to
attain lower rates and these rates may increase, either of which could harm our
business.
We face aggressive competition in our business, and if we do not compete
effectively our business will suffer
We encounter aggressive competition from over 30 competitors worldwide, many
of which have far greater sales and more extensive financial and business
resources than we have. Our competitors range from some of the world's largest
companies, such as Siemens GmbH, to many highly specialized firms, such as
Starkey Laboratories, Inc. and Oticon A/S, as well as many smaller hearing aid
companies. We may not be able to compete effectively with these competitors.
Consolidation within the industry has accelerated in the last several years,
and further consolidation could produce stronger competitors. In addition,
certain larger competitors have enhanced their competitive positions relative
to ours by bundling products and services to hearing care professionals. If we
fail to compete effectively, our business will suffer. For instance, we may
have to reduce the prices of our products to stay competitive, which would harm
our operating results.
If we fail to develop new and innovative products, our competitive position may
suffer
In order to be successful, we must develop new products and be a leader in
the commercialization of new technology innovations in the hearing aid market.
Technological innovation is expensive and unpredictable and may require hiring
expert personnel who are difficult to find and
10
<PAGE>
attract. Without the timely introduction of new products, our existing products
are likely to become technologically obsolete over time, which would harm our
business. The success of new product features or product offerings will depend
on several factors, including our ability to:
. identify consumer needs;
. price our products attractively;
. innovate and develop competitive products in a timely manner;
. successfully market and sell new products;
. manufacture and deliver quality products in sufficient quantities to
meet market demand; and
. differentiate our products from our competitors' offerings.
We may not have the technical capabilities or financial resources necessary
to develop technologically innovative products. In addition, any enhancements
to or new generations of our products, even if successfully developed, may not
generate revenue in excess of the costs of development. Our products may be
rendered obsolete by changing consumer preferences or the introduction of
products embodying new technologies or features by our competitors.
Selling hearing aid components to our competitors may harm our ability to sell
branded products
Our business strategy of selling hearing aid components to our competitors
may place us in a vulnerable position. For instance, we may not be able to
compete effectively with these other hearing aid manufacturers if they design
and manufacture a more competitive hearing aid with our components than we do,
or if they market their products more effectively than we do. We may find that
these competitors are able to capture a larger portion of the finished hearing
aid market, limiting our ability to expand our share of the finished hearing
aid market. This could harm our net sales growth and operating results.
We have limited manufacturing experience and may be unable to expand our
manufacturing capabilities sufficiently
To be successful, we must manufacture our products in commercial quantities
in compliance with regulatory requirements at acceptable costs. At the present
time, we have limited manufacturing experience and capabilities. During our
initial phase of selling products in 1998 and early 1999, we were required to
outsource some of our production to keep up with demand, which adversely
impacted our costs and gross margin. During the first half of 1999, we also
experienced problems in product quality, employee training and component
production. In the third quarter of 1999, we relocated our manufacturing
facility from Salt Lake City to the Minneapolis area. We may not be able to
expand our manufacturing capabilities at acceptable costs or enter into
agreements with third parties with respect to these activities. We could incur
significant expenses, particularly if we expand our facilities and hire
additional personnel. We may seek collaborative arrangements with other
companies to manufacture current products or new products. If we rely on third
parties to manufacture our products, our profit margins and our ability to
develop and deliver these products on a timely basis may suffer. Moreover,
these third parties may not perform adequately, and any failures by these
parties may impair our ability to deliver products on a timely basis or
otherwise harm our competitive position and market success.
11
<PAGE>
Our plan to outsource the production of CONFORMA may not be successful
We are currently producing CONFORMA internally. However, we recently selected
a manufacturer experienced in producing high-quality, standardized electronic
devices in volume and anticipate that we will eventually outsource all
production of CONFORMA to this manufacturer. If this manufacturer were unable
to produce commercial quantities of CONFORMA at an acceptable cost and quality
level and we were unable to qualify a substitute manufacturer in a timely
manner, our business would suffer.
Our entry into additional distribution channels could harm our relationships
with existing customers
We are currently exploring or testing additional distribution channels, such
as selling our hearing aids through alternative or emerging retail channels.
Our current initiatives or any future expansion of these initiatives could
alienate our traditional hearing care professional customers. It is possible
that our hearing care professional channel will react by reducing or
discontinuing their purchases from us. We cannot be certain in such a scenario
that the resulting loss of revenue would be offset by our revenue from new
distribution channels or that we would choose to continue using any such new
channels. Should hearing care professionals react unfavorably to our strategy,
our business will likely suffer.
We are subject to risks and uncertainties related to our international sales
and operations
International sales accounted for $7.8 million, or 27% of our net sales, in
1999. Our European sales operations are administered from our facilities in
Denmark. We anticipate that international sales will continue to account for a
significant portion of our sales. Our reliance on international sales and
operations exposes us to related risks and uncertainties, including:
. maintenance of an appropriate quality system to retain the European
Union's "CE" mark, which we must have to sell hearing aids in the EU;
. differing regulatory requirements;
. trade restrictions and changes in tariffs;
. import and export license requirements and restrictions;
. difficulties in staffing and managing international operations;
. difficulties in collecting receivables and longer collection periods;
and
. fluctuations in currency exchange rates.
If any of these risks materialize, our international sales could decrease and
the operating results of our foreign operations could suffer.
We must attract and retain qualified personnel to be successful, and
competition for qualified personnel is intense in our industry
Competition for qualified personnel in technology industries is intense. If
we are unable to hire and retain sufficient technical, sales, marketing and
manufacturing personnel, our business will suffer. Our future success depends
in part on the continued service of our key engineering, sales, marketing,
manufacturing, finance and executive personnel. We do not have long-term
employment contracts with any of our key personnel. We also must attract
qualified research scientists and engineers in order to continue to develop
innovative products. If we fail to retain and hire a sufficient number and type
of personnel, we will not be able to maintain and expand our business. Although
we believe we offer competitive salaries and benefits, we have been and may be
required to increase spending to retain personnel.
12
<PAGE>
We may encounter difficulties in managing our growth, which could adversely
affect our operating results
We have experienced a period of rapid growth that has placed and may continue
to place a strain on our human and capital resources. The number of our
employees increased from 110 at December 31, 1998 to 211 at December 31, 1999.
Our net sales increased from $2.1 million in 1998 to $28.7 million in 1999. If
we are unable to manage this growth effectively, our losses could increase. An
example of the strain arising from growth occurred during the first half of
1999, when we experienced problems in product quality, employee training and
component production. Our ability to manage our operations and growth
effectively requires us to continue to expend funds to improve our operational,
financial and management controls, reporting systems and procedures. If we are
unable to successfully implement improvements to our management information and
control systems in an efficient or timely manner, or if we encounter
deficiencies in existing systems and controls, then management may receive
inadequate information to manage our day-to-day operations properly.
We may be sued for product liability
We may be held liable if any product we develop, or any product that uses or
incorporates any of our technologies, causes injury or is found otherwise
unsuitable. Complications that can occur from hearing aid use include allergic
reactions, skin irritation and abrasions, all of which can be caused by the
materials used in the manufacture of the hearing aids or improper use of the
hearing aid by the consumer or dispenser. In addition, hearing aids can emit
distracting or uncomfortable sounds during normal use or failure and may be a
factor in the onset of or change in tinnitus (ringing in the ears). Although we
have not experienced any significant product liability issues to date, product
liability is an inherent risk in the production and sale of hearing aid
products. We intend to continue to maintain product liability insurance, but
this insurance may become prohibitively expensive or may not fully cover our
potential liabilities. Inability to obtain sufficient insurance coverage at an
acceptable cost or otherwise to protect against potential product liability
claims could prevent or inhibit the commercialization of our products. If we
are sued for an injury caused by our products, the resulting liability could
harm our business.
Third parties may claim we are infringing their intellectual property, and we
could suffer significant expenses or be prevented from selling certain products
Third parties may claim that we are infringing their intellectual property
rights. While we do not believe that any of our products infringe the
proprietary rights of third parties, we may be unaware of intellectual property
rights of others that may cover some of our technology. Whether or not we
actually infringe a third party's rights, any litigation regarding patents or
other intellectual property could be costly and time-consuming and divert our
management and key personnel from our business operations. The complexity of
the technology involved and the uncertainty of intellectual property litigation
increase these risks. Claims of intellectual property infringement might also
require us to enter into costly royalty or license agreements. For example, in
1999, we settled a claim with one of our competitors who claimed that our
products infringed on certain of its patents. To avoid litigation, we agreed to
pay a royalty on our sales through September 2001. However, we may not always
be able to obtain royalty or license agreements on terms acceptable to us, or
at all. We also may be subject to significant damages or injunctions against
the sale of our products.
Third parties may infringe our intellectual property and we may expend
significant resources enforcing our rights or suffer competitive injury
Our success depends in large part on our proprietary technology. We rely on a
combination of patents, copyrights, trademarks, trade secrets, confidentiality
procedures and licensing arrangements
to establish and protect our proprietary technology. If we fail to successfully
enforce our intellectual property rights, our competitive position will suffer.
13
<PAGE>
We may be required to spend significant resources to monitor and police our
intellectual property rights. We may not be able to detect infringement and may
lose our competitive position in the market before we do so. In addition,
competitors may design around our proprietary technology or develop competing
technologies. Intellectual property rights may also be unavailable or limited
in some foreign countries.
Our pending patent and trademark registration applications may not be allowed
or competitors may challenge the validity or scope of these registrations. In
addition, our patents may not provide us with a significant competitive
advantage.
If we fail to comply with a variety of governmental regulations, our business
may suffer
Our products are considered to be medical devices and are, accordingly,
subject to extensive regulation in the United States and internationally, which
may hamper the timing of our product introductions or subject us to costly
penalties in the event we fail to comply.
We must comply with facility registration and product listing requirements of
the Food and Drug Administration, or FDA, and adhere to its Quality System
regulations. The FDA enforces the Quality System regulations through periodic
inspections, which we have yet to undergo. If we or any third-party
manufacturers of our products do not conform to the Quality System regulations,
we will be required to find alternative manufacturers that do conform, which
could be a long and costly process.
Generally, medical devices must either receive premarket clearance through
the 510(k) process or be an exempt product. Although we received 510(k)
clearance for our EXPRESSfit fitting and programming system and CONFORMA
hearing aid, we believe our future products and enhancements are exempt from
the 510(k) process. However, if we are required to comply with the FDA
requirements or if we fail to comply, we may be unable to market such products
or enhancements in a timely manner, if at all. Noncompliance with applicable
FDA requirements can result in fines, injunctions, civil penalties, recall or
seizure of products, total or partial suspension of production or criminal
prosecution.
Sales of our products outside the United States are subject to foreign
regulatory requirements that vary widely from country to country. The time
required to obtain approvals required by other countries may be longer than
that required for FDA clearance or approval, and requirements for such
approvals may differ from FDA requirements. In order to market our products in
the 15 member countries of the European Union, we are required to obtain the
EU's CE mark certification, which we accomplished by meeting the requirements
of ISO 9001 in December 1998. Any failure to maintain our ISO 9001
certification or CE mark could harm our business.
14
<PAGE>
Risks Related To This Offering and Our Stock
Our stock price could be extremely volatile, and you may not be able to resell
your shares at or above the price you paid for them
Before this offering, there has not been a public market for our common
stock, and an active public market for our common stock may not develop or be
sustained after this offering. Further, the market price of our common stock
may decline below the price you paid for your shares. The market price of our
common stock could be subject to significant fluctuations after the offering.
Among the factors that could affect our stock price are:
. quarterly variations in our results of operations;
. changes in recommendations by the investment community or in their
estimates of our revenues or operating results;
. speculation in the press or investment community;
. strategic moves by our competitors, such as product announcements or
acquisitions;
. general market conditions; and
. domestic and international macroeconomic factors unrelated to our
performance.
The stock market in general, and technology stocks in particular, have
experienced extreme volatility that has often been unrelated to the operating
performance of particular companies. These broad market fluctuations may
adversely affect the market price of our common stock.
In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted. If a securities class action suit is filed against us, we would
incur substantial legal fees and our management's attention and resources would
be diverted from operating our business in order to respond to the litigation.
Substantial sales of our common stock after the offering may depress the market
price of our common stock
Sales of substantial amounts of our common stock in the public market after
this offering, or the perception that such sales will occur, could adversely
affect the market price of our common stock and make it difficult for us to
raise funds through equity offerings in the future. A substantial number of
outstanding shares of common stock and shares issuable upon exercise of
outstanding options and warrants will become available for resale in the public
market at prescribed times. Of the shares to be outstanding after the
offering, shares offered by this prospectus will be eligible for immediate
sale in the public market without restriction by persons other than our
affiliates. The remaining %, or shares, of our total outstanding shares
will become available for resale in the public market as shown in the chart
below.
<TABLE>
<CAPTION>
Number of Shares Date Available for Resale
---------------- -------------------------
<S> <C>
.............................. Immediately
.............................. (180 days after this offering)
.............................. Various dates beginning in , 2000
</TABLE>
Beginning 180 days after this offering, holders of shares of the
common stock may require us to register their shares for resale under the
federal securities laws. Registration of such shares would result in these
stockholders being able to immediately resell their shares in the public
market. Any such sales or anticipation thereof could cause the market price of
our common stock to decline.
In addition, after the offering, we also intend to register the 10,041,084
shares of common stock subject to outstanding options or reserved for issuance
under our existing and proposed stock plans. For more information, see "Shares
Eligible for Future Sale."
15
<PAGE>
Investors in this offering will experience immediate and substantial dilution
Investors buying shares in this offering will incur immediate and substantial
dilution in the pro forma net tangible book value of their shares of common
stock. This dilution will be approximately $ per share, based on an
assumed initial public offering price of $ per share. If the holders of
outstanding options exercise their options, investors who buy shares in this
offering will incur further dilution. For more information, see "Dilution."
Some of our existing stockholders can exert control over us and may not make
decisions that are in the best interests of all stockholders
After this offering, our officers, directors and principal stockholders
(i.e., any stockholder who owns more than 5% of our common stock) will together
control approximately % of our outstanding common stock. As a result, these
stockholders, if they act together, will be able to exert a significant degree
of influence over our management and affairs and over matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions. In addition, this concentration of
ownership may delay or prevent a change in control of our company and might
affect the market price of our common stock, even when a change may be in the
best interests of all stockholders. In addition, the interests of those holding
this concentrated ownership may not always coincide with our interests or the
interests of other stockholders, and, accordingly, they could cause us to enter
into transactions or agreements which we would not otherwise consider.
Provisions in our charter documents and Delaware law may deter takeover efforts
that you feel would be beneficial to stockholder value
Our certificate of incorporation and bylaws and Delaware law contain
provisions which could make it harder for a third party to acquire us without
the consent of our board of directors. These provisions include a classified
board of directors and limitations on actions by our stockholders. In addition,
our board of directors has the right to issue preferred stock without
stockholder approval that could be used to dilute a potential hostile acquiror.
Delaware law also imposes some restrictions on mergers and other business
combinations between us and any holder of 15% or more of our outstanding common
stock. While we believe these provisions provide for an opportunity to receive
a higher bid by requiring potential acquirors to negotiate with our board of
directors, these provisions apply even if the offer may be considered
beneficial by some stockholders and a takeover bid otherwise favored by a
majority of our stockholders might be rejected by our board of directors.
FORWARD-LOOKING STATEMENTS
You should not rely on forward-looking statements in this prospectus. This
prospectus contains forward-looking statements within the meaning of federal
securities laws that relate to future events or our future financial
performance. In many cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "intend," "potential" or "continue" or the
negative of these terms or other comparable terminology. Examples of these
forward-looking statements include, but are not limited to, statements
regarding the following: the introduction and development of new products and
product improvements, the increasing segmentation of the hearing aid market
between companies that have digital products and those that do not, the
strategy of selling hearing aid components providing additional revenue and
opportunity and accelerating the validation of our technology, the growth in
the hearing impaired population, the implied growth of hearing aid sales
generally and digital hearing aid sales in particular, the success of our
CONFORMA product, our becoming the best hearing aid company in the world,
delivering superior products that appeal to users of hearing aids and the non-
user hearing impaired, expanding our distribution, increasing the penetration
of our branded products,
16
<PAGE>
the creation of new distribution opportunities, obtaining additional
distribution partners that increase our geographic reach, increasing brand
awareness, achieving economies of scale, our products' providing the highest
levels of satisfaction for hearing impaired consumers, deriving benefits in
terms of reduced costs and increased quality of production, estimated warranty
costs, increasing sales and improving customer service, growth in operating
expenses, increased other income, increased capital expenditures, growth in
operations, infrastructure and personnel, the lack of a material adverse effect
of Year 2000 problems on our financial condition and results of operations, the
lack of a material impact of the adoption of SFAS No. 133, operating loss
carryforwards expiring as indicated, enhancing our competitive position and
having sufficient manufacturing capacity to satisfy future demand for our
products. Factors that may cause actual results to differ materially from the
results expressed or implied by these forward-looking statements are set forth
under "Risk Factors."
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We do not intend to update any of the
forward-looking statements after the date of this prospectus or to conform
these statements to actual results.
USE OF PROCEEDS
Our net proceeds from the sale of shares of common stock in this
offering at an assumed initial public offering price of $ per share are
estimated to be approximately $ million (approximately $ million if the
underwriters' over-allotment option is exercised in full), after deducting the
estimated underwriting discount and offering expenses payable by us.
We intend to use the net proceeds of this offering for general corporate
purposes, including:
. further development and commercialization of our products;
. research and development;
. repayment of all existing debt and capital lease obligations; and
. working capital.
The amounts and timing of our actual expenditures for each of these purposes
may vary significantly depending upon numerous factors, including the status of
our product development efforts, competition, marketing and sales activities
and market acceptance of our products. Pending use for these or other purposes,
we intend to invest the net proceeds of this offering in short-term,
investment-grade securities.
From time to time, in the ordinary course of business, we evaluate possible
acquisitions of, or investments in, businesses, products and technologies that
are complementary to our business. A portion of the net proceeds may be used to
fund acquisitions or investments. We currently have no arrangements, agreements
or understandings for any such acquisitions or investments.
DIVIDEND POLICY
We have never declared or paid cash dividends on our common stock. We
currently intend to retain all available funds and future earnings, if any, for
use in the operation and expansion of our business and do not anticipate paying
dividends in the foreseeable future.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization at December 31, 1999:
. On an actual basis;
. On a "pro forma" basis to reflect the conversion of all outstanding
convertible preferred stock and convertible promissory notes and the
exercise of warrants as described in the first paragraph after the table
under "Summary--The Offering" on page 6; and
. On a "pro forma as adjusted" basis to reflect the sale of shares
of common stock in this offering at an assumed initial public offering
price of $ per share, after deducting the estimated underwriting
discount and offering expenses payable by us, and the application of a
portion of the net proceeds to repay our debt and capital lease
obligations.
<TABLE>
<CAPTION>
As of December 31, 1999
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands, except share
and per share data)
<S> <C> <C> <C>
Convertible promissory notes, including
accrued interest(1).......................... $ 8,064 $ $
-------- ---- ----
Line of credit and capital lease obligations
(including current portion).................. 4,765
-------- ---- ----
Mandatorily redeemable convertible preferred
stock, Series B, C, and D $.001 par value;
23,139,323 shares designated; 22,958,534
shares outstanding; none pro forma and pro
forma as adjusted............................ 36,130
-------- ---- ----
Stockholders' equity (deficit):
Preferred stock, Series A convertible $.001
par value; 853,621 shares designated and
outstanding--none pro forma and pro forma
as adjusted................................ 342
Common stock, $.001 par value; 35,000,000
shares authorized; 2,753,716 shares issued
and outstanding pro forma and
pro forma as adjusted...................... 3
Additional paid-in capital.................. 6,256
Deferred stock-based compensation........... (3,613)
Accumulated deficit......................... (41,778)
Accumulated other comprehensive loss........ (11)
-------- ---- ----
Total stockholders' equity (deficit)...... (38,801)
-------- ---- ----
Total capitalization...................... $ 10,158 $ $
======== ==== ====
</TABLE>
- --------
(1) The face value of the convertible promissory notes is $8.5 million. The
difference between the face value and the amount shown above reflects the
allocation of a portion of the proceeds from the sale of $4.5 million of
such notes to the warrants that were issued in connection with such sale.
See Note 5 of Notes to the Consolidated Financial Statements.
The above table excludes the shares of common stock issuable upon exercise of
outstanding options and warrants described in the second paragraph after the
table under "Summary--The Offering" on page 6.
Subsequent to December 31, 1999 (through February , 2000), the Board of
Directors granted options to purchase an additional shares of common
stock at a weighted average exercise price of $ per share. See
"Management--Incentive Stock Plans" for a detailed description of our incentive
stock plans and "Description of Capital Stock" for a detailed description of
our capital stock.
18
<PAGE>
DILUTION
Our pro forma net tangible book value (deficit) as of December 31, 1999 was
$ million, or $ per share of common stock. Pro forma net tangible
book value (deficit) per share represents the amount of total tangible assets
less total liabilities, divided by the number of outstanding shares of common
stock after giving effect to the conversion of all outstanding convertible
preferred stock and convertible promissory notes and the exercise of warrants
as described in the first paragraph after the table under "Summary--The
Offering" on page 6.
After giving effect to the sale of shares of common stock offered
by this prospectus at an assumed initial public offering price of $ per
share, less the estimated underwriting discount and offering expenses payable
by us, our pro forma net tangible book value at December 31, 1999 would have
been $ million, or $ per share. This represents an immediate
increase in the pro forma net tangible book value to existing stockholders of
$ per share and an immediate dilution to new investors of $ per share.
The following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................. $
Pro forma net tangible book value per share as of December 31,
1999.......................................................... $
Increase per share attributable to new investors............... $
----
Pro forma net tangible book value per share after the offering... $
----
Dilution per share to new investors.............................. $
====
</TABLE>
The following table summarizes, on a pro forma basis as of December 31, 1999,
the difference between the number of shares of common stock purchased from us,
the total consideration paid to us and the average price per share paid (i) by
our existing stockholders; and (ii) by the new public investors purchasing
stock in this offering:
<TABLE>
<CAPTION>
Shares Total
Purchased Consideration Average
-------------- -------------- Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1)............ $ $
New investors .......................
----- ----- --- -----
Total.............................. 100.0% $ 100.0%
===== ===== === =====
</TABLE>
- --------
(1) Including Hoya Healthcare Corporation. See "Certain Transactions--Hoya
Healthcare Corporation."
The above table excludes the outstanding options and warrants described in
the second paragraph after the table under "Summary--The Offering" on page 6.
To the extent that any of these options or warrants are exercised, there will
be further dilution to new investors.
19
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data for the five years ended
December 31, 1999 are derived from our financial statements, which were audited
by Arthur Andersen LLP, independent public accountants.
The selected consolidated financial data set forth below should be read in
conjunction with our consolidated financial statements and related notes and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus. In particular, see Note 2 to
consolidated financial statements for an explanation of the calculation of net
loss per share and per share amounts.
<TABLE>
<CAPTION>
For the Years Ended December 31,
---------------------------------------------------
1995 1996 1997 1998 1999
------- --------- --------- --------- ---------
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations:
Net sales................ $ -- $ -- $ -- $ 2,143 $ 28,694
Cost of sales (1)........ -- -- -- 2,056 17,062
------- --------- --------- --------- ---------
Gross profit........... -- -- -- 87 11,632
------- --------- --------- --------- ---------
Operating expenses:
Selling, general and
administrative (1).... 944 1,090 1,471 8,444 17,343
Research and
development (1)....... 136 455 3,855 5,832 7,015
Stock-based
compensation.......... -- -- -- -- 1,025
------- --------- --------- --------- ---------
Total operating
expenses............ 1,080 1,545 5,326 14,276 25,383
------- --------- --------- --------- ---------
Operating loss........... (1,080) (1,545) (5,326) (14,189) (13,751)
Other income (expense)... 7 (39) 91 311 (1,155)
------- --------- --------- --------- ---------
Net loss................. (1,073) (1,584) (5,235) (13,878) (14,906)
Accretion on mandatorily
redeemable convertible
preferred stock......... (33) (148) (593) (1,561) (2,431)
------- --------- --------- --------- ---------
Net loss applicable to
common stockholders..... $(1,106) $ (1,732) $ (5,828) $ (15,439) $ (17,337)
======= ========= ========= ========= =========
Basic and diluted net
loss per common share... $ (1.19) $ (1.69) $ (4.33) $ (8.22) $ (6.69)
======= ========= ========= ========= =========
Weighted average number
of common shares
outstanding............. 926,904 1,024,766 1,345,937 1,878,765 2,590,055
======= ========= ========= ========= =========
</TABLE>
- --------
(1) Excludes the following amounts of noncash stock-based compensation
separately reflected: cost of sales--$47; selling, general and
administrative--$840; and research and development--$138.
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents...... $ 1,146 $ 1,264 $ 1,718 $ 11,930 $ 5,939
Working capital (deficit)...... 1,085 1,996 10,521 8,706 (5,119)
Total assets................... 1,250 2,619 13,091 16,872 18,462
Long-term obligations.......... 485 438 625 1,690 2,085
Convertible promissory notes... -- -- -- -- 8,064
Mandatorily redeemable
convertible preferred stock... 1,783 4,636 19,555 33,662 36,130
Total stockholders' deficit.... (1,100) (2,801) (8,549) (23,853) (38,801)
</TABLE>
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion in this prospectus contains forward-looking statements that
involve risks and uncertainties. These statements refer to our future plans,
objectives, expectations and intentions. These statements may be identified by
the use of words such as "believes," "expects," "anticipates," "intends,"
"plans" and similar expressions. Our actual results could differ materially and
adversely from those anticipated in such forward-looking statements. Factors
that could contribute to these differences include, but are not limited to, the
risks discussed in the section titled "Risk Factors" in this prospectus.
Overview
We design, manufacture and market advanced digital hearing aids and hearing
aid components designed to provide the highest levels of satisfaction for
hearing impaired consumers. We were primarily engaged in hearing aid research
and development from our inception in 1991 to September 1998, at which time we
shipped our first branded product, NATURA. In 1999, we also began selling
hearing aid components consisting of our proprietary DSP platform to
established hearing aid companies and partially completed hearing aids, or
faceplates, to certain distributors who market finished hearing aids under our
brand name.
Comparison of the Years Ended December 31, 1999 and December 31, 1998
Net Sales. Net sales consist of product sales less provisions for sales
returns, which are made at the time of sale. Sales are recognized when products
are shipped. Net sales were $28.7 million for the year ended December 31, 1999,
an increase of $26.6 million from net sales of $2.1 million for the year ended
December 31, 1998. Because we began selling our products in September 1998, the
1998 amount reflects only one full quarter of sales, all of which consisted of
branded products in the United States. The 1999 amount reflects a full year of
sales and includes $4.2 million of European sales and $11.0 million of hearing
aid component sales. The balance of the net sales increase of $11.4 million
related to growth in our United States customer base. During 1999, we
introduced our BTE hearing aid model, which accounted for the majority of our
European sales and allowed us to expand our market penetration in the United
States. See "Business--Customers."
We have a 90-day return period for our branded products and do not allow
returns of our hearing aid components. The provisions for sales returns
aggregated $0.7 million and $10.1 million in 1998 and 1999, respectively. This
increase principally related to the increase in net sales from 1998 to 1999. As
of December 31, 1998 and 1999, allowances for sales returns of $0.3 million and
$2.0 million, respectively, were reflected as a reduction in accounts
receivable. We believe that the hearing aid industry in the United States
experiences a high rate of product returns due to factors such as statutorily
required liberal return policies and product performance inconsistent with
consumers' expectations. We believe our return rates are within the range
experienced by other high-end hearing aid manufacturers. Due to the need to
provide a return policy competitive with industry practice for our higher-end,
higher-priced products, we expect sales returns to continue at a relatively
high rate.
Cost of Sales. Cost of sales consists of manufacturing costs, royalty
expenses, quality assurance costs and costs associated with product returns,
remakes and repairs. Cost of sales was $17.1 million for the year ended
December 31, 1999, an increase of $15.0 million from cost of sales of $2.1
million for the year ended December 31, 1998. The increase is primarily due to
the increase in net sales. As a percentage of net sales, gross profit increased
to 41% for the year ended December 31, 1999 from 4% the previous year as the
fixed costs of our manufacturing operations were spread over a much greater
sales level. During 1998 and 1999, cost of sales was adversely affected by low
production volumes for our hearing aids. In addition, during the initial phase
of selling
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products in 1998 and early 1999, we were required to outsource some of our
production to keep up with demand, which adversely impacted our costs and gross
margin. We discontinued this outsourcing in 1999 as we developed the capability
and the capacity to manufacture our requirements internally. During the first
half of 1999, we experienced product quality problems, but we believe we have
improved our manufacturing processes as we have increased our production
capacity.
In the fall of 1999, we relocated our hearing aid production operation from
Salt Lake City to the Minneapolis area, where the presence of many major
hearing aid and medical device companies has created a skilled labor pool.
While the duplication of manufacturing operations and costs of relocation
adversely affected our 1999 cost of sales, we expect to derive future benefits
in terms of reduced costs and increased quality of production.
At the time of sale, we provide for the cost of remaking and repairing
products under warranty. The warranty period is generally one or two years for
branded products and 30 to 120 days for hearing aid components. Because of the
length of the warranty period, adjustments to the originally recorded
provisions may be necessary from time to time. In 1998 and 1999, the provisions
for warranty costs were $0.2 million and $1.3 million, respectively. As of
December 31, 1998 and 1999, the warranty reserve was $0.1 million and $0.4
million, respectively.
Selling, General and Administrative. Selling, general and administrative
expense primarily consists of wages and benefits for sales and marketing
personnel, sales commissions and advertising, marketing support and
administrative expenses. Selling, general and administrative expense was $17.3
million for the year ended December 31, 1999, an increase of $8.9 million, or
105%, from the $8.4 million recorded for the year ended December 31, 1998. This
increase was largely due to starting up and expanding our European operations,
increased marketing expenditures related to the introduction of new products
and the hiring of additional direct sales and sales support personnel to
increase sales and improve customer service.
We expect selling, general and administrative expense to increase as we
expand our staff, incur additional costs related to the anticipated growth of
our business and increase direct-to-consumer advertising and promotions. We
intend to continue to pursue an aggressive branding and advertising campaign
and therefore, we expect marketing related expenses to increase. Marketing
expenses may also vary considerably from quarter to quarter as a result of the
timing of our advertising campaigns. To the extent that our sales volume
increases in future periods, we expect certain sales and marketing expenses to
increase as we expand our customer service distribution and fulfillment
activities. This includes the costs of staffing and further developing our
direct sales force and customer care capabilities.
Research and Development. Research and development expense consists primarily
of wages and benefits for personnel and consulting, software, intellectual
property, clinical study and engineering support costs. Research and
development expense was $7.0 million for the year ended December 31, 1999, an
increase of $1.2 million, or 20%, from the $5.8 million recorded for the year
ended December 31, 1998. Increased research and development expense in 1999
related to development of CONFORMA, which we began test marketing at the end of
1999, and our NATURA BTE hearing aid model, which we introduced in the second
quarter of 1999, as well as costs incurred in connection with our ISO 9001
approval and CE mark certification that allowed us to begin sales of hearing
aids in Europe. We are making continual efforts to improve our existing
products as well as to develop new products because we believe that investment
in new product development is critical to attaining our strategic objectives.
As a result, we expect research and development expense to continue to
increase.
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Stock-Based Compensation. We have recorded deferred stock-based compensation
expense of $4.6 million, representing the difference between the exercise price
and the deemed fair value of the common stock on the grant date for stock
options granted to employees in 1999. This amount is being amortized over the
vesting periods of the individual stock options. In 1999, $1.0 million of this
amount was amortized, and the remaining amount will be amortized as follows:
$2.1 million, $0.9 million, $0.4 million and $0.2 million in the years ended
December 31, 2000, 2001, 2002 and 2003, respectively.
Other Income (Expense). Other income consists primarily of earnings on our
cash and cash equivalents. Other expense consists principally of interest
associated with convertible promissory notes, short-term borrowings and capital
lease obligations. We incurred other expense of $1.2 million for the year ended
December 31, 1999 compared to other income of $0.3 million for the year ended
December 31, 1998. This shift resulted from decreased cash and cash equivalents
and increased debt necessary to support our operations, capital expenditures
and increased working capital requirements in 1998 and 1999. We expect other
income to increase in the future based on investment of the net proceeds from
this offering.
Income Tax Provision. There has been no provision or benefit for income taxes
for any period since inception due to our operating losses. See "Tax Matters."
Comparison of the Years Ended December 31, 1998 and December 31, 1997
Net Sales. Net sales were $2.1 million for the year ended December 31, 1998
compared to no sales for the year ended December 31, 1997. In September 1998,
we introduced our first branded product line, NATURA, to the United States
market. All sales in 1998 related to the NATURA line.
Cost of Sales. Cost of sales was $2.1 million for the year ended December 31,
1998 compared to no cost of sales for the year ended December 31, 1997. The
gross margin of 4% in 1998 was due to the high costs of establishing and
maintaining manufacturing operations with a low volume of production.
Selling, General and Administrative. Selling, general and administrative
expense was $8.4 million for the year ended December 31, 1998, an increase of
$6.9 million from the $1.5 million recorded for the year ended December 31,
1997. This increase was primarily due to marketing-related spending supporting
the introduction of the NATURA product line and the hiring of sales and sales
support personnel to increase sales and commence customer service activities.
Research and Development. Research and development expense was $5.8 million
for the year ended December 31, 1998, an increase of $1.9 million, or 51%, from
the $3.9 million recorded for the year ended December 31, 1997. Much of the
increased spending was due to improvements to our DSP platform. During the
beginning of 1998, changes were made to our DSP platform to move it from a
prototype stage to a manufacturable integrated circuit. We also made
improvements to EXPRESSfit, our system for programming our hearing aids, to
make the process more compatible with hearing care professionals' expectations.
Other Income (Expense). Other income of $0.3 million for the year ended
December 31, 1998 increased by $0.2 million from the $0.1 million of other
income recorded for the year ended December 31, 1997. We received additional
capital funding during 1998 and as a result had increased income from investing
these proceeds.
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Quarterly Results
The fourth quarter of 1998 was the first full quarter in which we generated
revenue. The following tables set forth unaudited quarterly consolidated
statements of operations for the five quarters ended December 31, 1999 in
absolute dollars and as a percentage of net sales. This unaudited quarterly
consolidated information, in the opinion of management, includes all
adjustments necessary for a fair presentation of such information in accordance
with generally accepted accounting principles.
<TABLE>
<CAPTION>
For the Quarters Ended
------------------------------------------------
Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1999 1999 1999 1999
-------- --------- -------- --------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Net sales.................... $ 2,081 $ 3,221 $ 5,642 $ 8,370 $11,461
Cost of sales................ 2,016 3,092 3,532 4,536 5,902
------- ------- ------- ------- -------
Gross profit................. 65 129 2,110 3,834 5,559
Selling, general and
administrative expense...... 4,339 3,871 5,238 4,107 4,127
Research and development
expense..................... 1,575 1,465 1,759 1,943 1,848
Stock-based compensation..... -- 12 81 147 785
------- ------- ------- ------- -------
Operating loss............... (5,849) (5,219) (4,968) (2,363) (1,201)
Other income (expense)....... 24 2 (252) (294) (611)
------- ------- ------- ------- -------
Net loss..................... $(5,825) $(5,217) $(5,220) $(2,657) $(1,812)
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Dec. 31, March 31, June 30, Sept. 30, Dec. 31,
1998 1999 1999 1999 1999
-------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
Net sales................... 100.0 % 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales............... 96.9 96.0 62.6 54.2 51.5
------ ------ ----- ----- -----
Gross profit................ 3.1 4.0 37.4 45.8 48.5
Selling, general and
administrative expense..... 208.5 120.2 92.8 49.0 36.0
Research and development
expense.................... 75.7 45.5 31.2 23.2 16.1
Stock-based compensation.... -- 0.4 1.4 1.8 6.9
------ ------ ----- ----- -----
Operating loss.............. (281.1) (162.1) (88.0) (28.2) (10.5)
Other income (expense)...... 1.2 0.1 (4.5) (3.5) (5.3)
------ ------ ----- ----- -----
Net loss.................... (279.9)% (162.0)% (92.5)% (31.7)% (15.8)%
====== ====== ===== ===== =====
</TABLE>
The trends implied by the above table are not necessarily indicative of
future operating results, growth rates, margins or quarter-to-quarter
comparisons.
Liquidity and Capital Resources
Historically, our principal sources of funds were the sale of common and
preferred stock, the sale of subordinated convertible debt, capital lease
financing arrangements and bank borrowings, totaling approximately $46.4
million.
Net cash used in operating activities totaled $4.6 million, $12.5 million and
$14.0 million in 1997, 1998 and 1999, respectively. For these periods, net cash
used by operating activities was primarily to fund ongoing operations. Net cash
used for operating activities consisted primarily of net operating losses and
increases in accounts receivable and inventories, which were partially offset
by increases in accounts payable and accrued expenses.
To date, our investing activities have consisted mainly of purchases of
property and equipment. Capital expenditures, including those made under
capital leases, totaled $1.0 million, $2.3 million and $2.6 million for 1997,
1998 and 1999, respectively. We financed the acquisition of the majority of our
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<PAGE>
1998 and 1999 property and equipment through capital leases. We expect to
experience an increase in our capital expenditures consistent with our
anticipated growth in operations, infrastructure and personnel.
Net cash from financing activities was $14.2 million, $12.8 million and
$9.0 million in 1997, 1998 and 1999, respectively. In July 1999, we sold $4.5
million of our 6% convertible promissory notes to our existing investors. The
principal and accrued interest on these notes will convert into shares of our
common stock at the closing of this offering at the IPO price. In addition, in
December 1999, we sold $4.0 million of our 6% convertible promissory notes to
Hoya Healthcare Corporation in connection with our appointment of Hoya as our
exclusive distributor of branded products in Japan. Hoya has agreed to purchase
an additional $3.0 million of our 6% convertible promissory notes on March 31,
2000 and another $3.0 million when we close this offering. All of Hoya's notes
will convert into common stock at the closing of this offering--$7.0 million at
93% of the IPO price and $3.0 million at 100% of the IPO price. See "Certain
Transactions--Hoya Healthcare Corporation."
At December 31, 1999, we had $5.9 million in cash and cash equivalents, $4.8
million of non-convertible debt and capital lease obligations, $8.1 million of
convertible notes ($8.5 million in face value), mandatorily redeemable
convertible preferred stock with a redemption value of $36.1 million and an
accumulated deficit of $41.8 million. We have a $4.0 million bank credit
facility, of which $2.0 million was outstanding at December 31, 1999. This
borrowing was repaid in January 2000. The line of credit bears interest at a
rate of prime plus 2.0% and expires on June 30, 2000. Our credit facility
requires us to maintain a specified level of tangible net worth and includes
restrictions on our incurring additional unsubordinated indebtedness, pledging
or encumbering our assets, paying dividends, and entering into mergers and
acquisitions.
All of the convertible debt and preferred stock will convert into common
stock upon the closing of this offering. We intend to repay all of our
remaining debt with a portion of the net proceeds from this offering. See "Use
of Proceeds" and "Capitalization."
We expect to experience growth in our operating expenses for the foreseeable
future in order to execute our business plan, particularly in the areas of
research and development and sales and marketing. As a result, we estimate that
these operating expenses, as well as other expenditures we expect to incur to
improve our manufacturing capability and increase our manufacturing capacity,
will constitute a significant use of our cash resources. In addition, we may
use cash resources to fund acquisitions of complementary businesses and
technologies; however, we currently have no commitments or agreements and are
not involved in any negotiations regarding such transactions. We believe that
the net proceeds we will receive from Hoya and from this offering, together
with our available cash and bank line of credit, will be sufficient to meet our
operating and working capital requirements and capital expenditures for at
least the next twelve months. Thereafter, we may find it necessary to obtain
additional equity or debt financing. In the event that additional financing is
required, we may not be able to raise it on terms acceptable to us, if at all.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
To date, we have not utilized derivative financial instruments or derivative
commodity instruments. We invest our cash in money market funds, which are
subject to minimal credit and market risk. All of our outstanding debt will be
repaid or converted in connection with this offering. We believe the market
risks associated with these financial instruments are immaterial.
Foreign Currency Risk
We face foreign currency risks primarily as a result of the revenues we
receive from sales made outside the United States. Fluctuations in the exchange
rates between the U.S. dollar and other currencies could increase the sales
price of our products in international markets where the prices of
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<PAGE>
our products are denominated in U.S. dollars or lead to currency exchange
losses where the prices of our products are denominated in local currencies.
Year 2000
The Year 2000 issue is the result of computer programs being unable to
correctly recognize dates beyond December 31, 1999. This could result in a
system failure or miscalculations causing disruptions of operations, including,
among other things, a temporary inability to process transactions, send
invoices, or engage in other normal business activities. We have reviewed our
product line and determined that all of the products we have sold and will
continue to sell, including our fitting software, are Year 2000 compliant. We
have installed most of our business systems and personal computers in the last
18 months and we have determined that all of our critical business systems are
Year 2000 compliant. These business systems encompass all major categories of
systems we use, including manufacturing, sales, finance and human resources. We
are also actively working with our suppliers of products and services to
determine that these suppliers' operations and the products and services they
provide are Year 2000 compliant. While we cannot guarantee that any system of
any other company is Year 2000 compliant, we have not experienced any
significant problems to date relating to the Year 2000 issue.
Based on currently available information, we do not believe that the Year
2000 issue has had or will have a material adverse effect on our financial
condition or overall results of operations; however, we cannot be certain to
what extent we may be affected by such matters in the future. In addition, we
cannot guarantee that the failure to ensure Year 2000 compliance by a supplier
or another third party would not have a material adverse effect on us.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." We are required to adopt SFAS No. 133 for
the year ending December 31, 2000. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Because we currently
hold no derivative financial instruments and do not currently engage in hedging
activities, adoption of SFAS No. 133 is expected to have no material impact on
our financial condition or results of operations.
Tax Matters
As of December 31, 1999, we had federal net operating loss carryforwards of
approximately $24.5 million and foreign net operating loss carryforwards of
approximately $1.6 million. Our net operating loss carryforwards will expire at
various dates beginning in 2003 through 2019, if not utilized. Utilization of
the net operating loss carryforwards is subject to a substantial annual
limitation due to the "change of ownership" rules provided by the Internal
Revenue Code and similar state tax provisions. We have not yet evaluated the
potential impact of these provisions on our ability to utilize the net
operating loss carryforwards. To the extent that any single-year loss is not
utilized to the full amount of the limitation, such unused loss is carried over
to subsequent years until the earlier of its utilization or the expiration of
the relevant carryforward period.
Deferred tax assets and liabilities are based on differences between
financial reporting and tax reporting bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. We have provided a full valuation
allowance against our net deferred tax assets due to uncertainties surrounding
their realization, primarily due to our lack of an earnings history. See Note 7
of Notes to Consolidated Financial Statements.
26
<PAGE>
BUSINESS
Overview
We design, manufacture and market advanced digital hearing aids and hearing
aid components designed to provide the highest levels of satisfaction for
hearing impaired consumers. Capitalizing on a new understanding of human
hearing, we have developed patented digital signal processing, or DSP,
technologies and embedded them in the smallest single-chip DSP platform ever
installed in a hearing aid. We believe our hearing aids set a new standard for
consumer satisfaction because they are smaller, more comfortable and more
reliable and deliver more natural sound than competing hearing aids.
We introduced our first branded line, NATURA, in the United States in
September 1998 and internationally in 1999. Since the NATURA introduction, we
have achieved five consecutive quarters of increasing revenues culminating in
net sales of $11.5 million in the fourth quarter of 1999. We began test
marketing our second brand, CONFORMA, in December 1999 and aim to launch this
product in the United States in March 2000. CONFORMA, using the same
proprietary DSP technologies as NATURA, achieves the same superior sound
quality but incorporates new materials technology to deliver instant-fit
capability. CONFORMA also makes advances in miniaturization, comfort and
reliability. We continue to invest in research and development to introduce new
products and product improvements. We sell our branded products directly to
more than 1,000 hearing care professionals in the United States and through a
network of established distributors throughout much of Europe, Japan, Australia
and Canada.
Digital hearing aids represent the fastest growing segment of the hearing aid
market. As digital technology replaces analog technology, we believe the market
will be increasingly segmented into companies that have digital hearing aids
and those that do not. We are capitalizing on this emerging market trend not
only by selling our branded products, but also by selling hearing aid
components consisting of our proprietary DSP platform to established hearing
aid companies that lack a satisfactory digital product line. This strategy
provides significant additional revenue and future opportunity while
accelerating the validation of our technology in the marketplace.
Background
The Ear and Hearing
The following is a diagram of the ear and its various components:
[Diagram of ear with the following components identified: outer ear, malleus
(hammer), incus (anvil), organ of balance, stopes (stirrup), nerves to the
central auditory system and brain, inner ear (cochlea), eustachian tube, middle
ear, tympanum (eardrum), pinna and ear canal.]
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<PAGE>
The ear is a sensory organ that can be divided into four sections: the outer
ear, the middle ear, the inner ear and the central auditory system. Sound
processing begins as external sounds enter the outer ear, travel down the ear
canal and strike the eardrum. The sound vibrations are transferred from the
eardrum via the ossicular bone chain in the middle ear to the inner ear. In the
inner ear, the sound waves create fluid vibrations in the cochlea, a fluid-
filled, snail-shaped organ that codes sound vibrations into nerve impulses
using thousands of tiny hair cells. These nerve impulses relay sound
information to the brain via a network of neural transmitters known as the
central auditory system. Various portions of the central auditory system then
process and analyze these impulses, providing the sensory perception of
hearing.
The range of human hearing is measured in both frequency, referred to as
pitch, and intensity, referred to as loudness. Pitch is classically measured in
cycles per second, or Hertz (Hz), while loudness is gauged in decibels (dB).
Sound itself is actually a form of energy that is characterized in Hz and dB.
Speech is one of the most important sounds we hear and process. It provides
information, warning signals, emotion, localization and a sense of three-
dimensional space. Speech sounds contain energy in the frequencies from about
125 to 8,000 Hz and conversational speech levels span from 30 to 70 dB. Vowels
tend to be the louder components and lie in the lower portion of the frequency
range while consonants are softer and lie in the higher frequency range.
Hearing Impairment
The major causes of hearing loss are aging, noise exposure, disease and
injury. Hearing loss is usually gradual and painless, in many cases developing
so slowly that it is barely noticeable. People often do not realize that they
have lost some of their hearing, even though family, business associates and
friends may be quite aware of it. The effects of any hearing loss can be
severe, often dramatically changing the affected person's lifestyle. In adults,
hearing loss creates coping mechanisms, which may include isolation from family
and friends and a reluctance to participate in public events. In children,
hearing loss may negatively affect the ability to learn, the development of
communication skills, and the ability to interact with others.
Approximately 90% of all permanent hearing impairments are characterized as
sensorineural losses, and the remaining 10% are characterized as conductive
losses. Conductive losses, which are caused by structural imperfections in the
ear, can generally be corrected by surgery. Sensorineural losses, which stem
from deterioration of or damage to the cochlea, typically cannot be improved by
medical or surgical means. Hearing aids offer the most effective means of
improving sensorineural losses.
In the case of sensorineural hearing loss, the various sounds are not
affected equally. Typically, higher frequencies are more difficult to perceive
than lower frequencies. Accordingly, the first sounds to "disappear" are those
that have the highest pitches, such as women's and children's voices and birds'
singing. Furthermore, speech becomes much more difficult to comprehend since it
is the softer, high-pitched consonants that provide essential information to
facilitate discrimination among words. Consider the following word list: cat,
hat, fat, sat. Without the ability to clearly understand the first letter of
each of these words, a person is rendered helpless to make out meaning and
context and to truly comprehend what is being said. This inability to
discriminate among words can make it significantly more difficult to understand
what is said in public gatherings, on television or over the telephone and
impedes conversation within a group of people. As a result, people with hearing
losses often complain that they can hear others talking but do not understand
what is being said.
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An example of the impact of high-frequency hearing loss is illustrated by
the following chart:
[Graph of high-frequency hearing loss. Vertical axis measures loudness in
decibels from 0 to 120. Horizontal axis measures frequency in Hertz from 0 to
16,000. The upper comfort is identified across all frequencies at 120
decibels. A line of relatively constant slope, beginning at approximately
125Hz, 20dB and extending through approximately 16,000Hz, 83dB, identifies the
threshold of impaired hearing. A dotted line, beginning at approximately
125Hz, 20dB dipping to approximately 4,000Hz, 10dB and rising to approximately
16,000Hz, 18dB, marks the threshold of normal hearing. An elipse shows that
lawnmower occupies frequencies between approximately 125 and 750Hz and is
between approximately 97 and 105dB. Another elipse shows that vowels in speech
occupy frequencies between approximately 150 and 800Hz and is between
approximately 57 and 65dB. A final elipse shows that consonants in speech
occupy frequencies between approximately 2,500 and 10,000Hz and is between
approximately 38 and 46dB.]
Individual hearing loss does not occur uniformly across the frequency range.
Rather, hearing loss occurs at specific frequencies over the audible range. As
a result, the best solutions are those that provide amplification where it is
needed and not broadly across the frequency range. To improve hearing among
hearing impaired individuals, it is critical that the soft sounds of speech
are raised to the level of audibility while environmental sounds are
concurrently maintained at a comfortable level.
The Hearing Aid Market
The market for hearing aids is very large and has substantial unmet needs.
Industry researchers estimate that there are approximately 300 million people
worldwide, including nearly 30 million in the United States, who have hearing
deficits sufficiently severe to interfere with their understanding of normal,
everyday speech. However, fewer than 20% of these persons have purchased a
hearing aid, and only half of these hearing aid owners routinely wear their
hearing aids. Some surveys indicate that more than two-thirds of hearing aid
owners are dissatisfied with the performance of their hearing aids in noisy
environments.
The use of hearing aids is particularly low among the mild and moderate
segments of the hearing impaired population, which are generally populated
with younger individuals. These segments of the population are estimated to
comprise over 80% of the hearing impaired population, but often do not
purchase hearing aids due to the stigma associated with wearing a hearing aid
and because existing products are perceived as inadequate, uncomfortable,
unreliable, expensive and unattractive.
The following table shows the percentage of each of the four segments of the
hearing impaired population that have purchased hearing aids:
<TABLE>
<CAPTION>
% of Impaired % of Hearing
Impairment Classification Population Aid Penetration
------------------------- ------------- ---------------
<S> <C> <C>
Mild 31% 4%
Moderate 50 22
Severe 15 50
Profound 4 37
</TABLE>
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Despite this low level of market penetration and high degree of
dissatisfaction, in 1998 worldwide retail sales of hearing aids were
approximately $4.6 billion and wholesale sales were approximately $1.8 billion.
The number of hearing aids sold has grown 5% annually during the 1990's. We
anticipate that demographic trends, such as the aging of "baby boomers," will
accelerate the growth in the size of the hearing impaired population.
The hearing aid market can be categorized into two segments: analog and
digital. Digital hearing aids were first introduced in 1996 and currently
represent 10% of global hearing aid sales. Despite their premium pricing,
digital hearing aids represent the fastest growing segment of the market. We
believe that as companies exploit the full potential of the digital platform
over the next several years, the percentage of sales from digital hearing aids
will increase significantly.
According to MarketTrak, nearly 40% of all hearing aids are sold in the
United States and about one-third are sold in Europe. The Pacific Rim
represents nearly 15% of global volume and the rest of the world accounts for
the balance.
Hearing Aids and Hearing Aid Technology
Types of Hearing Aids
A hearing aid generally consists of an external shell surrounding a
microphone that detects incoming sound and an amplifier that increases the
intensity of the sound either across the frequency spectrum or, for newer,
programmable hearing aids, certain parts of the spectrum. The hearing aid also
contains a miniature speaker (receiver) to transmit the modified sound to the
eardrum. A tiny battery with a life of one to four weeks supplies power.
Hearing aids are generally available in several models and sizes. The four
most common configurations are, ranging from smallest to largest:
. completely-in-the-canal, referred to as CIC;
. in-the-canal, referred to as ITC;
. in-the-ear, referred to as ITE; and
. behind-the-ear, referred to as BTE.
The smaller devices are usually inconspicuous, address less severe hearing
losses and are more expensive than larger devices. The larger devices generally
address more severe hearing losses and also appeal to individuals with limited
manual dexterity, who may find the smaller devices harder to manipulate.
The Evolution of Hearing Aid Technology
Early hearing aids simply amplified previously inaudible sounds to an audible
level, which caused sounds that were comfortable or fairly loud to become
uncomfortably loud. Hence, the wearer was often forced to adjust the hearing
aid volume control in order to avoid distortion and find the acceptable balance
between sounds of differing intensities. This problem severely limited
improvements in speech intelligibility, so hearing was, in reality, only
partially improved.
In the 1980's, hearing aids emerged that amplified sounds at different
frequencies by predetermined amounts. These hearing aids were also able to
limit sound amplification past a certain output to avoid discomfort associated
with overamplification. Although hearing aids employing this technology helped
somewhat and are still sold today, these hearing aids did not improve speech
recognition to a level that satisfied users.
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In the early 1990's, multiband compression was introduced into hearing aids.
This technology enabled differential amplification, which varies according to
input intensity level, of two or more separate parts of the frequency spectrum.
Many hearing aid companies have now developed analog multiband compression
circuits that improve speech intelligibility from its previously low levels.
By 1996, technological advances based on digital signal processing led to the
first digital hearing aids. Digital technology allows more channels, or
"bands," to segregate the frequency range and provides better compression and
more effective sound processing algorithms to be built into smaller integrated
circuits that consume less power. As a result, battery life is longer. Analog
circuits can provide very similar sound processing benefits, but not in the
small size, low-power integrated circuits required for small hearing aids.
Nearly 20% of today's hearing aids are classified as "premium" hearing aids.
Premium hearing aids are often called "programmables" because a prescriptive
correction adapted to an individual's hearing loss is loaded into each hearing
aid. Sophisticated multiband compression circuits enable these hearing aids to
deliver differential amplification in the frequency bands where it is most
needed. Some of these hearing aids have analog signal processing and digital
programming, while some have digital signal processing and digital programming.
The Process of Getting a Hearing Aid
Hearing aids are sold as a part of a bundled package that typically includes
the devices themselves, the audiological exam and related services. In the
United States, the bundle is usually paid for entirely by the consumer, since
Medicare, Medicaid and private insurance historically have not provided
coverage. The hearing care professional devotes significant time to the
consumer, and it is the hearing care professional who determines the price of
the package.
Premium hearing aids, either 100% digital or digitally programmable,
typically cost the consumer $2,000 to $3,500 each (or $4,000 to $7,000 per
pair), with $1,000 to $1,400 of this going to the manufacturer. Conventional
analog hearing devices, comprising 80% of sales in the market, typically cost
the consumer $400 to $1,200 each, with one-third to one-half of the price going
to the manufacturer.
An individual who seeks help for a sensorineural hearing loss is often
referred by an ear-nose-throat physician to a hearing care professional--an
audiologist or a hearing aid dispenser. The hearing care professional performs
an audiologic test and extensive fitting procedures prior to selling the
hearing device.
Most hearing aids, particularly in the United States, are custom-made to each
individual's ear canal, particularly for users in the mild to moderate loss
category. The hearing care professional first takes an impression of the
person's ear canal with a liquid silicone material that hardens to the
approximate shape of the canal. This impression is sent to the manufacturer who
then builds an aid within a custom shell that matches the impression. This
process usually requires about one week.
There is considerable art and craftsmanship associated with creating custom
hearing aids that fit comfortably. A great deal of judgment is involved in
shaping the final shell, and the impressions themselves are often imperfect
replicas of the consumer's canal anatomy. The hearing care professional either
makes small modifications to the shell by sanding different surfaces or sends
the hearing aid back to the manufacturer for a remake due to discomfort. It is
quite common for a new hearing aid to require remaking, which often requires an
additional week.
Limitations of Traditional Hearing Aids
Traditional hearing aids have generally failed to satisfy the needs of the
hearing impaired due to several limitations in the performance of the hearing
aids themselves as well as in the process
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required to purchase hearing aids. Although some manufacturers have made
advances in one or two of the areas listed below, to date, no hearing aid
manufacturer has successfully addressed all of the following limitations with a
single hearing aid:
. Lack of Acceptable Sound Quality. A large measure of user
dissatisfaction stems from the lack of adequate or acceptable sound
processing. Of the hearing aids sold today, we estimate that 80% are
manufactured using older analog technology. These low-price hearing aids
were designed to make everything louder by amplifying all sounds by a
predetermined amount regardless of the frequency or intensity of the
incoming sounds. Despite technological advances over the last 30 years,
many newer premium hearing aids simply use digital technology to
implement an older understanding of human hearing and are thus unable to
restore natural sound quality.
. Cosmetically Unappealing. Traditional hearing aids are large,
unattractive devices. Many hearing impaired individuals feel there is a
stigma attached to wearing a noticeable hearing aid.
. Uncomfortable. Virtually all hearing aids, despite being custom-molded,
are made of hard plastic that can irritate the wearer after prolonged
use.
. Lengthy Process of Obtaining a Hearing Aid. The time from an initial
appointment until the delivery of a final hearing aid can take from one
to four weeks and involves multiple appointments with a hearing care
professional. In addition, a consumer returning a hearing aid for a
remake or repair must wait a week or more for a refurbished hearing aid,
during which time the consumer is without the benefit of a custom
hearing aid.
. Unreliable. Hearing aids have historically been viewed by many owners as
unreliable and, in fact, often require repair more than once a year. The
majority of these repairs are caused by an accumulation of earwax as
opposed to a component malfunction. Wearers typically do not clean their
aids and many hearing care professionals are ineffective in this
endeavor so the manufacturer is often left to perform this service.
. Expensive. Hearing aids can cost up to $3,500 each, which represents a
significant investment for the hearing impaired individual.
The limitations of current hearing aid products, the inefficiencies of the
dispensing process and the custom nature of fitting a hearing aid have led to
high levels of returns, remakes and repairs, which are commonly referred to in
the industry as the "three R's." Returns, remakes and repairs have affected
manufacturers, dispensers and wearers for decades and significantly increase
costs for all three groups.
Industry statistics indicate that 27% of all hearing aid products are
returned to manufacturers for credit. Product returns result, in large part,
from lenient return policies. Consumer protection laws allow consumers to
return their hearing aids for a refund if they are dissatisfied during an
initial trial period, which generally ranges from 30 to 90 days. Many
dispensing audiologists take advantage of these liberal return policies and fit
consumers with two or three hearing aids before selecting a final product. The
unused, now custom-fitted, hearing aids are simply returned to the
manufacturers for credit. In addition, particularly after enduring a time
intensive process and paying a high cost for a hearing aid, a consumer's
expectations for product performance may be beyond the product's capability, or
the consumer may not perceive that the hearing aid offers an appropriate value.
As a result, we believe that return rates for premium products are higher than
those for traditional hearing aids.
Approximately 30% of the custom-molded shells manufacturers produce are
returned to manufacturers for a product remake. The current custom-molding
process used to fit hearing aids into the person's ear canal is inexact and
generally requires the hearing care professional to make
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small modifications to the shell. If a proper fit cannot be achieved by the
hearing care professional, he or she will often return the product to the
manufacturer to be disassembled and remade, a costly and time-consuming
process.
We estimate that approximately one in five hearing aids are sent to the
manufacturer for repair during its warranty period. A majority of hearing aid
repairs, however, are not due to component failure, but are caused by an
accumulation of earwax in the shell because users do not effectively clean
their hearing aids. The manufacturer's repair process typically consists of
cleaning the hearing aid and replacing wax-clogged components. This is both
time-intensive and costly for all parties involved.
Our Technology Solution
By simultaneously applying several innovative technologies to achieve
improved sound quality, tiny size, comfortable fit and superior reliability, we
have developed a new generation of premium-performance hearing aids designed to
address the limitations of traditional hearing aids. Our key technologies
include the following:
Digital Signal Processing Technologies
The core of our technology is our proprietary digital sound processing, or
DSP, technologies, which were developed by three world-renowned experts in
sound dynamics and digital signal processing. First, Dr. Douglas Chabries, Dean
of the College of Engineering and Technology at Brigham Young University,
developed a new algorithm for processing audio signals based on an improved
understanding of the physical operation of the human cochlea. Then,
collaborating with Dr. Thomas Stockham, Jr., digital audio pioneer at the
Massachusetts Institute of Technology and later Professor of Engineering at the
University of Utah, Chabries refined and patented the core digital sound
processing technology used in our hearing aids. Finally, Dr. Carver Mead,
Professor of Computer Science at the California Institute of Technology, joined
Chabries and Stockham to miniaturize the technology and further develop it for
specific application to the human auditory system.
Using the advancements of our technological founders and this new
understanding of human hearing, our proprietary DSP technologies implement a
patented set of algorithms. These algorithms pre-process the incoming sound and
present it to the impaired cochlea in a way that restores natural loudness
perception and preserves the cues necessary for speech understanding. In
addition, our DSP technologies process sound at a rate we believe to be
significantly faster than other hearing aids. Traditionally, hearing aids have
not processed sounds quickly enough to allow a wearer to "localize" sounds, or
ascertain which direction a sound is coming from. We believe that our products
are the first to solve this problem, thus providing a much more natural hearing
experience and restoring lost localization and directionality of sound.
Single Chip Solution
Using state-of-the-art chip design capabilities, we have embedded our DSP
technologies into a single chip that is the smallest, most sophisticated DSP
chip available in a hearing aid today. No other hearing aid company has
introduced a single-chip DSP solution. This proprietary DSP chip is an
advanced, energy-efficient integrated circuit that powers remarkable frequency-
specific, level-dependent, multi-channel features. The result of this
convergence of advanced hearing science and leading edge digital technology is
a family of hearing aids that delivers a more natural, lifelike listening and
communication experience and addresses the specific auditory needs of the
hearing impaired.
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This integrated circuit contains proprietary technology in the form of our
DSP core, analog-to-digital and digital-to-analog converters and on-chip
memory.
. The analog-to-digital converter connects directly to a microphone and
converts the changing output signal from an analog level to a digital
number. Our analog-to-digital converter incorporates several proprietary
design features that represent significant advancements over analog-to-
digital converters contained in competitive products.
. Our DSP core executes the fixed, proprietary algorithm using one of two
sets of internally stored, programmable coefficients, or prescriptions.
The DSP core then processes the stream of numbers from the analog-to-
digital converter and sends them to the digital-to-analog converter.
. The digital-to-analog converter converts the numbers received from the
DSP core to a pulse-width-modulated waveform, which drives the miniature
loudspeaker, or receiver.
. The on-chip memory stores consumer prescriptions, user specific
information and manufacturing data.
Our DSP core contains nine independent compression channels. These nine
independent channels allow for precise control of both the frequency response
(frequency-dependent gain) and loudness response (level-dependent gain).
Approximating a graphic equalizer, our hearing aids break the world of sound
down into more than twice as many distinct channels as most other popular
hearing aids on the market. As a result, our hearing aids can be fine-tuned to
within 1 dB of prescriptive targets at one-half octave intervals across a
frequency range from 500 to 6,000 Hz. This precision allows a wearer's
prescriptive requirements to be matched with unprecedented accuracy.
[Diagram of Sonic Innovations' DSP core. A microphone is on the left connected
to nine independent channels. The channels are labelled from top to bottom:
500Hz, 750Hz, 1000Hz, 1500Hz, 2000Hz, 4000Hz, 5000Hz and 6000Hz. These channels
are in turn connected to a receiver.]
Advancements in Materials Science
Using proprietary advancements in materials technology, our CONFORMA product
utilizes a soft disposable foam tip that, when placed in a wearer's ear canal,
conforms quickly and precisely to the shape of the canal, providing an instant
fit and increased comfort for the wearer. This stands in contrast to
traditional hearing aids that utilize custom-made, hard plastic shells. This
disposable tip also addresses a leading cause of hearing aid failures--a
natural build-up of earwax.
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EXPRESSfit Software
In order to ensure that our new model of human hearing and state-of-the-art
technologies are properly programmed to the individual needs of the hearing aid
wearer, we have developed a proprietary programming system, EXPRESSfit.
EXPRESSfit enables our hearing aids to be easily configured by the hearing care
professional to the unique needs of the wearer. The advanced technology of our
sophisticated DSP chip is programmed by our software to make sure that sounds
within each half octave frequency range are amplified appropriately in the
right contrasts to sounds in every other channel. Initially presented on a
novel hand-held PalmPilot platform, it has also been adapted to work within
NOAH, a popular PC-based industry programming and fitting standard. We believe
that our software solution is an integral part of ensuring that our
technological advances appropriately target and meet the needs of each
individual hearing aid consumer.
Our Products
We have packaged our sophisticated, proprietary technologies into a broad
line of premium digital hearing aids which offer what we believe is superior
sound quality, smaller size, enhanced personalization and increased reliability
at competitive prices. All of our products incorporate our proprietary DSP
platform and are programmable to address the hearing loss of the individual
user. We currently sell our branded products both as completed hearing aids and
as partial hearing aids, or faceplates, to certain distributors who then market
finished hearing aids under our brand names. With our branded products, we also
offer a software programming system, EXPRESSfit, which enables these products
to be individually configured to the unique needs of the wearer, leading to a
substantial improvement in sound quality. In addition, we sell hearing aid
components consisting of our DSP platform to established hearing aid
manufacturers who then market their private label products containing our DSP
platform.
Our Current Products
NATURA. We launched our first brand, NATURA, in the United States in
September 1998 and expanded distribution to Europe, Japan, Australia and Canada
in 1999. NATURA, the first product to incorporate our proprietary DSP
technologies, provides what we believe is the best sound quality available in
traditionally configured hearing aids. The NATURA product line is available in
the four traditional hearing aid configurations, CIC, ITC, ITE and BTE. Due to
the smaller than usual DSP chip used, NATURA products are smaller than most
traditional hearing aids.
CONFORMA. We commenced test marketing of our novel CIC hearing aid, CONFORMA,
in December 1999 and aim to launch the product in the United States in March
2000. Our CONFORMA product introduces a new, innovative hearing aid
configuration which delivers a fast, comfortable fit in the smallest hearing
aid available, eliminating the need to custom mold a hard plastic shell to fit
the wearer's ear canal.
CONFORMA physically consists of two parts. The first is a tiny core about the
diameter of a pencil eraser that contains the product's electronics and our
proprietary DSP chip, a smaller and slightly modified configuration of the chip
used in the NATURA product line. The second component of CONFORMA is a vented,
flexible, disposable soft tip that comes in multiple sizes, fits snugly around
the core, and conforms quickly and precisely to the shape of the ear canal.
CONFORMA is the first product with the potential to address all of the major
limitations of traditional hearing aids and significantly alter the way hearing
aids are made and sold. Equipped with our proprietary DSP technologies,
CONFORMA delivers superior sound quality with improved speech intelligibility.
CONFORMA fits far down the ear canal of the wearer, making it nearly invisible
and eliminating the stigma of wearing a hearing aid. The foam tip allows the
wearer to achieve a custom
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fit in a single visit and provides superior comfort versus the hard plastic
shell of traditional custom-molded models. We have priced CONFORMA to provide a
superior price/value package to the consumer.
CONFORMA directly addresses the major factors leading to the high rates of
returns, remakes and repairs associated with traditional hearing aids. Because
CONFORMA is not custom-molded, should a wearer choose to return CONFORMA, the
hearing care professional can simply repackage it for resale to another
consumer rather that returning it to the manufacturer for credit. As a
standardized product, CONFORMA eliminates the need for costly remakes. The
disposable nature of the tip eliminates the major cause of manufacturer repairs
by allowing the wearer to simply replace the tip at regular intervals to avoid
the build-up of earwax in the unit.
Hearing Aid Components. We sell hearing aid components consisting of our DSP
platform to established hearing aid companies. These companies incorporate our
DSP platform into hearing aids of their own design that they then sell under
their own brands.
Our Future Products
We are currently directing our new product development efforts beyond
CONFORMA primarily in the areas of DSP chip enhancements and software
revisions. We are developing an enhanced DSP chip that incorporates advanced
electronic noise reduction to improve speech intelligibility. We plan to
introduce this new chip in our NATURA line in March 2000, and in CONFORMA later
in the year. We are also developing directional capability for our BTE NATURA
hearing aid that we intend to introduce in the fourth quarter of 2000. Further
back in the development pipeline, we are working on improved feedback
suppression, wireless programming capabilities and specific enhancements to the
CONFORMA integrated circuit to make it smaller and to increase the power to
address more severe hearing losses. Based on our cumulative experience to date
with tens of thousands of fittings, we are further modifying our EXPRESSfit
software to improve programming ease and enhance the integrated circuit's
processing capabilities. As we develop future generation technology, we intend
to establish it first in our branded products before making it available to
other hearing aid manufacturers.
Business Strategy
Our mission is to be the best hearing aid company in the world by delivering
a superior product that appeals not only to those consumers who currently use
or have tried hearing aids, but also to the 80% of the hearing impaired
population that historically has chosen not to purchase hearing aids. Key
elements of our strategy include the following:
. Continue to Introduce Innovative Products. As a technological leader
in the industry, we intend to continue to invest significantly in
research and development in order to introduce new products and
product improvements more rapidly than is typical in our industry.
For example, in the first half of 2000, we plan to launch both our
new CONFORMA product and the next generation of NATURA, which will
incorporate an integrated circuit with improved noise reduction
technology.
. Expand Our Distribution. We currently sell our branded products to
over 1,000 of the approximately 12,000 hearing care professionals in
the United States. We are expanding our sales force in the United
States to increase the penetration of our branded products with
hearing care professionals who dispense premium digital products. We
believe that the evolution of the current distribution channel,
combined with the characteristics of our branded products,
particularly the ease of fitting and the anticipated reduction in
hearing aid returns, remakes and repairs, will create new
distribution opportunities. We are exploring alternative and
emerging retail channels,
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including selling through large hearing care chains and other chain-
based retailers. Outside the United States, we are actively pursuing
additional distribution partners to increase our geographic reach.
. Sell Our DSP Platform. We sell our DSP platform to selected
established hearing aid companies that have approached us seeking to
benefit from our superior technology. We believe that this strategy
can accelerate market acceptance of our technology and be a
significant source of revenue.
. Increase Brand Awareness. In order to differentiate our products and
reach a greater percentage of potential consumers, we have
undertaken a brand-oriented approach to our marketing and selling
efforts. We are targeting hearing care professionals and expanding
our direct-to-consumer advertising and promotion efforts.
. Achieve Economies of Sale. We expect that, as sales volumes
increase, per unit production costs of our products will decline. In
addition, CONFORMA offers an opportunity to standardize the
production process and avoid the custom-molding processes used by
other hearing aid manufacturers and in our NATURA line. We believe
that this can enable us to achieve further economies of scale.
Sales and Marketing
Hearing aids have traditionally been dispensed (sold to the consumer) by
hearing care professionals. Due to the hearing care professional's influence
over a consumer's choice of a hearing aid brand, we believe that developing and
maintaining strong relationships with hearing care professionals is the most
critical aspect of our sales and marketing strategy. As a result, we aim to
deliver a high level of customer service and support to our hearing care
professionals. In addition, we believe that this high level of customer service
is imperative for building our brands, particularly in the U.S. professional
channel.
In the United States, there are approximately 5,000 degreed audiologists and
7,000 hearing aid dispensers. We position our products as premium-priced,
superior performance hearing aids and therefore, our direct sales force has
targeted only a select number of these hearing care professionals who are
capable of and interested in dispensing high-end premium digital hearing aids.
In 1999, we sold our branded products directly to over 1,000 hearing care
professional accounts in the United States.
Our U.S. sales force is currently comprised of ten field sales people, three
full-time trainers, a number of regional part-time trainers and three inside
sales people. This group both sells to and trains hearing care professionals in
order to differentiate our brands and to ensure proficiency with programming
and fitting. We also advertise our products to hearing care professionals
through promotional materials, trade publications and conventions. Our sales
force is responsible for executing cooperative advertising programs jointly
with specific customers to generate consumer demand for our brands.
Outside the United States, we sell our branded products through a network of
established distributors throughout much of Europe, Japan, Canada and
Australia. In 1998, we established Sonic Innovations A/S, a wholly owned
subsidiary located in Denmark, to drive European sales and marketing efforts.
Sonic Innovations A/S sells to hearing aid distributors in most European Union
markets, who in turn sell to their established customer bases of hearing care
professionals. Sonic Innovations A/S also sells our branded products on a
direct basis to hearing care professionals in Germany, Europe's largest hearing
aid market. In Japan, we have entered into an agreement with Hoya Healthcare
Corporation to serve as our exclusive distributor of branded products. See
"Certain Transactions--Hoya Healthcare Corporation." Distribution agreements
generally cover multi-year periods and are terminable for non-performance.
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To further our marketing effort, we use world class advertising, public
relations and market research agencies. These organizations work in tandem with
our internal marketing team to communicate the brands' advantages to customers.
We are planning to implement a direct-to-consumer branded advertising and
promotion strategy that reflects our belief that both consumers and hearing
care professionals are important to the success of our products.
We believe that the evolution of the current distribution channel, combined
with the characteristics of our branded products, particularly the ease of
fitting and reduced hearing aid returns, remakes and repairs, will create new
distribution opportunities. We are exploring alternative and emerging retail
channels, including selling through large hearing care chains and other chain-
based retailers.
Customers
In 1999, approximately 47% of our net sales were derived from sales of our
branded products through over 1,000 health care professionals in the United
States, with about 600 of these accounts purchasing on a regular basis.
Approximately 17% of our net sales came from sales of our branded products
outside the United States, principally through distributors. Sales of hearing
aid components, consisting of our DSP platform, to established hearing aid
manufacturers comprised the remaining 36% of net sales in 1999. Sales of our
hearing aid components to Starkey Laboratories, Inc., which sells its own brand
of digital hearing aids based on our DSP platform, comprised approximately 26%
of our net sales. Starkey is obligated to make minimum purchases for 2000 and
2001 that are greater than the purchases it made in 1999. Sales of our hearing
aid components to Rion Co., Ltd., which operates in Japan, accounted for 10% of
our net sales.
Research and Development
We continue to work on both product improvements and new product development,
and we expect to continue both activities in the future at increasing levels.
We intend to use product improvements and new product development to enhance
our competitive position in the market. As of December 31, 1999, there were 34
employees actively involved in research, development and regulatory activities.
Their skills include audiology, clinical research, integrated circuit
engineering, software engineering and materials science. For the years ended
December 31, 1997, 1998 and 1999, we spent $3.9 million, $5.8 million and $7.0
million, respectively, on research and development.
Intellectual Property
We seek to protect our intellectual property through patents and non-
disclosure agreements. We hold three U.S. patents, and we are the exclusive
licensee for hearing aid and hearing protection applications under two patents
held by Brigham Young University. We have 27 patent applications pending, and
we have drafted four other patent applications, which we expect to file in the
first half of 2000.
Under our 1995 license agreement with BYU, which we amended in 1996, we have
an exclusive worldwide license to utilize certain technology owned by BYU. The
technology includes two patents involving digital signal processing, audio
signal processing and hearing compression, including the fundamental sound
processing algorithm incorporated into our DSP platform. Under this agreement,
which expires in 2014, the expiration of the last claim of the patents, we are
responsible for the payment of all fees and costs associated with filing and
maintaining patent rights. As consideration for the license, we issued 184,000
shares of our common stock to BYU and agreed to pay BYU fees aggregating
$580,000. We have paid $330,000 of these fees, and we will pay $100,000 in 2000
and $150,000 in 2001.
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In 1997, we entered into another license agreement with BYU giving us the
perpetual right to use certain "noise suppression" technologies owned by BYU.
We have exclusive worldwide rights to use these technologies in hearing aid and
hearing protection applications and a non-exclusive right to use them for other
applications. We are also required to make royalty payments to BYU equal to
0.5% of gross sales derived from products containing the licensed technologies.
Because these technologies had not been incorporated in the products we sold in
1998 and 1999, we paid the annual minimum royalty of $50,000 in each of those
years.
In 1998, we entered into a license agreement with K/S HIMPP, a Danish
partnership, that owns approximately 200 patents that are considered essential
for the production of programmable hearing aids. We are required to pay K/S
HIMPP a royalty equal to 3% of our net sales from our products, all of which
incorporate certain of the licensed technologies. In connection with the
formation of K/S HIMPP, certain of our competitors acquired a paid-up license
for a flat fee of $2.0 million. These companies do not have to pay any further
royalties to K/S HIMPP for the use of the licensed technologies.
In 1999, in order to settle a claim by one of our competitors that our
products infringed on certain of its patents, we entered into a license
agreement under which we agreed to pay a royalty equal to 1.5% of our net sales
from hearing aids and components from October 1998 through September 2001.
We also rely on trade secret information, technical know-how and innovation
to continuously expand our proprietary position. We require our employees and
consultants to execute non-disclosure and assignment of inventions agreements
upon commencement of their employment or engagement.
Manufacturing
We have manufacturing facilities in Salt Lake City, Utah, Eagan, Minnesota
and Copenhagen, Denmark. We perform the majority of our manufacturing at our
Eagan site near Minneapolis, where the presence of many major hearing aid and
medical device companies has created a skilled labor pool that we have been
able to leverage to our advantage. Our manufacturing operations consist of the
following activities:
. overseeing the production of the integrated circuit used in our
products;
. assembling and testing the electronic subsystems;
. fabricating custom earmolds;
. integrating the electronic components into the hearing aid shell; and
. testing and calibrating the finished hearing aid.
We assemble our custom NATURA CIC, ITC and ITE products according to
specifications received from hearing care professionals. After receiving an
impression of the wearer's ear canal and programming requirements of the
hearing aid, the custom earmold shell and electronic circuitry are assembled.
Our NATURA BTE products are assembled using a standard plastic housing and are
not custom-molded for a wearer's ear.
In contrast, CONFORMA is assembled using standardized components, consisting
of electronic circuitry, a tiny metal housing and disposable foam tips, and
thus eliminates custom-molding steps associated with traditionally configured
hearing aids, including our NATURA products. In addition, CONFORMA is
programmed by the hearing care professional at the time of sale to meet the
specific auditory needs of the wearer. We are currently producing our initial
CONFORMA products internally.
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However, we recently selected a manufacturer experienced in producing high-
quality, standardized electronic devices in volume and anticipate that we will
eventually outsource all production of the CONFORMA product to this
manufacturer.
We rely on several sole source or limited source suppliers and manufacturers
for key components used in our products, including the proprietary integrated
circuit used in all of our products and the foam tip used in the CONFORMA
product. See "Risk Factors--We rely on several important suppliers and
manufacturers, and the loss of these suppliers or the services of these
manufacturers may harm our business."
Competition
We believe that although the hearing aid marketplace is highly fragmented,
competition is fiercely intense. There are approximately 32 companies who have
a manufacturing and marketing presence in the hearing aid industry, down from
nearly 70 in 1990. Consolidation in the hearing aid industry has accelerated in
the last two years, as evidenced by the acquisitions of Dahlberg/Miracle Ear,
ReSound and Philips.
We compete with companies such as Siemens GmbH, Starkey Laboratories Inc.,
Widex A/S, William Demant Holding A/S (through its Oticon, and Bernafon
subsidiaries) and Great Nordic (through its GN ReSound division), all of which
have established products and substantially greater financial, sales and
marketing, manufacturing and development resources than we currently possess.
Our competitors may develop products that are more effective in treating
hearing loss than our own products, thus rendering our technologies and
products obsolete or uncompetitive.
The digital segment of the hearing aid industry is characterized by
increasing competition and rapid new product introductions. The proliferation
of digital hearing aids is likely to lead to increasing price pressure and
intense marketing campaigns as each company tries to differentiate its product
from the others.
We compete primarily on the basis of:
. sound quality;
. technology;
. size, particularly in CIC models;
. quality;
. comfort;
. reliability;
. price;
. ease of fitting the hearing aid;
. sales and distribution capabilities; and
. customer service, support and training.
We believe we compete favorably with respect to each of these factors.
The hearing aid industry has seen notable change in the past three years, and
the introduction of competitive products can have a significant impact on our
operations. Our success will depend on our ability to create advanced
technology rapidly, apply technology cost-effectively, attract and retain
highly skilled personnel, obtain necessary patent protections and manufacture
and successfully market and sell in a variety of distribution channels.
40
<PAGE>
Employees
As of December 31, 1999, we had 211 employees, including 17 in
administration, 32 in sales support and marketing, 34 in research, development
and regulatory, 102 in operations and 26 in European operations. None of our
employees are represented by a labor union. We have not experienced any work
stoppages, and we consider our relations with our employees to be good.
Facilities
We lease approximately 12,000 square feet of manufacturing and office space
in Eagan, Minnesota, under a five-year lease expiring in December 2004. In Salt
Lake City, Utah, we lease approximately 55,000 square feet of manufacturing and
office space under a five-year lease expiring in August 2004. Our Denmark
subsidiary leases approximately 2,000 square feet of office and manufacturing
space in Copenhagen under a two-year lease expiring in July 2000. We believe
that we have sufficient manufacturing capacity to satisfy demand for our
products in the near future. Any significant increase in manufacturing capacity
will require the hiring and training of additional qualified manufacturing
personnel.
Government Regulation
Our products are regulated as medical devices. Accordingly, product
development, labeling, manufacturing processes and promotional activities are
subject to extensive review and rigorous regulation by government agencies in
countries in which we sell our products.
In the United States, the FDA regulates the design, manufacture,
distribution, preclinical and clinical study, clearance and approval of medical
devices. Medical devices are classified in one of three classes on the basis of
the controls necessary to reasonably assure their safety and effectiveness. Our
products are Class I devices, the least stringent class, which only requires
general controls, including labeling, premarket notification and adherence to
the FDA's Quality System regulations.
Before a new hearing aid that is not exempt from the FDA's requirements can
be introduced to the market in the United States, the manufacturer must obtain
FDA clearance through a 510(k) Premarket Notification or obtain FDA approval.
Our fitting and programming system and CONFORMA hearing instrument received
premarket clearance through the 510(k) process as a Class I device. Our other
hearing aids are also Class I devices and have been exempted from the 510(k)
process. After marketing clearance, manufacture and distribution of our
products are subject to continuing regulation by the FDA. We are subject to
routine inspections by the FDA to determine compliance with facility
registration, product listing requirements, medical device reporting
regulations and Quality System requirements. The Quality System regulation is
similar to good manufacturing practices and relates to product testing and
quality assurance as well as the maintenance of records and documentation.
Sales of medical device products outside the United States are subject to
foreign regulatory requirements that vary widely from country to country. The
time required to obtain approvals required by other countries may be longer or
shorter than that required for FDA clearance or approval, and requirements for
licensing may differ from FDA requirements. This disparity in the regulation of
medical devices may result in more rapid product approvals in certain countries
than in the United States, while approvals in countries such as Japan may
require more time than in the United States.
In order to market our products in the 15 member countries of the European
Union, we are required to obtain CE mark certification. CE mark certification
is an international symbol of adherence
41
<PAGE>
to certain quality assurance standards and compliance with the European Medical
Devices Directives, including the certification of our Quality System. ISO 9001
certification in conjunction with demonstrated performance to the medical
device directive is one of the alternatives available to meet the CE mark
requirements. We have met the requirements of ISO 9001 for all of our
manufacturing sites, and our products sold in the EU bear the CE mark of
quality.
Legal Proceedings
We are not a party to any material legal proceedings.
42
<PAGE>
MANAGEMENT
Directors and Executive Officers
The following table sets forth our directors and executive officers and their
ages as of December 31, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Andrew G. Raguskus...... 54 President and Chief Executive Officer and Director
Stephen L. Wilson....... 47 Vice President and Chief Financial Officer
Jorgen Heide............ 61 Vice President, International and OEM Division
Weston O. Ison.......... 59 Vice President, Quality and Regulatory
Gregory N. Koskowich,
Ph.D. ................. 39 Vice President, Research and Development
Michael D. Monahan...... 53 Vice President, U.S. Professional Division
Orlando P. Rodrigues.... 38 Vice President, Consumer Development Division
Anthony B. Evnin,
Ph.D.(1)............... 60 Director
Luke B. Evnin,
Ph.D.(2)............... 40 Director
Kevin J. Ryan(2)........ 60 Director
G. Gary Shaffer......... 45 Director
Sigrid Van Bladel,
Ph.D.(2)............... 34 Director
Allan M. Wolfe,
M.D.(1)................ 62 Director
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Andrew G. Raguskus joined Sonic Innovations in September 1996 as President,
Chief Executive Officer and Director. Mr. Raguskus was Chief Operating Officer
for Sonic Solutions, Inc., a maker of digital audio workstations, during 1996.
He was Senior Vice President of Operations for ReSound Corporation, a hearing
aid company, from 1991 to 1995. Prior to joining ReSound, Mr. Raguskus held
positions with various technology companies, including Sun Microsystems, Inc.
and General Electric's Medical Systems Division, where he developed computer
systems for GE's line of CAT scanners. Mr. Raguskus earned a bachelor's degree
in electrical engineering from Rensselaer Polytechnic Institute and is a
graduate of GE's MPA management program.
Stephen L. Wilson joined Sonic Innovations in October 1999 as Vice President
and Chief Financial Officer. From 1997 to 1999, Mr. Wilson was Executive Vice
President and Chief Financial Officer and Secretary of Computer Motion, Inc., a
medical robotics company. From 1990 to 1997, he was Vice President Finance and
Chief Financial Officer of St. Jude Medical, Inc., a medical device company.
Mr. Wilson is a director of Angeion Corporation. He earned a bachelor's degree
in accounting from the University of Connecticut and is a certified public
accountant.
Jorgen Heide joined Sonic Innovations in March 1997 as Vice President of
Operations and became Vice President of the International and OEM Division in
1999. From 1992 through early 1997, Mr. Heide served as Director of Technology,
Vice President of Manufacturing, Vice President of Technology and finally, as
Vice President of Worldwide Technical Services, for ReSound Corporation. From
1984 to 1992, he was Vice President of Research and Development for the
microsurgery division of Smith and Nephew, Richards Medical Company. Mr. Heide
earned his masters degree in electrical engineering from Frederiksberg Tekiske
Skole in Copenhagen, Denmark. Mr. Heide has been granted seven U.S. patents for
inventions relating to hearing aids.
Weston O. Ison joined Sonic Innovations in November 1999 as Vice President of
Quality and Regulatory. From 1992 to late 1999, Mr. Ison was Vice President of
Quality, Customer Service, and Operations Planning and prior to that, Director
of Quality of America National Can. Mr. Ison's previous experience included 19
years at General Electric Company, where he led the quality control group in
the introduction of GE's line of CAT scanners. He earned a bachelor's degree in
electrical engineering from the University of Utah and is a graduate of GE's
manufacturing management program.
43
<PAGE>
Gregory N. Koskowich, Ph.D. joined Sonic Innovations in June 1997 as Vice
President, Engineering. Previously, Dr. Koskowich was Vice President of Product
Development at IMP, Inc., a developer of custom mixed-signal integrated
circuits, from 1996 to 1997. From 1992 through 1995, Dr. Koskowich was Manager
of Microelectronics Engineering for ReSound Corporation. Dr. Koskowich earned a
doctorate in electrical engineering from the University of Washington and holds
master's and bachelor's degrees in electrical engineering from the University
of Calgary. He has several patents, inventions and journal publications to his
credit.
Michael D. Monahan joined Sonic Innovations in March 1998 as Vice President
of Sales and became Vice President of the U.S. Professional Division in 1999.
Previously, Mr. Monahan was Director of Sales of Enact, Inc., a medical
information company, from 1997 to 1998, National Sales Manager for HDC
Corporation, a medical company, from 1996 to 1997 and Sales Manager for Menlo
Care, Inc., a medical device company, from 1992 to 1996. Mr. Monahan was
previously Director of Sales, Director of Corporate Accounts and Regional
Manager for Ivac Corporation (a subsidiary of Eli Lilly and Co.). Mr. Monahan
earned a bachelor's degree in business administration from California State
College.
Orlando P. Rodrigues joined Sonic Innovations in January 1998 as Vice
President of Marketing and became Vice President of the Consumer Development
Division in 1999. From 1993 to 1998, Mr. Rodrigues was Director of Marketing
and Group Product Director for the Vision Care Group of Alcon, Inc., a
subsidiary of Nestle S.A. From 1983 to 1993, He was Director of Strategic
Marketing, Director of Lens Care Marketing, Senior Product Manager and
Territory Manager for Allergan, Inc. Mr. Rodrigues earned a bachelor's degree
in biochemistry and a bachelor's degree in managerial studies from Rice
University.
Anthony B. Evnin, Ph.D. has been a director of Sonic Innovations since
October 1995. He has been a General Partner of Venrock Associates, Rockefeller
Family and Associates, since 1975. Dr. Evnin serves on the boards of Ribozyme
Pharmaceuticals, Inc. and Triangle Pharmaceuticals, Inc. Dr. Evnin earned his
bachelor's degree from Princeton University and earned a Ph.D. in chemistry
from Massachusetts Institute of Technology.
Luke B. Evnin, Ph.D. has been a director of Sonic Innovations since October
1995. He has been a General Partner of MPM Asset Management LLC since February
1998. Prior to that, Dr. Evnin was a General Partner for Accel Partners, a
venture capital firm, from September 1994 to February 1998. Dr. Evnin serves on
the boards of EPIX Medical, Inc., a pharmaceutical company, and several private
companies. Dr. Evnin earned a bachelor's degree in molecular biology from
Princeton University and earned a Ph.D. in the department of biochemistry from
the University of California at San Francisco.
Kevin J. Ryan has been a director of Sonic Innovations since June 1999. He
has been Chairman, President and Chief Executive Officer of Wesley Jessen
VisionCare, Inc., a manufacturer of contact lenses since June 1995. Prior to
that, Mr. Ryan was President of Biosource Technologies Inc., a
biopharmaceuticals company, from 1991 to 1995. Mr. Ryan is a graduate of Notre
Dame University.
G. Gary Shaffer has been a director of Sonic Innovations since October 1997.
He is a General Partner at Morgenthaler Ventures, a venture capital firm, which
he joined in 1987. Prior to 1987, he was a marketing executive for Spectra-
Physics, a laser manufacturer. He currently serves on the boards of several
private companies including Agility Communications, Coalescent Surgical, Inc.,
LuMend, Inc., NeuroControl Corporation and Thermage, Inc. He earned a
bachelor's degree in engineering sciences from Dartmouth College and an M.B.A.
from Stanford University.
44
<PAGE>
Allan M. Wolfe, M.D. has been a director of Sonic Innovations since December,
1993. He has been a General Partner of Utah Ventures, a venture capital firm,
since 1989. Dr. Wolfe earned a bachelor's degree in American civilization from
Cornell University and an M.D. from New York University School of Medicine.
Sigrid Van Bladel, Ph.D. has been a director of Sonic Innovations since
October 1997. She has been a partner of New Enterprise Associates, since 1994.
Her current board memberships include Acorn Cardiovascular, Alsius Corporation,
EndoVasix, Myogen and Spiration. Dr. Van Bladel earned a "Licenciaat" in
chemistry/biochemistry and a Ph.D. in molecular biology from the University of
Ghent, Belgium and an M.B.A. from Stanford University.
Our board of directors currently consists of seven members. Prior to the
closing of this offering, our board of directors will be divided into three
classes, with each director serving a three-year term and one class being
elected at each year's annual meeting of stockholders. Dr. Luke Evnin and
Mr. Ryan will be in the class of directors whose initial term expires at the
2001 annual meeting of stockholders. Dr. Anthony Evnin, Mr. Shaffer and Dr. Van
Bladel will be in the class of directors whose initial term expires at the 2002
annual meeting of the stockholders. Dr. Wolfe and Mr. Raguskus will be in the
class of directors whose initial term expires at the 2003 annual meeting of
stockholders.
Executive officers are elected by the board of directors and serve until
their successors have been duly elected and qualified. Anthony Evnin is the
father of Luke Evnin. Other than the foregoing, there are no family
relationships among any of our directors or officers.
Board Committees
Our board of directors has an audit committee and a compensation committee.
The audit committee consists of Dr. Luke Evnin, Mr. Ryan and Dr. Van Bladel.
The audit committee reviews our financial statements and accounting practices
and makes recommendations to the board of directors regarding the selection of
independent public accountants. The compensation committee consists of Dr.
Anthony Evnin and Dr. Wolfe. The compensation committee makes recommendations
to the board of directors concerning salaries and incentive compensation for
our officers and employees and administers our stock plans.
Director Compensation
Directors are not paid any fee or other cash compensation for acting as a
director, although directors are reimbursed for reasonable expenses incurred in
attending board or committee meetings. In July 1998, each of our outside
directors (or venture capital firms associated with the director) at that time
was granted an option to purchase 8,000 shares of common stock at an exercise
price of $0.50 per share. These options vest at the rate of 1/24th each month
from the grant date. Each director was granted an additional option to purchase
8,000 shares of common stock at an exercise price of $1.50 per share in June
1999. This option vests at the rate of 25% one year from the date of grant and
1/48th each month thereafter such that full vesting will be achieved in four
years. Mr. Ryan was granted an option to purchase 25,000 shares of common stock
at an exercise price of $1.50 per share in June 1999. This option vests at the
rate of 25% one year from the date of grant and 1/48th each month thereafter
such that full vesting will be achieved in four years.
Compensation Committee Interlocks and Insider Participation
None of the members of the compensation committee is currently, or has ever
been at any time since our formation, one of our officers or employees, nor has
served as a member of the board of directors or compensation committee of any
entity that has one or more officers serving as a member of our board of
directors or compensation committee.
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<PAGE>
Executive Compensation
The following table sets forth the compensation paid by us during 1999 to our
chief executive officer and to our four other most highly compensated executive
officers who received salary and bonus compensation of more than $100,000
during 1999:
<TABLE>
<CAPTION>
Long Term
Compensation
------------
Awards
------------
Annual
Compensation Securities
---------------- Underlying All Other
Name and Position Salary Bonus Options Compensation
- ----------------- -------- ------- ------------ ------------
<S> <C> <C> <C> <C>
Andrew G. Raguskus................. $231,000 $55,000 200,000 $ --
President and Chief Executive
Officer
Jorgen Heide....................... 193,333 45,000 120,000 --
Vice President, International and
OEM Division
Orlando P. Rodrigues............... 190,000 -- 120,000 --
Vice President, Consumer
Development Division
Gregory N. Koskowich............... 176,250 35,000 120,000 --
Vice President, Research and
Development
Michael P. Monahan................. 145,833 -- -- --
Vice President, U.S. Professional
Division
</TABLE>
Stock Options Granted in the Fiscal Year Ended December 31, 1999
The following table sets forth information with respect to stock options
granted during the fiscal year ended December 31, 1999 to each of the named
executive officers. All options were granted under our 1993 Stock Plan. The
following options were granted at exercise prices equal to the fair market
value of our common stock as determined by our board of directors on the dates
of grant.
The percentage of options granted is based on an aggregate of 2,065,500
options granted by us during the fiscal year ended December 31, 1999 to our
employees, including the named executive officers. The potential realizable
value amounts in the last two columns of the following chart represent
hypothetical gains that could be achieved for the respective options if
exercised at the end of the option term. The assumed 5% and 10% annual rates of
stock price appreciation from the date of grant to the end of the option term
are provided in accordance with rules of the SEC and do not represent our
estimate or projection of the future common stock price. Actual gains, if any,
on stock option exercises are dependent on the future performance of the common
stock, overall market conditions and the option holder's continued employment
through the vesting period.
<TABLE>
<CAPTION>
Individual Grants
---------------------------------------------------
Potential Realizable
Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation for
Underlying Granted to Exercise Option Terms
Options Employees Price Per Expiration -----------------------
Name Granted in Fiscal Year Share Date 5% 10%
- ---- ---------- -------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Andrew G. Raguskus...... 200,000(1)(2) 9.7% $3.00 11/19/2009 $ 377,337 $ 956,245
Jorgen Heide............ 120,000(1) 5.8 3.00 11/19/2009 226,402 573,747
Orlando P. Rodrigues.... 120,000(2) 5.8 3.00 11/19/2009 226,402 573,747
Gregory N. Koskowich.... 120,000(2) 5.8 3.00 11/19/2009 226,402 573,747
Michael P. Monahan...... -- -- -- -- -- --
</TABLE>
- --------
(1) Options granted to Mr. Heide and options to purchase 100,000 shares granted
to Mr. Raguskus vest at the rate of 25% of the shares on the first
anniversary of the date of grant and 1/48th of
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<PAGE>
the shares each calendar month thereafter, such that full vesting occurs
four years after the date of grant.
(2) Options granted to Mr. Rodrigues and Dr. Koskowich and options to purchase
100,000 shares granted to Mr. Raguskus vest on November 19, 2005 or
earlier if certain performance criteria, as approved by our board of
directors, are met.
Aggregate Option Exercises In 1999 and Year-End Values
The following table sets forth the number of shares acquired upon the
exercise of stock options during 1999 and the number of shares covered by both
exercisable and unexercisable stock options held by each of the named
executive officers at December 31, 1999.
<TABLE>
<CAPTION>
Number Of
Securities Underlying Value Of Unexercised
Shares Unexercised Options In-The-Money Options
Acquired At Fiscal Year-End At Fiscal Year-End (2)
on Value ------------------------- -------------------------
Exercise Realized (1) Exercisable Unexercisable Exercisable Unexercisable
--------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Andrew G. Raguskus...... -- -- 295,686 452,814 $1,119,154 $1,129,671
Jorgen Heide............ 55,000 $47,300 50,313 214,687 182,917 453,983
Orlando P. Rodrigues.... -- -- 90,625 229,375 93,750 511,406
Gregory N. Koskowich.... 12,500 23,250 25,000 207,500 333,594 432,500
Michael P. Monahan...... -- -- 60,000 90,000 216,000 319,500
</TABLE>
- --------
(1) The value realized reflects the fair market value of our common stock
underlying the option on the date of exercise as determined by our board
of directors minus the exercise price of the option.
(2) The value of unexercised in-the-money options is based on a value of $4.00
per share, the fair market value of our stock on December 31, 1999 as
determined by our board of directors.
Employment Agreements and Change-of-Control Arrangements
We have agreed to provide Gregory N. Koskowich with, among other things, a
severance payment of six month's salary in the event that we terminate his
employment. We have agreed to provide Orlando P. Rodrigues with, among other
things, a severance package of six month's salary and benefits in the event
that we terminate his employment without cause. In addition, in the event of
an acquisition of our company, all of the 150,000 shares of common stock
subject to the option granted upon his employment shall immediately vest. All
110,000 shares of common stock subject to the option granted to Michael P.
Monahan upon his employment will immediately vest upon an acquisition of our
company. We have agreed to provide Stephen L. Wilson with a severance package
of one year's salary, bonus and benefits if we terminate his employment. In
the event that Mr. Wilson is terminated upon a change of control of our
company, he will receive two year's salary and bonus and all of his
outstanding options will immediately vest.
Pursuant to a resolution of the Board of Directors, half of the shares
subject to the initial options grant to our executive officers upon commencing
their employment shall immediately vest (with the exception of Messrs.
Rodrigues and Monahan, whose benefits upon an acquisition are described
above).
Employee Benefit Plans
1993 Stock Plan
Our 1993 Stock Plan was adopted by our board of directors and approved by
our stockholders in 1993. The 1993 Stock Plan provides for the granting to our
employees of incentive stock options
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<PAGE>
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, and for the granting to employees, directors and independent
contractors of nonstatutory stock options. As of December 31, 1999, options to
purchase 4,903,289 shares were outstanding under the 1993 Stock Plan and
637,795 shares remained available for future grant. The 1993 Stock Plan is
administered by the compensation committee, which has sole discretion and
authority, consistent with the provisions of the 1993 Stock Plan, to determine
which eligible participants will receive options, the time when options will be
granted, the terms of options granted and the number of shares which will be
subject to options granted under the 1993 Stock Plan.
The exercise price of incentive stock options must at least be equal to the
fair market value of a share of common stock on the date the option is granted
(110% with respect to optionees who own at least 10% of the voting power of all
classes of our stock). Nonstatutory options shall have an exercise price of not
less than 85% of the fair market value of a share of common stock on the date
such option is granted. Payment of the exercise price may be made in cash, by
delivery of shares of our common stock, waiver of compensation due or accrued
or, in certain circumstances, through the delivery of a promissory note. The
compensation committee has the authority to determine the time or times at
which options granted under the 1993 Stock Plan become exercisable, provided
that options must expire no later than ten years from the date of grant (five
years with respect to optionees who own at least 10% of the voting power of all
classes of our stock).
2000 Stock Plan
Our board of directors intends to adopt the 2000 Stock Plan in connection
with this offering. Shares available for grant under the 1993 Stock Plan will
be transferred to the 2000 Stock Plan and reserved for issuance thereunder. No
further grants shall then be made under the 1993 Stock Plan. The maximum
aggregate number of shares of common stock that may be optioned and sold under
the 2000 Stock Plan is expected to be 4,000,000 shares (not including available
shares transferred from the 1993 Stock Plan) plus additional shares to be added
on each January 1st equal to the lesser of (i) 5% of our then outstanding
shares, (ii) 2,000,000 shares, or (iii) a lesser amount as determined by our
board of directors. Other terms of the 2000 Stock Plan are substantially
similar to those of the 1993 Stock Plan as described above. The 2000 Stock Plan
must be approved by the stockholders.
2000 Employee Stock Purchase Plan
Our board of directors intends to adopt the 2000 Employee Stock Purchase Plan
to qualify as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code. The plan will be implemented with two-year offering
periods with purchases occurring at six-month intervals commencing on the
completion of this offering. We anticipate initially reserving an aggregate of
500,000 shares of common stock for issuance under the plan plus an annual
increase to be added on each January 1st equal to the lesser of (i) 200,000
shares, (ii) 1% of the outstanding shares on such date, or (iii) a lesser
amount as determined by our board of directors. The initial offering period
will conclude on June 30, 2002. The plan will be administered by our board of
directors or a committee of our board. Employees will be eligible to
participate if they are full time employees. The plan permits eligible
employees to purchase common stock through payroll deductions, which may not
exceed the greater of $25,000 or 10% of an employee's compensation. The price
of stock purchased under the plan will be 85% of the lower of the fair market
value of the common stock at the beginning of the two year offering period or
the applicable purchase date. Employees may end their participation in the
offering at any time during the offering period, and participation ends
automatically on termination of employment. Our board of directors may at any
time amend or terminate the plan, except that no such amendment or termination
may adversely affect shares previously purchased under the plan. In addition,
our board of directors may not, without stockholder
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<PAGE>
approval, materially increase the number of shares of common stock available
for issuance, alter the purchase price formula so as to reduce the purchase
price payable for shares of common stock or materially modify the eligibility
requirements for participation or the benefits available to participants. The
plan will continue in effect for a term of ten years.
401(k) Plan
We have a Section 401(k) Profit Sharing Plan. The 401(k) plan is a tax-
qualified plan covering all full-time employees who are over 21 years of age.
Under the 401(k) plan, participants generally may elect to defer a portion of
their compensation. In addition, at the discretion of the board of directors,
Sonic Innovations may make matching contributions into the 401(k) plan for all
eligible employees. Sonic Innovations has not made any contributions to the
401(k) plan to date.
Advisory Board
We have formed a scientific advisory board to assist us in better serving the
needs of hearing impaired individuals as we move into an era increasingly
dominated by information exchange and technology. The purpose of the advisory
board is to promote insight into hearing impairment and potential hearing aid
technology, as well as to provide guidance for research and development
investment. The advisory board will also review trends in medicine, audiology,
technology, and dispensing practices to determine what will influence future
hearing heath care. Specifically, the advisory board will, among other things,
review:
. application of outer and inner hair cell relationships to speech
processing;
. electronic feedback suppression/cancellation;
. hearing aid signal processing design;
. DSP technologies;
. auditory implants;
. fitting and verification procedures; and
. fitting algorithms.
The members of the advisory board are:
Jeannette S. Johnson, Ph.D. is the Chairperson of the advisory board and was
our Vice President of Regulatory and Clinical Affairs from 1996 through
December 1999. Dr. Johnson is experienced in audiological research, regulatory
compliance, quality systems, education and training, and international
marketing. She was instrumental in providing clinical and regulatory guidance
in getting our NATURA brand to market, as well as in our obtaining ISO 9001
approval and CE Mark certification. Prior to joining us, Dr. Johnson was Vice
President of Corporate Regulatory, Quality and Clinical Affairs for ReSound
Corporation from 1989 to 1996 where she was instrumental in opening the
European and Japanese markets. Prior to that, Dr. Johnson managed clinical
research for the hearing health group within the Life Sciences Sector at the 3M
Company. While at 3M, she directed multi-site field trials to establish safety
and efficacy of cochlear implants for use by children and adults. Earlier, Dr.
Johnson managed audiology programs for the Province of British Columbia and the
Republic of Korea (as a member of the Peace Corps) and was on the faculty of
the University of Southern California and Central Washington State University.
Dr. Johnson has over three decades of experience in audiology and related
fields and has personally fit over 10,000 hearing aids on patients. Dr. Johnson
earned doctoral and master's degrees in audiology from Northwestern University
and a bachelor's degree from the University of Wisconsin at Milwaukee.
49
<PAGE>
Douglas M. Chabries, Ph.D. is the Dean of the College of Engineering and
Technology at Brigham Young University and is recognized internationally as an
authority on digital speech processing and adaptive compression technologies.
He has been a BYU faculty member since 1978. From 1970 to 1978, Dr. Chabries
researched and designed signal processing technologies for underwater acoustic
homing weapons for the U.S. Navy. Dr. Chabries received a B.S. in Electrical
Engineering from the University of Utah, a M.S. in Electrical Engineering from
the California Institute of Technology, and a Ph.D. from Brown University. He
has participated with the National Academy of Science panel on noise
suppression for improvement of speech intelligibility, has been issued
ten patents in the areas of adaptive signal processing and digital hearing
enhancements, and has published numerous professional articles.
Richard W. Christiansen, Ph.D. is Associate Dean of the College of
Engineering and Technology at Brigham Young University and is recognized
internationally as an authority on digital signal processing algorithms used in
pattern detection and recognition and noise removal. He has been a BYU faculty
member since 1978 and is currently Professor of Electrical and Computer
Engineering and Director of the Digital Signal Processing Laboratory and Center
for Signal Processing. Dr. Christiansen received a B.S. in Electrical
Engineering from Rutgers University, an M.S. in Physics from the University of
New Mexico and a Ph.D. in Electrical Engineering from the University of Utah.
He has been issued five patents in the areas of data compression, hearing
enhancement and noise suppression and has authored or co-authored over 40
technical publications.
Robyn M. Cox, Ph.D. is Professor of Audiology and Director of the Hearing Aid
Research Laboratory, School of Audiology and Speech-Language Pathology, at the
University of Memphis. Dr. Cox's research interests include hearing aid fitting
strategies, especially for nonlinear hearing aids, documenting outcomes in
hearing aid rehabilitation with the elderly, the relationship of non-auditory
variables to hearing aid fitting outcomes, and prediction of fitting outcomes
before the fitting. Dr. Cox received a degree in Speech Therapy from the
University of Queensland, Australia, a B.S. in Speech and Hearing and a M.A. in
Audiology and Psychology at Ball State University and a Ph.D. in Audiology from
Indiana University.
David A. Fabry, Ph.D. is Section Head, Audiology, Department of
Otorhinolaryngology, at the Mayo Clinic. He is an Associate Professor at the
Mayo Graduate School of Medicine as well as an Adjunct Associate Professor,
Department of Communication Disorders, at the University of Minnesota. Dr.
Fabry is the President-Elect and Director of the American Academy of Audiology,
and is the Editor of the American Journal of Audiology. In addition, he is an
active member of the American National Standards Institute (ANSI), a member of
the Hearing Instrument Dispenser's Practical Examination Committee of the
Minnesota Department of Health, and participates in the SBIR Study Section of
the National Institute of Health. Dr. Fabry is also a member of a number of
other audiology groups and is an editorial consultant for a number of audiology
publications. Dr. Fabry has presented at many national and international
meetings and has authored or co-authored 40 technical publications. Dr. Fabry
received a B.A. in Psychology, an M.A. in Audiology, and a Ph.D. in Speech and
Hearing Science, all from the University of Minnesota.
50
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1997, there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which we were or are to be
a party in which the amount involved exceeds $60,000, and in which any
director, executive officer, holder of more than 5% of our common stock or any
member of the immediate family of any of these people had or will have a direct
or indirect material interest other than compensation agreements and other
arrangements described in "Management" and the transactions described below.
Sales of Our Preferred Stock, Convertible Notes and Warrants
The following table summarizes the private placement transactions since
January 1, 1997 in which we sold preferred stock, convertible notes and
warrants to our directors, executive officers, 5% stockholders and persons and
entities affiliated with them.
<TABLE>
<CAPTION>
No. of Shares of Preferred
Stock
---------------------------
No. of Shares
Series Convertible Subject to
B Series C Series D Notes Warrants
------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
Accel Partners......... 831,770 942,120 500,000 $853,876 85,388
Entities affiliated with
Morgenthaler Ventures.. -- 2,500,000 537,722 601,563 60,156
Entities affiliated with
MPM Asset Management... -- -- 3,600,000 850,442 85,044
Entities affiliated with
New Enterprise
Associates (NEA)....... -- 2,500,000 537,722 708,312 70,831
Utah Ventures........... 110,209 177,033 62,500 30,000 3,000
Entities affiliated with
Venrock Associates..... 831,770 942,120 500,000 853,876 85,388
Entities affiliated with
The Travelers Insurance
Company................ 415,884 471,060 306,590 438,145 43,815
</TABLE>
Many of the members of our board of directors are affiliated with entities
that have invested in Sonic Innovations since January 1, 1997. Dr. Anthony
Evnin is a General Partner of Venrock Associates. Dr. Luke Evnin is a General
Partner of MPM Asset Management and previously was a General Partner at Accel
Partners. Mr. Shaffer is a General Partner of Morgenthaler Ventures. Dr. Van
Bladel is a Partner of New Enterprise Associates (NEA). Dr. Wolfe is a General
Partner of Utah Ventures.
Preferred Stock. In May 1997, we sold shares of our Series B Preferred Stock
at a price of $0.71 per share. In October 1997, we sold additional shares of
our Series B Preferred Stock at a price of $1.42 per share. In October 1997, we
also sold shares of our Series C Preferred Stock at a price of $1.60 per share.
In October 1998, we sold shares of our Series D Preferred Stock at a price of
$2.00 per share.
Convertible Notes and Warrants. During July and August of 1999, we sold 6%
convertible promissory notes in the aggregate principal amount of $4,500,000.
The principal and interest on those notes will convert upon the closing of this
offering into common stock at the initial public offering price. Assuming an
initial public offering price of $ per share, each $1,000 of principal and
interest will convert into shares of common stock. As part of the sale
of the convertible notes, we also issued warrants exercisable for
450,000 shares of common stock at a per share price of $2.00.
Hoya Healthcare Corporation
In December 1999, we entered into an agreement with Hoya Healthcare
Corporation that provides for Hoya to become our exclusive distributor of
branded products, including NATURA and CONFORMA, in Japan. We have retained the
rights to sell certain hearing aid componentry to other
51
<PAGE>
companies which distribute in the Japanese market. In connection with the
strategic alliance, Hoya purchased $4.0 million of our 6% convertible
promissory notes, which will convert into shares of our common stock at 93% of
the initial public offering price. In addition, Hoya has agreed to purchase an
additional $6.0 million of convertible promissory notes under the following
schedule:
. If the IPO occurs by March 31, 2000, Hoya will purchase a $6.0 million
convertible note upon the IPO, convertible at the IPO price.
. If the IPO occurs between April 1, 2000 and June 30, 2000, Hoya will
purchase a $3.0 million convertible note on March 31, 2000, convertible
at 93% of the IPO price, and a $3.0 million convertible note upon the
IPO convertible at the IPO price.
. If the IPO occurs after June 30, 2000, Hoya will purchase a $3.0 million
convertible note on March 31, 2000, and a $3.0 million convertible note
on June 30, 2000, both convertible at 93% of the IPO price.
From time to time, we have granted stock options to some of our officers and
directors. See "Management--Director Compensation" and "--Stock Options Granted
in the Fiscal Year Ended December 31, 1999."
We believe that the shares issued in the above described transactions were
sold at the then fair market value, as determined by the Board of Directors,
and that the terms of all the above described transactions were no less
favorable than we could have obtained from unaffiliated third parties.
52
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our common stock as of December 31, 1999, and as
adjusted to reflect the sale of the common stock in this offering, by:
. each person, or group of affiliated persons, who is known by us to own
beneficially more than 5% of the common stock;
. each of our directors;
. each executive officer named in the Summary Compensation Table; and
. all of our directors and executive officers as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Number of Beneficially Owned
Shares ------------------------
Beneficially Before After
Name of Beneficial Owner Owned(1) Offering Offering
- ------------------------ ------------ ---------- ----------
<S> <C> <C> <C>
Entities affiliated with Venrock
Associates......................... 4,397,218 16.3%
30 Rockefeller Plaza #5508
New York, NY 10112
Entities affiliated with Accel
Partners........................... 4,393,309 16.3
One Palmer Square
Princeton, NJ 08542
Entities affiliated with MPM Asset
Management......................... 3,685,044 13.6
601 Gateway Blvd., Suite 360
South San Francisco, CA 94080
Entities affiliated with New
Enterprise Associates(2)........... 3,114,886 11.5
2490 Sand Hill Road
Menlo Park, CA 94025
Entities affiliated with
Morgenthaler Venture Partners(2)... 3,104,211 11.5
2730 Sand Hill Road
Menlo Park, CA 94025
Entities affiliated with The
Travelers Insurance Company........ 2,256,320 8.4
205 Columbus Blvd.
Hartford, CT 06183
Hoya Healthcare Corporation.........
Shinjuku i-Land Tower
8F. 5-1, Nishi-Shinjuku 6-chome
Shinjuku-ku, Tokyo 163-1308
Japan
Andrew G. Raguskus(3)............... 642,958 2.4
Jorgen Heide(4)..................... 113,645 *
Gregory N. Koskowich(5)............. 119,792 *
Michael P. Monahan(4)............... 66,250 *
Orlando P. Rodrigues(5)............. 92,708 *
Anthony B. Evnin, Ph.D.(6).......... 4,403,551 16.3
Luke B. Evnin, Ph.D.(7)............. 3,691,377 13.7
Kevin J. Ryan....................... -- *
G. Gary Shaffer(8).................. 3,104,211 11.5
Sigrid Van Bladel, Ph.D.(9)......... 3,114,886 11.5
Allan M. Wolfe, M.D.(10)............ 1,279,840 4.7
All directors and executive officers
as a group(11) (13 persons)........ 16,829,218 60.5
</TABLE>
- --------
53
<PAGE>
* Represents less than 1% of our outstanding common stock.
(1) Based on 27,015,871 shares outstanding as of December 31, 1999, assuming
conversion of outstanding preferred stock and cash exercise of outstanding
warrants to purchase 450,000 shares of common stock, but excluding shares
of common stock issuable upon conversion of convertible promissory notes.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to securities, subject to community property
laws, where applicable. Shares of common stock subject to options or
warrants that are presently exercisable or exercisable within 60 days are
deemed to be beneficially owned by the person holding such options for the
purpose of computing the percentage ownership of such, but are not treated
as outstanding for the purpose of computing the percentage of any other
person.
(2) Includes options exercisable for 6,333 shares of common stock within 60
days of December 31, 1999.
(3) Includes options exercisable for 328,958 shares of common stock within 60
days of December 31, 1999. Excludes options that vest upon reaching
certain performance milestones.
(4) Represents shares subject to options exercisable within 60 days of
December 31, 1999.
(5) Represents shares subject to options exercisable within 60 days of
December 31, 1999. Excludes options that vest upon reaching certain
performance milestones.
(6) Includes 4,397,218 shares of common stock held by entities associated with
Venrock Associates, of which Dr. Anthony Evnin is a General Partner. Dr.
Anthony Evnin disclaims beneficial interest in those shares. Includes
options exercisable for 6,333 shares of common stock exercisable within 60
days of December 31, 1999.
(7) Includes 3,685,044 shares of common stock held by entities associated with
MPM Asset Management, of which Dr. Luke Evnin is a General Partner. Dr.
Luke Evnin disclaims beneficial ownership in those shares. Includes
options exercisable for 6,333 shares of common stock within 60 days of
December 31, 1999.
(8) Represents shares beneficially owned by entities affiliated with
Morgenthaler Ventures, of which Mr. Shaffer is a General Partner. Mr.
Shaffer disclaims beneficial ownership in those shares. Includes options
exercisable for 6,333 shares of common stock within 60 days of December
31, 1999.
(9) Represents shares beneficially owned by entities affiliated with New
Enterprise Associates, of which Dr. Van Bladel is a Partner. Dr. Van
Bladel disclaims beneficial ownership in those shares. Includes options
exercisable for 6,333 shares of common stock within 60 days of December
31, 1999.
(10) Represents shares beneficially owned by Utah Ventures, of which Dr. Wolfe
is a General Partner. Dr. Wolfe disclaims beneficial ownership in those
shares. Includes options exercisable for 6,333 shares of common stock
within 60 days of December 31, 1999.
(11) Includes options exercisable for 810,518 shares of common stock within 60
days of December 31, 1999.
54
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Immediately following the closing of this offering, our authorized capital
stock will consist of 70,000,000 shares of common stock, $0.001 par value per
share, and 5,000,000 shares of preferred stock, $0.001 par value per share. As
of December 31, 1999, there were outstanding shares of common stock held
of record by 92 stockholders, warrants to purchase 72,129 shares of common
stock and options to purchase 4,903,289 shares of common stock.
Common Stock
Subject to preferences that may apply to shares of preferred stock
outstanding at the time, 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 our board of directors may from time to time
determine. Each stockholder is entitled to one vote for each share of common
stock held on all matters submitted to a vote of stockholders. Cumulative
voting for the election of directors is not provided for in our certificate of
incorporation, which means that the holders of a majority of the shares voted
can elect all of the directors then standing for election. The common stock is
not entitled to preemptive rights and is not subject to conversion or
redemption. Each outstanding share of common stock is, and all shares of common
stock to be outstanding upon completion of this offering will be, fully paid
and nonassessable.
Preferred Stock
Pursuant to our certificate of incorporation, our board of directors has the
authority, without further action by the stockholders, to issue up to 5,000,000
shares of preferred stock in one or more series and to fix the designations,
powers, preferences, privileges, and relative participating, optional or
special rights as well as the qualifications, limitations or restrictions
thereof, including dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences, any or all of which may be greater than
the rights of the common stock. Our board of directors, without stockholder
approval, can issue preferred stock with voting, conversion or other rights
that could adversely affect the voting power and other rights of the holders of
common stock. Preferred stock could thus be issued quickly with terms
calculated to delay or prevent a change in control or make removal of
management more difficult. Additionally, the issuance of preferred stock may
have the effect of decreasing the market price of the common stock, and may
adversely affect the voting and other rights of the holders of common stock. At
present, we have no plans to issue any of the preferred stock following this
offering.
Warrants
Upon the closing of this offering, we will have warrants outstanding to
purchase 32,789 shares of common stock at $1.60 per share that expire in May
2003. We also have warrants outstanding to purchase 59,009 shares (39,340
shares if this offering is completed by May 31, 2000) of common stock at $2.00
per share, which expire in December 2004. The holder of these warrants is
entitled to antidilution protection in the event we issue shares of common
stock at a price less than $2.00 per share and is also entitled to certain
registration rights as described below.
Registration Rights
The holders of 24,262,155 shares of common stock and warrants to purchase
39,340 shares of common stock have the right to require us to register those
shares under the Securities Act of 1933.
55
<PAGE>
If we register any of our common stock for our own account or for the account
of other security holders, these holders are entitled to include their shares
of common stock in the registration, subject to the ability of the underwriters
to limit the number of shares included in the offering under certain
circumstances. In addition, subject to limitations contained in the
registration rights agreement, the holders of 24,262,155 shares of common stock
may require that we use our best efforts to register their shares if the
holders of at least 30% of those shares make the request. Furthermore, the
holders of at least 20% of those shares may require us to register their shares
on a Form S-3 registration statement when we are eligible to use Form S-3. We
will bear all fees, costs and expenses of any such registration, other than
underwriting discounts and commissions.
Delaware Anti-Takeover Law and Charter Provisions
Certain provisions of our certificate of incorporation and bylaws may have
the effect of making it more difficult for a third party to acquire, or of
discouraging a third party from attempting to acquire, control of us. Such
provisions could limit the price that certain investors might be willing to pay
in the future for shares of our common stock. Certain of these provisions allow
us to issue preferred stock without any vote or further action by the
stockholders, require advance notification of stockholder proposals and
nominations of candidates for election as directors, and eliminate cumulative
voting in the election of directors. In addition, our bylaws provide that
special meetings of the stockholders may be called only by the board of
directors and that the authorized number of directors may be changed only by
resolution of the board of directors. These provisions may make it more
difficult for stockholders to take certain corporate actions and could have the
effect of delaying or preventing a change in control of our Company.
In addition, we are subject to Section 203 of the Delaware General
Corporation Law. This law prohibits a Delaware corporation from engaging in any
business combination with any interested stockholder, unless any of the
following conditions are met. First, this law does not apply if prior to the
date of the transaction, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder. Second, the law does not apply
if upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at least
85% of the voting stock of the corporation outstanding at the time the
transaction commenced, excluding for purposes of determining the number of
shares outstanding those shares owned by persons who are directors and also
officers and those shares owned by employee stock plans in which employee
participants do not have the right to determine confidentially whether shares
held subject to the plan will be tendered in a tender or exchange offer. Third,
the law does not apply if, at or after the date of the transaction, the
business combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 66 2/3% of the outstanding voting stock which is
not owned by the interested stockholder.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the Company's common stock will be
American Stock Transfer & Trust Company. The Transfer Agent's telephone number
is (718) 921-8217.
56
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our common
stock. Future sales of substantial amounts of common stock in the pubic market
could adversely affect the market price of our common stock.
Upon completion of this offering, we will have outstanding an aggregate of
shares of common stock, assuming the issuance of shares of common
stock offered hereby and no exercise of options after December 31, 1999. Of
these shares, the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, except
for any shares purchased by "affiliates" of Sonic Innovations as that term is
defined in Rule 144 under the Securities Act. Shares purchased by affiliates
may generally only be sold pursuant to an effective registration statement
under the Securities Act or in compliance with limitations of Rule 144 as
described below.
The remaining shares of common stock held by existing stockholders were
issued and sold by us in reliance on exemptions from the registration
requirements of the Securities Act. All of these shares will be subject to
"lock-up" agreements providing that the stockholders will not offer, sell or
otherwise dispose of any of the shares of common stock owned by them for a
period of 180 days after the date of this prospectus. Goldman, Sachs & Co.,
however, may in its sole discretion, at any time without notice, release all or
any portion of the shares subject to lock-up agreements. Upon expiration of the
lock-up agreements, shares will become eligible for sale pursuant to
Rule 144(k), shares will become eligible for sale under Rule 144 and
shares will become eligible for sale under Rule 701.
<TABLE>
<CAPTION>
Days After Date Shares Eligible
Of This Prospectus For Sale Comment
------------------ --------------- -------
<C> <C> <S>
Upon Effectiveness.. Shares sold in the offering
180 days............ Lock-up released; shares saleable under
Rules 144(k),
144 and 701
</TABLE>
Immediately after the completion of this offering, we intend to file a
registration statement on Form S-8 under the Securities Act to register all of
the shares of common stock issued or reserved for future issuance under our
stock option plans and our stock purchase plan. Based upon the number of shares
subject to outstanding options as of December 31, 1999 and currently reserved
for issuance under our stock plans, this registration statement would cover
approximately shares in addition to annual increases in the number of
shares available under the stock option plans and stock purchase plan pursuant
to the terms of such plans. Shares registered under the registration statement
will generally be available for sale in the open market immediately after the
180 day lock-up agreements expire.
Also beginning six months after the date of this offering, holders of
shares of our common stock, including shares issuable upon conversion of
preferred stock, will be entitled to certain rights with respect to
registration of these shares for sale in the public market. See "Description of
Capital Stock--Registration Rights." Registration of these shares under the
Securities Act would result in these shares becoming freely tradable without
restriction under the Securities Act immediately upon effectiveness of the
registration.
57
<PAGE>
Rule 144
In general, under Rule 144 as currently in effect, beginning 180 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell in "broker's
transactions" or to market makers, within any three-month period, a number of
shares that does not exceed the greater of:
. 1% of the number of shares of common stock then outstanding (which will
equal approximately shares immediately after this offering); or
. the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to the availability of current
public information about Sonic Innovations.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been our affiliate at
any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without having to comply with the manner of sale, public information,
volume limitation or notice filing provisions of Rule 144. Therefore,
"144(k) shares" may be sold immediately upon expiration of the lock-up
agreements.
Rule 701
In general, under Rule 701, any of our employees, directors, officers,
consultants or advisors who purchase shares from us in connection with a
compensatory stock or option plan or other written agreement before the
effective date of this offering is entitled to sell such shares 180 days after
the effective date of this offering in reliance on Rule 144, in the case of
affiliates, without having to comply with the holding period and notice filing
requirements of Rule 144 and, in the case of non-affiliates, without having to
comply with the public information, volume limitation or notice filing
requirements of Rule 144.
58
<PAGE>
UNDERWRITING
Sonic Innovations and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions, each underwriter has severally agreed to purchase the
number of shares indicated in the following table. Goldman, Sachs & Co.,
Deutsche Bank Securities Inc. and U.S. Bancorp Piper Jaffray Inc. are the
representatives of the underwriters.
<TABLE>
<CAPTION>
Number
Underwriters of Shares
------------ ---------
<S> <C>
Goldman, Sachs & Co. ..............................................
Deutsche Bank Securities Inc. .....................................
U.S. Bancorp Piper Jaffray Inc.....................................
--------
Total............................................................
========
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
shares from Sonic Innovations to cover such sales. They may exercise
that option for 30 days. If any shares are purchased pursuant to this option,
the underwriters will severally purchase shares in approximately the same
proportion as set forth in the table above.
The following table shows the per share and total underwriting discount to be
paid to the underwriters by Sonic Innovations. Such amounts are shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares.
<TABLE>
<CAPTION>
Paid by Sonic Innovations
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per Share.......................................... $ $
Total.............................................. $ $
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the initial public offering price. Any
such securities dealers may resell any shares purchased from the underwriters
to certain other brokers or dealers at a discount of up to $ per share from
the initial public offering price. If all the shares are not sold at the
initial offering price, the representatives may change the offering price and
the other selling terms.
Sonic Innovations and its officers, directors and principal stockholders have
agreed with the underwriters not to dispose of or hedge any of their common
stock or securities convertible into or exchangeable for shares of common stock
during the period from the date of this prospectus continuing through the date
180 days after the date of this prospectus, except with the prior written
consent of the representatives. This agreement does not apply to our issuance
of securities pursuant to any existing employee benefit plans or in connection
with acquisition transactions, provided that the recipients of such securities
agree not to dispose of or hedge any of such securities for the same 180-day
period. See "Shares Eligible for Future Sale" for a discussion of transfer
restrictions.
At the request of Sonic Innovations, the underwriters have reserved for sale,
at the initial public offering price, up to shares of common stock
for certain directors, employees and friends of Sonic Innovations. There can be
no assurance that any of the reserved shares will be so purchased. The number
of shares available for sale to the general public in the offering will be
reduced by the number of reserved shares sold. Any reserved shares not so
purchased will be offered to the general public on the same basis as the other
shares offered hereby.
59
<PAGE>
Prior to this offering, there has been no public market for the common stock.
The initial public offering price for the common stock will be negotiated
between Sonic Innovations and the representatives of the underwriters. Among
the factors to be considered in determining the initial public offering price
of the shares, in addition to prevailing market conditions, will be Sonic
Innovations' historical performance, estimates of Sonic Innovations' business
potential and earnings prospects, an assessment of Sonic Innovations'
management and the consideration of the above factors in relation to market
valuations of companies in related businesses.
Application has been made for quotation of the common stock on The Nasdaq
National Market under the symbol "SNCI."
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a particular
underwriter repays to the underwriters a portion of the underwriting discount
received by it because the representatives have repurchased shares sold by or
for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the common stock. As a result, the price of the
common stock may be higher than the price that otherwise might exist in the
open market. If these activities are commenced, they may be discontinued by the
underwriters at any time. These transactions may be effected on The Nasdaq
National Market, in the over-the-counter market or otherwise.
The underwriters do not expect sales to discretionary accounts to exceed five
percent of the total number of shares offered.
Sonic Innovations estimates that its share of the total expenses of the
offering, excluding underwriting discount, will be approximately $ .
Sonic Innovations has agreed to indemnify the several underwriters against
certain liabilities, including liabilities under the Securities Act of 1933.
60
<PAGE>
VALIDITY OF THE COMMON STOCK
The validity of the common stock offered by this prospectus will be passed
upon for Sonic Innovations by Wilson Sonsini Goodrich & Rosati, Professional
Corporation, Palo Alto, California, and for the underwriters by Sullivan &
Cromwell, Washington, D.C. As of the date of this prospectus, an investment
partnership composed of current and former members of and persons associated
with Wilson Sonsini Goodrich & Rosati, Professional Corporation, and an
individual member of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, beneficially own an aggregate of 14,085 shares of Sonic
Innovations common stock.
EXPERTS
The consolidated financial statements of Sonic Innovations, Inc. and
subsidiary as of December 31, 1998 and 1999 and for each of the three years in
the period ended December 31, 1999 and Schedule II included in this prospectus
and elsewhere in the registration statement have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included herein in reliance upon the authority of
said firm as experts in giving said reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the
Securities Act with respect to the shares sold in this offering. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. For further
information with respect to us and our common stock, reference is made to the
Registration Statement and the exhibits and schedules filed as a part thereof.
You should read the documents filed with the SEC as exhibits to the
registration statement for a more complete description of the matter involved.
We will be filing quarterly and annual reports, proxy statements and other
information with the SEC. You may read and copy any document that we file at
the public reference facilities of the SEC at Room 1024, 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further
information on the public reference rooms. Our SEC filings are also available
to the public from the SEC's web site at http://www.sec.gov.
61
<PAGE>
SONIC INNOVATIONS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999............. F-3
Consolidated Statements of Operations for Each of the Three Years in the
Period Ended December 31, 1999.......................................... F-4
Consolidated Statements of Stockholders' Deficit for Each of the Three
Years in the Period Ended December 31, 1999............................. F-5
Consolidated Statements of Cash Flows for Each of the Three Years in the
Period Ended December 31, 1999.......................................... F-6
Notes to Consolidated Financial Statements............................... F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sonic Innovations, Inc.:
We have audited the accompanying consolidated balance sheets of Sonic
Innovations, Inc. (a Delaware corporation) and subsidiary (collectively, the
"Company") as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' deficit and cash flows for each of the
three years in the period ended December 31, 1999. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Sonic Innovations, Inc. and subsidiary as of December 31, 1998 and 1999, and
the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
Salt Lake City, Utah
February 3, 2000
F-2
<PAGE>
SONIC INNOVATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 11,929,540 $ 5,939,255
Accounts receivable, net.......................... 1,647,632 4,924,684
Inventories....................................... 243,620 2,368,373
Prepaid expenses and other........................ 258,764 697,525
------------ ------------
Total current assets............................. 14,079,556 13,929,837
------------ ------------
PROPERTY AND EQUIPMENT:
Furniture and office equipment.................... 1,169,804 2,104,136
Machinery and equipment........................... 977,784 2,083,518
Computer equipment................................ 1,222,108 1,730,600
Leasehold improvements............................ 123,423 107,762
------------ ------------
3,493,119 6,026,016
Less accumulated depreciation and amortization.... (976,736) (2,288,332)
------------ ------------
Net property and equipment....................... 2,516,383 3,737,684
------------ ------------
OTHER ASSETS...................................... 276,495 794,530
------------ ------------
Total assets..................................... $ 16,872,434 $ 18,462,051
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Line of credit.................................... $ 770,429 $ 1,966,142
Convertible promissory notes, including accrued
interest......................................... -- 8,064,476
Current portion of capital lease obligations...... 547,842 863,585
Current portion of technology license obligation.. 170,000 100,000
Accounts payable.................................. 2,128,017 3,873,661
Accrued payroll related expenses.................. 788,735 1,577,895
Other accrued expenses............................ 968,345 2,602,699
------------ ------------
Total current liabilities........................ 5,373,368 19,048,458
LONG-TERM LIABILITIES:
Capital lease obligations, net of current
portion.......................................... 1,440,400 1,935,445
Technology license obligation, net of current
portion.......................................... 250,000 150,000
------------ ------------
Total liabilities................................ 7,063,768 21,133,903
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, 4, 5
and 6)
MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED
STOCK:
Series B, 8,807,138 shares designated and
outstanding (aggregate liquidation preference of
$6,367,561 as of December 31, 1999).............. 7,428,356 7,951,574
Series C, 7,907,185 shares designated, 7,874,396
shares outstanding (aggregate liquidation
preference of $12,599,034 as of December 31,
1999)............................................ 13,619,934 14,609,593
Series D, 6,425,000 shares designated, 6,259,000
and 6,277,000 shares outstanding, respectively
(aggregate liquidation preference of $12,554,000
as of December 31, 1999)......................... 12,613,727 13,568,395
------------ ------------
Total mandatorily redeemable convertible
preferred stock................................. 33,662,017 36,129,562
------------ ------------
STOCKHOLDERS' DEFICIT:
Preferred stock, Series A convertible, $.001 par
value; 853,621 shares designated and outstanding
(aggregate liquidation preference of $356,913 as
of December 31, 1999) ........................... 341,711 341,711
Common stock, $.001 par value; 35,000,000 shares
authorized, 2,431,728 and 2,753,716 shares
outstanding, respectively........................ 2,432 2,754
Additional paid-in capital........................ 246,520 6,255,983
Deferred stock-based compensation................. -- (3,612,620)
Accumulated deficit............................... (24,440,197) (41,777,602)
Accumulated other comprehensive loss.............. (3,817) (11,640)
------------ ------------
Total stockholders' deficit...................... (23,853,351) (38,801,414)
------------ ------------
Total liabilities and stockholders' deficit.... $ 16,872,434 $ 18,462,051
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
SONIC INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Net sales............................. $ -- $ 2,142,958 $ 28,694,146
Cost of sales (exclusive of $46,709 of
stock-based compensation shown
below)............................... -- 2,056,225 17,061,973
----------- ------------ ------------
Gross profit...................... -- 86,733 11,632,173
----------- ------------ ------------
Operating expenses:
Selling, general and administrative
(exclusive of $840,495 of stock-
based compensation shown below).... 1,470,958 8,443,791 17,342,410
Research and development (exclusive
of $138,286 of stock-based
compensation shown below).......... 3,855,170 5,832,131 7,015,298
Stock-based compensation............ -- -- 1,025,490
----------- ------------ ------------
Total operating expenses.......... 5,326,128 14,275,922 25,383,198
----------- ------------ ------------
Operating loss........................ (5,326,128) (14,189,189) (13,751,025)
----------- ------------ ------------
Other income (expense):
Interest expense.................... (50,603) (185,447) (990,005)
Interest and other income........... 141,849 496,614 124,657
Foreign currency exchange loss...... -- -- (289,487)
----------- ------------ ------------
Total other income (expense)...... 91,246 311,167 (1,154,835)
----------- ------------ ------------
Net loss.............................. (5,234,882) (13,878,022) (14,905,860)
Accretion on mandatorily redeemable
convertible preferred stock.......... (593,403) (1,561,470) (2,431,545)
----------- ------------ ------------
Net loss applicable to common
stockholders......................... $(5,828,285) $(15,439,492) $(17,337,405)
=========== ============ ============
Basic and diluted net loss per common
share................................ $ (4.33) $ (8.22) $ (6.69)
=========== ============ ============
Weighted average number of common
shares outstanding................... 1,345,937 1,878,765 2,590,055
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
SONIC INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Series B, C and D
Mandatorily Redeemable Series A
Convertible Preferred Convertible Deferred
Stock (Non-Equity) Preferred Stock Common Stock Additional Stock-based Accumu-
---------------------- ---------------- ---------------- Paid-in Compre- Compen- lated
Shares Amount Shares Amount Shares Amount Capital hensive Loss sation Deficit
---------- ----------- ------- -------- --------- ------ ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
December 31,
1996............ 6,292,927 $ 4,635,962 761,313 $281,710 1,294,800 $1,295 $ 88,177 $ -- $ -- $ (3,172,420)
Exercise of
common stock
options......... 65,000 65 6,535
Extension of
life of certain
stock options... 22,400
Series B
preferred stock
issued for
services........ 17,605 24,999
Sale of Series B
preferred stock,
net of issuance
costs........... 2,496,606 1,825,192
Sale of Series C
preferred stock,
net of issuance
costs........... 7,825,000 12,475,783
Series B
preferred stock
accretion....... 447,336 (447,336)
Series C
preferred stock
accretion....... 146,067 (146,067)
Other
comprehensive
income.......... 51,221
Net loss........ (5,234,882) (5,234,882)
---------- ----------- ------- -------- --------- ------ ---------- ------------ ----------- ------------
Comprehensive
loss............ $ (5,183,661)
============
BALANCE,
December 31,
1997............ 16,632,138 19,555,339 761,313 281,710 1,359,800 1,360 117,112 $ -- -- (9,000,705)
Exercise of
common stock
options......... 1,071,928 1,072 129,408
Exercise of
Series A
preferred stock
warrants........ 92,308 60,001
Series C
preferred stock
issued for
services........ 49,396 79,032
Series D
preferred stock
issued for
services........ 9,000 18,000
Sale of Series D
preferred stock,
net of issuance
costs........... 6,250,000 12,448,176
Series B
preferred stock
accretion....... 494,867 (494,867)
Series C
preferred stock
accretion....... 919,052 (919,052)
Series D
preferred stock
accretion....... 147,551 (147,551)
Other
comprehensive
loss............ (55,038) --
Net loss........ (13,878,022) (13,878,022)
---------- ----------- ------- -------- --------- ------ ---------- ------------ ----------- ------------
Comprehensive
loss............ $(13,933,060)
============
BALANCE,
December 31,
1998............ 22,940,534 33,662,017 853,621 341,711 2,431,728 2,432 246,520 $ -- -- (24,440,197)
Exercise of
common stock
options......... 321,988 322 52,182
Series D
preferred stock
issued for
services........ 18,000 36,000
Series B
preferred stock
accretion....... 523,218 (523,218)
Series C
preferred stock
accretion....... 989,659 (989,659)
Series D
preferred stock
accretion....... 918,668 (918,668)
Accelerated
vesting of
certain stock
options......... 170,000
Warrants granted
with convertible
promissory
notes........... 945,000
Warrants granted
with debt
agreement....... 204,171
Deferred stock-
based
compensation.... 4,638,110 (4,638,110)
Stock-based
compensation.... 1,025,490
Other
comprehensive
loss............ (7,823)
Net loss........ (14,905,860) (14,905,860)
---------- ----------- ------- -------- --------- ------ ---------- ------------ ----------- ------------
Comprehensive
loss............ $(14,913,683)
============
BALANCE,
December 31,
1999............ 22,958,534 $36,129,562 853,621 $341,711 2,753,716 $2,754 $6,255,983 $(3,612,620) $(41,777,602)
========== =========== ======= ======== ========= ====== ========== =========== ============
<CAPTION>
Accumu-
lated
Other
Compre-
hensive
Income/
(Loss) Total
--------- -------------
<S> <C> <C>
BALANCE,
December 31,
1996............ $ -- $ (2,801,238)
Exercise of
common stock
options......... 6,600
Extension of
life of certain
stock options... 22,400
Series B
preferred stock
issued for
services........ --
Sale of Series B
preferred stock,
net of issuance
costs........... --
Sale of Series C
preferred stock,
net of issuance
costs........... --
Series B
preferred stock
accretion....... (447,336)
Series C
preferred stock
accretion....... (146,067)
Other
comprehensive
income.......... 51,221 51,221
Net loss........ (5,234,882)
--------- -------------
Comprehensive
loss............
BALANCE,
December 31,
1997............ 51,221 (8,549,302)
Exercise of
common stock
options......... 130,480
Exercise of
Series A
preferred stock
warrants........ 60,001
Series C
preferred stock
issued for
services........ --
Series D
preferred stock
issued for
services........ --
Sale of Series D
preferred stock,
net of issuance
costs........... --
Series B
preferred stock
accretion....... (494,867)
Series C
preferred stock
accretion....... (919,052)
Series D
preferred stock
accretion....... (147,551)
Other
comprehensive
loss............ (55,038) (55,038)
Net loss........ -- (13,878,022)
--------- -------------
Comprehensive
loss............
BALANCE,
December 31,
1998............ (3,817) (23,853,351)
Exercise of
common stock
options......... 52,504
Series D
preferred stock
issued for
services........ --
Series B
preferred stock
accretion....... (523,218)
Series C
preferred stock
accretion....... (989,659)
Series D
preferred stock
accretion....... (918,668)
Accelerated
vesting of
certain stock
options......... 170,000
Warrants granted
with convertible
promissory
notes........... 945,000
Warrants granted
with debt
agreement....... 204,171
Deferred stock-
based
compensation.... --
Stock-based
compensation.... 1,025,490
Other
comprehensive
loss............ (7,823) (7,823)
Net loss........ (14,905,860)
--------- -------------
Comprehensive
loss............
BALANCE,
December 31,
1999............ $(11,640) $(38,801,414)
========= =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
SONIC INNOVATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss............................. $ (5,234,882) $(13,878,022) $(14,905,860)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization...... 192,176 735,715 1,361,741
Preferred stock issued for
services.......................... 24,999 97,032 36,000
Expense related to remeasurement of
stock options..................... 22,400 -- 170,000
Gain on sale of marketable
securities........................ (12,466) (323,466) --
Gain on sale of property and
equipment......................... (4,077) (4,096) --
Non-cash interest on convertible
promissory notes.................. -- -- 393,750
Stock-based compensation........... -- -- 1,025,490
Changes in assets and liabilities:
Accounts receivable, net.......... -- (1,647,632) (3,352,140)
Inventories....................... -- (243,620) (2,148,704)
Prepaid expenses and other........ (34,241) (223,035) (180,392)
Other assets...................... (154,176) (115,805) (519,939)
Technology license obligation..... (30,000) (50,000) (170,000)
Accounts payable and accrued
expenses......................... 617,288 3,112,008 4,326,628
------------ ------------ ------------
Net cash used in operating
activities..................... (4,612,979) (12,540,921) (13,963,426)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment... (124,939) (544,687) (1,151,852)
Purchase of marketable securities.... (11,493,305) -- --
Proceeds from sale of marketable
securities.......................... 2,370,834 10,500,000 --
Proceeds from sale of property and
equipment........................... 109,420 -- --
Payment received on note receivable.. 33,536 -- --
------------ ------------ ------------
Net cash provided by (used in)
investing activities........... (9,104,454) 9,955,313 (1,151,852)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of convertible
promissory notes.................... -- -- 8,500,000
Line of credit borrowings, net....... -- 770,429 1,195,713
Principal payments on long-term debt
and capital lease obligations....... (136,610) (607,781) (632,277)
Deferred public offering costs....... -- -- (69,661)
Proceeds from exercise of common
stock options....................... 6,600 130,480 52,504
Proceeds from issuance of preferred
stock, net of issuance costs........ 14,300,975 12,448,176 --
Proceeds from exercise of preferred
stock warrants, net of issuance
costs............................... -- 60,001 --
------------ ------------ ------------
Net cash provided by financing
activities..................... 14,170,965 12,801,305 9,046,279
------------ ------------ ------------
EFFECT OF EXCHANGE RATE CHANGES ON
CASH AND CASH EQUIVALENTS........... -- (3,817) 78,714
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS.................... 453,532 10,211,880 (5,990,285)
CASH AND CASH EQUIVALENTS, beginning
of year............................. 1,264,128 1,717,660 11,929,540
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of
year................................ $ 1,717,660 $ 11,929,540 $ 5,939,255
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the year for
interest.......................... $ 50,603 $ 178,447 $ 444,177
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING AND INVESTING ACTIVITIES:
Equipment acquired under capital
leases............................ $ 842,118 $ 1,757,975 $ 1,443,025
Mandatorily redeemable convertible
preferred stock accretion......... $ 593,403 $ 1,561,470 $ 2,431,545
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) NATURE OF OPERATIONS
Sonic Innovations, Inc. (the "Company") began its operations in 1991 and
reincorporated in Delaware in 1997. The Company designs, manufactures and
markets advanced digital hearing aids designed to provide the highest levels of
satisfaction for hearing impaired customers. Capitalizing on a new
understanding of human hearing, the Company has developed patented digital
signal processing, or DSP, technologies and embedded them in the smallest
single-chip DSP platform ever installed in a hearing aid. The Company launched
its first branded line, NATURA, in September 1998. The Company sells finished
hearing aids, partial hearing aids and hearing aid components to hearing care
professionals, distributors and other hearing aid manufacturers in the United
States, and much of Europe, Japan, Australia and Canada.
The Company has incurred operating losses since its inception. The Company is
subject to a number of risks associated with companies in a similar stage of
operations, including dependence on key employees for technology and support,
potential competition from larger, more established companies, the need to
penetrate the market with new products and the ability to obtain adequate
financing to support its growth. The Company's activities to date have been
financed primarily through private placements of equity securities, including
preferred stock issuances of $14,300,000 in 1997 and $12,400,000 in 1998, and
borrowings under a credit facility established in 1998. The Company raised
additional capital by issuing $8,500,000 million of convertible promissory
notes in 1999. The Company is seeking additional capital through the issuance
of equity securities, but there can be no assurance that additional funding
will be available to the Company on acceptable terms, if at all.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Sonic
Innovations, Inc. and its wholly owned subsidiary, Sonic Innovations A/S, a
Danish corporation. All significant intercompany balances and transactions have
been eliminated in consolidation.
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 reported amounts of assets and
liabilities and revenues and expenses, as well as the disclosure of contingent
assets and liabilities. Actual results could differ from those estimates.
Sales, Sales Returns and Concentrations of Credit Risk
The Company sells its branded products directly to hearing care professionals
in the United States and through a network of established distributors in much
of Europe, Japan, Australia and Canada. The Company also sells hearing aid
components to other hearing aid manufacturers. Sales are recognized when
products are shipped. Net sales consist of product sales less provisions for
sales returns, which are made at the time of sale. The Company has a 90-day
return period for its branded products, does not allow returns of its component
products and accounts for returns in accordance with SFAS No. 48. The
provisions for sales returns aggregated $696,000 and $10,088,000 in 1998 and
1999, respectively. As of December 31, 1998 and 1999, allowances for sales
returns of $282,000 and $1,974,000, respectively, were reflected as a reduction
in accounts receivable.
F-7
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Revenues related to the sale of extended warranties are deferred and
recognized on a straight-line basis over the warranty period. As of December
31, 1999, deferred warranty revenue of $87,000 was included in other accrued
expenses.
The Company performs ongoing credit evaluations of its customers and provides
for doubtful accounts, which have been within management's expectations. As of
December 31, 1998 and 1999, the allowances for doubtful accounts were $51,400
and $461,000, respectively. During 1999, the Company had two significant
customers which comprised 26% and 10% of net sales. As of December 31, 1999,
these two customers combined accounted for approximately 38% of the net
accounts receivable balance.
Warranty Costs
At the time of sale, the Company provides for the cost of remaking and
repairing products under warranty. These costs are included in cost of sales.
The warranty period is generally one or two years for branded products and 30
to 120 days for component products. Because of the length of the warranty
period, adjustments to the originally recorded provisions may be necessary from
time to time. In 1998 and 1999, the provisions for warranty costs were $200,000
and $1,318,000, respectively. As of December 31, 1998 and 1999, the warranty
reserve was $83,000 and $364,000, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid, short-term investments purchased
with an original maturity of three months or less to be cash equivalents. As of
December 31, 1998 and 1999, cash equivalents consisted of certificates of
deposit and money market funds totaling $11,197,596 and $47,403, respectively.
Restricted Cash
In July 1999, the Company entered into a lease for its headquarters facility
that required the Company to deposit $560,000 into a restricted account for the
benefit of the landlord in the event of payment default. This amount may be
reduced provided certain financial milestones are met. Upon completion of an
IPO which raises a minimum of $20,000,000, the restricted account may be
reduced to a one-month security deposit of $101,323. As of December 31, 1998
and 1999, $50,000 was on deposit in a restricted account as collateral for a
merchant services agreement. Both of these deposits are long-term in nature and
classified as other assets.
Marketable Securities
During 1998, the Company had marketable securities consisting primarily of
short-term government and corporate securities which were recorded at fair
value. During 1999, the Company had no marketable securities. The proceeds from
sales of available-for-sale marketable securities during 1997 and 1998 were
$2,370,834 and $10,500,000, respectively. The realized gains on those sales
were $12,466 and $323,466 for the years ended December 31, 1997 and 1998,
respectively.
F-8
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Inventories
Inventories are stated at the lower of cost or market value using the FIFO
(first-in, first-out) method. Inventories at December 31, 1998 and 1999
consisted of the following:
<TABLE>
<CAPTION>
1998 1999
-------- ----------
<S> <C> <C>
Raw materials.......................................... $239,257 $1,365,443
Components............................................. -- 501,111
Work in process........................................ 4,363 159,059
Finished goods......................................... -- 342,760
-------- ----------
$243,620 $2,368,373
======== ==========
</TABLE>
Provision is made to reduce excess and obsolete inventories to their
estimated net realizable values. As of December 31, 1998 and 1999, the reserves
for excess and obsolete inventories were $60,000 and $250,000, respectively.
Property and Equipment
Property and equipment are stated at cost. Depreciation and amortization are
calculated using the straight-line method over the estimated useful lives of 7
years for furniture and fixtures and 3 to 5 years for machinery and equipment.
Leasehold improvements are amortized over the lease term of up to 5 years.
Upon the retirement or other disposition of property and equipment, the cost
and related accumulated depreciation or amortization are removed from the
accounts. The resulting gain or loss is included in other income (expense).
Major renewals and betterments are capitalized while minor expenditures for
maintenance and repairs are charged to expense as incurred.
Patent Costs
During 1997, 1998 and 1999, the Company expensed direct costs associated with
obtaining and filing patents of $105,000, $148,000 and $342,000, respectively.
Fair Value of Financial Instruments
The Company's financial instruments consist primarily of cash, cash
equivalents, accounts receivable, accounts payable, debt instruments and
mandatorily redeemable convertible preferred stock. The Company believes that
the carrying amounts of its financial instruments approximate their fair
values. The estimated fair values have been determined using appropriate market
information and valuation methodologies.
Foreign Currency Translation
The accounts of Sonic Innovations A/S are translated into U.S. dollars using
the exchange rate at the balance sheet date for assets and liabilities and the
weighted average exchange rate for the period for revenues, expenses, gains and
losses. Translation adjustments are recorded as a separate component of
comprehensive income (loss). Gains or losses resulting from foreign currency
transactions are included in other income (expense).
F-9
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Comprehensive Income (Loss)
For the year ended December 31, 1997, other comprehensive income consisted of
unrealized gains on marketable securities. For the year ended December 31,
1998, the components of other comprehensive loss consisted of a $3,817 foreign
currency translation adjustment and a $51,221 change in unrealized gain on
marketable securities. For the year ended December 31, 1999, other
comprehensive loss consisted of a foreign currency translation adjustment.
Research and Development
Research and development costs, which include basic research, development of
useful ideas into new products, continuing support and enhancement of existing
products and regulatory and clinical activities, are expensed as incurred.
Advertising
Advertising costs are expensed as incurred. Advertising costs for 1998 and
1999 were $562,000 and $2,606,000, respectively. No advertising costs were
incurred in 1997.
Net Loss Per Common Share
Basic and diluted net loss per common share were computed by dividing net
loss applicable to common stockholders by the weighted average number of common
shares outstanding. Common stock equivalents were not considered since their
effect would be antidilutive, thereby decreasing the net loss per common share.
As of December 31, 1999, common stock equivalents consisted of options for
4,903,289 shares; warrants for 541,798 shares (assuming conversion into common
stock of 32,789 shares of Series C preferred stock and 59,009 shares of Series
D preferred stock issuable upon exercise of outstanding warrants); $8,500,000
of convertible promissory notes convertible at either 93% or 100% of the
Company's initial public offering price; and 23,812,155 shares of convertible
preferred stock convertible on a share-for-share basis into common stock.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 ("SFAS No. 133") "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 requires the
recognition of all derivatives as either assets or liabilities in the balance
sheet and the measurement of those instruments at fair value. Gains and losses
resulting from changes in the values of those derivatives would be accounted
for depending on the use of the derivative and whether it qualifies for hedge
accounting. SFAS No. 133 is expected to be effective for the Company's year
ending December 31, 2001. The Company currently expects this new pronouncement
to have no material impact on its financial statements.
(3) LINE OF CREDIT
The Company has a lending arrangement with a bank that includes a line of
credit agreement providing for maximum borrowings of $4,000,000 (subject to
various limitations). Borrowings under the line of credit at December 31, 1999
were $1,966,142 and bear interest at the bank's prime rate plus 2.0% (10.5% at
December 31, 1999). The agreement expires on June 30, 2000. Borrowings under
the line of credit are secured by substantially all assets of the Company. The
line of credit requires financial and other covenants that include the
maintenance of a specified level of tangible
F-10
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
net worth, as well as restrictions on incurring additional unsubordinated
indebtedness, pledging or encumbering the Company's assets, paying dividends
and entering into mergers and acquisitions. As of December 31, 1999, the
Company was in compliance with all covenants. In connection with obtaining the
line of credit, the Company issued warrants to the bank to purchase 59,009
shares of Series D convertible preferred stock at an exercise price of $2.00
per share. The Company can reduce the number of shares issued pursuant to these
warrants to 39,340 shares if the Company completes an initial public offering
by May 31, 2000. The warrants expire in December 2004. The estimated fair value
of the warrants at the grant date of $204,000 was recorded as a debt issuance
cost and is being amortized over the term of the agreement. Subsequent to year-
end, the Company repaid all borrowings under the line of credit.
This line of credit replaced a $5,000,000 line of credit that was established
in 1998 which bore interest at the bank's prime rate plus 0.5% (8.25% at
December 31, 1998). Borrowings under that line of credit at December 31, 1998
were $770,429. During 1999, the Company's non-compliance with certain financial
covenants under the 1998 line of credit was permanently waived by the bank upon
entering into the new agreement.
The Company's maximum borrowings under the lines of credit during 1998 and
1999 were $770,429 and $1,966,142, respectively. During 1998 and 1999, the
Company had weighted average outstanding borrowings under the line of credit
agreement of $250,000 and $1,750,000, respectively with weighted average
interest rates of 8.80% and 8.51%, respectively.
(4) CAPITAL LEASE OBLIGATIONS
At December 31, 1998 and 1999, the Company held certain property and
equipment with a cost of $2,653,575 and $3,544,067, respectively, under capital
lease agreements with a bank. As of December 31, 1998 and 1999, the Company had
recorded accumulated amortization of $630,077 and $845,382, respectively,
related to these assets.
The following is a schedule by year of future minimum lease payments under
capital lease obligations together with the present value of the net minimum
lease payments at December 31, 1999:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000........................................................... $1,116,669
2001........................................................... 864,299
2002........................................................... 791,238
2003........................................................... 509,805
2004........................................................... 101,675
----------
Total net minimum lease payments............................... 3,383,686
Less amount representing interest.............................. (584,656)
----------
Present value of net minimum lease payments.................... 2,799,030
Current portion................................................ (863,585)
----------
Long-term portion.............................................. $1,935,445
==========
</TABLE>
In connection with entering into a capital lease agreement in 1998, the
Company issued warrants to a bank to purchase 32,789 shares of the Company's
Series C preferred stock at an
F-11
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
exercise price of $1.60 per share. The warrants expire in May 2003. The fair
value of the warrants was determined to be insignificant at the date of grant.
During 1999, the Company's non-compliance with certain financial covenants of
the capital lease agreement was permanently waived by the bank.
(5) CONVERTIBLE PROMISSORY NOTES
In July 1999, the Company issued $4,500,000 of convertible promissory notes
to existing preferred stockholders. The notes accrue interest at an annual rate
of 6% and principal and accrued interest automatically convert into shares of
common stock upon the closing of the Company's IPO at the IPO price. If there
is no IPO, the notes automatically convert into common stock on August 3, 2000
at a price of $2.00 per share. In connection with selling these notes, the
Company issued warrants for the purchase of 450,000 shares of its common stock
at $2.00 per share. The warrants expire on the earliest of: (i) July 29, 2002;
(ii) the closing of the Company's IPO; or (iii) the closing of an acquisition
of the Company. The Company allocated the $4,500,000 of proceeds between the
notes and the warrants based upon the relative fair values at the date of
issuance. This resulted in allocating $3,555,000 to the notes and $945,000 to
the warrants. The difference between the face amount of the notes and the
amount allocated to the notes is recorded as interest expense over the term of
the notes.
In December 1999, the Company issued a $4,000,000 convertible promissory note
to Hoya Healthcare Corporation ("Hoya"), a Japanese company that distributes
the Company's branded products in Japan. The note accrues interest at an annual
rate of 6% and automatically converts into shares of common stock upon the
closing of the Company's IPO at 93% of the IPO price. The contingent beneficial
conversion feature of 93% of the IPO price has a fair value of $280,000. This
amount will be recorded as additional interest expense if and when the
contingency (completion of an IPO) is resolved. Under the convertible note
purchase agreement, Hoya has agreed to purchase an additional $6,000,000 of
convertible promissory notes according to the following schedule:
. If the IPO occurs by March 31, 2000, on the effective date of the IPO
Hoya will purchase a $6,000,000 convertible note which will be
immediately converted to common stock at the IPO price.
. If the IPO occurs between April 1, 2000 and June 30, 2000, Hoya will
purchase (i) a $3,000,000 convertible note on March 31, 2000 which will
be converted on the effective date of the IPO at 93% of the IPO price
and (ii) a $3,000,000 convertible note on the effective date of the IPO
which will be immediately converted at the IPO price.
. If the IPO occurs after June 30, 2000, Hoya will purchase (i) a
$3,000,000 convertible note on March 31, 2000 and (ii) a $3,000,000
convertible note on June 30, 2000, both of which will be converted on
the effective date of the IPO at 93% of the IPO price.
If there is no IPO, the Company must repay the notes with interest one year
from the date of Hoya's purchase of the notes.
F-12
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(6) COMMITMENTS
Operating Leases
The Company leases various equipment and office space under noncancelable
operating leases that expire at various dates through 2004. Rental expense for
equipment and office space for the years ended December 31, 1997, 1998 and 1999
was $156,475, $279,062 and $835,198, respectively. Future minimum lease
payments under noncancelable leases at December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000........................................................ $1,430,607
2001........................................................ 1,453,680
2002........................................................ 1,441,647
2003........................................................ 1,467,508
2004........................................................ 1,032,918
----------
$6,826,360
==========
</TABLE>
The Company subleases office space in its Salt Lake City facility. Sublease
revenue totaled $30,080 in 1999. Revenue from subleases is expected to be
$169,876 in 2000, $153,917 in 2001 and $99,606 in 2002.
Brigham Young University Technology License Agreements
In 1995, the Company entered into a license agreement, as amended in 1996,
with Brigham Young University ("BYU"). The agreement provides the Company with
an exclusive worldwide license to utilize certain technology owned by BYU and
Thomas Stockham, Jr. (a stockholder of the Company). The technology includes
patents and patents pending involving hearing aid signal processing, audio
signal processing and hearing compression. During the term of the agreement,
the Company is responsible for the payment of all fees and costs associated
with filing and maintaining patent rights. As consideration for the license,
the Company issued 184,000 shares of its common stock to BYU, paid a license
fee of $80,000 during 1995 and agreed to pay an additional license fee of
$500,000 as follows: $30,000 in 1996, $50,000 in 1997, $70,000 in 1998,
$100,000 in 1999, $100,000 in 2000 and $150,000 in 2001. The Company may (but
is not entitled to) receive a credit against the $500,000 license fee for
certain approved research conducted through BYU. The Company is required to
make royalty payments to BYU equal to 50% of any consideration received from
sublicensing, assigning or transferring the licensed technology. Amounts paid
and owed under the agreement have been accounted for as purchased research and
development and expensed accordingly. The Company has classified as a current
liability the portion of its license obligations due within the next year.
In 1997, the Company entered into a separate license agreement with BYU to
utilize certain "noise reduction" technologies owned by BYU. As consideration
for the license, the Company paid a license fee of $50,000, which was expensed
during 1997. The Company is also required to make royalty payments to BYU in
the amount of 0.5% of the adjusted gross sales of the licensed products sold or
otherwise transferred to an end user, with an annual minimum royalty of
$50,000. During 1998 and 1999, royalties expensed under this agreement were
$50,000 because the related technology has not yet been incorporated into the
Company's products. The Company is also required to pay a "pass through
royalty" of 50% on any transfer of technology to a third party that is not an
end user. No such royalties were incurred or paid in 1997, 1998 and 1999.
F-13
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
K/S HIMPP License Agreement
In 1998, the Company entered into a license agreement with K/S HIMPP, a
Danish partnership, whereby the Company purchased the rights to use technology
covered by approximately 200 patents owned by K/S HIMPP that are considered
essential for the sale of programmable hearing aids. In connection with this
agreement, the Company is required to pay K/S HIMPP a royalty equal to 3% of
net sales of related products. HIMPP royalty expense in 1998 and 1999 totaled
$85,000 and $429,000, respectively.
Other License Agreement
In 1999, the Company entered into a license agreement to resolve a claim of
patent infringement made by a competitor under which the Company pays a 1.5%
royalty on all net sales of hearing aids for the period October 1998 through
September 2001, at which time the license will be paid in full. Royalty expense
pertaining to the agreement was $463,000 in 1999.
Supplier Purchase Commitment
In 1997, the Company entered into an agreement with an integrated circuit
manufacturer to produce integrated circuits used in the Company's products. The
agreement provides the manufacturer with a non-exclusive, non-sublicensable
license to use the Company's technology for non-hearing applications. In
return, the manufacturer granted the Company a license to minor improvements or
enhancements made to the technology by the manufacturer for hearing
applications. The agreement requires the Company to make future minimum
purchases as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
2000...................................................... $1,125,000
2001...................................................... 2,475,000
2002...................................................... 750,000
-----------
$4,350,000
===========
</TABLE>
The Company purchases all of its integrated circuits from this manufacturer.
Should this manufacturer be unable to provide the Company with these integrated
circuits, the ability of the Company to produce products for sale could be
materially impaired. The Company purchases other components including receivers
and microphones from a limited number of suppliers.
Employment Agreements
The Company has entered into employment agreements with various officers and
key employees that provide for, among other things, minimum annual base
salaries, bonuses and severance arrangements. The employment agreements may be
terminated by either party. As of December 31, 1999, the Company had accrued an
aggregate of approximately $247,000 for discretionary bonuses related to these
agreements.
F-14
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(7) INCOME TAXES
Net loss before income taxes consisted of the following components for the
years ended December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Domestic................................ $5,234,882 $13,471,481 $13,746,935
Foreign................................. -- 406,541 1,158,925
---------- ----------- -----------
Total................................. $5,234,882 $13,878,022 $14,905,860
========== =========== ===========
</TABLE>
Deferred tax assets and liabilities are determined based on the differences
between the financial reporting and tax bases of assets and liabilities using
enacted tax rates expected to apply when differences are expected to be settled
or realized. As of December 31, 1998 and 1999, the components of the deferred
tax assets were as follows:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Net operating loss carryforwards................ $ 5,231,548 $ 9,631,272
Capitalized start-up costs...................... 2,628,157 2,147,135
Receivables allowances.......................... 124,480 872,820
Reserves and other differences.................. 314,356 276,135
----------- ------------
8,298,541 12,927,362
Valuation allowance............................. (8,298,541) (12,927,362)
----------- ------------
$ -- $ --
=========== ============
</TABLE>
A valuation allowance for the total net deferred tax assets was recorded due
to the uncertainty of realization of the assets based upon the limited
operating history of the Company, the lack of profitability to date and no
assurance of future profitability.
As of December 31, 1999, the Company had net operating loss carryforwards for
federal income tax reporting purposes totaling approximately $24,478,000 and
foreign net operating loss carryforwards of approximately $1,565,000. The
foreign net operating loss carryforwards expire in 2003 and 2004, the federal
net operating loss carryforwards expire as follows:
<TABLE>
<CAPTION>
Year of Expiration
------------------
<S> <C>
2007......................................................... $ 43,000
2008......................................................... 66,000
2009......................................................... 108,000
2010......................................................... 401,000
2011......................................................... 992,000
2012......................................................... 2,708,000
2018......................................................... 8,940,000
2019 ........................................................ 11,220,000
-----------
$24,478,000
===========
</TABLE>
The Internal Revenue Code contains provisions that reduce or limit the
availability and utilization of net operating loss carryforwards if certain
changes in ownership have taken place or will take place. The Company has not
performed an analysis to determine whether any such limitations have occurred.
There can be no assurance that the Company will be able to utilize its net
operating loss carryforwards before they expire.
F-15
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(8) PREFERRED STOCK
The Company's certificate of incorporation authorizes the issuance of
26,425,000 shares of preferred stock with terms and preferences designated
therein. As of December 31, 1999, the Company had designated 853,621 shares as
Series A convertible ("Series A"), 8,807,138 shares as Series B redeemable,
convertible ("Series B"), 7,907,185 shares as Series C redeemable, convertible
("Series C"), and 6,425,000 shares as Series D redeemable, convertible ("Series
D").
During 1997, 2,496,606 shares of Series B were sold for $1,825,192 in cash,
17,605 shares of Series B were issued for services performed totaling $24,999,
and 7,825,000 shares of Series C were sold for $12,520,000 in cash. Direct
costs associated with the sale of Series C of $44,217 were netted against the
proceeds from the sale.
During 1998, warrants for the purchase of 92,308 shares of Series A with an
exercise price of $0.65 per share were exercised for cash totaling $60,001,
49,396 shares of Series C were issued for services performed totaling $79,032,
6,250,000 shares of Series D were sold for $12,500,000 in cash and 9,000 shares
of Series D were issued for services performed totaling $18,000. Direct costs
associated with the sale of Series D of $51,824 were netted against the
proceeds from the sale.
During 1999, the Company issued 18,000 shares of Series D for services
totaling $36,000.
Series A, B, C and D preferred stock are convertible at any time, at the
option of the holders, at the initial rate of one common share for each
preferred share. The number and kind of securities issuable upon conversion is
subject to adjustment from time to time upon the occurrence of certain events
as outlined in the certificate of incorporation and the sales agreements. The
preferred stockholders are entitled to one vote for each share of common stock
into which such holder's preferred stock is convertible. In addition, the
preferred stockholders are entitled to elect seven of the eight members of the
Board of Directors. In the event of the occurrence of any liquidation event,
the holders of Series A have preference over the common stockholders up to
their invested capital and the holders of Series B, C and D have preference
over the Series A and common stockholders up to the Series B, C and D invested
capital. The preferred stockholders have entered into agreements with the
Company that provide piggyback and demand registration rights.
Shares of Series B, C and D are redeemable on or after October 23, 2003 at
the election of 66 2/3 of each Series' holders. The redemption prices are equal
to the prices paid for each Series plus 7% for each year outstanding. As a
result of the mandatory redemption features, as of December 31, 1999, the
carrying values of Series B, C and D have been increased by $523,218, $989,659
and $918,668, respectively, to accrete each Series to its redemption value.
The holders of Series B, C and D are entitled to noncumulative per share
dividends of $0.071, $0.16 and $0.20, respectively, payable when and if
declared by the Board of Directors. As of December 31, 1999, no dividends had
been declared.
F-16
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(9) STOCK-BASED COMPENSATION
Stock Options
The Company's 1993 Stock Plan (the "Plan") provides for the issuance of a
maximum of 7,400,000 shares of common stock to officers, directors, consultants
and other employees. The Plan allows for the grant of incentive or nonqualified
stock options and stock purchase rights and is administered by the Board of
Directors. The Board of Directors determines the quantity, type of award, and
terms and conditions, including any vesting conditions. The maximum term of an
option may not exceed ten years and the Plan will expire in 2003. As of
December 31, 1999, 637,795 shares were available for grant under the Plan.
Options generally vest over a four-year period from the grant date.
The Company accounts for stock options issued to employees, officers and
directors under Accounting Principles Board Opinion No. 25 ("APB No. 25").
Under APB No. 25, compensation cost is recognized if an option's exercise price
is below the intrinsic fair market value of the Company's stock at the grant
date. If compensation expense for all stock options had been determined
consistent with Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), the Company's net loss and diluted net loss per common share would have
been increased as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ----------- -----------
<S> <C> <C> <C>
Net loss:
As reported......................... $5,234,882 $13,878,022 $14,905,860
Pro forma........................... 5,253,529 13,944,130 15,134,313
Basic and diluted net loss per common
share:
As reported......................... $ 4.33 $ 8.22 $ 6.69
Pro forma........................... 4.34 8.25 6.78
</TABLE>
A summary of the Company's stock option activity for 1997, 1998 and 1999 is
as follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
---------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996.............. 1,921,000 $ .12
Granted in 1997............................... 701,000 .15
Exercised in 1997............................. (65,000) .10
Forfeited or expired in 1997.................. (175,000) .11
----------
Outstanding at December 31, 1997.............. 2,382,000 .13
Granted in 1998............................... 2,142,800 .51
Exercised in 1998............................. (1,071,928) .12
Forfeited or expired in 1998.................. (72,072) .21
----------
Outstanding at December 31, 1998.............. 3,380,800 .37
Granted in 1999............................... 2,065,500 2.28
Exercised in 1999............................. (321,988) .16
Forfeited or expired in 1999.................. (221,023) .67
----------
Outstanding at December 31, 1999.............. 4,903,289 1.18
==========
</TABLE>
As of December 31, 1999, there were options for 1,471,128 shares of common
stock exercisable at a weighted average exercise price of $.37 per share.
F-17
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Stock options outstanding as of December 31, 1999 were as follows:
<TABLE>
<CAPTION>
Weighted
Average
Number of Remaining Number of
Options Contractual Options
Exercise Price Outstanding Life Exercisable
-------------- ----------- ----------- -----------
<S> <C> <C> <C>
$0.10.................................. 331,833 3.76 328,500
0.14.................................. 549,859 5.13 239,859
0.25.................................. 331,500 8.03 211,333
0.35.................................. 622,160 8.28 318,780
0.50.................................. 179,662 8.59 76,860
0.60.................................. 322,550 8.78 93,900
0.75.................................. 539,875 8.96 148,104
1.00.................................. 82,000 9.14 3,792
1.50.................................. 384,350 9.41 --
2.00.................................. 789,500 9.79 50,000
3.00.................................. 660,000 9.89 --
4.00.................................. 110,000 9.95 --
--------- ---------
4,903,289 1,471,128
========= =========
</TABLE>
The fair market value of each option is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1997, 1998 and 1999: risk-free interest rates of
7.00%, 6.75% and 6.33%, respectively; expected dividend yields of zero percent;
volatility of zero percent; and expected lives of 7 years.
During 1997, the Company expensed $22,400 related to the remeasurement of
certain stock option values due to changing their exercisable lives from 7
years to 10 years. During 1999, the Company expensed $170,000 related to the
remeasuring of certain stock option values due to accelerating their vesting
dates.
In connection with the issuance of certain stock options to employees in
1999, the Company recorded deferred stock-based compensation in the aggregate
amount of approximately $4,638,000, representing the difference between the
deemed fair value of the Company's common stock for accounting purposes and the
exercise price of stock options at the date of grant. The Company is amortizing
the deferred stock-based compensation over the option vesting periods of three
to six years. For the year ended December 31, 1999, amortization expense was
$1,025,490. At December 31, 1999, the remaining stock-based compensation of
approximately $3,613,000 will be amortized as follows: $2,061,000 in 2000,
$917,000 in 2001, $422,000 in 2002, $156,000 in 2003, $40,000 in 2004 and
$17,000 in 2005. The amount of deferred stock-based compensation expense to be
amortized in future periods could decrease if the related options are
forfeited.
F-18
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Warrants
At December 31, 1999, the following warrants to purchase common or preferred
stock were outstanding:
<TABLE>
<CAPTION>
Exercise
Warrants Price
-------- --------
<S> <C> <C>
Issued in connection with 1999 convertible promissory notes
(See Note 5) .............................................. 450,000 $2.00
Issued in connection with 1999 bank lending arrangement..... 59,009 2.00
Issued in connection with 1998 bank lending arrangement..... 32,789 1.60
-------
Total warrants outstanding at December 31, 1999............. 541,798
=======
</TABLE>
The warrants issued in connection with the 1999 bank lending arrangement will
be decreased to 39,340 shares if the Company completes an IPO by May 31, 2000.
The warrants issued in connection with the 1998 and 1999 bank lending
arrangement expire in May 2003 and December 2004, respectively.
During 1998, the Company received $60,001 in cash upon the exercise of
warrants. These warrants had been granted in connection with the issuance of
convertible notes payable in 1993, and provided for the purchase of 92,308
shares of Series A preferred stock at $0.65 per share.
(10) EMPLOYEE 401(k) PLAN
In 1997, the Company established an employee savings and retirement plan that
is a salary deferral plan under Section 401(k) of the Internal Revenue Code.
The Company's matching contributions are determined annually by the board of
directors. The Company did not make matching contributions to this plan in
1997, 1998 or 1999.
(11) SEGMENT INFORMATION
The Company currently operates through two geographic operating segments--
Sonic Innovations, Inc., a U.S.-based operation, and Sonic Innovations A/S, a
Denmark-based operation. Sonic Innovations, Inc. sells products in the U.S. and
internationally, except for Europe. Sonic Innovations A/S sells products
exclusively in Europe. The Company generally evaluates its operating results on
a company-wide basis because (1) the principal components of all products are
sourced from the United States and (2) all research and development and
considerable marketing and administrative support are globally provided from
the United States. However, management reviews the operating results of Sonic
Innovations A/S to make decisions about resource allocation and to assess
performance.
F-19
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below presents information for the Company's geographical operating
segments for 1998 and 1999.
<TABLE>
<CAPTION>
United
1998 States Europe Total
---- ------------ ---------- ------------
<S> <C> <C> <C>
Net sales to external customers... $ 2,142,958 $ -- $ 2,142,958
Operating loss.................... (13,782,648) (406,541) (14,189,189)
Identifiable segment assets....... 16,711,206 161,228 16,872,434
Net property and equipment........ 2,461,196 55,187 2,516,383
<CAPTION>
United
1999 States Europe Total
---- ------------ ---------- ------------
<S> <C> <C> <C>
Net sales to external customers... $ 24,507,471 $4,186,675 $ 28,694,146
Operating loss.................... (12,882,547) (868,478) (13,751,025)
Identifiable segment assets....... 15,423,589 3,038,462 18,462,051
Net property and equipment........ 3,609,646 128,038 3,737,684
</TABLE>
U.S. net sales include export sales.
In 1998, all sales were to customers located in the United States. In 1999,
sales representing more than 5% of the Company's net sales by country are as
follows:
<TABLE>
<S> <C>
United States................................ $20,724,523
Japan........................................ 2,926,417
Other........................................ 5,043,206
-----------
Total...................................... $28,694,146
===========
</TABLE>
A number of risks are inherent in international transactions. Fluctuations in
the exchange rates between the U.S. dollar and other currencies could increase
the sales price of the Company's products in international markets where the
prices of the Company's products are denominated in U.S. dollars or lead to
currency exchange losses where the prices of the Company's products are
denominated in local currencies.
The Company had two significant customers in 1999 which comprised 26% and 10%
of total net sales. The loss of either of these customers would have a material
adverse effect on the Company. There were no such customer concentrations in
1998.
(12) RELATED PARTY TRANSACTION
The Company's Vice President of Operations joined the Company in January
1999. He beneficially owned an information services consulting company that
provided services to the Company in exchange for $263,536, $583,788 and
$266,281 in 1997, 1998 and 1999, respectively.
F-20
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
Forward-Looking Statements............................................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Consolidated Financial Data..................................... 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 27
Management............................................................... 43
Certain Transactions..................................................... 51
Principal Stockholders................................................... 53
Description of Capital Stock............................................. 55
Shares Eligible for Future Sale.......................................... 57
Underwriting............................................................. 59
Validity of the Common Stock............................................. 61
Experts.................................................................. 61
Where You Can Find Additional Information................................ 61
Index to Consolidated Financial Statements............................... F-1
</TABLE>
---------------
Through and including , 2000 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when
acting as an underwriter and with respect to an unsold allotment or
subscription.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
Sonic Innovations, Inc.
Common Stock
---------------
[LOGO]
---------------
Goldman, Sachs & Co.
Deutsche Banc Alex. Brown
U.S. Bancorp Piper Jaffray
Representatives of the Underwriters
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than
underwriting discount and commissions, payable by the registrant in connection
with the sale of common stock being registered. All amounts are estimates
except the SEC registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee................................................. $
NASD filing fee......................................................
Nasdaq National Market listing fee...................................
Printing and engraving costs.........................................
Legal fees and expenses..............................................
Accounting fees and expenses.........................................
Blue sky fees and expenses...........................................
Transfer Agent and Registrar fees....................................
Miscellaneous expenses...............................................
------
Total.............................................................. $
======
</TABLE>
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law permits a corporation to
include in its charter documents, and in agreements between the corporation and
its directors and officers, provisions expanding the scope of indemnification
beyond that specifically provided by the current law.
Article IX of the registrant's Certificate of Incorporation provides for the
indemnification of directors to the fullest extent permissible under Delaware
law.
Article 6 of the registrant's Bylaws provides for the indemnification of
officers, directors and third parties acting on behalf of the registrant if
such person acted in good faith and in a manner reasonably believed to be in
and not opposed to the best interest of the registrant, and, with respect to
any criminal action or proceeding, the indemnified party had no reason to
believe his or her conduct was unlawful.
The registrant has entered into indemnification agreements with its directors
and executive officers, in addition to indemnification provided for in the
registrant's Bylaws, and intends to enter into indemnification agreements with
any new directors and executive officers in the future.
Item 15. Recent Sales of Unregistered Securities
Within the past three years, the registrant has issued unregistered
securities as follows:
(1) Within the last three years, the registrant has issued stock options to
purchase shares of common stock with exercise prices ranging from $0.10
to $ under its option plan. Of the options, options for
shares have been exercised, options for shares have been
cancelled and options for shares remain outstanding.
(2) On May 15, 1997 and in October 1997, the registrant issued an aggregate
of 2,496,606 shares of Series B preferred stock ("Series B"),
convertible into 2,496,606 shares of common stock, for an aggregate of
$1,825,192 in cash to 28 investors.
II-1
<PAGE>
(3) On September 5, 1997, the registrant issued 17,605 shares of Series B
for services performed totaling $24,999.
(4) On October 31, 1997, the registrant issued an aggregate of 7,825,000
shares of Series C preferred stock ("Series C"), convertible into
7,825,000 shares of common stock, for an aggregate of $12,520,000 in
cash, to 25 investors.
(5) On February 2, 1998, the registrant issued 38,146 shares of Series C
to one individual as compensation for recruitment services performed
totaling $61,034.
(6) On May 31, 1998, the registrant issued a warrant to purchase 32,789
shares of Series C at $1.60 in connection with an equipment financing.
(7) On August 5, 1998, the registrant issued an aggregate of 11,250 shares
of Series C to a public relations company for services performed
totaling $18,000.
(8) On August 14, 1998, the registrant issued 92,308 shares of Series A
Preferred Stock ("Series A"), convertible into 92,308 shares of common
stock, pursuant to the exercise of an outstanding warrant with an
aggregate exercise price of $60,001.
(9) In October 1998, the registrant issued 6,250,000 shares of Series D
preferred stock ("Series D"), convertible into 6,250,000 shares of
common stock, for an aggregate of $12,500,000 in cash to 28 investors.
(10) On November 11, 1998, February 5, 1999 and May 31, 1999, the
registrant issued an aggregate of 27,000 shares of Series D to a
public relations company for services performed totaling $54,000.
(11) In July and August 1999, the registrant issued 6% convertible
promissory notes, convertible into shares of common stock at the
initial public offering price, and warrants to purchase 450,000 shares
of common stock at $2.00 per share to 24 investors.
(12) In December 1999, the registrant issued a $4,000,000 convertible
promissory note bearing interest at 6% per annum to an international
distributor. The principal and interest is convertible into shares of
common stock at 93% of the initial public offering price.
(13) On December 22, 1999, the registrant issued a warrant to purchase
59,009 shares of Series D Preferred Stock in connection with an
equipment financing. The number of shares may be reduced to 39,340 if
the registrant completes the IPO by May 31, 2000.
None of the foregoing transactions involved any underwriters or any public
offering. Each transaction was exempt from the registration requirements of the
Securities Act by virtue of Section 4(2) thereof, Regulation D promulgated
thereunder or Rule 701 pursuant to compensatory benefit plans and contracts
relating to compensation as provided under Rule 701.
II-2
<PAGE>
Item 16. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the registrant.
3.2 Amended and Restated Certificate of Incorporation of the registrant to
be filed upon the closing of the offering made pursuant to this
registration statement.
3.3 Bylaws of the registrant.
3.4 Amended and Restated Bylaws of the registrant to be effective upon the
closing of the offering made pursuant to this registration statement.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Form of indemnification agreement entered into by the registrant with
each of its directors and executive officers.
10.2* 1993 Stock Plan and form of agreements thereunder.
10.3* 2000 Stock Plan and form of agreements thereunder.
10.4* 2000 Employee Stock Purchase Plan.
10.5 Registration Rights Agreement dated October 23, 1998 between the
registrant and certain stockholders, as amended.
10.6** OEM Agreement dated April 1, 1999 between the registrant and Starkey
Laboratories, Inc., as amended.
10.7** License and Manufacturing Agreement dated February 20, 1997.
10.8* License Agreement dated November 12, 1997 between the registrant and
Brigham Young University.
10.9* Exclusive License Agreement dated May 25, 1995 between the registrant
and Brigham Young University, as amended.
10.10 Patent License Agreement dated January 1, 1997 between the registrant
and K/S HIMPP, as amended.
10.11** Distribution Agreement dated December 30, 1999 between the registrant
and Hoya Healthcare Corporation.
10.12 Lease Agreement dated April 28, 1999 between the registrant and 2795
E. Cottonwood Parkway, L.C.
10.13 Loan and Security Agreement dated December 22, 1999 between the
registrant and Silicon Valley Bank.
10.14 Collateral Assignment, Patent Mortgage and Security Agreement dated
December 22, 1999 between the registrant and Silicon Valley Bank
10.15 Letter Agreement dated December 1, 1997 between the registrant and
Orlando Rodrigues.
10.16 Letter Agreement dated February 8, 1998 between the registrant and
Michael P. Monahan.
10.17 Letter Agreement dated May 4, 1997 between the registrant and Gregory
N. Koskowich.
10.18 Letter Agreement dated September 24, 1999 between the registrant and
Stephen L. Wilson.
10.19 Warrant to purchase stock issued in connection with Silicon Valley
Bank Loan dated December 22, 1999.
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Confidential treatment requested.
II-3
<PAGE>
Financial Statement Schedules
Schedule II Qualifying and Valuation Accounts
Schedules not listed above have been omitted because the information required
to be set forth therein is not applicable or is presented in the consolidated
financial statements or notes thereto.
Item 17. Undertakings
The registrant hereby undertakes to provide to the underwriters at the
closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification by the registrant for liabilities arising under
the Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the provisions referenced in Item 14 of
this registration statement or otherwise, the registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred or
paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by a
director, officer or controlling person in connection with the securities being
registered hereunder, the registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1993, as amended, the
Registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Salt Lake
City, State of Utah, on the 16th day of February, 2000.
Sonic Innovations, Inc.
/s/ Andrew G. Raguskus
By: _________________________________
Andrew G. Raguskus
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below hereby constitutes and appoints Andrew G. Raguskus and Stephen L. Wilson,
and each of them acting individually, as his true and lawful attorneys-in-fact
and agents, each with full power of substitution, for him in any and all
capacities, to sign any and all amendments to this Registration Statement
(including post-effective amendments or any abbreviated registration statement
and any amendments thereto filed pursuant to Rule 462(b) increasing the number
of securities for which registration is sought), and to file the same, with
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, with full power of each to act alone, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully for all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or his or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons on February 16, 2000 in the
capacities indicated:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ Andrew G. Raguskus President, Chief Executive Officer and
___________________________________________ Director (Principal Executive Officer)
Andrew G. Raguskus
/s/ Stephen L. Wilson Vice President and Chief Financial Officer
___________________________________________ (Principal Financial and Accounting
Stephen L. Wilson Officer)
/s/ Anthony B. Evnin Director
___________________________________________
Anthony B. Evnin
Director
___________________________________________
Luke B. Evnin
/s/ Kevin J. Ryan Director
___________________________________________
Kevin J. Ryan
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
/s/ G. Gary Shaffer Director
___________________________________________
G. Gary Shaffer
/s/ Sigrid Van Bladel Director
___________________________________________
Sigrid Van Bladel
/s/ Allan M. Wolfe Director
___________________________________________
Allan M. Wolfe
</TABLE>
II-6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Sonic Innovations, Inc.:
We have audited in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements of Sonic Innovations,
Inc. and subsidiary included in this registration statement and have issued our
report thereon dated February 3, 2000. Our audits were made for the purpose of
forming an opinion on the basic consolidated financial statements taken as a
whole. The Schedule of Valuation and Qualifying Accounts is the responsibility
of the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
consolidated financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
Arthur Andersen LLP
Salt Lake City, Utah
February 3, 2000
<PAGE>
SONIC INNOVATIONS, INC.
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance
at Balance at
Beginning End of
of Period Additions Deductions Period
--------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Accounts receivable:
Allowance for returns....... 1999 $282,000 $10,087,856 $8,396,027 $1,973,829
1998 -- 695,864 413,864 282,000
Allowance for doubtful
accounts................... 1999 51,426 593,888 184,758 460,556
1998 -- 51,426 -- 51,426
Warranty reserve.............. 1999 82,540 1,317,666 1,035,962 364,244
1998 -- 200,000 117,460 82,540
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Certificate of Incorporation of the registrant.
3.2 Amended and Restated Certificate of Incorporation of the registrant to
be filed upon the closing of the offering made pursuant to this
registration statement.
3.3 Bylaws of the registrant.
3.4 Amended and Restated Bylaws of the registrant to be effective upon the
closing of the offering made pursuant to this registration statement.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation.
10.1 Form of indemnification agreement entered into by the registrant with
each of its directors and executive officers.
10.2* 1993 Stock Plan and form of agreements thereunder.
10.3* 2000 Stock Plan and form of agreements thereunder.
10.4* 2000 Employee Stock Purchase Plan.
10.5 Registration Rights Agreement dated October 23, 1998 between the
registrant and certain stockholders, as amended.
10.6** OEM Agreement dated April 1, 1999 between the registrant and Starkey
Laboratories, Inc., as amended.
10.7** License and Manufacturing Agreement dated February 20, 1997.
10.8* License Agreement dated November 12, 1997 between the registrant and
Brigham Young University.
10.9* Exclusive License Agreement dated May 25, 1995 between the registrant
and Brigham Young University, as amended.
10.10 Patent License Agreement dated January 1, 1997 between the registrant
and K/S HIMPP, as amended.
10.11** Distribution Agreement dated December 30, 1999 between the registrant
and Hoya Healthcare Corporation.
10.12 Lease Agreement dated April 28, 1999 between the registrant and 2795
E. Cottonwood Parkway, L.C.
10.13 Loan and Security Agreement dated December 22, 1999 between the
registrant and Silicon Valley Bank.
10.14 Collateral Assignment, Patent Mortgage and Security Agreement dated
December 22, 1999 between the registrant and Silicon Valley Bank
10.15 Letter Agreement dated December 1, 1997 between the registrant and
Orlando Rodrigues.
10.16 Letter Agreement dated February 8, 1998 between the registrant and
Michael P. Monahan.
10.17 Letter Agreement dated May 4, 1997 between the registrant and Gregory
N. Koskowich.
10.18 Letter Agreement dated September 24, 1999 between the registrant and
Stephen L. Wilson.
10.19 Warrant to purchase stock issued in connection with Silicon Valley
Bank Loan dated December 22, 1999.
21.1 Subsidiaries of Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2* Consent of Counsel. Reference is made to Exhibit 5.1.
24.1 Power of Attorney (see page II-5).
27.1 Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Confidential treatment requested.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
SONIC INNOVATIONS, INC.
Sonic Innovations, Inc., a Delaware corporation, hereby certifies as
follows:
The original Certificate of Incorporation for Sonic Innovations, Inc. (the
"Company") was filed in the office of the Secretary of State of the State of
Delaware on November 7, 1997. All amendments to the Certificate of
Incorporation reflected herein have been duly authorized and adopted by the
Company's Board of Directors and stockholders in accordance with the provisions
of Sections 242 and 245 of the Delaware General Corporation Law. The original
name of incorporation was, SONIX TECHNOLOGIES, INC.
This Amended and Restated Certificate of Incorporation restates and
integrates and amends the Certificate of Incorporation of the Company. The text
of the Certificate of Incorporation is amended hereby to read as herein set
forth in full:
ARTICLE I
The name of the corporation is Sonic Innovations, Inc.
ARTICLE II
The nature of the business or purpose to be conducted or promoted by the
corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware.
ARTICLE III
The corporation shall have authority to issue shares as follows:
3.1 Thirty-five million (35,000,000) shares of common stock, par value
$0.001 per share. Each share of common stock shall entitle the holder thereof to
one (1) vote on each matter submitted to a vote at a meeting of shareholders.
3.2 Twenty-six million, four hundred twenty-five thousand (26,425,000)
shares of Preferred Stock, par value $0.001 per share, of which 853,621 shares
are designated as Series A Preferred Stock, 8,807,138 shares are designated as
Series B Preferred Stock, 7,907,185 shares are designated as Series C Preferred
Stock and 6,425,000 shares are designated as Series D Preferred Stock, with the
remainder of the Preferred Stock to be issued in the form and manner, with the
relative rights, preferences, qualifications, limitations or restrictions
thereon as the Board of Directors shall determine. The rights and preferences of
the Series A Preferred Stock, the Series B Preferred Stock, the Series C
Preferred Stock and the Series D Preferred Stock are set forth below.
<PAGE>
3.3 DEFINITIONS. As used herein, the following words and expressions have
the respective meanings set out below:
(a) "Certificate of Incorporation" means the Certificate of
Incorporation of the Company as amended and in effect from time to time.
(b) "Common Stock" means the capital stock of the Company designated
as common stock and authorized from time to time and being stock which is junior
to all series of Preferred Stock in respect of dividend payments and of
distributions or payments upon liquidation.
(c) "Preferred Stock" collectively refers to Series A Preferred
Stock, Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock.
(d) "Series A Preferred" means the authorized class of capital stock
of the Company designated as Series A Preferred Stock.
(e) "Series B Preferred" means the authorized class of capital stock
of the Company designated as Series B Preferred Stock.
(f) "Series C Preferred" means the authorized class of capital stock
of the Company designated as Series C Preferred Stock.
(g) "Series D Preferred" means the authorized class of capital stock
of the Company designated as Series D Preferred Stock.
3.4 RIGHTS AND PREFERENCES OF PREFERRED STOCK.
(a) Voting Rights. Except as otherwise provided by law, each holder
of Preferred Stock shall have the right to one vote for each share of Common
Stock into which such holder's Preferred Stock is convertible, and, with respect
to such vote, such holder shall have all voting rights and powers equal to the
voting rights and powers of holders of Common Stock and shall be entitled to
notice of any stockholders meetings in accordance with the Bylaws of the Company
and, except as set forth in subsection (b) below, shall be entitled to vote with
the holders of the Common Stock together as a single class upon any question
affecting the management and affairs of the Company.
(b) Board Representation. The Company shall have eight (8) members of
the Board of Directors. The holders of the Series A Preferred and the holders of
Common Stock, voting together, shall be entitled to elect two (2) members out of
the eight (8) members of the Board of Directors of the Company, one of whom
shall be the Chief Executive Officer of the Company (the "Series A Preferred
Representatives"). Such directors shall be elected by a majority vote of the
shares of Series A Preferred and Common Stock then outstanding, voting on a non-
cumulative basis. The holders of the Series B Preferred shall have the right to
vote as a class, and as a class to elect two (2) members out
-2-
<PAGE>
of the eight (8) members of the Board of Directors of the Company (the "Series B
Preferred Representatives"). Such directors shall be elected by a majority vote
of the shares of Series B Preferred then outstanding, voting on a non-cumulative
basis. The holders of the Series C Preferred shall have the right to vote as a
class, and as a class to elect two (2) members out of the eight (8) members of
the Board of Directors of the Company (the "Series C Preferred
Representatives"). Such directors shall be elected by a majority vote of the
shares of Series C Preferred then outstanding, voting on a non-cumulative basis.
The holders of the Series D Preferred shall have the right to vote as a class,
and as a class to elect one (1) member out of the eight (8) members of the Board
of Directors of the Company (the "Series D Preferred Representative"). Such
director shall be elected by a majority vote of the shares of Series D Preferred
then outstanding, voting on a non-cumulative basis. The holders of the Preferred
Stock and the holders of the Common Stock, voting together, shall be entitled to
elect one (1) member out of the eight (8) members of the Board of Directors of
the Company (the "Remaining Representative"), who shall be an industry
executive, as that term is understood by the Board, which director shall be
nominated by the other members of the Board of Directors of the Company. Such
director shall be elected by a majority vote of the shares of Preferred Stock
and Common Stock then outstanding, voting on a non-cumulative basis.
(c) Protective Provisions. As long as any shares of Series B
Preferred, Series C Preferred or Series D Preferred are outstanding, the Company
shall not, without first obtaining the approval of the holders of at least a
majority of the shares of Common Stock issuable upon conversion of the shares of
Series B Preferred, Series C Preferred and Series D Preferred then outstanding:
(i) pay any dividends to holders of Common Stock; (ii) alter or change the
rights, preferences or privileges of the Series B Preferred, Series C Preferred
or Series D Preferred; (iii) increase the authorized number of shares of Series
B Preferred, Series C Preferred or Series D Preferred of the Company; (iv)
create any new class or series of shares having preference over or being on
parity with the Series B Preferred, Series C Preferred or Series D Preferred;
(v) merge, sell or transfer all of the Common Stock or substantially all the
assets of the Company or engage in any transaction or series of transactions
that effect a change in the control of the Company; (vi) authorize any amendment
to the Certificate of Incorporation which would adversely affect the rights of
the holders of the Series B Preferred, Series C Preferred or Series D Preferred
or reclassify any shares of any class of capital stock into a class ranking
prior to or in parity with the Series B Preferred, Series C Preferred or Series
D Preferred; (vii) change the authorized number of directors of the Company;
(viii) repurchase any equity security except for shares of Common Stock of the
Company issued to or held by employees, officers, directors, contractors or
consultants of the Company or its subsidiaries upon termination of their
employment or services, pursuant to any agreement providing for such a right of
repurchase; or (ix) make any distribution described in Section 305 of the
Internal Revenue Code.
(d) Dividends.
1. The holders of Series A Preferred will not be entitled to
receive dividends, and no dividends will accrue or be paid with respect thereto.
The holders of outstanding shares of Series B Preferred, Series C Preferred and
Series D Preferred shall be entitled to receive, when and as declared by the
Board of Directors, out of any assets at the time legally available therefor,
dividends at the annual rate of $0.071, $0.16 and $0.20, respectively, per share
of Series B Preferred, Series C Preferred and Series D Preferred, payable in
preference and priority to any payment of any dividend on the Series A Preferred
and Common
-3-
<PAGE>
Stock of the Company. No dividends or other distributions shall be made with
respect to the Series A Preferred or Common Stock, other than dividends payable
solely in Series A Preferred or Common Stock, respectively, until all declared
dividends on the Series B Preferred, Series C Preferred and Series D Preferred
have been paid or set apart. The right to receive dividends on shares of Series
B Preferred, Series C Preferred and Series D Preferred shall not be cumulative,
and no right to such dividends shall accrue to holders of Series B Preferred,
Series C Preferred or Series D Preferred by reason of the fact that dividends on
said shares are not declared or paid in any year, nor shall any undeclared or
unpaid dividend accrue interest.
2. For purposes of this Section 3.4(d), unless the context
otherwise requires, a "distribution" shall mean the transfer of cash or other
property without consideration whether by way of dividend or otherwise, payable
other than in Common Stock, or the purchase or redemption of shares of the
Company (other than repurchases of Common Stock issued to or held by employees,
officers, directors, contractors or consultants of the Company or its
subsidiaries upon termination of their employment or services pursuant to
agreements providing for the right of said repurchase) for cash or property.
3. Dividends may be paid on the Series A Preferred and Common
Stock as and when declared by the Board of Directors, subject to the prior
dividend rights of the Series B Preferred, Series C Preferred and Series D
Preferred.
(e) Conversion. The holders of the Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred have conversion rights as
follows (the "Conversion Rights"):
1. Right to Convert.
(A) Right to Convert Series A Preferred. Each share of
Series A Preferred shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the Company
or any transfer agent for the Series A Preferred, into such number of fully paid
and nonassessable shares of Common Stock as is determined in the case of the
Series A Preferred by dividing $0.39 by the Series A Conversion Price,
determined as hereinafter provided, in effect at the time of the conversion. The
price at which shares of Common Stock shall be deliverable upon conversion of
the Series A Preferred (the "Series A Conversion Price") shall initially be
$0.39 per share of Common Stock. Such initial Conversion Price shall be subject
to adjustment as hereinafter provided.
(B) Right to Convert Series B Preferred. Each share of
Series B Preferred shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the Company
or any transfer agent for the Series B Preferred, into such number of fully paid
and nonassessable shares of Common Stock as is determined in the case of the
Series B Preferred by dividing $0.71 by the Series B Preferred Conversion Price,
determined as hereinafter provided, in effect at the time of the conversion. The
price at which shares of Common Stock shall be deliverable upon conversion of
the Series B Preferred (the "Series B Conversion Price") shall initially be
$0.71 per share of Common Stock. Such initial Conversion Price shall be subject
to adjustment as hereinafter provided.
-4-
<PAGE>
(C) Right to Convert Series C Preferred. Each share of
Series C Preferred shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the Company
or any transfer agent for the Series C Preferred, into such number of fully paid
and nonassessable shares of Common Stock as is determined in the case of the
Series C Preferred by dividing $1.60 by the Series C Preferred Conversion Price,
determined as hereinafter provided, in effect at the time of the conversion. The
price at which shares of Common Stock shall be deliverable upon conversion of
the Series C Preferred (the "Series C Conversion Price") shall initially be
$1.60 per share of Common Stock. Such initial Conversion Price shall be subject
to adjustment as hereinafter provided.
(D) Right to Convert Series D Preferred. Each share of
Series D Preferred shall be convertible, at the option of the holder thereof, at
any time after the date of issuance of such share at the office of the Company
or any transfer agent for the Series D Preferred, into such number of fully paid
and nonassessable shares of Common Stock as is determined in the case of the
Series D Preferred by dividing $2.00 by the Series D Preferred Conversion Price,
determined as hereinafter provided, in effect at the time of the conversion. The
price at which shares of Common Stock shall be deliverable upon conversion of
the Series D Preferred (the "Series D Conversion Price") shall initially be
$2.00 per share of Common Stock. Such initial Conversion Price shall be subject
to adjustment as hereinafter provided.
2. Automatic Conversion. Each share of Series A Preferred,
Series B Preferred, Series C Preferred and Series D Preferred shall
automatically be converted into shares of Common Stock at the then effective,
applicable Conversion Price upon the earlier of (i) immediately prior to the
closing of an underwritten public offering pursuant to an effective registration
statement under the Securities Act of 1933, as amended, covering the offer and
sale of securities for the account of the Company to the public at a price per
share of Common Stock of not less than $5.00 per share (subject to proportionate
adjustment in the event of a stock split, reverse stock split, reclassification
or stock dividend) and an aggregate offering price (net of all registration and
selling expenses) of not less than Fifteen Million Dollars ($15,000,000), (ii)
with respect to the Series A Preferred, the affirmative vote or the written
consent of holders of not less than a majority of the then outstanding shares of
Series A Preferred, (iii) with respect to the Series B Preferred, the
affirmative vote or the written consent of holders of not less than 66-2/3% of
the then outstanding shares of Series B Preferred, (iv) with respect to the
Series C Preferred, the affirmative vote or the written consent of holders of
not less 66-2/3% of the then outstanding shares of Series C Preferred, (v) with
respect to the Series D Preferred, the affirmative vote or the written consent
of holders of not less 66-2/3% of the then outstanding shares of Series D
Preferred.
3. Mechanics of Conversion. No fractional shares of Common
Stock shall be issued upon conversion of Series A Preferred, Series B Preferred,
Series C Preferred or Series D Preferred. In lieu of any fractional shares to
which the holder would otherwise be entitled, the Company shall pay cash equal
to such fraction multiplied by the then effective respective Conversion Price.
Before any holder of Series A Preferred, Series B Preferred,
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Series C Preferred or Series D Preferred shall be entitled to convert the same
into full shares of Common Stock and to receive certificates therefor, he shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Company or of any transfer agent for the Series A Preferred, Series B
Preferred, Series C Preferred or Series D Preferred, as the case may be, and
shall give written notice to the Company at such office that he elects to
convert the same. The Company shall, as soon as practicable thereafter, issue
and deliver at such office to such holder of Series A Preferred, Series B
Preferred, Series C Preferred or Series D Preferred, as the case may be, a
certificate or certificates for the number of shares of Common Stock to which he
shall be entitled as aforesaid and a check payable to the holder in the amount
of any cash amounts payable as the result of a conversion into fractional shares
of Common Stock. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the shares of
Series A Preferred, Series B Preferred, Series C Preferred or Series D
Preferred, as the case may be, to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock on such date.
4. Reservation of Stock Issuable Upon Conversion. The Company
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of the
shares of the Series A Preferred, Series B Preferred, Series C Preferred or
Series D Preferred such number of its shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all outstanding shares of the
Series A Preferred, Series B Preferred, Series C Preferred or Series D
Preferred; and if at any time the number of authorized but unissued shares of
Common Stock shall not be sufficient to effect the conversion of all then
outstanding shares of the Series A Preferred, Series B Preferred, Series C
Preferred or Series D Preferred, in addition to such other remedies as shall be
available to the holder of such Series A Preferred, Series B Preferred, Series C
Preferred or Series D Preferred, the Company will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purposes.
5. Adjustments to Conversion Price.
(A) Special Definitions. For purposes of this subsection 5,
the following definitions shall apply:
(1) "Options" shall mean rights, options or warrants
to subscribe for, purchase or otherwise acquire either Common Stock or
Convertible Securities.
(2) "Original Issue Date" for the Series C Preferred
and Series D Preferred shall mean the date on which the first share of Series C
Preferred or Series D Preferred, as the case may be, was issued.
(3) "Convertible Securities" shall mean any evidences
of indebtedness, shares (other than the Series A Preferred, Series B Preferred,
Series C Preferred and Series D Preferred) or other securities directly or
indirectly convertible into or exchangeable for Common Stock.
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(4) "Additional Shares of Common Stock" shall mean all
shares (including reissued shares) of Common Stock issued (or, pursuant to
subsection 5(C), deemed to be issued) by the Company after the Original Issue
Date, other than:
a. shares of Common Stock issued upon conversion
of the Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred authorized herein;
b. shares of Common Stock issued to officers,
directors, employees and consultants of the Company pursuant to the Company's
1993 Stock Plan (the "Plan"); provided, however, that the maximum aggregate
number of shares which may be subject to outstanding options or issued under the
Plan may not exceed 5,400,000 shares unless approved by the holders of a
majority of the Series C Preferred and Series D Preferred, voting together as a
class;
c. as a dividend or distribution on Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred or any
event for which adjustment is made pursuant to subsection 5(D) hereof;
d. shares of Common Stock issued or deemed issued
upon exercise of warrants to purchase 92,308 shares of Series A Preferred
outstanding as of the Original Issue Date of the Series C Preferred;
e. shares of Common Stock issued or deemed issued
upon pursuant to a merger, the sole purpose of which was to effect the
reincorporation of the Company from Utah into Delaware outstanding as of the
Original Issue Date of the Series C Preferred; or
f. shares of Common Stock issued or deemed issued
upon exercise of warrants to purchase 32,789 shares of Series C Preferred
outstanding as of the Original Issue Date of the Series D Preferred.
(B) No Adjustment of Conversion Price. No adjustment in the
Conversion Price of the Series C Preferred or Series D Preferred shall be made
in respect of the issuance of Additional Shares of Common Stock unless the
consideration per share for an Additional Share of Common Stock issued or deemed
to be issued by the Company is less than the applicable Conversion Price of such
series in effect on the date of and immediately prior to such issue.
(C) Deemed Issue of Additional Shares of Common Stock. In
the event the Company at any time or from time to time after the Original Issue
Date shall issue any Options or Convertible Securities or shall fix a record
date for the determination of holders of any class of securities entitled to
receive any such Options or Convertible Securities, then the maximum number of
shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein for a subsequent adjustment of such number that
would result in an adjustment pursuant to clause (2) below) of Common Stock
issuable upon the exercise of such Options or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such
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issue or, in case such a record date shall have been fixed, as of the close of
business on such record date, provided that Additional Shares of Common Stock
shall not be deemed to have been issued unless the consideration per share
(determined pursuant to subsection 5(E) hereof) of such Additional Shares of
Common Stock would be less than the Conversion Price of the Series C Preferred
or Series D Preferred, as the case may be, in effect on the date of and
immediately prior to such issue, or such record date, as the case may be, and
provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(1) no further adjustment in the Conversion Price shall be
made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(2) if such Options or Convertible Securities by their
terms provide, with the passage of time or otherwise, for any increase or
decrease in the consideration payable to the Company, or increase or decrease in
the number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease insofar
as it affects such Options or the rights of conversion or exchange under such
Convertible Securities;
(3) upon the expiration of any such Options or any rights
of conversion or exchange under such Convertible Securities which shall not have
been exercised, the Conversion Price computed upon the original issue thereof
(or upon the occurrence of a record date with respect thereto), and any
subsequent adjustments based thereon, shall, upon such expiration, be recomputed
as if:
a. in the case of Convertible Securities or Options
for Common Stock, the only Additional Shares of Common Stock issued were shares
of Common Stock, if any, actually issued upon the exercise of such Options or
the conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Company for the
issue of all such Options, whether or not exercised, plus the consideration
actually received by the Company upon such exercise, or for the issue of all
such Convertible Securities which were actually converted or exchanged, plus the
additional consideration, if any, actually received by the Company upon such
conversion or exchange, and
b. in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued upon the exercise
thereof were issued at the time of issue of such Options, and the consideration
received by the Company for the Additional Shares of Common Stock deemed to have
been then issued was the consideration actually received by the Company for the
issue of all such Options, whether or not exercised, plus the consideration
deemed to have been received by the Company upon the issue of the Convertible
Securities with respect to which such Options were actually exercised;
(4) no readjustment pursuant to clause (2) or (3) above
shall have the effect of increasing the Conversion Price to an amount which
exceeds the lower of (i) the
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Conversion Price on the original adjustment date, or (ii) the Conversion Price
that would have resulted from any issuance of Additional Shares of Common Stock
between the original adjustment date and such readjustment date; and
(5) in the case of any Options which expire by their terms
not more than 30 days after the date of issue thereof, no adjustment of the
Conversion Price shall be made until the expiration or exercise of all such
Options, whereupon such adjustment shall be made in the manner provided in
clause (3) above.
(D) Adjustment of Conversion Price of Series C Preferred and
Series D Preferred Upon Issuance of Additional Shares of Common Stock. In the
event that after the Original Issue Date the Company shall issue Additional
Shares of Common Stock (including Additional Shares of Common Stock deemed to be
issued pursuant to subsection 5(C)) without consideration or for a consideration
per share less than the Conversion Price of the Series C Preferred or the Series
D Preferred, as the case may be, in effect on the date of and immediately prior
to such issue, then and in such event, such Conversion Price of such series
shall be reduced, concurrently with such issue, to a price (calculated to the
nearest cent) determined by multiplying such Conversion Price of such series, by
a fraction, the numerator of which shall be the number of shares of Common Stock
outstanding immediately prior to such issue plus the number of shares of Common
Stock which the aggregate consideration, if any, received by the Company for the
total number of Additional Shares of Common Stock so issued would purchase at
such Conversion Price of such Series of Preferred Stock; and the denominator of
which shall be the number of shares of Common Stock outstanding immediately
prior to such issue plus the number of such Additional Shares of Common Stock so
issued; and provided further that, for the purposes of this subsection (D), all
shares of Common Stock issuable upon conversion of outstanding Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred and
outstanding Convertible Securities or exercise of outstanding Options shall be
deemed to be outstanding, and immediately after any Additional Shares of Common
Stock are deemed issued pursuant to subsection 5(C), such Additional Shares of
Common Stock shall be deemed to be outstanding.
(E) Determination of Consideration. For purposes of this
subsection 5, the consideration received by the Company for the issue of any
Additional Shares of Common Stock shall be computed as follows:
(1) Cash and Property: Except as provided in clauses (2)
and (3) below, such consideration shall:
a. insofar as it consists of cash, be deemed to be
the amount of cash received by the Company for such shares (or, if such shares
are offered by the Company for subscription, the subscription price, or, if such
shares are sold to underwriters or dealers for public offering without a
subscription offering, the initial public offering price), without deducting
therefrom any compensation or discount paid of allowed to underwriters or
dealers or others performing similar services or for any expenses incurred in
connection therewith;
b. insofar as it consists of property other than
cash, be computed at the fair value thereof at the time of such issue, as
determined in good faith by the
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Board; provided, however, that no value shall be attributed to any services
performed by any employee, officer or director of the Company; and
c. in the event Additional Shares of Common Stock are
issued together with other shares or securities or other assets of the Company
for consideration which covers both, be the proportion of such consideration so
received with respect to such Additional Shares of Common Stock, computed as
provided in clauses (a) and (b) above, as determined in good faith by the Board.
(2) Expenses. In the event the Company pays or incurs
expenses, commissions or compensation, or allows concessions or discounts to
underwriters, dealers or others performing similar services in connection with
such issue, in an aggregate amount in excess of 10% of the aggregate
consideration received by the Company for such issue, as determined in clause
(1) above, consideration shall be computed as provided in clause (1) above after
deducting the aggregate amount in excess of 10% of the aggregate consideration
received by the Company for the issue.
(3) Options and Convertible Securities. The consideration
per share received by the Company for Additional Shares of Common Stock deemed
to have been issued pursuant to subsection 5(C), relating to Options and
Convertible Securities, shall be determined by dividing
a. the total amount, if any, received or receivable
by the Company as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such consideration) payable to
the Company upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities by
b. the maximum number of shares of Common Stock (as
set forth in the instruments relating thereto, without regard to any provision
contained therein for a subsequent adjustment of such number) issuable upon the
exercise of such Options or the conversion or exchange of such Convertible
Securities.
(F) Adjustments for Stock Dividends, Subdivisions,
Combinations or Consolidations of Common Stock. In the event the
outstanding shares of Common Stock shall be subdivided (by stock dividend,
stock split, or otherwise), into a greater number of shares of Common
Stock, the Series A, Series B, Series C and Series D Conversion Prices then
in effect shall, concurrently with the effectiveness of such subdivision,
be proportionately decreased. In the event the outstanding shares of Common
Stock shall be combined or consolidated, by reclassification or otherwise,
into a lesser number of shares of Common Stock, the Series A, Series B,
Series C and Series D Conversion Prices then in effect shall, concurrently
with the effectiveness of such combination or consolidation, be
proportionately increased.
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(G) Adjustments for Other Distributions. In the event the
Company at any time or from time to time makes, or fixes a record date for the
determination of holders of Common Stock entitled to receive any distribution
payable in securities or assets of the Company other than shares of Common Stock
then and in each such event provision shall be made so that the holders of
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred shall receive upon conversion thereof, in addition to the number of
shares of Common Stock receivable thereupon, the amount of securities or assets
of the Company which they would have received had their Series A Preferred,
Series B Preferred, Series C Preferred and Series D Preferred been converted
into Common Stock on the date of such event and had they thereafter, during the
period from the date of such event to and including the date of conversion,
retained such securities or assets receivable by them as aforesaid during such
period, subject to all other adjustments called for during such period under
this subsection 5 with respect to the rights of the holders of the Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred.
(H) Adjustments for Reclassification, Exchange and
Substitution. If the Common Stock issuable upon conversion of the Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall
be changed into the same or a different number of shares of any other class or
classes of stock, whether by capital reorganization, reclassification or
otherwise (other than a subdivision or combination of shares provided for
above), then and in each such event the holder of each share of Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred shall
have the right thereafter to convert such share into the kind and amount of
shares of stock and other securities and property receivable upon such
reorganization or reclassification or other change by holders of the number of
shares of Common Stock that would have been subject to receipt by the holders
upon conversion of the Series A Preferred, Series B Preferred, Series C
Preferred and Series D Preferred immediately before that change, all subject to
further adjustment as provided herein.
6. No Impairment. The Company will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company but will at all
times in good faith assist in the carrying out of all the provisions of
subsection 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series A Preferred, Series B Preferred, Series C Preferred and Series D
Preferred against impairment.
7. Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to subsection 5, the
Company at its expense shall promptly compute such adjustment or readjustment in
accordance with the terms hereof and furnish to each holder of Series A
Preferred, Series B Preferred, Series C Preferred and Series D Preferred a
certificate setting forth such adjustment or readjustment and showing in detail
the facts upon which such adjustment or readjustment is based. The Company
shall, upon the written request at any time of any holder of Series A Preferred,
Series B Preferred, Series C Preferred or Series D Preferred, furnish or cause
to be furnished to such holder a like certificate setting forth (i) such
adjustments and readjustments, (ii) the Conversion Price at the time in effect,
and (iii) the number of
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shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of Series A Preferred, Series B
Preferred, Series C Preferred and Series D Preferred, as the case may be.
8. Notices of Record Date. In the event of any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend (other
than a cash dividend which is the same as cash dividends paid in previous
quarters) or other distribution, the Company shall mail to each holder of
Preferred Stock at least ten (10) days prior to the date specified herein, a
notice specifying the date on which any such record is to be taken for the
purpose of such dividend or distribution.
(f) Liquidation Preference. In the event of any liquidation,
dissolution or winding up of the Company, either voluntary or involuntary,
distributions to the stockholders of the Company shall be made in the following
manner:
1. The holders of the Series B Preferred, Series C Preferred
and Series D Preferred shall be entitled to receive, prior and in preference to
any distribution of any of the assets or surplus funds of the Company to the
holders of the Series A Preferred and the Common Stock by reason of their
ownership of such stock, the amount of $0.723 for each share of Series B
Preferred then held by them, the amount of $1.60 for each share of Series C
Preferred then held by them and the amount of $2.00 for each share of Series D
Preferred then held by them, in each case as adjusted for any subdivisions,
combinations, consolidations or stock distributions or dividends with respect to
such shares of Series B Preferred, Series C Preferred or Series D Preferred and,
in addition, an amount equal to all declared but unpaid dividends on the Series
B Preferred, Series C Preferred and Series D Preferred. If upon the occurrence
of such event the assets and funds thus distributed among the holders of the
Series B Preferred, Series C Preferred and Series D Preferred shall be
insufficient to permit the payment to such holders of the Series B Preferred,
Series C Preferred and Series D Preferred of the full preferential amount, then
the entire assets and funds of the Company legally available for distribution
shall be distributed among the holders of the Series B Preferred, Series C
Preferred and Series D Preferred on a pro rata basis, based on the aggregate
liquidation preference of the shares of Series B Preferred, the aggregate
liquidation preference of the shares of Series C Preferred and the aggregate
liquidation preference of the shares of Series D Preferred then held by each
holder.
2. After setting apart or paying in full the preferential
amounts due pursuant to subsection (f)(1), the remaining assets of the Company
available for distribution to stockholders, if any, shall be distributed to the
holders of the Series A Preferred, Series B Preferred, Series C Preferred and
Series D Preferred and Common Stock on a pro rata basis, based on the number of
shares of Common Stock then held by each holder on an as-converted basis.
3. A consolidation or merger of the Company with or into any
other corporation or corporations, or a sale, conveyance or disposition of all
or substantially all of the assets of the Company (except for a merger, the sole
purpose of which is to effect the reincorporation of the Company into another
state) or the effectuation by the Company of a transaction or series of related
transactions in which more than 50% of the voting power of the Company is
disposed of shall be deemed to be a liquidation, dissolution or winding up
within the meaning of this subsection (f).
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4. Notwithstanding subsection (f)(1) hereof, the Company may at any
time, out of funds legally available therefor, repurchase shares of Common Stock
of the Company issued to or held by employees, officers, directors, contractors
or consultants of the Company or its subsidiaries upon termination of their
employment or services, pursuant to any agreement providing for such right of
repurchase, whether or not dividends on the Series B Preferred, Series C
Preferred and Series D Preferred shall have been declared and funds set aside
therefor and such repurchases shall not be subject to the liquidation
preferences of the Series B Preferred, Series C Preferred and Series D
Preferred.
5. In any sale of assets of the Company, if the consideration
received by the Company is other than cash, its value will be deemed to be its
fair market value. In the case of publicly traded securities received in a
merger, consolidation or sale of the Company, fair market value shall mean the
closing market price for such securities on the last trading date prior to such
consolidation, merger or sale is consummated. If the consideration is in a form
other than publicly traded securities, its value shall be determined by the
Board of Directors of the Company.
(g) Redemption Rights of Series B Preferred, Series C Preferred and Series
D Preferred.
1. Upon the written request of the holders of 66-2/3% of the then
outstanding Series B Preferred at any time on or after the fifth anniversary of
the date on which the first share of Series D Preferred was issued (the "Series
D Original Issue Date"), to the extent the shares of Series B Preferred have not
been redeemed or converted prior to such date, the Company shall redeem an
amount equal to one-third of the issued, outstanding and unconverted shares of
Series B Preferred, on a pro rata basis with respect to each holder thereof, in
each of three annual installments beginning forty-five (45) days after the date
of receipt of such request (the "Series B Initial Redemption Date"), from any
source of funds legally available therefor (but in any event, funds expended to
effect such redemption shall not exceed in any one year an aggregate amount
equal to the greater of one-third of the working capital of the Company or one-
quarter of the net worth of the Company, in each case determined as of the close
of the prior fiscal year, as computed in accordance with generally accepted
accounting principles pursuant to the Company's audited financial statements for
the prior fiscal year). Not less than 30 and not more than 60 days before the
fourth anniversary of the Series D Original Issue Date, the Company shall send
to each holder of Series B Preferred the audited financial statements of the
Company for the prior fiscal year together with a notice advising such holders
of their rights under this subsection. If, and only if, no funds or insufficient
funds are available to the Company at any time to meet the Company's redemption
obligations pursuant to this subsection, then the Company's obligations to
redeem shares of Series B Preferred for which holders of a majority of the
outstanding Series B Preferred have delivered a written request for redemption
to the Company, shall be carried over to the succeeding year (subject to the
same limitations on payment as set forth above) until all shares entitled to be
redeemed and qualifying for redemption hereunder have been redeemed. The shares
of Series B Preferred that have not been redeemed shall continue to be entitled
to the dividend, conversion and other rights, preferences, privileges and
restrictions of the Series B Preferred.
2. Upon the request of the holders of 66-2/3% of the then
outstanding Series C Preferred at any time on or after the fifth anniversary of
the Series D Original Issue Date, to
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the extent the shares of Series C Preferred have not been redeemed or converted
prior to such date, the Company shall redeem an amount equal to one-third of the
issued, outstanding and unconverted shares of Series C Preferred, on a pro rata
basis with respect to each holder thereof, in each of three annual installments
beginning forty-five (45) days after the date of receipt of such request (the
"Series C Initial Redemption Date"), from any source of funds legally available
therefor (but in any event, funds expended to effect such redemption shall not
exceed in any one year an aggregate amount equal to the greater of one-third of
the working capital of the Company or one-quarter of the net worth of the
Company, in each case determined as of the close of the prior fiscal year, as
computed in accordance with generally accepted accounting principles pursuant to
the Company's audited financial statements for the prior fiscal year). Not less
than 30 and not more than 60 days before the fourth anniversary of the Series D
Original Issue Date, the Company shall send to each holder of Series C Preferred
the audited financial statements of the Company for the prior fiscal year
together with a notice advising such holders of their rights under this
subsection. If, and only if, no funds or insufficient funds are available to the
Company at any time to meet the Company's redemption obligations pursuant to
this subsection, then the Company's obligations to redeem shares of Series C
Preferred for which holders of a majority of the outstanding Series C Preferred
have delivered a written request for redemption to the Company, shall be carried
over to the succeeding year (subject to the same limitations on payment as set
forth above) until all shares entitled to be redeemed and qualifying for
redemption hereunder have been redeemed. The shares of Series C Preferred that
have not been redeemed shall continue to be entitled to the dividend, conversion
and other rights, preferences, privileges and restrictions of the Series C
Preferred.
3. Upon the request of the holders of 66-2/3% of the then
outstanding Series D Preferred at any time on or after the fifth anniversary of
the Series D Original Issue Date, to the extent the shares of Series D Preferred
have not been redeemed or converted prior to such date, the Company shall redeem
an amount equal to one-third of the issued, outstanding and unconverted shares
of Series D Preferred, on a pro rata basis with respect to each holder thereof,
in each of three annual installments beginning forty-five (45) days after the
date of receipt of such request (the "Series D Initial Redemption Date"), from
any source of funds legally available therefor (but in any event, funds expended
to effect such redemption shall not exceed in any one year an aggregate amount
equal to the greater of one-third of the working capital of the Company or one-
quarter of the net worth of the Company, in each case determined as of the close
of the prior fiscal year, as computed in accordance with generally accepted
accounting principles pursuant to the Company's audited financial statements for
the prior fiscal year). Not less than 30 and not more than 60 days before the
fourth anniversary of the Series D Original Issue Date, the Company shall send
to each holder of Series D Preferred the audited financial statements of the
Company for the prior fiscal year together with a notice advising such holders
of their rights under this subsection. If, and only if, no funds or insufficient
funds are available to the Company at any time to meet the Company's redemption
obligations pursuant to this subsection, then the Company's obligations to
redeem shares of Series D Preferred for which holders of a majority of the
outstanding Series D Preferred have delivered a written request for redemption
to the Company, shall be carried over to the succeeding year (subject to the
same limitations on payment as set forth above) until all shares entitled to be
redeemed and qualifying for redemption hereunder have been redeemed. The shares
of Series D Preferred that have not been redeemed shall continue to be entitled
to the dividend, conversion and other rights, preferences, privileges and
restrictions of the Series D Preferred.
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<PAGE>
4. The redemption price for each share of Series B Preferred
repurchased shall be equal to $0.71 plus 7% per year compounded annually and any
declared but unpaid dividends. The redemption price for each share of Series C
Preferred repurchased shall be equal to $1.60 plus 7% per year compounded
annually and any declared but unpaid dividends. The redemption price for each
share of Series D Preferred repurchased shall be equal to $2.00 plus 7% per year
compounded annually and any declared but unpaid dividends.
5. Upon receipt of a request for redemption from the holders of
Series B Preferred pursuant to Section (g)(1), Series C Preferred pursuant to
Section (g)(2) or Series D Preferred pursuant to Section (g)(3), as the case may
be (the "Initiating Series"), the Company shall notify in writing within 10 days
the holders of the Series D Preferred, Series C Preferred or Series B Preferred,
as the case may be (the "Remaining Series"), of the request of redemption made
by the holders of the Initiating Series. If a request for redemption is received
by the Company from the holders of 66-2/3% of the then outstanding shares of the
Remaining Series within 15 days, then the Initial Redemption Date of the
Remaining Series shall be the same date as the Initial Redemption Date of the
Initiating Series.
6. In the event insufficient funds are available to redeem all
shares of Series B Preferred, Series C Preferred, and Series D Preferred
entitled and electing to be redeemed pursuant to Sections (g)(1), (g)(2) and
(g)(3), the Company shall effect each such redemption pro rata among the holders
of the series electing redemption based upon the liquidation preference of the
shares of such series then held by each holder.
7. The Company may not redeem any shares of capital stock (except
for shares of Common Stock of the Company issued to or held by employees,
officers, contractors or consultants of the Company or its subsidiaries upon
termination of their employment or services, pursuant to any agreement providing
for a right of repurchase) prior to the Series B Preferred, Series C Preferred
and Series D Preferred without the prior written consent of the holders of a
majority of the Series B Preferred, Series C Preferred and Series D Preferred,
voting together.
8. Upon redemption pursuant to this Article, the shares of Series B
Preferred, Series C Preferred and Series D Preferred so redeemed shall be
cancelled and not subject to reissuance.
ARTICLE IV
The address of the corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle, zip code 19801. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE V
The corporation is to have perpetual existence.
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<PAGE>
ARTICLE VI
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the corporation.
ARTICLE VII
The election of directors need not be by written ballot unless the Bylaws
of the corporation shall so provide.
ARTICLE VIII
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the corporation.
ARTICLE IX
To the fullest extent permitted by the Delaware General Corporation Law or
any other applicable law as now in effect or as it may hereafter be amended, a
director of the corporation shall not be personally liable to the corporation or
its shareholders for monetary damages for any action taken, or any failure to
take any action, as a director.
The corporation shall indemnify to the fullest extent permitted by law any
person made or threatened to be made a party to an action or proceeding, whether
criminal, civil, administrative or investigative, by reason of the fact that he
or she or his or her testator or intestate is or was a director or officer of
the corporation or any predecessor of the corporation or serves or served any
other enterprise as a director, officer, employee or agent at the request of the
corporation or any predecessor to the corporation.
Neither any amendment nor repeal of this Article IX, nor the adoption of
any provision of this corporation's Certificate of Incorporation inconsistent
with this Article IX, shall eliminate or reduce the effect of this Article IX in
respect of any matter occurring, or any cause of action, suit or claim accruing
or arising or that, but for this Article IX, would accrue or arise, prior to
such amendment, repeal or adoption of an inconsistent provision.
ARTICLE X
Except as provided in Article IX above, the corporation reserves the right
to amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by
Andrew G. Raguskus, the President of the Company, and attested by William S.
Barth, the Assistant Secretary of the Corporation. The signatures below shall
constitute the affirmation or acknowledgment, under penalties of perjury, that
the facts herein stated are true.
Dated: October 22, 1998
----------
/s/ Andrew G. Raguskus
-----------------------------------------
Andrew G. Raguskus
President
ATTEST:
/s/ William S. Barth
- ----------------------------
William S. Barth
Assistant Secretary
-17-
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
SONIC INNOVATIONS, INC.
(Adopted Upon Effectiveness of the Company's Initial Public Offering)
(Stockholder Consent Still Required for Adoption)
Sonic Innovations, Inc., a Delaware corporation, hereby certifies as
follows:
The original Certificate of Incorporation for Sonic Innovations, Inc. (the
"Company") was filed in the office of the Secretary of State of the State of
Delaware on November 7, 1997 under the name SONIX TECHNOLOGIES, INC. All
amendments to the Certificate of Incorporation reflected herein have been duly
authorized and adopted by the Company's Board of Directors and stockholders in
accordance with the provisions of Sections 242 and 245 of the Delaware General
Corporation Law.
This Amended and Restated Certificate of Incorporation restates and
integrates and amends the Certificate of Incorporation of the Company. The text
of the Certificate of Incorporation is amended hereby to read as herein set
forth in full:
ARTICLE I
The name of the corporation is Sonic Innovations, Inc.
ARTICLE II
The nature of the business or purpose to be conducted or promoted by the
corporation is to engage in any lawful act or activity for which corporations
may be organized under the General Corporation Law of the State of Delaware.
ARTICLE III
The corporation shall have authority to issue shares as follows:
Seventy million (70,000,000) shares of common stock, par value $0.001 per
share. Each share of common stock shall entitle the holder thereof to one (1)
vote on each matter submitted to a vote at a meeting of shareholders.
Five million (5,000,000) shares of Preferred Stock, par value $0.001 per
share which may be issued from time to time in one or more series. The Board of
Directors is hereby authorized, subject to limitations prescribed by law, to fix
by resolution or resolutions the designations, powers, preferences and rights,
and the qualifications, limitations or restrictions thereof, of any wholly
unissued series of Preferred Stock, including without limitation authority to
fix by resolution or resolutions the dividend rights, dividend rate, conversion
rights, voting rights, rights and terms of redemption (including sinking fund
provisions), redemption price or prices, and liquidation
<PAGE>
preferences of any such series, and the number of shares constituting any such
series and the designation thereof, or any of the foregoing.
The Board of Directors is further authorized to increase (but not above the
total number of authorized shares of the class) or decrease (but not below the
number of shares of any such series then outstanding) the number of shares of
any series, the number of which was fixed by it, subsequent to the issuance of
shares of such series then outstanding, subject to the powers, preferences and
rights, and the qualifications, limitations and restrictions thereof stated in
the Certificate of Incorporation or the resolution of the Board of Directors
originally fixing the number of shares of such series. If the number of shares
of any series is so decreased, then the shares constituting such decrease shall
resume the status which they had prior to the adoption of the resolution
originally fixing the number of shares of such series.
ARTICLE IV
The number of directors which constitute the entire Board of Directors of
the corporation shall be as specified in the Bylaws of the corporation. At each
annual meeting of stockholders, directors of the corporation shall be elected to
hold office until the expiration of the term for which they are elected and
until their successors have been duly elected and qualified; except that if any
such election shall not be so held, such election shall take place at a
stockholders' meeting called and held in accordance with the General Corporation
Law.
The directors of the corporation shall be divided into three classes as
nearly equal in size as is practicable, hereby designated Class I, Class II and
Class III. The term of office of the initial Class I directors shall expire at
the first regularly-scheduled annual meeting of the stockholders following the
effective date of this corporation's initial public offering (the "Effective
Date"), the term of office of the initial Class II directors shall expire at the
second annual meeting of the stockholders following the Effective Date and the
term of office of the initial Class III directors shall expire at the third
annual meeting of the stockholders following the Effective Date. At each annual
meeting of stockholders, commencing with the first regularly-scheduled annual
meeting of stockholders following the Effective Date, each of the successors
elected to replace the directors of a Class whose term shall have expired at
such annual meeting shall be elected to hold office until the third annual
meeting next succeeding his or her election and until his or her respective
successor shall have been duly elected and qualified.
If the number of directors is hereafter changed, any newly created
directorships or decrease in directorships shall be so apportioned among the
classes as to make all classes as nearly equal in number as is practicable,
provided that no decrease in the number of directors constituting the Board of
Directors shall shorten the term of any incumbent director.
Any director may be removed from office by the stockholders of the
corporation only for cause. Vacancies occurring on the Board of Directors for
any reason and newly created directorships resulting from an increase in the
authorized number of directors may be filled only by vote of a majority of the
remaining members of the Board of Directors, although less than a quorum, at any
meeting of the Board of Directors. A person so elected by the Board of
Directors to fill a vacancy or
<PAGE>
newly created directorship shall hold office until the next election of the
Class for which such director shall have been chosen and until his or her
successor shall have been duly elected and qualified.
ARTICLE V
The address of the corporation's registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle, zip code 19801. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE VI
The corporation is to have perpetual existence.
ARTICLE VII
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors is expressly authorized to make, alter, amend or repeal
the Bylaws of the corporation.
ARTICLE VIII
The election of directors need not be by written ballot unless the Bylaws
of the corporation shall so provide.
ARTICLE IX
Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the corporation may be kept
(subject to any provision contained in the statutes) outside the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the corporation.
ARTICLE X
No action shall be taken by the stockholders of the Corporation except at
an annual or special meeting of the stockholders called in accordance with the
Bylaws and no action shall be taken by the stockholders by written consent.
ARTICLE XI
To the fullest extent permitted by the Delaware General Corporation Law or
any other applicable law as now in effect or as it may hereafter be amended, a
director of the corporation shall not be personally liable to the corporation or
its shareholders for monetary damages for any action taken, or any failure to
take any action, as a director.
The corporation shall indemnify to the fullest extent permitted by law any
person made or threatened to be made a party to an action or proceeding, whether
criminal, civil, administrative or investigative, by reason of the fact that he
or she or his or her testator or intestate is or was a director or officer of
the corporation or any predecessor of the corporation or serves or served any
other
<PAGE>
enterprise as a director, officer, employee or agent at the request of the
corporation or any predecessor to the corporation.
Neither any amendment nor repeal of this Article XI, nor the adoption of
any provision of this corporation's Certificate of Incorporation inconsistent
with this Article XI, shall eliminate or reduce the effect of this Article XI in
respect of any matter occurring, or any cause of action, suit or claim accruing
or arising or that, but for this Article XI, would accrue or arise, prior to
such amendment, repeal or adoption of an inconsistent provision.
ARTICLE XII
Except as provided in Article XI above, the corporation reserves the right
to amend, alter, change or repeal any provision contained in this Certificate of
Incorporation, in the manner now or hereafter prescribed by statute, and all
rights conferred upon stockholders herein are granted subject to this
reservation.
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate to be signed by
Andrew G. Raguskus, the President of the Company, and attested by ____________,
the Assistant Secretary of the Corporation. The signatures below shall
constitute the affirmation or acknowledgment, under penalties of perjury, that
the facts herein stated are true.
Dated: ______________, 1999
________________________________
Andrew G. Raguskus
President
ATTEST:
___________________________________
___________________
Assistant Secretary
<PAGE>
EXHIBIT 3.3
BYLAWS
OF
SONIC INNOVATIONS, INC.
ARTICLE 1
Stockholders
1.1 ANNUAL MEETINGS
An annual meeting of stockholders shall be held for the election of
directors at such date, time and place, either within or without the State of
Delaware, as may be designated by resolution of the Board of Directors from time
to time. Any other proper business may be transacted at the annual meeting.
<PAGE>
1.2 SPECIAL MEETINGS
A special meeting of the stockholders for any purpose or purposes may be
called at any time by the Board of Directors or by a committee of the Board of
Directors, which has been duly designated by the Board of Directors and whose
powers and authority, as expressly provided in a resolution of the Board of
Directors, include the power to call such meetings, but such special meetings
may not be called by any other person or persons.
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<PAGE>
1.3 NOTICE OF MEETINGS
Whenever stockholders are required or permitted to take any action at a
meeting, a written notice of the meeting shall be given which shall state the
place, date and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called. Unless otherwise provided
by law, the certificate of incorporation or these bylaws, the written notice of
any meeting shall be given not less than ten nor more than sixty days before the
date of the meeting to each stockholder entitled to vote at such meeting. If
mailed, such notice shall be deemed to be given when deposited in the mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
1.4 ADJOURNMENTS
Any meeting of stockholders, annual or special, may adjourn from time to
time to reconvene at the same or some other place, and notice need not be given
of any such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
1.5 QUORUM
Except as otherwise provided by law, the certificate of incorporation or
these bylaws, at each meeting of stockholders the presence in person or by proxy
of the holders of shares of stock having a majority of the votes which could be
cast by the holders of all outstanding shares of stock entitled to vote at the
meeting shall be necessary and sufficient to constitute a quorum. In the
absence of a quorum, the stockholders so present may, by majority vote, adjourn
the meeting from time to time in the manner provided in Section 1.4 of these
bylaws until a quorum shall attend. Shares of its own stock belonging to the
corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the corporation, shall neither be entitled to vote nor be counted
for quorum purposes; provided, however, that the foregoing shall not limit the
right of the corporation to vote stock, including but not limited to its own
stock, held by it in a fiduciary capacity.
1.6 ORGANIZATION
Meetings of stockholders shall be presided over by the Chairman of the
Board, if any, or in his absence by the Vice Chairman of the Board, if any, or
in his absence by the President, or in his absence by a Vice President, or in
the absence of the foregoing persons by a chairman designated by the Board of
Directors, or in the absence of such designation by a chairman chosen at the
meeting. The Secretary shall act as secretary of the meeting, but in his
absence the chairman of the meeting may appoint any person to act as secretary
of the meeting.
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<PAGE>
1.7 VOTING; PROXIES
Except as otherwise provided by the certificate of incorporation, each
stockholder entitled to vote at any meeting of stockholders shall be entitled to
one vote for each share of stock held by him which has voting power upon the
matter in question. Each stockholder entitled to vote at a meeting of
stockholders may authorize another person or persons to act for him by proxy,
but no such proxy shall be voted or acted upon after three years from its date,
unless the proxy provides for a longer period. A duly executed proxy shall be
irrevocable if it states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power.
A stockholder may revoke any proxy which is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or another duly executed proxy bearing a later date with the Secretary of
the corporation. Voting at meetings of stockholders need not be by written
ballot and need not be conducted by inspectors of election unless so determined
by the holders of shares of stock having a majority of the votes which could be
cast by the holders of all outstanding shares of stock entitled to vote thereon
which are present in person or by proxy at such meeting. At all meetings of
stockholders for the election of directors a plurality of the votes cast shall
be sufficient to elect. All other elections and questions shall, unless
otherwise provided by law, the certificate of incorporation or these bylaws, be
decided by the vote of the holders of shares of stock having a majority of the
votes which could be cast by the holders of all shares of stock entitled to vote
thereon which are present in person or represented by proxy at the meeting.
1.8 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors and which record date: (1) in the case of determination
of stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall, unless otherwise required by law, not be more than sixty nor
less than ten days before the date of such meeting; (2) in the case of
determination of stockholders entitled to express consent to corporate action in
writing without a meeting, shall not be more than ten days from the date upon
which the resolution fixing the record date is adopted by the Board of
Directors; and (3) in the case of any other action, shall not be more than sixty
days prior to such other action. If no record date is fixed: (1) the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or, if notice is waived, at the close of business
on the day next preceding the day on which the meeting is held; (2) the record
date for determining stockholders entitled to express consent to corporate
action in writing without a meeting when no prior action of the Board of
Directors is required by law, shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the corporation in accordance with applicable law, or, if prior action by the
Board of Directors is required by law, shall be at the close of business on the
day on which the Board of Directors adopts the resolution taking such prior
action; and (3) the record date for determining stockholders for any other
purpose shall be at the close of business on the day
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<PAGE>
on which the Board of Directors adopts the resolution relating thereto. A
determination of stockholders of record entitled to notice of or to vote at a
meeting of stockholders shall apply to any adjournment of the meeting; provided,
however, that the Board of Directors may fix a new record date for the adjourned
meeting.
1.9 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The Secretary shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof and may be inspected by any stockholder who is
present. Upon the willful neglect or refusal of the directors to produce such a
list at any meeting for the election of directors, they shall be ineligible for
election to any office at such meeting. The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine the stock ledger,
the list of stockholders or the books of the corporation, or to vote in person
or by proxy at any meeting of stockholders.
1.10 ACTION BY CONSENT OF STOCKHOLDERS
Unless otherwise restricted by this certificate of incorporation, any
action required or permitted to be taken at any annual or special meeting of the
stockholders may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing.
ARTICLE 2
BOARD OF DIRECTORS
2.1 NUMBER; QUALIFICATIONS
The Board of Directors shall consist of one or more members, the number
thereof to be determined from time to time by resolution of the Board of
Directors. Directors need not be stockholders.
2.2 ELECTION; RESIGNATION; REMOVAL; VACANCIES
The Board of Directors shall initially consist of the persons named as
directors in the certificate of incorporation, and each director so elected
shall hold office until the first annual meeting of stockholders or until his
successor is elected and qualified. At the first annual meeting of stockholders
and at each annual meeting thereafter, the stockholders shall elect directors
each of whom shall hold office for a term of one year or until his successor is
elected and qualified. Any director may resign at any time upon written notice
to the corporation. Any newly created directorship or any vacancy occurring in
the Board of Directors for any cause may be filled by a
-5-
<PAGE>
majority of the remaining members of the Board of Directors, although such
majority is less than a quorum, or by a plurality of the votes cast at a meeting
of stockholders, and each director so elected shall hold office until the
expiration of the term of office of the director whom he has replaced or until
his successor is elected and qualified.
2.3 REGULAR MEETINGS
Regular meetings of the Board of Directors may be held at such places
within or without the State of Delaware and at such times as the Board of
Directors may from time to time determine, and if so determined notices thereof
need not be given.
2.4 SPECIAL MEETINGS
Special meetings of the Board of Directors may be held at any time or place
within or without the State of Delaware whenever called by the President, any
Vice President, the Secretary, or by any member of the Board of Directors.
Notice of a special meeting of the Board of Directors shall be given by the
person or persons calling the meeting at least twenty-four hours before the
special meeting.
2.5 TELEPHONIC MEETINGS PERMITTED
Members of the Board of Directors, or any committee designated by the Board
of Directors, may participate in a meeting thereof by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
pursuant to this bylaw shall constitute presence in person at such meeting.
2.6 QUORUM; VOTE REQUIRED FOR ACTION
At all meetings of the Board of Directors a majority of the whole Board of
Directors shall constitute a quorum for the transaction of business. Except in
cases in which the certificate of incorporation or these bylaws otherwise
provide, the vote of a majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors.
2.7 ORGANIZATION
Meetings of the Board of Directors shall be presided over by the Chairman
of the Board, if any, or in his absence by the Vice Chairman of the Board, if
any, or in his absence by the President, or in their absence by a chairman
chosen at the meeting. The Secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.
2.8 INFORMAL ACTION BY DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the Board
of Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board of Directors or such committee,
-6-
<PAGE>
as the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board of Directors or such
committee.
ARTICLE 3
Committees
3.1 COMMITTEES
The Board of Directors may, by resolution passed by a majority of the whole
Board of Directors, designate one or more committees, each committee to consist
of one or more of the directors of the corporation. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of the committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in place of any such absent or
disqualified member. Any such committees to the extent permitted by law and to
the extent provided in the resolution of the Board of Directors, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the corporation, and may authorize the
seal of the corporation to be affixed to all papers which may require it.
3.2 COMMITTEE RULES
Unless the Board of Directors otherwise provides, each committee designated
by the Board of Directors may make, alter and repeal rules for the conduct of
its business. In the absence of such rules each committee shall conduct its
business in the same manner as the Board of Directors conducts its business
pursuant to Article III of these bylaws.
ARTICLE 4
Officers
4.1 EXECUTIVE OFFICERS; ELECTION; QUALIFICATIONS; TERM OF OFFICE;
RESIGNATION; REMOVAL; VACANCIES
The Board of Directors shall elect a President and Secretary, and it may,
if it so determines, choose a Chairman of the Board and a Vice Chairman of the
Board from among its members. The Board of Directors may also choose one or
more Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or
more Assistant Treasurers. Each such officer shall hold office until the first
meeting of the Board of Directors after the annual meeting of stockholders next
succeeding his election, and until his successor is elected and qualified or
until his earlier resignation or removal. Any officer may resign at any time
upon written notice to the corporation. The Board of Directors may remove any
officer with or without cause at any time, but such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
corporation. Any number of offices may be held by the same person. Any vacancy
occurring in any office of the corporation by
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<PAGE>
death, resignation, removal or otherwise may be filled for the unexpired portion
of the term by the Board of Directors at any regular or special meeting.
4.2 POWERS AND DUTIES OF EXECUTIVE OFFICERS
The officers of the corporation shall have such powers and duties in the
management of the corporation as may be prescribed by the Board of Directors
and, to the extent not so provided, as generally pertain to their respective
offices, subject to the control of the Board of Directors. The Board of
Directors may require any officer, agent or employee to give security for the
faithful performance of his duties.
ARTICLE 5
STOCK
5.1 CERTIFICATES
Every holder of stock shall be entitled to have a certificate signed by or
in the name of the corporation by the Chairman or Vice Chairman of the Board of
Directors, if any, or the President or Vice President, and by the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the
corporation, certifying the number of shares owned by him in the corporation.
Any of or all the signatures on the certificate may be a facsimile. In case any
officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue.
5.2 LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF NEW
CERTIFICATES
The corporation may issue a new certificate of stock in the place of any
certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate.
ARTICLE 6
INDEMNIFICATION
6.1 RIGHT TO INDEMNIFICATION
The corporation shall indemnify and hold harmless, to the fullest extent
permitted by applicable law as is presently exists or may hereafter be amended,
any person who was or is made or is threatened to be made a party or is
otherwise involved in any action, suit or proceeding, whether civil, criminal,
administrative or investigative (a "proceeding") by reason of the fact that he,
or a person for whom he is the legal representative, is or was a director,
officer, employee or agent of the
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<PAGE>
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust, enterprise or non-profit entity, including service with
respect to employee benefit plans, against all liability and loss suffered and
expenses reasonably incurred by such person. The corporation shall be required
shall be required to indemnify a person in connection with a proceeding
initiated by such person only if the proceeding was authorized by the Board of
Directors of the corporation.
6.2 PREPAYMENT OF EXPENSES
The corporation shall pay the expenses incurred in defending any proceeding
in advance of its final disposition, provided, however, that the payment of
expenses incurred by a director or officer in advance of the final disposition
of the proceeding shall be made only upon receipt of an undertaking by the
director or officer to repay all amounts advanced if it should be ultimately
determined that the director or officer is not entitled to be indemnified under
this Article or otherwise.
6.3 CLAIMS
If a claim for indemnification or payment of expenses under this Article is
not paid in full within sixty days after a written claim therefor has been
received by the corporation the claimant may file suit to recover the unpaid
amount of such claim and, if successful in whole or in part, shall be entitled
to be paid the expense of prosecuting such claim. In any such action the
corporation shall have the burden of proving that the claimant was not entitled
to the requested indemnification or payment of expenses under applicable law.
6.4 NON-EXCLUSIVITY OF RIGHTS
The rights conferred on any person by the Article VI shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the certificate of incorporation, these bylaws, agreement,
vote of stockholders or disinterested directors or otherwise.
6.5 OTHER INDEMNIFICATION
The corporation's obligation, if any, to indemnify any person who was or is
serving at its request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, enterprise or non-profit entity
shall be reduced by any amount such person may collect as indemnification from
such other corporation, partnership, joint venture, trust, enterprise or non-
profit enterprise.
6.6 AMENDMENT OR REPEAL
Any repeal or modification of the foregoing provisions of this Article VI
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
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ARTICLE 7
Miscellaneous
7.1 FISCAL YEAR
The fiscal year of the corporation shall be determined by resolution of the
Board of Directors.
7.2 SEAL
The corporate seal shall have the name of the corporation inscribed thereon
and shall be in such form as may be approved from time to time by the Board of
Directors.
7.3 WAIVER OF NOTICE OF MEETINGS OF STOCKHOLDERS, DIRECTORS AND COMMITTEES
Any written waiver of notice, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of any regular or special meeting
of the stockholders, directors, or members of a committee of directors need be
specified in any written waiver of notice.
7.4 INTERESTED DIRECTORS; QUORUM
No contract or transaction between the corporation and one or more of its
directors or officers, or between the corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors or officers are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the director
or officer in present at or participates in the meeting of the Board of
Directors or committee thereof which authorizes the contract or transaction, or
solely because his or their votes are counted for such purpose, if: (1) the
material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the Board of Directors or the
committee, and the Board of Directors or committee in good faith authorizes the
contract or transaction by the affirmative votes of a majority of the
disinterested directors, even though the disinterested directors be less than a
quorum; or (2) the material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (3) the contract or
transaction is fair as to the corporation as of the time it is authorized,
approved or ratified, by the Board of Directors, a committee thereof, or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
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7.5 FORM OF RECORDS
Any records maintained by the corporation in the regular course of its
business, including its stock ledger, books of account, and minute books, may be
kept on, or be in the form of, punch cards, magnetic tape, photographs,
microphotographs, or any other information storage device, provided that the
records so kept can be converted into clearly legible form within a reasonable
time. The corporation shall so convert any records so kept upon the request of
any person entitled to inspect the same.
7.6 AMENDMENT OF BYLAWS
These bylaws may be altered or repealed, and new bylaws made, by the Board
of Directors, but the stockholders may make additional bylaws and may alter and
repeal any bylaws whether adopted by then or otherwise.
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<PAGE>
BYLAWS
OF
SONIC INNOVATIONS, INC.
<PAGE>
EXHIBIT 3.4
AMENDED AND RESTATED BYLAWS
OF
SONIC INNOVATIONS, INC.
(amended and restated as of __________, 1999,
effective as of the closing of the corporation's initial public offering)
ARTICLE 1
Stockholders
1.1 ANNUAL MEETINGS
An annual meeting of stockholders shall be held for the election of
directors at such date, time and place, either within or without the State of
Delaware, as may be designated by resolution of the Board of Directors from time
to time. Any other proper business may be transacted at the annual meeting.
1.2 ADVANCE NOTICE PROCEDURES
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be: (A) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the board
of directors, (B) otherwise properly brought before the meeting by or at the
direction of the board of directors, or (C) otherwise properly brought before
the meeting by a stockholder. For business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the secretary of the corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the corporation not less than one hundred twenty
(120) calendar days before the date on which the corporation first mailed its
proxy statement to stockholders in connection with the previous year's annual
meeting of stockholders; provided, however, that in the event that no annual
meeting was held in the previous year or the date of the annual meeting has been
changed by more than thirty (30) days from the from the prior year, notice by
the stockholder to be timely must be so received not later than the close of
business on the later of one hundred twenty (120) calendar days in advance of
such annual meeting or ten (10) calendar days following the date on which public
announcement of the date of the meeting is first made. A stockholder's notice to
the secretary shall set forth as to each matter the stockholder proposes to
bring before the annual meeting: (i) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (ii) the name and address, as they appear on the
corporation's books, of the stockholder proposing such business, (iii) the class
and number of shares of the corporation which are beneficially owned by the
stockholder, (iv) any material interest of the stockholder in such business, and
(v) any other information that is required to be provided by the stockholder
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(the
<PAGE>
"1934 Act"), in his capacity as a proponent to a stockholder proposal.
Notwithstanding the foregoing, in order to include information with respect to a
stockholder proposal in the proxy statement and form of proxy for a
stockholder's meeting, stockholders must provide notice as required by the
regulations promulgated under the 1934 Act. Notwithstanding anything in these
Bylaws to the contrary, no business shall be conducted at any annual meeting
except in accordance with the procedures set forth in this paragraph (a). The
chairman of the annual meeting shall, if the facts warrant, determine and
declare at the meeting that business was not properly brought before the meeting
and in accordance with the provisions of this paragraph (a), and, if he should
so determine, he shall so declare at the meeting that any such business not
properly brought before the meeting shall not be transacted.
(b) Only persons who are nominated in accordance with the procedures set
forth in this paragraph (b) shall be eligible for election as directors.
Nominations of persons for election to the board of directors of the corporation
may be made at a meeting of stockholders by or at the direction of the board of
directors or by any stockholder of the corporation entitled to vote in the
election of directors at the meeting who complies with the notice procedures
set forth in this paragraph (b). Such nominations, other than those made by or
at the direction of the board of directors, shall be made pursuant to timely
notice in writing to the secretary of the corporation in accordance with the
provisions of paragraph (a) of this Section 1.2. Such stockholder's notice shall
set forth (i) as to each person, if any, whom the stockholder proposes to
nominate for election or re-election as a director: (A) the name, age, business
address and residence address of such person, (B) the principal occupation or
employment of such person, (C) the class and number of shares of the corporation
which are beneficially owned by such person, (D) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nominations are to be made by the stockholder, and (E) any other information
relating to such person that is required to be disclosed in solicitations of
proxies for elections of directors, or is otherwise required, in each case
pursuant to Regulation 14A under the 1934 Act (including without limitation such
person's written consent to being named in the proxy statement, if any, as a
nominee and to serving as a director if elected); and (ii) as to such
stockholder giving notice, the information required to be provided pursuant to
paragraph (a) of this Section 1.2. At the request of the board of directors,
any person nominated by a stockholder for election as a director shall furnish
to the secretary of the corporation that information required to be set forth in
the stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the corporation unless nominated
in accordance with the procedures set forth in this paragraph (b). The chairman
of the meeting shall, if the facts warrants, determine and declare at the
meeting that a nomination was not made in accordance with the procedures
prescribed by these Bylaws, and if he should so determine, he shall so declare
at the meeting, and the defective nomination shall be disregarded.
These provisions shall not prevent the consideration and approval or
disapproval at an annual meeting of reports of officers, directors and
committees of the board of directors, but in connection therewith no new
business shall be acted upon at any such meeting unless stated, filed and
received as herein provided. Notwithstanding anything in these bylaws to the
contrary, no business brought
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before a meeting by a stockholder shall be conducted at an annual meeting except
in accordance with procedures set forth in this Section 1.2.
1.3 SPECIAL MEETINGS
A special meeting of the stockholders may be called at any time by the
board of directors, the chairman of the board, the vice chairman of the board or
the president, but such special meetings may not be called by any other person
or persons. Only such business shall be considered at a special meeting of
stockholders as shall have been stated in the notice for such meeting.
1.4 NOTICE OF MEETINGS
Whenever stockholders are required or permitted to take any action at a
meeting, a written notice of the meeting shall be given which shall state the
place, date and hour of the meeting, and, in the case of a special meeting, the
purpose or purposes for which the meeting is called. Unless otherwise provided
by law, the certificate of incorporation or these bylaws, the written notice of
any meeting shall be given not less than ten nor more than sixty days before the
date of the meeting to each stockholder entitled to vote at such meeting. If
mailed, such notice shall be deemed to be given when deposited in the mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
1.5 ADJOURNMENTS
Any meeting of stockholders, annual or special, may adjourn from time to
time to reconvene at the same or some other place, and notice need not be given
of any such adjourned meeting if the time and place thereof are announced at the
meeting at which the adjournment is taken. At the adjourned meeting the
corporation may transact any business which might have been transacted at the
original meeting. If the adjournment is for more than thirty days, or if after
the adjournment a new record date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting.
1.6 QUORUM
Except as otherwise provided by law, the certificate of incorporation or
these bylaws, at each meeting of stockholders the presence in person or by proxy
of the holders of shares of stock having a majority of the votes which could be
cast by the holders of all outstanding shares of stock entitled to vote at the
meeting shall be necessary and sufficient to constitute a quorum. In the
absence of a quorum, the stockholders so present may, by majority vote, adjourn
the meeting from time to time in the manner provided in Section 1.5 of these
bylaws until a quorum shall attend. Shares of its own stock belonging to the
corporation or to another corporation, if a majority of the shares entitled to
vote in the election of directors of such other corporation is held, directly or
indirectly, by the corporation, shall neither be entitled to vote nor be counted
for quorum purposes; provided, however, that the foregoing shall not limit the
right of the corporation to vote stock, including but not limited to its own
stock, held by it in a fiduciary capacity.
1.7 ORGANIZATION
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Meetings of stockholders shall be presided over by the Chairman of the
Board, if any, or in his absence by the Vice Chairman of the Board, if any, or
in his absence by the President, or in his absence by a Vice President, or in
the absence of the foregoing persons by a chairman designated by the Board of
Directors, or in the absence of such designation by a chairman chosen at the
meeting. The Secretary shall act as secretary of the meeting, but in his
absence the chairman of the meeting may appoint any person to act as secretary
of the meeting.
1.8 VOTING; PROXIES
Except as otherwise provided by the certificate of incorporation, each
stockholder entitled to vote at any meeting of stockholders shall be entitled to
one vote for each share of stock held by him which has voting power upon the
matter in question. Each stockholder entitled to vote at a meeting of
stockholders may authorize another person or persons to act for him by proxy,
but no such proxy shall be voted or acted upon after three years from its date,
unless the proxy provides for a longer period. A duly executed proxy shall be
irrevocable if it states that it is irrevocable and if, and only as long as, it
is coupled with an interest sufficient in law to support an irrevocable power.
A stockholder may revoke any proxy which is not irrevocable by attending the
meeting and voting in person or by filing an instrument in writing revoking the
proxy or another duly executed proxy bearing a later date with the Secretary of
the corporation. Voting at meetings of stockholders need not be by written
ballot and need not be conducted by inspectors of election unless so determined
by the holders of shares of stock having a majority of the votes which could be
cast by the holders of all outstanding shares of stock entitled to vote thereon
which are present in person or by proxy at such meeting. At all meetings of
stockholders for the election of directors a plurality of the votes cast shall
be sufficient to elect. All other elections and questions shall, unless
otherwise provided by law, the certificate of incorporation or these bylaws, be
decided by the vote of the holders of shares of stock having a majority of the
votes which could be cast by the holders of all shares of stock entitled to vote
thereon which are present in person or represented by proxy at the meeting.
1.9 FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD
In order that the corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders or any adjournment thereof,
or to express consent to corporate action in writing without a meeting, or
entitled to receive payment of any dividend or other distribution or allotment
of any rights, or entitled to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action,
the Board of Directors may fix a record date, which record date shall not
precede the date upon which the resolution fixing the record date is adopted by
the Board of Directors and which record date: (1) in the case of determination
of stockholders entitled to vote at any meeting of stockholders or adjournment
thereof, shall, unless otherwise required by law, not be more than sixty nor
less than ten days before the date of such meeting; (2) in the case of
determination of stockholders entitled to express consent to corporate action in
writing without a meeting, shall not be more than ten days from the date upon
which the resolution fixing the record date is adopted by the Board of
Directors; and (3) in the case of any other action, shall not be more than sixty
days prior to such other action. If no record date is fixed: (1) the record
date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the day next preceding the
day on which notice is given, or, if
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notice is waived, at the close of business on the day next preceding the day on
which the meeting is held; (2) the record date for determining stockholders
entitled to express consent to corporate action in writing without a meeting
when no prior action of the Board of Directors is required by law, shall be the
first date on which a signed written consent setting forth the action taken or
proposed to be taken is delivered to the corporation in accordance with
applicable law, or, if prior action by the Board of Directors is required by
law, shall be at the close of business on the day on which the Board of
Directors adopts the resolution taking such prior action; and (3) the record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating thereto. A determination of stockholders of record entitled to notice
of or to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
1.10 LIST OF STOCKHOLDERS ENTITLED TO VOTE
The Secretary shall prepare and make, at least ten days before every
meeting of stockholders, a complete list of the stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof and may be inspected by any stockholder who is
present. Upon the willful neglect or refusal of the directors to produce such a
list at any meeting for the election of directors, they shall be ineligible for
election to any office at such meeting. The stock ledger shall be the only
evidence as to who are the stockholders entitled to examine the stock ledger,
the list of stockholders or the books of the corporation, or to vote in person
or by proxy at any meeting of stockholders.
1.11 ACTION BY CONSENT OF STOCKHOLDERS
Subject to the rights of the holders of the shares of any series of
Preferred Stock or any other class of stock or series thereof having a
preference over the Common Stock as dividend or upon liquidation, any action
required or permitted to be taken by the stockholders of the corporation must be
effected at a duly called annual or special meeting of stockholders of the
corporation and may not be effected by any consent in writing by such
stockholders.
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ARTICLE 2
Board of Directors
2.1 POWERS
Subject to the provisions of the General Corporation Law of Delaware and to
any limitations in the certificate of incorporation or these bylaws relating to
action required to be approved by the stockholders or by the outstanding shares,
the business and affairs of the corporation shall be managed and all corporate
powers shall be exercised by or under the direction of the board of directors.
2.2 NUMBER; QUALIFICATIONS
The Board of Directors shall consist of one or more members, the number
thereof to be determined from time to time by resolution of the Board of
Directors. Directors need not be stockholders.
2.3 ELECTION AND TERM OF OFFICE OF DIRECTORS
Except as provided in Section 2.4 of these bylaws, directors shall hold
office until the expiration of the term for which elected and until a successor
has been elected and qualified; except that if any such election shall not be so
held, such election shall take place at a stockholders' meeting called and held
in accordance with the Delaware General Corporation Law.
The directors of the corporation shall be divided into three classes as
nearly equal in size as is practicable, hereby designated Class I, Class II and
Class III. The term of office of the initial Class I directors shall expire at
the first regularly-scheduled annual meeting of the stockholders following the
effective date of these amended and restated bylaws (the "Effective Date"), the
term of office of the initial Class II directors shall expire at the second
annual meeting of the stockholders following the Effective Date and the term of
office of the initial Class III directors shall expire at the third annual
meeting of the stockholders following the Effective Date. For the purposes
hereof, the initial Class I, Class II and Class III directors shall be those
directors so designated by the Board of Directors and elected by the
stockholders prior to the Effective Date. At each annual meeting of
stockholders, commencing with the first regularly-scheduled annual meeting of
stockholders following the Effective Date, each of the successors elected to
replace the directors of a Class whose term shall have expired at such annual
meeting shall be elected to hold office until the third annual meeting next
succeeding his or her election and until his or her respective successor shall
have been duly elected and qualified. If the number of directors is hereafter
changed, any newly created directorships or decrease in directorships shall be
so apportioned among the classes as to make all classes as nearly equal in
number as is practicable, provided that no decrease in the number of directors
constituting the Board of Directors shall shorten the term of any incumbent
director.
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2.4 RESIGNATION AND VACANCIES
Any director may resign effective on giving written notice to the chairman
of the board, the president, the secretary or the board of directors, unless the
notice specifies a later time for that resignation to become effective. If the
resignation of a director is effective at a future time, the board of directors
may elect a successor to take office when the resignation becomes effective.
Each director so elected shall hold office until the expiration of the term of
office of the director whom he has replaced and until a successor has been
elected and qualified.
Vacancies occurring on the Board of Directors for any reason and newly
created directorships resulting from an increase in the authorized number of
directors may be filled only by vote of a majority of the remaining members of
the Board of Directors, although less than a quorum, at any meeting of the Board
of Directors. A person so elected by the Board of Directors to fill a vacancy
or newly created directorship shall hold office until the next election of the
Class for which such director shall have been chosen and until his or her
successor shall have been duly elected and qualified.
If at any time, by reason of death or resignation or other cause, the
corporation should have no directors in office, then any officer or any
stockholder or an executor, administrator, trustee or guardian of a stockholder,
or other fiduciary entrusted with like responsibility for the person or estate
of a stockholder, may call a special meeting of stockholders in accordance with
the provisions of the certificate of incorporation or these bylaws, or may apply
to the Court of Chancery for a decree summarily ordering an election as provided
in Section 211 of the General Corporation Law of Delaware (relating to meetings
of shareholders).
2.5 REMOVAL
Any director may be removed from office by the stockholders of the
corporation only for cause.
2.6 REGULAR MEETINGS
Regular meetings of the Board of Directors may be held at such places
within or without the State of Delaware and at such times as the Board of
Directors may from time to time determine, and if so determined notices thereof
need not be given.
2.7 SPECIAL MEETINGS
Special meetings of the Board of Directors may be held at any time or place
within or without the State of Delaware whenever called by the President, any
Vice President, the Secretary, or by any member of the Board of Directors.
Notice of a special meeting of the Board of Directors shall be given by the
person or persons calling the meeting at least twenty-four hours before the
special meeting.
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2.8 TELEPHONIC MEETINGS PERMITTED
Members of the Board of Directors, or any committee designated by the Board
of Directors, may participate in a meeting thereof by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and participation in a meeting
pursuant to this bylaw shall constitute presence in person at such meeting.
2.9 QUORUM; VOTE REQUIRED FOR ACTION
At all meetings of the Board of Directors a majority of the whole Board of
Directors shall constitute a quorum for the transaction of business. Except in
cases in which the certificate of incorporation or these bylaws otherwise
provide, the vote of a majority of the directors present at a meeting at which a
quorum is present shall be the act of the Board of Directors.
2.10 ORGANIZATION
Meetings of the Board of Directors shall be presided over by the Chairman
of the Board, if any, or in his absence by the Vice Chairman of the Board, if
any, or in his absence by the President, or in their absence by a chairman
chosen at the meeting. The Secretary shall act as secretary of the meeting, but
in his absence the chairman of the meeting may appoint any person to act as
secretary of the meeting.
2.11 INFORMAL ACTION BY DIRECTORS
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the Board
of Directors, or of any committee thereof, may be taken without a meeting if all
members of the Board of Directors or such committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors or such committee.
ARTICLE 3
Committees
3.1 COMMITTEES
The Board of Directors may, by resolution passed by a majority of the whole
Board of Directors, designate one or more committees, each committee to consist
of one or more of the directors of the corporation. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of the committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in place of any such absent or
disqualified member. Any such committees to the extent permitted by law and to
the extent provided in the resolution of the Board of Directors, shall
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have and may exercise all the powers and authority of the Board of Directors in
the management of the business and affairs of the corporation, and may authorize
the seal of the corporation to be affixed to all papers which may require it.
3.2 COMMITTEE RULES
Unless the Board of Directors otherwise provides, each committee designated
by the Board of Directors may make, alter and repeal rules for the conduct of
its business. In the absence of such rules each committee shall conduct its
business in the same manner as the Board of Directors conducts its business
pursuant to Article II of these bylaws.
ARTICLE 4
Officers
4.1 EXECUTIVE OFFICERS; ELECTION; QUALIFICATIONS; TERM OF OFFICE;
RESIGNATION; REMOVAL; VACANCIES
The Board of Directors shall elect a President and Secretary, and it may,
if it so determines, choose a Chairman of the Board and a Vice Chairman of the
Board from among its members. The Board of Directors may also choose one or
more Vice Presidents, one or more Assistant Secretaries, a Treasurer and one or
more Assistant Treasurers. Each such officer shall hold office until the first
meeting of the Board of Directors after the annual meeting of stockholders next
succeeding his election, and until his successor is elected and qualified or
until his earlier resignation or removal. Any officer may resign at any time
upon written notice to the corporation. The Board of Directors may remove any
officer with or without cause at any time, but such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
corporation. Any number of offices may be held by the same person. Any vacancy
occurring in any office of the corporation by death, resignation, removal or
otherwise may be filled for the unexpired portion of the term by the Board of
Directors at any regular or special meeting.
4.2 POWERS AND DUTIES OF EXECUTIVE OFFICERS
The officers of the corporation shall have such powers and duties in the
management of the corporation as may be prescribed by the Board of Directors
and, to the extent not so provided, as generally pertain to their respective
offices, subject to the control of the Board of Directors. The Board of
Directors may require any officer, agent or employee to give security for the
faithful performance of his duties.
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ARTICLE 5
Stock
5.1 CERTIFICATES
Every holder of stock shall be entitled to have a certificate signed by or
in the name of the corporation by the Chairman or Vice Chairman of the Board of
Directors, if any, or the President or Vice President, and by the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary, of the
corporation, certifying the number of shares owned by him in the corporation.
Any of or all the signatures on the certificate may be a facsimile. In case any
officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent, or registrar before such certificate is issued, it may
be issued by the corporation with the same effect as if he were such officer,
transfer agent, or registrar at the date of issue.
5.2 LOST, STOLEN OR DESTROYED STOCK CERTIFICATES; ISSUANCE OF NEW
CERTIFICATES
The corporation may issue a new certificate of stock in the place of any
certificate theretofore issued by it, alleged to have been lost, stolen or
destroyed, and the corporation may require the owner of the lost, stolen or
destroyed certificate, or his legal representative, to give the corporation a
bond sufficient to indemnify it against any claim that may be made against it on
account of the alleged loss, theft or destruction of any such certificate or the
issuance of such new certificate.
ARTICLE 6
Indemnification
6.1 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation shall indemnify and hold harmless, to the fullest extent
permitted by the General Corporation Law of Delaware as it presently exists or
may hereafter be amended, any director or officer of the corporation who was or
is made or is threatened to be made a party or is otherwise involved in any
action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "proceeding") by reason of the fact that he, or a person for
whom he is the legal representative, is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or of a
partnership, joint venture, trust, enterprise or non-profit entity, including
service with respect to employee benefit plans, against all liability and loss
suffered and expenses reasonably incurred by such person in connection with any
such action, suit, or proceeding. The corporation shall be required to
indemnify a person in connection with a proceeding initiated by such person only
if the proceeding was authorized by the Board of Directors of the corporation.
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6.2 INDEMNIFICATION OF OTHERS
The corporation shall have the power to indemnify and hold harmless, to the
extent permitted by the General Corporation Law of Delaware as it presently
exists or may hereafter be amended, any employee or agent of the corporation who
was or is made or is threatened to be made a party or is otherwise involved in
any action, suit or proceeding by reason of the fact that he, or a person for
whom he is the legal representative, is or was an employee or agent of the
corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust, enterprise or non-profit entity, including service with
respect to employee benefit plans, against all liability and loss suffered and
expenses reasonably incurred by such person in connection with any such action,
suit, or proceeding.
6.3 PREPAYMENT OF EXPENSES
The corporation shall pay the expenses incurred in defending any proceeding
in advance of its final disposition, provided, however, that the payment of
expenses incurred by a director or officer in advance of the final disposition
of the proceeding shall be made only upon receipt of an undertaking by the
director or officer to repay all amounts advanced if it should be ultimately
determined that the director or officer is not entitled to be indemnified under
this Article 6 or otherwise.
6.4 DETERMINATION; CLAIMS
If a claim for indemnification or payment of expenses under this Article 6
is not paid in full within sixty days after a written claim therefor has been
received by the corporation the claimant may file suit to recover the unpaid
amount of such claim and, if successful in whole or in part, shall be entitled
to be paid the expense of prosecuting such claim. In any such action the
corporation shall have the burden of proving that the claimant was not entitled
to the requested indemnification or payment of expenses under applicable law.
6.5 NON-EXCLUSIVITY OF RIGHTS
The rights conferred on any person by the Article VI shall not be exclusive
of any other rights which such person may have or hereafter acquire under any
statute, provision of the certificate of incorporation, these bylaws, agreement,
vote of stockholders or disinterested directors or otherwise.
6.6 INSURANCE
The corporation may purchase and maintain insurance on behalf of any person
who is or was a director, officer, employee or agent of the corporation, or is
or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
the provisions of the General Corporation Law of Delaware.
6.7 OTHER INDEMNIFICATION
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The corporation's obligation, if any, to indemnify any person who was or is
serving at its request as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust, enterprise or non-profit entity
shall be reduced by any amount such person may collect as indemnification from
such other corporation, partnership, joint venture, trust, enterprise or non-
profit enterprise.
6.8 AMENDMENT OR REPEAL
Any repeal or modification of the foregoing provisions of this Article VI
shall not adversely affect any right or protection hereunder of any person in
respect of any act or omission occurring prior to the time of such repeal or
modification.
ARTICLE 7
Miscellaneous
7.1 FISCAL YEAR
The fiscal year of the corporation shall be determined by resolution of the
Board of Directors.
7.2 SEAL
The corporate seal shall have the name of the corporation inscribed thereon
and shall be in such form as may be approved from time to time by the Board of
Directors.
7.3 WAIVER OF NOTICE OF MEETINGS OF STOCKHOLDERS, DIRECTORS AND COMMITTEES
Any written waiver of notice, signed by the person entitled to notice,
whether before or after the time stated therein, shall be deemed equivalent to
notice. Attendance of a person at a meeting shall constitute a waiver of notice
of such meeting, except when the person attends a meeting for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened. Neither the
business to be transacted at, nor the purpose of any regular or special meeting
of the stockholders, directors, or members of a committee of directors need be
specified in any written waiver of notice.
7.4 INTERESTED DIRECTORS; QUORUM
No contract or transaction between the corporation and one or more of its
directors or officers, or between the corporation and any other corporation,
partnership, association, or other organization in which one or more of its
directors or officers are directors or officers, or have a financial interest,
shall be void or voidable solely for this reason, or solely because the director
or officer in present at or participates in the meeting of the Board of
Directors or committee thereof which authorizes the contract or transaction, or
solely because his or their votes are counted for such purpose, if: (1) the
material facts as to his relationship or interest and as to the contract or
transaction
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are disclosed or are known to the Board of Directors or the committee, and the
Board of Directors or committee in good faith authorizes the contract or
transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; or (2)
the material facts as to his relationship or interest and as to the contract or
transaction are disclosed or are known to the stockholders entitled to vote
thereon, and the contract or transaction is specifically approved in good faith
by vote of the stockholders; or (3) the contract or transaction is fair as to
the corporation as of the time it is authorized, approved or ratified, by the
Board of Directors, a committee thereof, or the stockholders. Common or
interested directors may be counted in determining the presence of a quorum at a
meeting of the Board of Directors or of a committee which authorizes the
contract or transaction.
7.5 FORM OF RECORDS
Any records maintained by the corporation in the regular course of its
business, including its stock ledger, books of account, and minute books, may be
kept on, or be in the form of, punch cards, magnetic tape, photographs,
microphotographs, or any other information storage device, provided that the
records so kept can be converted into clearly legible form within a reasonable
time. The corporation shall so convert any records so kept upon the request of
any person entitled to inspect the same.
7.6 AMENDMENT OF BYLAWS
These bylaws may be altered or repealed, and new bylaws made, by the Board
of Directors, but the stockholders may make additional bylaws and may alter and
repeal any bylaws whether adopted by then or otherwise.
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AMENDED AND RESTATED BYLAWS
OF
SONIC INNOVATIONS, INC.
(amended and restated on _____________, 1999
effective as of the closing of the corporation's initial public offering)
<PAGE>
EXHIBIT 10.1
SONIC INNOVATIONS, INC.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement ("Agreement") is made as of this __ day of
__________, _____, by and between Sonic Innovations, Inc., a Delaware
corporation (the "Company"), and _________________________ ("Indemnitee").
WHEREAS, the Company and Indemnitee recognize the increasing difficulty in
obtaining directors' and officers' liability insurance, the significant
increases in the cost of such insurance and the general reductions in the
coverage of such insurance;
WHEREAS, the Company and Indemnitee further recognize the substantial
increase in corporate litigation in general, subjecting officers and directors
to expensive litigation risks at the same time as the availability and coverage
of liability insurance has been severely limited; and
WHEREAS, the Company desires to attract and retain the services of highly
qualified individuals, such as Indemnitee, to serve as officers and directors of
the Company and to indemnify its officers and directors so as to provide them
with the maximum protection permitted by law.
NOW, THEREFORE, in consideration for Indemnitee's services as an officer or
director of the Company, the Company and Indemnitee hereby agree as follows:
1. Indemnification.
(a) Third Party Proceedings. The Company shall indemnify Indemnitee
if Indemnitee is or was a party or is threatened to be made a party to any
threatened, pending or completed action, suit, proceeding or any alternative
dispute resolution mechanism, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the Company) by reason
of the fact that Indemnitee is or was a director, officer, employee or agent of
the Company, or any subsidiary of the Company, or by reason of the fact that
Indemnitee is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement (if such settlement is approved
in advance by the Company, which approval shall not be unreasonably withheld)
actually and reasonably incurred by Indemnitee in connection with such action,
suit or proceeding if Indemnitee acted in good faith and in a manner Indemnitee
reasonably believed to be in or not opposed to the best interests of the
Company, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe Indemnitee's conduct was unlawful. The termination
of any action, suit or proceeding by judgment, order, settlement, conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that Indemnitee did not act in good faith and in a manner which
Indemnitee reasonably believed to be in or not opposed to the best interests of
the Company, and, with respect to any
<PAGE>
criminal action or proceeding, had reasonable cause to believe that Indemnitee's
conduct was unlawful.
(b) Proceedings By or in the Right of the Company. The Company shall
indemnify Indemnitee if Indemnitee was or is a party or is threatened to be made
a party to any threatened, pending or completed action or suit by or in the
right of the Company or any subsidiary of the Company to procure a judgment in
its favor by reason of the fact that Indemnitee is or was a director, officer,
employee or agent of the Company, or any subsidiary of the Company, or by reason
of the fact that Indemnitee is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys' fees)
and, to the fullest extent permitted by law, amounts paid in settlement actually
and reasonably incurred by Indemnitee in connection with the defense or
settlement of such action or suit if Indemnitee acted in good faith and in a
manner Indemnitee reasonably believed to be in or not opposed to the best
interests of the Company, except that no indemnification shall be made in
respect of any claim, issue or matter as to which Indemnitee shall have been
adjudged to be liable to the Company unless and only to the extent that the
Court of Chancery of the State of Delaware or the court in which such action or
suit was brought shall determine upon application that, despite the adjudication
of liability but in view of all the circumstances of the case, Indemnitee is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery of the State of Delaware or such other court shall deem proper.
(c) Mandatory Payment of Expenses. To the extent that Indemnitee has
been successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Subsections (a) and (b) of this Section 1, or in
defense of any claim, issue or matter therein, Indemnitee shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
Indemnitee in connection therewith.
2. Agreement to Serve. In consideration of the protection afforded by
this Agreement, if Indemnitee is a director of the Company he agrees to serve at
least for the 90 days after the effective date of this Agreement as a director
and not to resign voluntarily during such period without the written consent of
a majority of the Board of Directors. If Indemnitee is an officer of the Company
not serving under an employment contract, he agrees to serve in such capacity at
least for 90 days and not to resign voluntarily during such period without the
written consent of a majority of the Board of Directors. Following the
applicable period set forth above, Indemnitee agrees to continue to serve in
such capacity at the will of the Company (or under separate agreement, if such
agreement exists) so long as he is duly appointed or elected and qualified in
accordance with the applicable provisions of the Bylaws of the Company or any
subsidiary of the Company or until such time as he tenders his resignation in
writing. Nothing contained in this Agreement is intended to create in Indemnitee
any right to continued employment.
3. Expenses; Indemnification Procedure.
(a) Advancement of Expenses. The Company shall advance all expenses
incurred by Indemnitee in connection with the investigation, defense, settlement
or appeal of any civil or criminal action, suit or proceeding referenced in
Section 1(a) or (b) hereof (but not amounts actually
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paid in settlement of any such action, suit or proceeding). Indemnitee hereby
undertakes to repay such amounts advanced only if, and to the extent that, it
shall ultimately be determined that Indemnitee is not entitled to be indemnified
by the Company as authorized hereby. The advances to be made hereunder shall be
paid by the Company to Indemnitee within thirty (30) days following delivery of
a written request therefor by Indemnitee to the Company.
(b) Notice/Cooperation by Indemnitee. Indemnitee shall, as a
condition precedent to his right to be indemnified under this Agreement, give
the Company notice in writing as soon as practicable of any claim made against
Indemnitee for which indemnification will or could be sought under this
Agreement. Notice to the Company shall be directed to the President of the
Company at the address shown on the signature page of this Agreement (or such
other address as the Company shall designate in writing to Indemnitee). Notice
shall be deemed received three business days after the date postmarked if sent
by domestic certified or registered mail, properly addressed, five business days
if sent by airmail to a country outside of North America; otherwise notice shall
be deemed received when such notice shall actually be received by the Company.
In addition, Indemnitee shall give the Company such information and cooperation
as it may reasonably require and as shall be within Indemnitee's power.
(c) Procedure. Any indemnification and advances provided for in
Section 1 and this Section 3 shall be made no later than thirty (30) days after
receipt of the written request of Indemnitee. If a claim under this Agreement,
under any statute, or under any provision of the Company's Certificate of
Incorporation or Bylaws providing for indemnification, is not paid in full by
the Company within thirty (30) days after a written request for payment thereof
has first been received by the Company, Indemnitee may, but need not, at any
time thereafter bring an action against the Company to recover the unpaid amount
of the claim and, subject to Section 14 of this Agreement, Indemnitee shall also
be entitled to be paid for the expenses (including attorneys' fees) of bringing
such action. It shall be a defense to any such action (other than an action
brought to enforce a claim for expenses incurred in connection with any action,
suit or proceeding in advance of its final disposition) that Indemnitee has not
met the standards of conduct which make it permissible under applicable law for
the Company to indemnify Indemnitee for the amount claimed. However, Indemnitee
shall be entitled to receive interim payments of expenses pursuant to Subsection
3(a) unless and until such defense may be finally adjudicated by court order or
judgment from which no further right of appeal exists. It is the parties'
intention that if the Company contests Indemnitee's right to indemnification,
the question of Indemnitee's right to indemnification shall be for the court to
decide, and neither the failure of the Company (including its Board of
Directors, any committee or subgroup of the Board of Directors, independent
legal counsel, or its stockholders) to have made a determination that
indemnification of Indemnitee is proper in the circumstances because Indemnitee
has met the applicable standard of conduct required by applicable law, nor an
actual determination by the Company (including it Board of Directors, any
committee or subgroup of the Board of Directors, independent legal counsel, or
its stockholders) that Indemnitee has not met such applicable standard of
conduct, shall create a presumption that Indemnitee has or has not met the
applicable standard of conduct.
(d) Notice to Insurers. If, at the time of the receipt of a notice of
a claim pursuant to Section 3(b) hereof, the Company has director and officer
liability insurance in effect, the Company
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shall give prompt notice of the commencement of such proceeding to the insurers
in accordance with the procedures set forth in the respective policies. The
Company shall thereafter take all necessary or desirable action to cause such
insurers to pay, on behalf of the Indemnitee, all amounts payable as a result of
such proceeding in accordance with the terms of such policies.
(e) Selection of Counsel. In the event the Company shall be obligated
under Section 3(a) hereof to pay the expenses of any proceeding against
Indemnitee, the Company, if appropriate, shall be entitled to assume the defense
of such proceeding, with counsel approved by Indemnitee, upon the delivery to
Indemnitee of written notice of its election to do so. After delivery of such
notice, approval of such counsel by Indemnitee and the retention of such counsel
by the Company, the Company will not be liable to Indemnitee under this
Agreement for any fees of counsel subsequently incurred by Indemnitee with
respect to the same proceeding, provided that (i) Indemnitee shall have the
right to employ his counsel in any such proceeding at Indemnitee's expense; and
(ii) if (A) the employment of counsel by Indemnitee has been previously
authorized by the Company, (B) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Company and Indemnitee in the
conduct of any such defense, or (C) the Company shall not, in fact, have
employed counsel to assume the defense of such proceeding, then the fees and
expenses of Indemnitee's counsel shall be at the expense of the Company.
4. Additional Indemnification Rights; Nonexclusivity.
(a) Scope. Notwithstanding any other provision of this Agreement,
the Company hereby agrees to indemnify the Indemnitee to the fullest extent
permitted by law, notwithstanding that such indemnification is not specifically
authorized by the other provisions of this Agreement, the Company's Certificate
of Incorporation, the Company's Bylaws or by statute. In the event of any
change, after the date of this Agreement, in any applicable law, statute, or
rule which expands the right of a Delaware corporation to indemnify a member of
its board of directors or an officer, such changes shall be, ipso facto, within
the purview of Indemnitee's rights and Company's obligations, under this
Agreement. In the event of any change in any applicable law, statute or rule
which narrows the right of a Delaware corporation to indemnify a member of its
board of directors or an officer, such changes, to the extent not otherwise
required by such law, statute or rule to be applied to this Agreement shall have
no effect on this Agreement or the parties' rights and obligations hereunder.
(b) Nonexclusivity. The indemnification provided by this Agreement
shall not be deemed exclusive of any rights to which Indemnitee may be entitled
under the Company's Certificate of Incorporation, its Bylaws, any agreement, any
vote of stockholders or disinterested Directors, the General Corporation Law of
the State of Delaware, or otherwise, both as to action in Indemnitee's official
capacity and as to action in another capacity while holding such office. The
indemnification provided under this Agreement shall continue as to Indemnitee
for any action taken or not taken while serving in an indemnified capacity even
though he may have ceased to serve in such capacity at the time of any action,
suit or other covered proceeding.
5. Partial Indemnification. If Indemnitee is entitled under any
provision of this Agreement to indemnification by the Company for some or a
portion of the expenses, judgments, fines or penalties actually or reasonably
incurred by him in the investigation, defense, appeal or
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settlement of any civil or criminal action, suit or proceeding, but not,
however, for the total amount thereof, the Company shall nevertheless indemnify
Indemnitee for the portion of such expenses, judgments, fines or penalties to
which Indemnitee is entitled.
6. Mutual Acknowledgement. Both the Company and Indemnitee acknowledge
that in certain instances, Federal law or applicable public policy may prohibit
the Company from indemnifying its directors and officers under this Agreement or
otherwise. Indemnitee understands and acknowledges that the Company has
undertaken or may be required in the future to undertake with the Securities and
Exchange Commission to submit the question of indemnification to a court in
certain circumstances for a determination of the Company's right under public
policy to indemnify Indemnitee.
7. Officer and Director Liability Insurance. The Company shall, from time
to time, make the good faith determination whether or not it is practicable for
the Company to obtain and maintain a policy or policies of insurance with
reputable insurance companies providing the officers and directors of the
Company with coverage for losses from wrongful acts, or to ensure the Company's
performance of its indemnification obligations under this Agreement. Among other
considerations, the Company will weigh the costs of obtaining such insurance
coverage against the protection afforded by such coverage. In all policies of
director and officer liability insurance, Indemnitee shall be named as an
insured in such a manner as to provide Indemnitee the same rights and benefits
as are accorded to the most favorably insured of the Company's directors, if
Indemnitee is a director; or of the Company's officers, if Indemnitee is not a
director of the Company but is an officer. Notwithstanding the foregoing, the
Company shall have no obligation to obtain or maintain such insurance if the
Company determines in good faith that such insurance is not reasonably
available, if the premium costs for such insurance are disproportionate to the
amount of coverage provided, if the coverage provided by such insurance is
limited by exclusions so as to provide an insufficient benefit, or if Indemnitee
is covered by similar insurance maintained by a subsidiary or parent of the
Company.
8. Severability. Nothing in this Agreement is intended to require or
shall be construed as requiring the Company to do or fail to do any act in
violation of applicable law. The Company's inability, pursuant to court order,
to perform its obligations under this Agreement shall not constitute a breach of
this Agreement. The provisions of this Agreement shall be severable as provided
in this Section 8. If this Agreement or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify Indemnitee to the full extent permitted by any applicable
portion of this Agreement that shall not have been invalidated, and the balance
of this Agreement not so invalidated shall be enforceable in accordance with its
terms.
9. Exceptions. Any other provision herein to the contrary
notwithstanding, the Company shall not be obligated pursuant to the terms of
this Agreement:
(a) Claims Initiated by Indemnitee. To indemnify or advance expenses
to Indemnitee with respect to proceedings or claims initiated or brought
voluntarily by Indemnitee and not by way of defense, except with respect to
proceedings brought to establish or enforce a right to indemnification under
this Agreement or any other statute or law or otherwise as required under
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Section 145 of the Delaware General Corporation Law, but such indemnification or
advancement of expenses may be provided by the Company in specific cases if the
Board of Directors has approved the initiation or bringing of such suit; or
(b) Lack of Good Faith. To indemnify Indemnitee for any expenses
incurred by the Indemnitee with respect to any proceeding instituted by
Indemnitee to enforce or interpret this Agreement, if a court of competent
jurisdiction determines that each of the material assertions made by the
Indemnitee in such proceeding was not made in good faith or was frivolous; or
(c) Insured Claims. To indemnify Indemnitee for expenses or
liabilities of any type whatsoever (including, but not limited to, judgments,
fines, ERISA excise taxes or penalties, and amounts paid in settlement) which
have been paid directly to Indemnitee by an insurance carrier under a policy of
officers' and directors' liability insurance maintained by the Company.
(d) Claims Under Section 16(b). To indemnify Indemnitee for expenses
and the payment of profits arising from the purchase and sale by Indemnitee of
securities in violation of Section 16(b) of the Securities Exchange Act of 1934,
as amended, or any similar successor statute.
10. Construction of Certain Phrases.
(a) For purposes of this Agreement, references to the "Company" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors, officers, and employees or agents, so that
if Indemnitee is or was a director, officer, employee or agent of such
constituent corporation, or is or was serving at the request of such constituent
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, Indemnitee shall stand in
the same position under the provisions of this Agreement with respect to the
resulting or surviving corporation as Indemnitee would have with respect to such
constituent corporation if its separate existence had continued.
(b) For purposes of this Agreement, references to "other enterprises"
shall include employee benefit plans; references to "fines" shall include any
excise taxes assessed on Indemnitee with respect to an employee benefit plan;
and references to "serving at the request of the Company" shall include any
service as a director, officer, employee or agent of the Company which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants, or beneficiaries;
and if Indemnitee acted in good faith and in a manner Indemnitee reasonably
believed to be in the interest of the participants and beneficiaries of an
employee benefit plan, Indemnitee shall be deemed to have acted in a manner "not
opposed to the best interests of the Company" as referred to in this Agreement.
11. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall constitute an original.
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12. Successors and Assigns. This Agreement shall be binding upon the
Company and its successors and assigns, and shall inure to the benefit of
Indemnitee and Indemnitee's estate, heirs, legal representatives and assigns.
13. Attorneys' Fees. In the event that any action is instituted by
Indemnitee under this Agreement to enforce or interpret any of the terms hereof,
Indemnitee shall be entitled to be paid all court costs and expenses, including
reasonable attorneys' fees, incurred by Indemnitee with respect to such action,
unless as a part of such action, the court of competent jurisdiction determines
that each of the material assertions made by Indemnitee as a basis for such
action were not made in good faith or were frivolous. In the event of an action
instituted by or in the name of the Company under this Agreement or to enforce
or interpret any of the terms of this Agreement, Indemnitee shall be entitled to
be paid all court costs and expenses, including attorneys' fees, incurred by
Indemnitee in defense of such action (including with respect to Indemnitee's
counterclaims and cross-claims made in such action), unless as a part of such
action the court determines that each of Indemnitee's material defenses to such
action were made in bad faith or were frivolous.
14. Notice. All notices, requests, demands and other communications under
this Agreement shall be in writing and shall be deemed duly given (i) if
delivered by hand and receipted for by the party addressee, on the date of such
receipt, or (ii) if mailed by domestic certified or registered mail with postage
prepaid, on the third business day after the date postmarked. Addresses for
notice to either party are as shown on the signature page of this Agreement, or
as subsequently modified by written notice.
15. Consent to Jurisdiction. The Company and Indemnitee each hereby
irrevocably consent to the jurisdiction of the courts of the State of Delaware
for all purposes in connection with any action or proceeding which arises out of
or relates to this Agreement and agree that any action instituted under this
Agreement shall be brought only in the state courts of the State of Delaware.
16. Choice of Law. This Agreement shall be governed by and its provisions
construed in accordance with the laws of the State of Delaware, as applied to
contracts between Delaware residents entered into and to be performed entirely
within Delaware without regard to the conflict of law principles thereof.
17. Period of Limitations. No legal action shall be brought and no cause
of action shall be asserted by or in the right of the Company against
Indemnitee, Indemnitee's estate, spouse, heirs, executors or personal or legal
representatives after the expiration of two years from the date of accrual of
such cause of action, and any claim or cause of action of the Company shall be
extinguished and deemed released unless asserted by the timely filing of a legal
action within such two-year period; provided, however, that if any shorter
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period of limitations is otherwise applicable to any such cause of action, such
shorter period shall govern.
18. Subrogation. In the event of payment under this Agreement, the
Company shall be subrogated to the extent of such payment to all of the rights
of recovery of Indemnitee, who shall execute all documents required and shall do
all acts that may be necessary to secure such rights and to enable the Company
effectively to bring suit to enforce such rights.
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<PAGE>
19. Amendment and Termination. No amendment, modification, termination or
cancellation of this Agreement shall be effective unless it is in writing signed
by both the parties hereto. No waiver of any of the provisions of this Agreement
shall be deemed or shall constitute a waiver of any other provisions hereof
(whether or not similar) nor shall such waiver constitute a continuing waiver.
20. Integration and Entire Agreement. This Agreement sets forth the
entire understanding between the parties hereto and supersedes and merges all
previous written and oral negotiations, commitments, understandings and
agreements relating to the subject matter hereof between the parties hereto.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
SONIC INNOVATIONS, INC.
__________________________________________________
Signature of Authorized Signatory
__________________________________________________
Print Name and Title
Address: 2795 East Cottonwood Parkway, Suite 660
Salt Lake City, UT 84121-7036
AGREED TO AND ACCEPTED:
INDEMNITEE:
______________________________
Signature
______________________________
Print Name and Title
Address: ____________________
____________________
____________________
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EXHIBIT 10.5
AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
SONIC INNOVATIONS, INC.
October 23, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
1. Definitions........................................................... 1
2. Registration Rights................................................... 1
2.1 Piggyback Registration........................................... 1
2.2 Demand Registration.............................................. 2
2.3 Registration on Form S-3......................................... 2
2.4 Registration Procedures.......................................... 3
2.5 Certain Conditions to Registration............................... 4
2.6 Notices of Registration Statements, Etc.......................... 5
2.7 Indemnity........................................................ 5
3. Expenses.............................................................. 7
4. Reports Under the Exchange Act........................................ 7
5. Transfer of Registration Rights....................................... 8
6. Termination of Registration Rights.................................... 8
7. Future Registration Rights............................................ 8
8. Modification and Waiver............................................... 8
9. Notices............................................................... 9
10. Gender and Number, Etc................................................ 9
11. Successors and Assigns................................................ 9
12. Counterparts.......................................................... 9
13. Entire Agreement and Captions......................................... 9
14. Governing Law......................................................... 9
15. Severability.......................................................... 9
16. No Third Party Beneficiaries.......................................... 10
17. No Partnership or Joint Venture....................................... 10
18. No Impairment......................................................... 10
</TABLE>
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AMENDED AND RESTATED
REGISTRATION RIGHTS AGREEMENT
THIS AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT (the "Agreement"),
dated as of October 23, 1998, is entered into by and among Sonic Innovations,
Inc., a Delaware corporation (the "Company"), and the holders of Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock set forth on Exhibit A.
WHEREAS, the holders of Series A Preferred Stock, Series B Preferred Stock
and Series C Preferred Stock and the Company previously entered into an Amended
and Restated Registration Rights Agreement dated October 31, 1997, and desire
that this Agreement supersede and replace in its entirety such prior agreement;
WHEREAS, contemporaneously with the execution of this Agreement, the
holders of Series D Preferred Stock are purchasing shares of Series D Preferred
Stock of the Company pursuant to a Series D Preferred Stock Purchase Agreement
dated as of the date hereof (the "Purchase Agreement"), and this Agreement is
executed as additional consideration for the holders of Series D Preferred Stock
to enter into the Purchase Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
1. Definitions
(a) The holders of Series A Preferred Stock, the holders of Series B
Preferred Stock, the holders of Series C Preferred Stock and the holders of
Series D Preferred Stock and any assigns shall hereinafter be collectively
referred to as the "Stockholders."
(b) "Shares" shall mean and include any of the following securities:
(i) the shares of common stock of the Company (the "Common Stock") held by the
Stockholders upon conversion of the Series A Preferred Stock, Series B Preferred
Stock, Series C Preferred Stock or Series D Preferred Stock, (ii) the Series A
Preferred Stock, (iii) the Series B Preferred Stock, (iv) the Series C Preferred
Stock, (v) the Series D Preferred Stock, or (vi) any additional securities
issued to the Stockholders with respect to the foregoing upon any stock split,
stock dividend, recapitalization, dilution, adjustment or similar event.
2. Registration Rights
2.1 Piggyback Registration. If at any time the Company shall propose
to file with the Securities and Exchange Commission (the "Commission") on behalf
of the Company or any other shareholder a registration statement under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to any
class of security (as defined in Section 3(a)(10) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")), other than a registration
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statement approved by the Board of Directors on Form S-4 or S-8, or such amended
or alternative form for Form S-4 or S-8 as the Commission may from time to time
adopt, the Company shall in each case timely notify the Stockholders and include
in such registration statement all of the Shares as the Stockholders may request
within twenty (20) days after the Company's giving of such notice, subject to
the conditions set forth herein.
2.2 Demand Registration. If at any time commencing the earlier of
three years from the date of this Agreement or six months after an initial
registration of the Company's Common Stock, the Company shall receive from the
Stockholders holding 30% or more of the Common Stock issued or issuable upon
conversion of the Series B Preferred Stock, Series C Preferred Stock and Series
D Preferred Stock (the "Initiating Stockholders"), a written request that the
Company effect a registration for aggregate proceeds in excess of $7,500,000
with respect to the Shares held by the Stockholders to permit the sale or
disposition thereof, the Company shall promptly, subject to the conditions and
in accordance with the procedures hereinafter set forth, file a registration
statement on an appropriate form as expeditiously as reasonably possible
covering such Shares; provided, however, that the Company shall not be obligated
to effect, or take any action to effect, any such registration pursuant to this
Section 2.2: (i) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance, unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act or applicable rules or regulations thereunder or (ii) after the Company has
effected two (2) such registrations pursuant to Section 2.2 and such
registrations have been declared or ordered effective and the sales of such
Registrable Securities shall have closed.
2.3 Registration on Form S-3. After the initial public offering of
the Company's Common Stock pursuant to a registration statement filed with and
declared effective by the Commission under the Act (the "Initial Public
Registration"), the Company shall use its best efforts to qualify for
registration on Form S-3 or any comparable or successor form or forms. After the
Company has qualified for the use of Form S-3, in addition to the rights
contained in the foregoing provisions of this Section 2, upon initiation of
holders of 20% of the outstanding shares of the Company's Preferred Stock
("Preferred Stock"), the Stockholders shall have the right to request
registrations on Form S-3 (such requests shall be in writing and shall state the
number of Shares to be disposed of and the intended methods of disposition of
such Shares by such holder or holders); provided, however, that the Company
shall not be obligated to effect any such registration (i) if a Form S-3
registration is unavailable; (ii) if the Stockholders, together with the holders
of any other securities of the Company entitled to inclusion in such
registration, propose to sell Shares (if any) on Form S-3 at an aggregate price
to the public of less than $500,000; (iii) if there has been more than two
registrations by the Company on Form S-3 in the previous 12-month period; (iv)
in any particular jurisdiction in which the Company would be required to execute
a general consent to service of process in effecting such registration,
qualification or compliance, unless the Company is already subject to service in
such jurisdiction and except as may be required by the Securities Act or
applicable rules or regulations thereunder; or (v) if the Board of Directors of
the Company determines that such Form S-3 registration would be seriously
detrimental to the Company, in which case such registration may be delayed for a
period not to exceed 60 days.
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2.4 Registration Procedures. If, pursuant to Sections 2.1, 2.2, or
2.3 hereof, the Company is required to include any Shares in a registration
statement proposed to be filed, the Company will, as expeditiously as possible:
(a) prepare and file such registration statement under the Securities Act on an
appropriate form and use its best efforts to cause such registration statement
to become effective; (b) prepare and file with the Commission such amendments
and supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to comply with the provisions of the
Securities Act and the Exchange Act with respect to the offer of the securities
covered by such registration statement during the period required for
distribution of such securities; (c) furnish to the holder of such Shares such
number of copies of such registration statement and all amendments thereto and
of such prospectus (including each preliminary, amended or supplemental
prospectus) as such holders may reasonably request in order to facilitate the
sale or transfer of the securities covered by such registration statement; (d)
use its best efforts to register or qualify the securities covered by any such
registration statement in such jurisdictions as such holders may reasonably
request; provided, however, that the Company shall not be required in connection
therewith or as a condition thereto to qualify to do business or to file a
general consent to service of process in any such states or jurisdictions; (e)
enter into and perform its obligations under an underwriting agreement, in the
usual and customary form, with the managing underwriter of the offering; (f)
inform Stockholders of any event that renders the prospectus untrue or
misleading; (g) cause all securities registered in the offering to become listed
on each securities exchange on which similar securities issued by the Company
are then listed; (h) provide a transfer agent, registrar and CUSIP number for
all securities registered no later than the effective date of the offering; (i)
furnish, at the request of the Stockholders, on the date that such Shares are
delivered to the underwriters for sale pursuant to such registration or, if such
Shares are not being sold through underwriters, on the date such registration
statement becomes effective (A) an opinion, dated on such date, in a form
customary to such transactions, of the independent counsel representing the
Company for the purposes of such registration, addressed to the underwriters, if
any, and to the Stockholders making such request, reasonably acceptable in form
and substance to such underwriters, if any, and the Stockholders and (B) a
letter, dated on such date, from the independent certified public accountants of
the Company, addressed to the underwriters, if any, and the Stockholders,
stating that they are independent certified public accountants within the
meaning of the Securities Act and that in the opinion of such accountants, the
financial statements and other financial data of the Company included in the
registration statement or the prospectus, or any amendment or supplement thereto
(including, in each case, documents incorporated by reference thereto), comply
as to form in all material respects with the applicable accounting requirements
of the Securities Act; such opinion of counsel shall additionally cover such
other legal matters with respect to the registration statement and the Company
as the underwriters, if any, or the Stockholders may reasonably request; and
such letter from the independent certified public accountants shall additionally
cover such other financial matters (including information as to the period
ending not more than five (5) business days prior to the date of such letter)
with respect to the registration statement and the Company as the underwriters,
if any, or the Stockholders may reasonably request; and (j) use its best efforts
to cause such registration statement to become effective, and, upon the request
of the holders of a majority of the registrable securities registered
thereunder, keep such registration statement effective for a period of up to one
hundred twenty (120) days or until the distribution contemplated in the
registration statement has been completed; provided, however, that
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(i) such 120-day period shall be extended for a period of time equal to the
period the Shareholder refrains from selling any securities included in such
registration at the request of an underwriter of Common Stock (or other
securities) of the Company; and (ii) in the case of any registration of
registrable securities on Form S-3 which are intended to be offered on a
continuous or delayed basis, such 120-day period shall be extended, if
necessary, to keep the registration statement effective until all such
registrable securities are sold; provided, however, that Rule 415, or any
successor rule under the Securities Act, permits an offering on a continuous or
delayed basis; and provided, further, that applicable rules under the Securities
Act governing the obligation to file a post-effective amendment permit, in lieu
of filing a post-effective amendment which (A) includes any prospectus required
by Section 10(a)(3) of the Securities Act or (B) reflects facts or events
representing a material or fundamental change in the information set forth in
the registration statement, the incorporation by reference of information
required to be included in (A) and (B) above to be contained in periodic reports
filed pursuant to Section 13 or 15(d) of the Exchange Act in the registration
statement.
2.5 Certain Conditions to Registration.
(a) The right of the Stockholders to have any Shares included in
any registration statement pursuant to the provisions of Sections 2.1 or 2.2
hereof shall be subject to the following further conditions: (a) should the
request for registration be pursuant to Section 2.1, and should the registration
statement proposed by the Company relate to an underwritten offering of
securities of the Company, and should the managing underwriter for the Company
inform the Company in writing that, in such underwriter's opinion, such
registration of all or a part of the Shares would materially impair the
Company's ability to sell the securities being registered by the Company, then
the Stockholders shall be entitled to participate pro rata with all other
stockholders entitled to registration rights ("Other Stockholders") based upon
the number of shares owned by or issuable to the Stockholders and each Other
Stockholders in the maximum amount of shares that such underwriter determines
may be sold without such impairment but in no event shall the amount of
securities of the selling Stockholders included in any such registration be
reduced below thirty percent (30%) of the total amount of securities included in
such registration, except for a registration relating to the Company's Initial
Public Registration, from which all securities of the selling Shareholder may be
excluded; (b) should the request for registration be pursuant to Section 2.2,
and should the managing underwriter inform the Company in writing that, in such
underwriter's opinion, the number of shares requested to be registered is more
than the number such underwriter reasonably expects can be sold upon acceptable
terms, then the Stockholders and the Other Stockholders shall be entitled to
participate pro rata, based upon the number of shares owned by or issuable to
each of them; (c) the Stockholders shall furnish to the Company in writing such
information and documents as, in the opinion of counsel to the Company, may be
reasonably required to properly prepare and file such registration statement in
accordance with applicable provisions of the Securities Act; and (d) if the
Stockholders desire to sell and distribute securities over a period of time, or
from time to time at the prevailing market prices pursuant to a registration
statement to be filed by the Company under the Securities Act, then the
Stockholders shall execute and deliver to the Company such written undertakings
as the Company and its counsel may reasonably require in order to assure full
compliance with relevant provisions of the Securities Act and the Exchange Act;
and (e) all Stockholders proposing to distribute their securities through such
underwriting shall (together with
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the Company as provided in Section 2.4(e)) enter into and perform its
obligations under an underwriting agreement, in the usual and customary form,
with the underwriter or underwriters selected for such underwriting by a
majority in interest of the Initiating Stockholders and reasonably acceptable to
the Company.
(b) Notwithstanding the foregoing, if the Company shall furnish to the
Initiating Stockholders, a certificate signed by the President or Chief
Executive Officer of the Company stating that in the good faith judgment of the
Board of Directors of the Company, it would be seriously detrimental to the
Company and its Stockholders for such registration statement to be filed and it
is therefore essential to defer the filing of such registration statement, then
the Company shall have the right to defer such filing for a period of not more
than 90 days after receipt of the request of the Initiating Stockholders;
provided, however, that the Company may not utilize this right more than once in
any twelve (12) month period.
2.6 Notices of Registration Statements, Etc. Except for the Initial
Public Registration, the Company shall not file any registration statement under
the Securities Act covering any debt or equity securities unless it shall first
have given the Stockholders written notice thereof and, if so requested by the
Stockholders, shall have consulted with the Stockholders concerning the
selection of underwriters, counsel and independent public accountants for the
Company and if, in the judgment of the Stockholders exercised in good faith, any
of the Stockholders are or might be deemed to be controlling persons of the
Company, the Company shall not file any such registration statement unless it
shall first have appointed underwriters, counsel, and independent public
accountants for the Company reasonably satisfactory to the Stockholders. A
Shareholder shall also have the right, at any time when, in its judgment
exercised in good faith, it is or might be deemed to be a controlling person of
the Company, to participate in the preparation of such registration statement
and to require the insertion therein of material that in its judgment, as
aforesaid, should be included, and at the expense of the Company to retain
counsel or independent public accountants or both to assist it in such
participation.
2.7 Indemnity.
(a) The Company agrees to indemnify and hold harmless the
Stockholders, their officers, directors and partners, as sellers of Shares, each
underwriter (within the meaning of the Securities Act) of such securities and
each person, if any, who controls (within the meaning of either Section 15 of
the Securities Act or Section 20 of the Exchange Act) any such seller,
controlling person or underwriter, from and against any losses, claims, damages
or liabilities, joint or several, that any such seller, underwriter or
controlling person may incur or to which any such seller, underwriter or
controlling person may become subject, under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in any preliminary prospectus, or
contained, on the effective date thereof, in any registration statement or final
or summary prospectus included therein, or any amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not
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misleading, or any violation or alleged violation of the Securities Act, the
Exchange Act or any rule or regulation promulgated under the Securities Act or
the Exchange Act (all such acts are hereinafter referred to as a "Violation");
and the Company will reimburse each such seller, underwriter or controlling
person for any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such loss, claim, damage, liability or
action, whether or not resulting in liability; provided, however, the Company
will not be liable in any case to the extent that any such loss, claim, damage,
liability or expense arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration statement, such preliminary, final or summary prospectus or such
amendment or supplement in reliance upon and in conformity with written
information furnished by or on behalf of any such seller specifically for use in
the preparation thereof.
(b) Each seller of Shares will, severally and not jointly, indemnify
and hold harmless the Company, each of its directors, each of its officers who
sign or have signed said registration statement, each underwriter, each other
seller and each person, if any, who controls the Company or such underwriter or
seller (within the meaning of either Section 15 of the Securities Act or Section
20 of the Exchange Act), to the same extent as the foregoing indemnity from the
Company to such seller, insofar as such losses, claims, damages, or liabilities
(or actions in respect thereto) arise out of or are based upon any Violation, in
each case to the extent (and only to the extent) that such Violation occurs in
reliance upon and in conformity with written information furnished by such
seller of Shares expressly for use in connection with the preparation of such
registration statement, such preliminary, final or summary prospectus or such
amendment or supplement, and will reimburse the Company or any such director,
officer, underwriter or controlling person for any legal or other expenses
reasonably incurred by it in connection with investigating or defending any such
loss, claim, damage, liability or action, whether or not resulting in liability;
provided, however, that the indemnity agreement contained in this subsection
2.7(b) shall not apply to amounts paid in settlement of any such loss, claim,
damage, liability or action if such settlement is effected without the consent
of such seller, which consent shall not be unreasonably withheld; and, provided,
further, that, in no event shall any indemnity under this subsection 2.7(b)
exceed the gross proceeds from the offering received by such seller.
(c) Promptly after receipt by an indemnified party of notice of the
commencement of any legal action against such indemnified party in respect of
which indemnity or reimbursement may be sought against the indemnifying party
under this Agreement, such indemnified party shall notify the indemnifying party
in writing of the commencement thereof, and, subject to the provisions
hereinafter stated, the indemnifying party shall assume the defense of such
action (including, the employment of counsel, who shall be counsel satisfactory
to such indemnified party, and the payment of expenses in connection therewith).
To the extent the Company and the indemnified party believe it prudent or
necessary, in their good faith discretion, such indemnified party shall, in
addition to the foregoing, have the right to employ separate counsel in any such
action and to participate in the defense thereof, and the fees and expenses of
such counsel shall be at the expense of the indemnifying party. The
indemnifying party shall not be liable to indemnify any person for any
settlement of any such action effected without the consent of the indemnifying
party. The failure to deliver written notice to the indemnifying party within a
reasonable time of the
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commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 2.7, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 2.7.
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for above is due in
accordance with its terms but is held by a court to be unavailable on grounds of
policy or otherwise, the person or persons (individually, an "Indemnitor" and
collectively, the "Indemnitors") who would otherwise have been required to
indemnify any other person (the "Indemnitee") hereunder, shall contribute to the
aggregate losses, claims, damages, liabilities and expenses to which any such
Indemnitee may be subject in such proportion so that such Indemnitor is or such
Indemnitors, collectively, are responsible for that portion represented by the
percentage that the aggregate public offering price of the shares sold by such
Indemnitor or Indemnitors bears to the aggregate public offering price of all
shares sold in such registered offering; provided, however, that no person
adjudged guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) by a court of competent jurisdiction, in a final
judgment, shall be entitled to contribution from any person who was not adjudged
guilty of such fraudulent misrepresentation. Any party entitled to contribution
shall, promptly after receipt of notice of the commencement of any action, suit
or proceeding against such party in respect of which a claim for contribution
may be made against another person hereunder, notify such other person, but the
omission to so notify another person shall not relieve such person from any
other obligation it may have hereunder or otherwise.
(e) The indemnification of underwriters provided for in this Section
shall be on such other terms and conditions as are at the time customary and
reasonably required by such underwriters.
3. Expenses. Except for underwritten discounts and commissions, the
Company shall pay any and all expenses incurred in connection with
registrations, filings, or qualifications required pursuant to the provisions
contained herein, including reasonable fees and expenses of one counsel for all
the Stockholders.
4. Reports Under the Exchange Act. With a view to making available to
the Stockholders the benefits of Rule 144 promulgated under the Securities Act,
the Company agrees to use its best efforts: (i) to register under Section 12 of
the Exchange Act, not later than ninety (90) days after the end of the fiscal
year in which the first registration statement under the Securities Act filed by
the Company is declared effective, (ii) to file with the Commission in a timely
manner all reports and other documents required to be filed by an issuer of
securities registered under the Securities Act or the Exchange Act and (iii) so
long as the Stockholders own any of the Shares, to furnish in writing upon any
such Shareholder's request the following information:
(a) The Company's name, address and telephone number;
(b) The Company's Internal Revenue Service identification number;
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(c) The Company's Commission file number;
(d) The number of shares of Common Stock outstanding as shown by the
most recent report or statement published by the Company; and
(e) Whether the Company has filed all reports required to be filed by
Sections 13 or 15(d) of the Exchange Act during the preceding twelve (12)
months. With respect to a rule or regulation of the Commission (other than Rule
144) that may at any time permit Stockholders to sell Shares to the public
without registration, the Company agrees to take such action as is reasonable to
enable utilization of such rule.
5. Transfer of Registration Rights. The registration rights granted
hereunder may only be assigned (and only with all related obligations) by a
Stockholder in connection with a transfer of the Stockholder's Shares to an
affiliate (or other related entity) of such Stockholder or to a transferee who,
after such assignment or transfer holds at least 100,000 Shares. The Company
shall be given written notice by the Stockholders at the time of any such
transfer stating the name and address of the transferee and identifying the
Shares with respect to which the rights under this Agreement are being assigned.
6. Termination of Registration Rights. The registration rights granted
pursuant to Section 2 of this Agreement shall terminate and be of no force and
effect as to any Stockholder and any subsequent transferee upon the earlier of
(a) the expiration of three (3) years from the initial public offering of the
Company's Common Stock and (b) when all Shares held or entitled to be held upon
conversion by such Stockholder may immediately be sold under Rule 144 during any
90-day period; provided, however, that with respect to the Registration Rights
granted pursuant to Section 2.2 herein, the provisions of this Section 6 shall
not apply to any holder who owns more than 2% of the Company's outstanding stock
until the earlier of (c) such time as such holder owns less than 2% of the
outstanding stock of the Company and (d) five years from the Company's Initial
Public Registration.
7. Future Registration Rights. No future registration rights may be
granted without consent of the holders of a majority of the shares of Common
Stock issuable upon conversion of the outstanding Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock.
8. Modification and Waiver. The parties may amend, modify or supplement
this Agreement in such manner as may be agreed upon by them in writing at any
time; provided, however, that no amendment, modification or supplement shall be
effective without the consent of the holders of at least 50% of the shares of
Common Stock issuable upon conversion of the outstanding Series B Preferred
Stock, Series C Preferred Stock and Series D Preferred Stock. Any party may by
an instrument in writing extend the time for or waive the performance of any of
the obligations of another party or waive compliance by another party with any
of the provisions contained herein. The failure of any party at any time or
times to require performance of any provision hereof shall in no manner affect
such party's right at a later date to enforce the same. No waiver by any party
of a breach of this Agreement, whether by conduct or otherwise, in any one or
more instances shall be, or shall be deemed to be, a further or continuing
waiver of such breach,
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waiver of any condition or of any other breach of this Agreement. No waiver by
any one party to this Agreement shall be deemed to be a waiver of any other
party to this Agreement.
9. Notices. Unless otherwise provided, any notice required or permitted
under this Agreement shall be given in writing and shall be deemed effectively
given the earlier of (i) when received, (ii) upon personal delivery to the party
to be notified, (iii) one business day after delivery via facsimile upon
appropriate confirmation, (iv) one day after being deposited with an overnight
courier service or (v) three days after deposit with the United States Post
Office, by registered or certified mail, postage prepaid and addressed to the
party to be notified at the address set forth on the signature page of this
Agreement, or at such other address as such party may designate by ten days
advance written notice to all other parties.
10. Gender and Number, Etc. All words or terms used in this Agreement,
regardless of the number or gender in which they are used, shall be deemed to
include any other number and the other gender as the context may require.
"Hereof," "herein," and "hereunder" and words of similar import shall be
construed to refer to this Agreement as a whole, and not to any particular
paragraph or provisions, unless expressly so stated.
11. Successors and Assigns. This Agreement shall not be assignable by any
party without the prior written consent of all other parties hereto or except
pursuant to Section 5 hereof, except that the Company may assign this Agreement
to a successor corporation pursuant to the reincorporation of the Company into
another state. Subject to the foregoing, all rights hereunder may be assigned or
otherwise conveyed to any such permitted transferee or assignee. Subject to the
foregoing, this Agreement shall be binding upon and inure to the benefit of the
respective successors and assigns of the parties hereto.
12. Counterparts. This Agreement may be executed in any number of
counterparts with the same effect as if the signatures to each counterpart were
upon the same instrument.
13. Entire Agreement and Captions. This Agreement sets forth the entire
understanding of the parties hereto and supersedes all prior agreements,
arrangements and communications, whether oral or written, between or among the
parties with respect to the subject matter hereof. Captions appearing in this
Agreement are for convenience of reference only and shall not be deemed to
explain, limit or amplify the provisions hereof.
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
15. Severability. If any provisions contained in this Agreement shall for
any reason be held invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not invalidate the entire
Agreement. Such provision shall be deemed to be modified to the extent necessary
to render it valid and enforceable and if no such modification shall render it
valid and enforceable then the Agreement shall be construed as if not containing
such provision.
-9-
<PAGE>
16. No Third Party Beneficiaries. Nothing herein expressed or implied is
intended to confer upon any person, other than the parties hereto or their
respective permitted assigns, successors, heirs and legal representatives, any
rights, remedies, obligations or liabilities under or by reason of this
Agreement.
17. No Partnership or Joint Venture. Notwithstanding anything to the
contrary contained herein, nothing contained herein shall be construed as
creating a partnership or joint venture relationship between the parties hereto,
and the parties hereto shall be deemed to have made any elections necessary
under any applicable law, rule or regulation to prevent their being considered
or deemed to be a partnership or joint venture.
18. No Impairment. The Company will not take any action, or fail to take
any action, avoid or seem to avoid the observance or performance of any of the
terms to be performed by the Company hereunder and the Company will at all times
act in good faith to assist the Stockholders in the carrying out of the
provisions of this Agreement as may be necessary to preserve and protect the
registration rights of the Stockholders under this Agreement.
-10-
<PAGE>
This Amended and Restated Registration Rights Agreement is executed and
delivered on the day and year first above written.
"COMPANY" SONIC INNOVATIONS, INC.,
a Delaware corporation
/s/ William S. Barth
------------------------------------------------
Signature of Authorized Signatory
William S. Barth, Vice President-Finance and CFO
------------------------------------------------
Print Name and Title
"STOCKHOLDERS" See Exhibit A
------------------------------------------------
Print Name of Stockholder
------------------------------------------------
Signature of Authorized Signatory
------------------------------------------------
Print Name and Title
AMENDED AND RESTATED REGISTRATION RIGHTS AGREEMENT
-11-
<PAGE>
EXHIBIT A
Series A Stockholders:
Mr. Jim Dreyfous
Utah Ventures Limited Partnership
423 Wakara Way, Suite 206
Salt Lake City, UT 84108
George M. Sims
535 East 5th Avenue
Salt Lake City, UT 84103
Carver A. Mead
Foveonics
10131 Bubb Rd., #B
Cupertino, CA 95014
New Era Investments
Attn: Nick S. Vidalakis
First Interstate Building
999 Third Avenue, Suite 1020
Seattle, WA 98104
Series B, Series C and/or Series D Stockholders:
Jim Dreyfous Accel Investors '95 L.P.
Utah Ventures Limited Partnership Attn: G. Carter Sednaoui
423 Wakara Way, Suite 1020 One Palmer Square
Salt Lake City, UT 84108 Princeton, NJ 08542
George M. Sims Ellmore C. Patterson Partners
535 East 5th Avenue Attn: G. Carter Sednaoui
Salt Lake City, UT 84103 One Palmer Square
Princeton, NJ 08542
Accel IV L.P.
Attn: G. Carter Sednaoui Venrock Associates
One Palmer Square Attn: Anthony B. Evnin
Princeton, NJ 08542 30 Rockefeller Plaza, #5508
New York, NY 10112
Accel Keiretsu, L.P.
Attn: G. Carter Sednaoui Venrock Associates II, L.P.
One Palmer Square Attn: Anthony B. Evnin
Princeton, NJ 08542 30 Rockefeller Plaza, #5508
New York City, NY 10112
-12-
<PAGE>
The Travelers Insurance Company Calvert Social Venture Partners
Attn: Daniel B. Kenney Attn: John May
Securities 9 PB 402 Maple Avenue West
205 Columbus Blvd., Loading Dock Vienna, VA 22180
Hartford, CT 06183-2030
Labrador Ventures II, L.P.
The Travelers Indemnity Company Attn: Stuart Davidson
Attn: Daniel B. Kenney 400 Seaport Court, Suite 250
Securities 9 PB Redwood City, CA 94063
205 Columbus Blvd., Loading Dock
Hartford, CT 06183-2030 Effie E. Westervelt Revocable Trust
26 Southridge, E
The Travelers Life and Annuity Company Tiburon, CA 94920
Attn: Daniel B. Kenney
Securities 9 PB Effie E. Westervelt
205 Columbus Blvd., Loading Dock 26 Southridge, E
Hartford, CT 06183-2030 Tiburon, CA 94920
The Phoenix Insurance Company Harry A. George
Attn: Daniel B. Kenney Solstice Capital
Securities 9 PB 13651 E. Camino La Cebadilla
205 Columbus Blvd., Loading Dock Tucson, AZ 87549
Hartford, CT 06183-2030
Patricia H. Highberg
New Era Investments Randall Road
Attn: Nick Vidalakis Off Church Hill
First Interstate Building Woodstock, VT 05091
999 Third Avenue, Suite 1020
Seattle, WA 98104 Carol H. Tolan
200 E. 89th Street
California Institute of Technology New York, NY 10128
Attn: Sandra Ell
551 South Wilson Avenue Arno Penzias
Pasadena, CA 91125 1960 Grant Ave.
San Francisco, CA 94133
PV Securities Corporation
Attn: Phil Villers Morgenthaler Venture Partners IV
97 Lowell Road Attn: Mr. Gary Schaffer
Suite 11-4 2730 Sand Hill Road, Suite 280
Concord, MA 01742 Menlo Park, CA 94025
PV Securities Corp. New Enterprise Associates VII, Ltd.
20 Whit's End Road Attn: Ms. Sigrid Van Bladel
Concord, MA 07142 2490 Sand Hill Road
Menlo Park, CA 94025
<PAGE>
NEA Presidents Fund, L.P. BB BioVentures LP
Attn: Ms. Sigrid Van Bladel Attn: Luke Evnin
2490 Sand Hill Road 1 Cambridge Center
Menlo Park, CA 94025 9th Floor
Cambridge, MA 02142
NEA Ventures 1997, Limited Partnership
Attn: Ms. Sigrid Van Bladel MPM Asset Management Investors 1998 LLC
2490 Sand Hill Road Attn: Luke Evnin
Menlo Park, CA 94025 1 Cambridge Center
9th Floor
Joshua Mailman Cambridge, MA 02142
Sirius Business Corp.
150 East 58th Street MPM Bioventures Parallel Fund LP
New York, NY 10155 Attn: Luke Evnin
1 Cambridge Center
9th Floor
Cambridge, MA 02142
<PAGE>
EXHIBIT 10.6
SONIC INNOVATIONS, INC.
AND
STARKEY LABORATORIES, INC.
OEM AGREEMENT
April 19, 1999
[ * ]= CERTAIN INFORMATION IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
OEM AGREEMENT
This OEM AGREEMENT, including the attached Exhibits (the "Agreement"),
---------
made and entered into as of April 1, 1999 (the "Effective Date"), is by and
--------------
between Sonic Innovations, Inc. ("Sonic"), a Delaware corporation with an office
-----
at 5330 S 900 East, Ste. 240, Salt Lake City, Utah 84117, and Starkey
Laboratories, Inc. ("Starkey"), a Minnesota corporation with an office at 6600
-------
Washington Ave., So., Eden Prairie, Minnesota 55344 (each of Sonic and Starkey,
a "Party"; together, the "Parties").
----- -------
BACKGROUND
----------
A. Sonic is engaged in the business of manufacturing, distributing,
and selling Hybrids (as defined below) for use in hearing aid devices and other
products; and
B. Starkey desires to purchase Hybrids from Sonic, and distribute and
sell Products (as defined below) to, customers in the Territory (as defined
below); and
C. Starkey desires to purchase from Sonic, and Sonic desires to sell
to Starkey, such Hybrids for the purpose of incorporating the same into Products
for resale to customers in the Territory.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the Parties agree as follows:
1. DEFINITIONS.
-----------
1.1 "Date Code" shall mean the date of manufacture of each Hybrid
---------
manufactured and sold by Sonic.
1.2 "Hybrid" shall mean Sonic's proprietary integrated circuit for
------
digital signal processing as it exists as of the Effective Date.
1.3 "Product(s)" shall mean Starkey's proprietary hearing aid product
----------
which incorporates a Hybrid.
1.4 "Reliability Specification" shall mean the reliability
-------------------------
specification documents numbers 99012-008 (Effective Date 7/9/95), Rev. A and
99012-006 (Effective Date 7/9/95), Rev. A, as provided by Starkey to Sonic and
attached hereto as Exhibit C.
1.5 "Specifications" shall mean the specifications for the use and
--------------
operation of the Hybrid as set forth in Exhibit A.
-1-
<PAGE>
1.6 "Starkey Affiliate" shall mean, with respect to Starkey, a
-----------------
corporation, company or other entity that is owned or controlled by Starkey by
virtue of Starkey's direct or indirect ownership or control of more than fifty
percent (50%) of the outstanding shares or securities (representing the right to
vote for the election of directors or other managing authority) of such
corporation, company or other entity, but such corporation, company or other
entity shall be deemed to be a Starkey Affiliate only so long as such ownership
or control exists.
1.7 "Term" shall have the meaning set forth in Section 11.1.
----
1.8 "Territory" shall mean, until October 1, 1999, any country
---------
outside the United States of America and its territories in which Starkey
operates wholly-owned manufacturing or distribution facilities; provided,
however, that after October 1, 1999, the Territory shall expand to include such
entities within the United States of America and its territories.
2. GRANT OF OEM RIGHTS.
-------------------
2.1 Appointment. Subject to the terms and conditions of this
-----------
Agreement, Sonic hereby grants to Starkey and Starkey Affiliates the non-
exclusive rights to (i) manufacture Products, and (ii) market, sell and
distribute Products to end user customers in the Territory.
2.2 Sale Conveys No Right to Manufacture or Modify. The Hybrids are
----------------------------------------------
offered for sale and are sold by Sonic subject in every case to the condition
that (i) except as necessary to program such Hybrid for a particular end-user,
such sale does not convey any license, expressly or by implication, to modify,
duplicate, reverse engineer or otherwise copy or reproduce any of the Hybrids,
(ii) Starkey and Starkey Affiliates shall use each Hybrid only as incorporated
into and sold as part of a Product and for no other purpose whatsoever, (iii)
Starkey and Starkey Affiliates shall not use Hybrids for any purpose except to
manufacture and service Products, and (iv) Starkey and Starkey Affiliates will
not sell or otherwise distribute Hybrids except incorporated into a Product.
2.3 Reservation of Rights; No Rights Beyond OEM Rights. Except as
--------------------------------------------------
expressly provided in this Article 2, (i) no right, title, or interest is
granted, whether express or implied, by Sonic to Starkey or a Starkey Affiliate,
(ii) nothing in this Agreement shall be deemed to grant to Starkey or a Starkey
Affiliate rights in any products or technology other than the Hybrids, and (iii)
no provision of this Agreement shall be deemed to restrict Sonic's right to
exploit technology, know-how, patents, or any other intellectual property
rights.
3. PRICE AND PAYMENT.
-----------------
3.1 Hybrid Prices. Starkey shall pay to Sonic the sum of [ * ]
-------------
for each Hybrid that it receives from Sonic.
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
-2-
<PAGE>
3.2 Payment.
-------
(a) Sonic shall invoice Starkey and Starkey shall make payments
to Sonic under this Agreement in United States dollars in immediately available
funds to a bank account designated by Sonic by wire transfer as follows: [Sonic
to provide]. All payments made hereunder shall be paid in full, without any
deduction of taxes or charges of any kind, except to the extent that a
governmental authority imposes income taxes or other taxes on payments made to
Sonic pursuant to this Agreement. In the event that such taxes must be paid by
Starkey, then Starkey may deduct such taxes from the payment and send Sonic tax
payment certificates, receipts, and other such supporting data and to take other
reasonable acts as may be requested by Sonic to establish that such taxes have
been deducted and paid by Starkey on behalf of Sonic. Starkey shall cooperate
with Sonic to aid Sonic to recover any such taxes paid.
(b) Payment for Hybrids supplied subject to Section 3.1 shall be
made net thirty (30) days after the date of shipment of the relevant Hybrids by
Sonic to Starkey.
(c) Any payments due hereunder which are not paid within five (5)
days of the date such payments are due in accordance with Section 3.2(b) shall
bear interest at the lesser of one and one-half percent (1-1/2%) per month or
the maximum rate permitted by law, calculated on the number of days such payment
is delinquent. This Section 3.2(c) shall in no way limit any other remedies
available to Sonic.
4. TERMS OF PURCHASE AND SALE.
---------------------------
4.1 Minimum Annual Order. Upon Starkey's successful evaluation
--------------------
of the Hybrid and calibration test systems, which evaluation period will end no
later than May 31, 1999, Starkey shall place a binding purchase order with Sonic
for a minimum of [ * ] Hybrids to be delivered no later than twelve (12) months
after the Effective Date.
4.2 Forecasts. On the ninetieth (90/th/) day prior to the first
---------
(1/st/) anniversary of the Effective Date, and every year thereafter during the
Term, Starkey shall provide to Sonic a [non-binding] written forecast of the
number of Hybrids that Starkey expects to purchase over the subsequent twelve
(12) months ("Forecasts").
4.3 Order and Acceptance. All orders for Hybrids shall be made
by signed written purchase orders by Starkey to a Sonic employee designated in
writing by Sonic, sent to Sonic at Sonic's address for notice hereunder and
proposing a delivery date that is consistent with the Forecasts and not less
than sixty (60) days after Sonic's receipt of such purchase order. To the extent
that any one purchase order exceeds [ * ] Hybrids, such purchase order must be
submitted to Sonic at least ninety (90) days in advance of any requested
delivery date. Orders shall be placed by a signed written purchase order, which
may be provided to Sonic by fax. Sonic shall accept or reject purchase orders by
fax or in writing within seven (7) days of receipt, it being understood that no
purchase order shall be binding upon Sonic until accepted by Sonic. Sonic shall
fulfill purchase orders accepted by Sonic pursuant to the terms and conditions
of this Agreement.
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
-3-
<PAGE>
No partial shipment of an order shall constitute the acceptance of the entire
order, absent the written acceptance of such entire order. Once accepted by
Sonic, Starkey may cancel or reschedule purchase orders for Hybrids only with
Sonic's prior written approval.
4.4 Invoicing. Sonic shall submit an invoice to Starkey upon shipment by
---------
Sonic of Hybrids ordered by Starkey. Each such invoice shall state Starkey's
aggregate price for Hybrids in a given shipment, plus any freight, taxes or
other costs incident to the purchase or shipment initially paid by Sonic but to
be borne by Starkey hereunder.
4.5 Shipping. All Hybrids delivered pursuant to the terms of this
--------
Agreement shall be suitably packed for surface or air shipment, in Starkey's
discretion, in Sonic's standard shipping cartons, and delivered, at Starkey's
direction, to Starkey or a carrier agent FCA (per Incoterms, ICC Ed. 1990) the
shipping location designated by Starkey (the "Shipping Location"), at which time
-----------------
risk of loss shall pass to Starkey. Sonic shall ship Hybrids using the carrier
specified in Starkey's purchase order provided that if Starkey does not provide
instructions with respect to the carrier to be used, Sonic shall select the
carrier. All freight, insurance, and other shipping expenses, as well as any
special packing expenses incurred by Sonic at the request of Starkey, shall be
paid by Starkey. Starkey shall also bear all applicable taxes, export taxes,
duties and similar charges, and any charges that may be assessed against the
Hybrids after delivery to Starkey or the carrier at the Shipping Location. All
shipments and freight charges shall be deemed correct unless Sonic receives from
Starkey, no later than forty-five (45) days after the shipping date of a given
shipment, a written notice specifying the shipment, the purchase order number,
and the exact nature of the discrepancy between the order and shipment or
discrepancy in the freight cost, as applicable. To the extent that there is any
conflict between any invoice or purchase order delivered hereunder and the terms
and conditions of this Agreement, the terms and conditions of this Agreement
shall control as to such conflict.
4.6 Returns. Except as set forth in Article 5 below, Starkey may return
-------
Hybrids only with Sonic's prior written approval. Hybrids returned to Sonic
other than under Article 7 shall be returned FCA (per Incoterms, ICC Ed. 1990)
the destination point designated by Sonic and shall be subject to a restocking
fee in an amount equal to five percent (5%) of the price paid by Starkey to
Sonic for such Hybrid as set forth in Section 3.1. Starkey shall also bear all
applicable taxes, export taxes, duties and similar charges, and any charges that
may be assessed against the Products in connection with such delivery to Sonic
at the destination point.
5. ACCEPTANCE. Starkey shall inspect all Hybrids promptly upon receipt thereof
----------
and may reject any Hybrid [that fails to conform to the warranties set forth in
Article 7 below at the time of delivery to Starkey,] provided that Starkey
notifies Sonic of such non-conformity within thirty (30) days of delivery.
Except as set forth in this Article 5 and Article 7 below, Starkey shall return
Hybrids to Sonic only with Sonic's prior written approval.
6. SONIC MANUFACTURING CALIBRATION SYSTEM. In order to permit Starkey to test
--------------------------------------
and calibrate Products, Sonic shall sell to Starkey units of its Sonic
Manufacturing Calibration System at Sonic's cost. Such sale is made subject to
the condition that (i) such sale does not convey
-4-
<PAGE>
any license, expressly or by implication, to modify, duplicate, reverse
engineer, or otherwise copy or reproduce the Sonic Manufacturing Calibration
System, and (ii) Starkey shall not make any other use of the Sonic Manufacturing
Calibration System other than to test Hybrids sold by Sonic to Starkey pursuant
to this Agreement.
7. LIMITED WARRANTY.
----------------
7.1 Hybrid Limited Warranty. Sonic warrants to Starkey that, subject
-----------------------
to the exclusions set forth in this Section 7.1 and in Section 7.2 below, for a
period of one hundred twenty (120) days following delivery to Starkey, Hybrids
manufactured and delivered hereunder shall: (i) substantially conform to the
Specifications and the Reliability Specification; (ii) be manufactured in
accordance with good manufacturing practices and standards established in the
trade; and (iii) be manufactured in accordance with all applicable laws,
regulations, rules and governmental directives. The foregoing warranty is
contingent upon proper use of the Hybrid in the applications for it was intended
as indicated in the Specifications. The above limited warranty applies only to
defects reported to Sonic in accordance with Sonic's standard reporting
procedures [described in the Specifications] and does not apply to any Hybrid
which after dispatch from the Shipping Location (i) has been altered or subject
to undue electrical or mechanical force or stresses, (ii) has not been
maintained in accordance with any transportation, storage, handling or
maintenance instructions supplied by Sonic, (iii) has been damaged by negligence
or accident, or (iv) has been damaged by acts of nature, vandalism, burglary,
neglect, or misuse. In the event of any breach of the above limited warranty
and provided that the Parties agree to upon a Return Merchandise Authorization
(an "RMA"), Starkey's exclusive remedy and Sonic's sole and exclusive liability
---
shall be, at Sonic's sole election, to replace the Hybrid at Sonic's expense or
to provide Starkey with a credit or refund in the amount of the price paid by
Starkey for the non-conforming Hybrid(s) properly assigned an RMA.
7.2 Disclaimer of Other Warranties. EXCEPT FOR THE LIMITED
------------------------------
WARRANTIES PROVIDED IN SECTION 7.1 ABOVE, SONIC GRANTS NO OTHER WARRANTIES OR
CONDITIONS, EXPRESS OR IMPLIED, BY STATUTE, OR OTHERWISE, REGARDING THE HYBRID,
AND SONIC SPECIFICALLY DISCLAIMS THE IMPLIED WARRANTIES OF FITNESS FOR A
PARTICULAR PURPOSE, MERCHANTABILITY, AND NONINFRINGEMENT. SONIC DISCLAIMS ANY
WARRANTY THAT OPERATION OF THE HYBRID WILL BE UNINTERRUPTED OR ERROR-FREE. ANY
OTHER REPRESENTATIONS OR WARRANTIES MADE BY ANY PERSON OR ENTITY, INCLUDING
EMPLOYEES OR REPRESENTATIVES OF SONIC, THAT ARE INCONSISTENT HEREWITH SHALL BE
DISREGARDED AND SHALL NOT BE BINDING UPON SONIC.
8. EXCHANGE OF DATA; GOVERNMENTAL APPROVAL.
---------------------------------------
8.1 Exchange. Starkey shall promptly provide to Sonic all [technical
--------
and/or clerical] data made, developed, or acquired by or for Starkey with
respect to the Hybrid. Sonic shall provide to Starkey access to data from
Hybrid studies that Sonic possesses as of the Effective Date, or develops or
acquires during the Term, and that is reasonably necessary for Starkey to obtain
those
-5-
<PAGE>
governmental approvals that Starkey is responsible for obtaining pursuant to
this Article 8 below, to the extent that Sonic has the right to disclose such
data to Starkey for the foregoing purposes and subject to Article 13 below.
8.2 Disclosure. Starkey will only use, reference, and disclose Data
----------
relating to the Hybrid to third parties as required to obtain governmental
approval to market and distribute Products pursuant to this Article 8, as
required by law, or, to the extent Sonic has the right to authorize Starkey to
do so and only with Sonic's prior written approval which shall not be
unreasonably withheld, to market and promote the Products, in each case subject
to Article 13 below.
8.3 Health Regulatory Approval. Starkey, at Starkey's expense, shall
--------------------------
be responsible for obtaining regulatory approvals from [the U.S. Food and Drug
Administration] and its foreign equivalents in the Territory to the extent
required by the foregoing regulatory authorities to sell and distribute the
Products in the Territory.
8.4 Registrations, Licenses and Permits. Starkey, at Starkey's
-----------------------------------
expense, shall obtain all registrations, licenses, and permits required to
comply with the laws and regulations within the Territory for sale and
distribution of the Products.
9. ADDITIONAL OBLIGATIONS OF STARKEY.
---------------------------------
9.1 Translation. Starkey shall at its cost provide any and all
-----------
resources necessary to translate all manuals, instructions, literature, and
package insert data sheets relating to the Hybrid for use in the Territory.
9.2 Business Obligations. Any and all obligations associated with
--------------------
Starkey's business shall remain the sole responsibility of Starkey. Any and all
sales and other agreements between Starkey and its customers are and shall
remain Starkey's exclusive responsibility and shall have no effect on Starkey's
obligations pursuant to this Agreement.
9.3 Foreign Corrupt Practices Act. In conformity with the United
-----------------------------
States Foreign Corrupt Practices Act, Starkey and its employees and agents shall
not directly or indirectly make any offer, payment, promise to pay, or authorize
payment, or offer a gift, promise to give, or authorize the giving of anything
of value for the purpose of influencing an act or decision of an official of any
government within the Territory or the United States Government (including a
decision not to act) or inducing such official to use his influence to affect
any such governmental act or decision in order to assist Sonic in obtaining,
retaining, or directing any such business.
9.4 Custom Fitting. Except as otherwise permitted in this Agreement,
--------------
Starkey shall not, nor allow any third party to, make any use of or otherwise
attempt to copy Sonic's proprietary Best Fit Fast/TM/ and ExpressFit/TM/ custom
fitting system.
-6-
<PAGE>
9.5 Advertising and Promotions. Starkey shall not make any reference
--------------------------
in its marketing or sales literature to the following: Natura/TM/, Sonic
innovations, or Best Fit Fast/TM/, ExpressFit/TM/ or any other promotional
materials used by Sonic in the sales and marketing of the Natura/TM/.
9.6 Product Packaging, Patent Marking, and Labeling. Starkey shall
-----------------------------------------------
label the Products with the Starkey tradename and trademarks and the Starkey
tradename and trademarks only, and Starkey shall not label the Products with any
of the following proprietary Sonic marks: Natura/TM/, Sonic innovations, or
Best Fit Fast/TM/, ExpressFit/TM/ or any other trademark of Sonic unless
required by applicable law. Starkey shall mark all Products it sells or
distributes pursuant to this Agreement in accordance with the applicable patent
statute or regulations in the country or countries of manufacture and sale
thereof, including with those patent numbers listed on Exhibit B.
9.7 No Reverse Engineering. Starkey shall not, nor shall it allow
----------------------
any third party to, disassemble or reverse engineer the Hybrid or decompile or
otherwise attempt to obtain to the source code from the object code of any
software embedded on any Hybrid.
10. REPORTS. Pursuant to the FDA's Medical Device Reporting (MDR)
-------
Regulations, Sonic and/or Starkey may be required to report to the FDA
information that reasonably suggests that a Hybrid may have caused or
contributed to a death or serious injury or has malfunctioned and that the
device would be likely to cause or contribute to a death or serious injury if
the malfunction were to recur. The Parties agree to supply to each other any
such information regarding Hybrids used in Products promptly after becoming
aware of it so that each party can comply with its own governmental reporting
requirements.
11. TERM AND TERMINATION.
--------------------
11.1 Term. The term of this Agreement shall commence on the
----
Effective Date and continue in full force and effect until three (3) years from
the Effective Date, unless earlier terminated pursuant to this Article 11 (such
period, the "Term"); provided that after the Term, the Agreement will
----
automatically renew for additional one (1) year periods unless either Party
provides written notice of its intent not to renew at least one hundred eighty
(180) days prior to the expiration of the Term or such additional one (1) year
period.
11.2 Termination for Convenience. Either party may terminate this
---------------------------
Agreement for its convenience upon one hundred eighty (180) days written notice
to the other.
11.3 Termination for Cause. Either Sonic or Starkey may terminate
---------------------
this Agreement by written notice stating its intent to terminate in the event
the other shall have breached or defaulted in the performance of any of its
material obligations hereunder, and such default shall have continued for sixty
(60) days after written notice thereof was provided to the breaching party by
the non-breaching party. In addition, Sonic may terminate this Agreement by
written notice in the event Starkey does not pay Sonic in accordance with the
provisions of Section 3.2 and such failure shall have continued for ten (10)
days after written notice thereof was provided to Starkey by Sonic.
-7-
<PAGE>
Further, Sonic may terminate this Agreement immediately upon written notice in
the event of any breach or threatened breach by Starkey of any of Sections 2,
9.4, 9.5, 9.6, or 9.7.
11.4 Termination for Infringement. Starkey may terminate this
----------------------------
Agreement immediately upon notice if (i) a court of competent jurisdiction
determines in a non-appealable final judgment that the Hybrid infringes the
Intellectual Property rights of a third party, or (ii) the use, manufacture,
sale, offer for sale or import of Hybrids is enjoined as the result of such
Hybrid's infringement of a third party's Intellectual Property rights.
11.5 Termination for Bankruptcy. Either party may terminate this
--------------------------
Agreement effective upon written notice to the other party in the event the
other party declares bankruptcy or becomes the subject of any voluntary or
involuntary proceeding under the U.S. Bankruptcy Code or any state insolvency
proceeding, and such proceeding is not terminated within one hundred twenty
(120) days of its commencement.
11.6 Effect of Termination.
---------------------
(a) Expiration or termination of this Agreement for any reason
shall not release any party hereto from any liability which, at the time of such
termination, has already accrued to the other party or which is attributable to
a period prior to such termination nor preclude either party from pursuing any
rights and remedies it may have hereunder or at law or in equity with respect to
any breach of this Agreement. It is understood and agreed that monetary damages
may not be a sufficient remedy for any breach of this Agreement and that the
non-breaching party may be entitled to injunctive relief as a remedy for any
such breach. Such remedy shall not be deemed to be the exclusive remedy for any
such breach of this Agreement, but shall be in addition to all other remedies
available at law or in equity.
(b) Within thirty (30) days after the effective date of
termination of this Agreement, Starkey shall use its reasonable efforts to
provide Sonic with a complete inventory of Hybrids in Starkey's possession, in
transit to Starkey from Sonic or otherwise in Starkey's control. Starkey's
rights under Article 2 shall survive to the extent reasonably necessary for
Starkey to dispose of all such Hybrids pursuant to the terms and conditions of
this Agreement. Upon any expiration or other termination of this Agreement,
Sonic may inspect Starkey's Hybrid inventory. [Sonic may at cost repurchase any
inventory of Hybrids in Starkey's possession.]
(c) Repairs or Replacement. Upon termination of this Agreement
----------------------
and for five (5) years thereafter, Sonic shall agree to provide repair or
replacement Hybrids for sale to Starkey; provided that, (i) such repair or
replacement Hybrid is distributed to Starkey or a Starkey Affiliate end-user
customer who purchased a Product prior to the end of the Term and solely for the
purpose of repairing, replacing or servicing such Product.
11.7 No Renewal, Extension or Waiver. Acceptance of any order from,
-------------------------------
or sale of, any Hybrid to Starkey after the date of termination of this
Agreement or pursuant to Section 11.6(c) shall not be construed as a renewal or
extension hereof, or as a waiver of termination by Sonic.
-8-
<PAGE>
11.8 Limitation of Liability Upon Termination. In the event of termination
----------------------------------------
by either party in accordance with any of the provisions of this Agreement,
neither party shall be liable to the other, because of such termination, for
compensation, reimbursement or damages on account of the loss of prospective
profits or anticipated sales or on account of expenditures, inventory,
investments, leases or commitments in connection with the business or goodwill
of Sonic or Starkey.
11.9 Survival of Certain Terms. The provisions of Articles 7, 12, 13, 14,
-------------------------
15, and Sections 11.6, 11.8, and 11.9 shall survive termination for any reason.
12. LIMITATION OF LIABILITY.
-----------------------
SONIC'S ENTIRE LIABILITY ARISING OUT OF THIS AGREEMENT AND/OR THE SALE OF
HYBRIDS SHALL BE LIMITED TO THE AGGREGATE AMOUNTS PAID BY STARKEY TO SONIC FOR
THE PRODUCTS UNDER THIS AGREEMENT. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR
COSTS OF PROCUREMENT OF SUBSTITUTE GOODS BY ANYONE. IN NO EVENT SHALL EITHER
PARTY BE LIABLE TO THE OTHER PARTY OR ANY OTHER PERSON FOR ANY SPECIAL,
CONSEQUENTIAL OR INCIDENTAL DAMAGES, HOWEVER CAUSED AND ON ANY THEORY OF
LIABILITY ARISING OUT OF THIS AGREEMENT, AND WHETHER OR NOT SUCH PARTY HAS BEEN
ADVISED OF THE POSSIBILITY OF SUCH DAMAGE. THESE LIMITATIONS SHALL APPLY
NOTWITHSTANDING ANY FAILURE OF ESSENTIAL PURPOSE OF ANY LIMITED REMEDY PROVIDED
HEREIN. NOTWITHSTANDING THE FOREGOING PROVISIONS OF THIS ARTICLE 12, THE
FOREGOING LIMITATIONS OF LIABILITY SET FORTH IN THIS ARTICLE 12 SHALL NOT APPLY
TO LIABILITY ARISING UNDER ARTICLES 13 OR 14 OR SECTION 2.3, AND SHALL NOT
DIMINISH THE REMEDIES EXPRESSLY PROVIDED IN ARTICLE 7.
13. CONFIDENTIALITY.
---------------
13.1 Confidential Information. Except as expressly provided herein, the
------------------------
parties agree that, for the Term of this Agreement and for seven (7) years
thereafter, the receiving party shall not publish or otherwise disclose and
shall not use for any purpose, except as expressly permitted herein any
information furnished to it by the other party hereto pursuant to this Agreement
which if disclosed in tangible form is marked "Confidential" or with other
similar designation to indicate its confidential or proprietary nature, or if
disclosed orally is confirmed as confidential or proprietary by the party
disclosing such information at the time of such disclosure or within thirty (30)
days thereafter ("Confidential Information"). Notwithstanding the foregoing, it
is understood and agreed that Confidential Information shall not include
information that, in each case as demonstrated by written documentation:
(a) was already known to the receiving party, other than under
an obligation of confidentiality, at the time of disclosure;
-9-
<PAGE>
(b) was generally available to the public or otherwise part of
the public domain at the time of its disclosure to the receiving party;
(c) became generally available to the public or otherwise part
of the public domain after its disclosure and other than through any act or
omission of the receiving party in breach of this Agreement; or
(d) was subsequently lawfully disclosed to the receiving party
by a person other than a party hereto or developed by the receiving party
without reference to any information or materials disclosed by the disclosing
party.
13.2 Confidentiality of Agreement. Each Party agrees that the terms
----------------------------
and conditions, but not the existence, of this Agreement shall be treated as the
other's Confidential Information and that no reference to the terms and
conditions of this Agreement or to activities pertaining thereto can be made in
any form of public or commercial advertising without the prior written consent
of the other Party; provided, however, that each Party may disclose the terms
-------- -------
and conditions of this Agreement: (i) as required by any court or other
governmental body; (ii) as otherwise required by law; (iii) to legal counsel of
the Parties; (iv) in connection with the requirements of an initial public
offering or securities filing; (v) in confidence, to accountants, banks, and
financing sources and their advisors; (vi) in confidence, in connection with the
enforcement of this Agreement or rights under this Agreement; or (vii) in
confidence, in connection with a merger or acquisition or proposed merger or
acquisition, or the like.
13.3 Compelled Disclosure. If a Receiving Party believes that it
--------------------
will be compelled by a court or other authority to disclose Confidential
Information of the Disclosing Party, it shall give the Disclosing Party prompt
written notice so that the Disclosing Party may take steps to oppose such
disclosure.
14. INDEMNIFICATION.
---------------
14.1 Indemnification of Starkey.
--------------------------
(a) Sonic shall indemnify, defend, and hold harmless Starkey and
the Starkey Affiliates and their respective directors, officers, employees, and
agents, and the successors and assigns of any of the foregoing (the "Starkey
Indemnitees") from and against all claims, losses, costs, and liabilities
(including, without limitation, payment of reasonable attorneys' fees and other
expenses of litigation), and shall pay any damages (including settlement
amounts) finally awarded with respect to claims, suits, or proceedings (any of
the foregoing, a "Claim") brought by third parties against a Starkey Indemnitee,
caused by (a) a failure by Sonic to manufacture the Hybrid in accordance with
the Specifications, (b) breach of any representation made by Sonic hereunder, or
(c) the negligence or willful misconduct of Sonic, except to the extent such
Claim is covered under Section 14.2 below or is caused by the negligence or
willful misconduct of a Starkey Indemnitee.
-10-
<PAGE>
(b) Starkey agrees that Sonic has the right to defend, or at its
option to settle, and Sonic agrees, at its own expense, to defend or at its
option to settle, any claim, suit or proceeding brought against Starkey by any
third party for infringement of any U.S. or foreign patents or copyright by the
Hybrid arising out of or in connection with this Agreement, and Sonic agrees to
indemnify, defend and hold harmless the Starkey Indemnitees (as defined in
Section 14.1(a) above) from and against any and all claims, losses, damages,
costs and liabilities (including payment of reasonable attorneys fees and other
expenses of litigation) arising from such infringement claim and shall pay any
damages finally awarded with respect to such a claim, suit or proceeding.
Notwithstanding the provisions of this Section 14.1(b), Sonic assumes no
liability for (i) any combination of Hybrid with other products not provided by
Sonic, which infringement would not arise from the Hybrid standing alone, or
(ii) the modification of the Hybrid by Starkey or any third party where such
infringement would not have occurred but for such modifications.
Notwithstanding the foregoing, if it is adjudicatively determined that the
Hybrid infringes, or in Sonic's sole opinion, may be found to infringe a third
party's patent or copyright, or if the sale or use of the Products is, as a
result of such infringement, enjoined, then Sonic may, at its sole option and
expense either: (i) replace the Hybrid with other noninfringing functionally
equivalent integrated circuits; or (ii) modify the Hybrid to make the Hybrid
functionally equivalent and noninfringing; or (iii) if (i) - (ii) are deemed
commercially impracticable by Sonic, discontinue sales of the Hybrid to Starkey
under this Agreement. THE FOREGOING PROVISIONS OF THIS SECTION 14.1(b) STATE
THE ENTIRE LIABILITY OF SONIC AND THE EXCLUSIVE REMEDY OF STARKEY WITH RESPECT
TO ANY ALLEGED INFRINGEMENT OF THIRD PARTY PATENTS, COPYRIGHTS, TRADEMARKS OR
OTHER INTELLECTUAL PROPERTY RIGHTS BY THE HYBRID OR ANY PART THEREOF OR THE USE
OF EITHER.
14.2 Indemnification of Sonic. Starkey shall indemnify, defend, and
------------------------
hold harmless Sonic, and its Affiliates and their respective directors,
officers, employees and agents, and the successors, and assigns of any of the
foregoing (the "Sonic Indemnitees") from and against all claims, losses, costs,
and liabilities (including, without limitation, payment of reasonable attorneys'
fees and other expenses of litigation), and shall pay any damages (including
settlement amounts) finally awarded with respect to a Claim brought by third
parties against a Sonic Indemnitee, arising out of or relating to (a) acts or
omissions of Starkey in the distribution or marketing of Products; (b) breach of
any of the representations or warranties made by Starkey hereunder, (c) a claim
that the Product infringes any intellectual property rights of a third party,
except in each case to the extent such claim is covered under Section 14.1, (d)
any failure by Starkey to obtain any applicable governmental approvals or
licenses required for the marketing and distribution of the Products, (e) a
claim relating to the manufacture or operation of the Product to the extent that
such claim is not due solely to a manufacturing defect in the Hybrid, or (f) the
negligence or willful misconduct of Starkey, except, in each case, to the extent
such claim is covered under Section 14.1 or is caused by the negligence or
willful misconduct of a Sonic Indemnitee.
14.3 Indemnification Procedures. A party (the "Indemnitee") that
--------------------------
intends to claim indemnification under this Article 14 shall promptly notify the
other party (the "Indemnitor") in writing of any claim in respect of which the
Indemnitee or any of its directors, officers, employees,
-11-
<PAGE>
agents, successors, or assigns intends to claim such indemnification, and the
Indemnitor shall have sole control of the defense and/or settlement thereof,
provided that the indemnified party may participate in any such proceeding with
counsel of its choice at its own expense. The indemnity agreement in this
Article 14 shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the consent of the Indemnitor, which consent
shall not be withheld unreasonably. The failure to deliver written notice to the
Indemnitor within a reasonable time after the commencement of any such action,
if prejudicial to its ability to defend such action, shall relieve such
Indemnitor of any liability to the Indemnitee under this Article 14, but the
omission to so deliver written notice to the Indemnitor shall not relieve the
Indemnitor of any liability that it may otherwise have to any Indemnitee than
under this Article 14. The Indemnitee under this Article 14, its employees and
agents, shall cooperate fully with the Indemnitor and its legal representatives
and provide full information in the investigation of any Claim covered by this
indemnification. Notwithstanding anything to the contrary contained in this
Article 14, neither party shall be liable for any costs or expenses incurred
without its prior written authorization.
15. MISCELLANEOUS PROVISIONS.
------------------------
15.1 Independent Contractors. The relationship of Sonic and Starkey
-----------------------
established by this Agreement is that of independent contractors, and nothing
contained in this Agreement shall be construed to (i) give either party the
power to direct or control the day-to-day activities of the other, (ii)
constitute the parties as partners, joint venturers, co-owners or otherwise as
participants in a joint or common undertaking, or (iii) allow a party to create
or assume any obligation on behalf of the other party for any purpose
whatsoever.
15.2 Governing Law. This Agreement and all acts and transactions
-------------
pursuant hereto and the rights and obligations of the parties hereto shall be
governed, construed and interpreted in accordance with the laws of the State of
Utah, without reference to rules of conflicts or choice of laws. This Agreement
shall not be governed by the 1980 United Nations Convention on Contracts for the
International Sale of Goods.
15.3 Arbitration. If a dispute arises between the parties relating to the
-----------
interpretation or performances of this Agreement or the grounds for the
termination thereof, representatives of the parties with decision-making
authority shall meet to attempt in good faith to negotiate a resolution of the
dispute prior to pursuing other available remedies. If within thirty (30) days
after such meeting the parties have not succeeded in negotiating a resolution of
the dispute, such dispute shall be submitted to final and binding arbitration
under the then current Commercial Arbitration Rules of the American Arbitration
Association ("AAA") by one (1) arbitrator in Salt Lake City, Utah. Such
arbitrator shall be selected by the mutual agreement of the parties or, failing
such agreement, shall be selected according to the aforesaid AAA rules. The
arbitrator will be instructed to prepare and deliver a written, reasoned opinion
stating his decision within thirty (30) days of the completion of the
arbitration. Such arbitration shall be concluded within nine (9) months
following the filing of the initial request for arbitration. The parties shall
bear the costs of arbitration equally and shall bear
-12-
<PAGE>
their own expenses, including professional fees. The decision of the arbitrator
shall be final and non-appealable and may be enforced in any court of competent
jurisdiction.
15.4 Notices. Any notice required or permitted by this Agreement
-------
shall be in writing and shall be sent by prepaid registered or certified mail,
return receipt requested, internationally recognized courier or personal
delivery, or by fax with confirming letter mailed or otherwise delivered under
the conditions described above in each case addressed to the other party at the
address shown below or at such other address for which such party give notice
hereunder. Such notice shall be deemed to have been given when delivered:
If to Starkey: Starkey Laboratories, Inc.
6600 Washington Ave., South
Eden Prairie, Minnesota 55344
Attn: Jerome Ruzicka
Tel.: (612) 941-6401
Fax: (612) 828-9262
If to Sonic: Sonic Innovations, Inc.
5330 S 900 East, Ste. 240
Salt Lake City, Utah 84117
Attn.: Jorgen Heide
Tel.: (801) 288-0993
Fax: (801) 288-0998
15.5 Force Majeure. Nonperformance of any party hereto (except for
-------------
payment obligations) shall be excused to the extent that performance is rendered
impossible by strike, fire, earthquake, flood, governmental acts or orders or
restrictions, delay or failure of suppliers, or any other reason where failure
to perform is beyond the reasonable control and not caused by the gross
negligence or willful misconduct of the nonperforming party.
15.6 Assignment. This Agreement shall not be assignable by either
----------
party to any third party hereto without the written consent of the other party
hereto, except that either party may assign this Agreement without the other
party's consent to an entity that acquires all or substantially all of the
business or assets of the assigning party pertaining to the subject matter
hereof, in each case whether by merger, acquisition, or otherwise. Any assignee
shall agree to perform the obligations of the assignor of this Agreement, and
this Agreement shall be binding on and inure to the benefit of any permitted
assignee.
15.7 Partial Invalidity. If any provision of this Agreement is held
------------------
to be invalid by a court of competent jurisdiction, then the remaining
provisions shall remain, nevertheless, in full force and effect. The parties
agree to renegotiate in good faith any term held invalid and to be bound by the
mutually agreed substitute provision in order to give the most approximate
effect originally intended by the parties.
-13-
<PAGE>
15.8 Publicity. The parties may agree upon a press release to
---------
announce the execution of this Agreement, together with a corresponding question
and answer outline for use in responding to inquiries about the Agreement;
thereafter, Sonic and Starkey may each disclose to third parties the information
contained in such press release and question and answer outline without the need
for further approval by the other. From time to time during the term of this
Agreement, the Parties may agree upon additional press releases.
Notwithstanding the foregoing, neither party may issue any press release or
other publicity or use the name of the other party without both parties' express
written consent.
15.9 Export Laws. Notwithstanding anything to the contrary
-----------
contained herein, all obligations of Sonic and Starkey are subject to prior
compliance with United States and foreign export regulations and such other
United States and foreign laws and regulations as may be applicable, and to
obtaining all necessary approvals required by the applicable agencies of the
government of the United States and the governments in the Territory. Sonic and
Starkey shall cooperate with each other and shall provide assistance to the
other as reasonably necessary to obtain any required approvals.
15.10 No Waiver. No waiver of any term or condition of this
---------
Agreement shall be valid or binding on either party unless agreed in writing by
the party to be charged. The failure of either party to enforce at any time any
of the provisions of the Agreement, or the failure to require at any time
performance by the other party of any of the provisions of this Agreement, shall
in no way be construed to be a present or future waiver of such provisions, nor
in any way affect the validity of either party to enforce each and every such
provision thereafter.
15.11 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original and all of which
together shall constitute one instrument.
15.12 Entire Agreement. This Agreement, including the Exhibits
----------------
attached hereto, constitutes the entire agreement of the parties with respect to
the subject matter hereof, and supersedes all prior or contemporaneous
understandings or agreements, whether written or oral, between Sonic and Starkey
with respect to such subject matter. The terms of any purchase order are
expressly excluded. No amendment or modification hereof shall be valid or
binding upon the parties unless made in writing and signed by the duly
authorized representatives of both parties.
-14-
<PAGE>
IN WITNESS WHEREOF, the undersigned are duly authorized to execute
this Agreement on behalf of Sonic and Starkey as applicable.
SONIC INNOVATIONS, INC. STARKEY LABORATORIES, INC.
("Sonic") ("Starkey")
By: /s/ Jorgen Heide By: /s/ Jerome C. Ruzicka
-------------------------------------- --------------------------
Print Name: Jorgen Heide Print Name: Jerome C. Ruzicka
------------------------------ -------------------
Title: Vice President Business Development Title: President
----------------------------------- -----------------------
-15-
<PAGE>
EXHIBIT A
---------
SPECIFICATION
[*]
<PAGE>
EXHIBIT B
---------
Patent Numbers
United States Patent No. 5,500,902
United States Patent No. 5,848,171
<PAGE>
EXHIBIT C
RELIABILITY SPECIFICATION
<PAGE>
TITLE: Solder Stress testing SPEC.NO.99012-006
Purpose
1.0 Purpose
- -----------
This document describes the test methods for performing soldering stress
simulation on hearing aid amplifiers. This test simulates thermal shock effects
subjected to amplifiers during hearing aid production. Thermal shock effects
can cause delamination of encapsulation epoxy on thickfilm hybrids, cause
blistering or delamination in FR4 epoxy boards, or cause failure due to poor
electrical connections. This testing determines if the amplifier under test is
prone to the above types of failures or any other type of failure.
2.0 Equipment/Materials
- ------------------------
Soldering iron
Solder pot
Flux
Tweezers
Microscope with range of 30X-200X
Amplifier print (for reference)
3.0 Procedure
- --------------
Check that all test circuits have been electrically tested and an
electrical response representing each is available for later review. Mark the
test circuits so they may be easily identified after solder stress testing and
submitted for electrical re-test.
Method 1 (Glencoe wiring simulation)
------------------------------------
Hybrid amplifier circuits: Inspect closely under 200X magnification for any
evidence of delamination.
Surface Mount amplifiers: Inspect closely at 30X for any evidence of kapton
separation or FR4 damage.
Do not perform Glencoe wiring simulation on any test sample that exhibits
any evidence of delamination or damage. Report results to QE before
continuing test.
Set-up
------
. Install new tip into soldering iron.
. Set soldering iron tip to approximately 700F.
. Apply flux (as needed) to amplifier circuit.
<PAGE>
TITLE: Solder Stress testing SPEC.NO.99012-006
Glencoe Solder Stress test:
--------------------------
. Apply soldering iron to solder pad #1 on test circuit #1 and dwell for
about three seconds. Remove iron for about three seconds. Repeat
solder/desolder cycle twice more for a total of three cycles.
. Apply soldering iron to solder pad #1 on test circuit #2 and dwell for
about three seconds. Remove iron for about three seconds. Repeat
solder/desolder cycle twice more for a total of three cycles.
. Return to test circuit #1 and apply soldering iron to solder pad #2
and apply three cycles of solder/desolder, as described in the previous
step. Repeat procedure on test circuit #2 with pad #2.
. Repeat three cycles of solder/desolder as described in the steps above
for every pad on all test circuits.
Note: Any sequence of applying three cycles of solder/desolder is
acceptable as long as the circuit under test does not encounter consecutive
-----------
applications of solder/desolder cycling to different pads on the same
circuit. Using circuit pairs for the test, as described in this procedure,
is the simplest and most time effective method.
Post-test visual inspection:
---------------------------
Hybrid circuits: Inspect closely at 200X for any evidence of delamination.
Surface Mount circuits: Inspect closely at 30X for any evidence of damage.
Electrical re-test
------------------
Submit all samples to hybrid lab for electrical retest. Compare post-test
response with pre-test response for each test circuit. Note any
significant shift in response.
Method 2 (Solder pot method)
----------------------------
Note: This method applies only to hybrid thickfilm circuit amplifiers.
Inspect closely under 200X magnification for any evidence of delamination.
Do not perform Glencoe wiring simulation on any test sample that exhibits
any evidence of delamination or damage. Report result to QE before
continuing test.
. If not otherwise directed by QE, set solder pot temperature to
approximately 238C.
. Use tweezers and dip hybrid into solder pot for a duration of three
seconds. Allow to cool for about thirty seconds, and repeat solder pot
dips.
. After three dips, look closely for delamination at 200X magnification.
Observe for any evidence of delamination. Three dips is the minimum
exposure required for method 2 of Solder Stress Testing.
<PAGE>
TITLE: Solder Stress testing SPEC.NO.99012-006
. If required, remove any solder bridges with soldering iron.
Electrical re-test
------------------
Submit all samples to hybrid lab for electrical test. Compare post-test
response with pre-test response for each test circuit. Note any
significant shift in response.
4.0 Reference Documents
- ------------------------
None
5.0 Records
- ------------
Test Information compiled in reliability lab evaluation report.
<PAGE>
Amendment to OEM Agreement Dated April 19, 1999
Between
SONIC Innovations, Inc. ("SONIC") and
Starkey Laboratories, Inc. ("Starkey")
SONIC and Starkey agree to amend their OEM Agreement as follows:
DATE OF AMENDMENT
------------------
December 14, 1999
19.1 GENERAL
Starkey agrees to provide SONIC a two-year, guaranteed, non-cancelable
blanket purchase order for the purchase of SONIC Hybrids.
TERM
----
January 1, 2000 through December 31, 2001.
QUANTITY
--------
Starkey agrees to purchase a minimum of [ * ] Hybrids per calendar year in
each of 2000 and 2001.
CURRENT GENERATION HYBRID PRICING
---------------------------------
For the current generation Hybrid, part number 2000444, the pricing for the
first [ * ] Hybrids ordered shall be $[ * ] each.
For quantities above [ * ] Hybrids, pricing shall be $[ * ] each.
21.2 NEW GENERATION HYBRID PRICING
For new generation Hybrids, the pricing for the first Hybrids shall be
$185.00 each.
For Hybrid quantities [ * ] through [ * ], pricing shall be $[ * ] each.
For Hybrid quantities [ * ] through [ * ], pricing shall be $[ * ] each.
For Hybrid quantities [ * ] through [ * ], pricing shall be $[ * ] each.
For Hybrid quantities greater than [ * ], pricing shall be negotiated.
/s/ Jorgen Heide /s/ Jerome C. Ruzicka
- --------------------------- ---------------------
Jorgen Heide Jerome C. Ruzicka
VP International & Licensing Division President, Starkey Laboratories, Inc.
SONIC Innovations, Inc.
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 10.7
[ * ]
LICENSE AND MANUFACTURING AGREEMENT
This License and Manufacturing Agreement (the "Agreement") is entered into
on February 20, 1997 by and between [ * ] and SONIX TECHNOLOGIES,
INC., a Utah corporation ("Sonix").
RECITALS
A. Sonix is in the business of designing, developing and selling certain
products for hearing applications which incorporate integrated circuits;
B. [ * ] is in the business of designing, developing, manufacturing and
selling various types of integrated circuits; and
C. Sonix and [ * ] desire to enter into this Agreement for the purposes of
setting forth the terms and conditions under which [ * ] will be granted the
right to make or have made certain integrated circuits, for sale to Sonix and
other customers of [ * ], and [ * ] will provide manufacturing services to Sonix
with respect to certain of Sonix integrated circuits.
AGREEMENT
NOW, THEREFORE, IN CONSIDERATION OF THE FOREGOING AND THE MUTUAL COVENANTS
CONTAINED HEREIN, THE PARTIES AGREE AS FOLLOWS:
SECTION 1
DEFINITIONS
For purposes of this Agreement the following terms shall have the meanings
set forth below:
1.1 Sonix Patents. "Sonix Patents" shall mean all patents, patent
applications, and additions, continuations, continuations-in part, divisions,
reissues or extensions based thereon, if any, in all countries of the world,
which are owned by Sonix now or at any time during the term of this Agreement,
or which are licensed by Sonix from a third party with the right to grant sub
licenses of the scope granted herein, and which are required for the
manufacture, use and sale of Products.
1.2 Effective Date. "Effective Date" shall mean the date first set forth
above.
[ * ]= CERTAIN INFORMATION IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
<PAGE>
1.3 Licensed Technology. "Licensed Technology" shall mean those
integrated circuits and any Updates which are delivered by Sonix to [ * ],
comprising Sonix's core DSP, audio processing algorithm, low power/low voltage
technology and related circuit techniques and architecture.
1.4 Hearing Applications. "Hearing Applications" shall mean all
applications involving hearing assistance, hearing restoration, hearing
enhancement, hearing protection, hearing simulation or hearing replacement
relating to personal hearing aids or similar types of devices.
1.5 Non-Hearing Applications. "Non-Hearing Applications" shall mean all
applications other than Hearing Applications, including but not limited to
telephone and personal audio entertainment products.
1.6 Sonix Know-How. "Sonix Know-How" shall mean Sonix's processes,
designs, know-how, trade secrets and other information owned by Sonix or
licensed to Sonix from a third party with the right to grant sub-licenses of the
scope granted herein that are necessary or useful to manufacture, use and sell
Products.
1.7 Products. " Product(s)" shall mean one or more integrated circuit
products, developed or manufactured by or for [ * ] using all or a portion of
the Licensed Technology, Sonix Patents or Sonix Know-How.
1.8 Net Selling Price. "Net Selling Price" shall mean the invoiced
price, F.O.B. [ * ]'s factory, to its customer, less any quantity and trade
discounts, independent sales representative or independent distributor
commissions, and/or product returns, and excluding charges for handling,
freight, taxes or duties of any kind, C.O.D. charges, insurance, and the like.
1.9 Updates. "Updates" shall mean any updates, modifications,
corrections, or improvements made after the date hereof to the Licensed
Technology made during the term of the Agreement.
SECTION 2
LICENSES
2.1 License Grant. Sonix hereby grants to [ * ] a worldwide, non-
exclusive license, non-sublicensable, under the Licensed Technology, Sonix
Patents and Sonix Know-How, to make, have made, modify, use, market and sell the
Products for Non-Hearing Applications.
(a) The licenses granted to [ * ] by Sonix pursuant to Section 2.1
hereof, may be transferred by [ * ] to a majority-owned subsidiary
or parent, or pursuant to a merger, reincorporation or other
transfer, but may not be transferred separately except to a
subsidiary of [ * ], provided however that such subsidiary or
parent agrees to be bound by the terms of this Agreement. The
license granted above may not otherwise be transferred except as
set forth in this Section 2.1 (a). Any such transfer shall not
relieve [ * ] of its obligations hereunder.
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
2
<PAGE>
2.2 License to Sonix. [ * ] hereby grants to Sonix a perpetual,
worldwide, non- exclusive, non-transferable-license, to make, use and sell
products that include minor improvements or enhancements made by [ * ] to the
Licensed Technology for use by Sonix solely in Hearing Applications. If [ * ]
makes a major or substantial improvement or enhancement to the Licensed
Technology, [ * ] and Sonix shall meet to discuss a license to such major
improvements to Sonix for Hearing Applications.
2.3 Intellectual Property Rights. [ * ] agrees that Sonix will retain
sole ownership and complete intellectual property rights to the Licensed
Technology, Sonix Patents and Sonix Know- How licensed to [ * ] hereunder and to
any enhancements, modifications, improvements, changes or derivative products
thereto made by or for Sonix. Sonix agrees that [ * ] will retain sole
ownership and complete intellectual property rights to all masks, test
hardware/software and other tooling generated to the extent that any or all the
foregoing are generated by or for [ * ] to manufacture the Products and to any
enhancements, modifications, improvements, changes or derivative products made
by [ * ] with respect to the Products.
SECTION 3
OBLIGATIONS OF THE PARTIES
The Parties respectively agree to perform the following tasks with respect
to the Products:
(a) [ * ] shall make available to Sonix its design, electrical and layout
rule set for [ * ]'s [ * ] Process.
(b) [ * ] shall make available to Sonix, in a format compatible with
Sonix's design platform, the [ * ] digital cell library; transistor level Hspice
models (level 42 or level 49); 1/0 pad library and gate level and transfer
transistor level representations for the EEPROM.
(c) A preliminary design review will be held at [ * ]. [ * ] and Sonix
shall review and agree on the scope of the work, (for example, Sonix's product
specification, test specification and test plan) begin the design.
(d) Sonix shall design, simulate, layout, run DRC and LVS on the circuit
and generate a GDSII tape for the complete chip, except for the EEPROM bit-cell.
Sonix will not be given EEPROM bit-cell information.
(e) [ * ] shall integrate the EEPROM bit-cell into the EEPROM, run DRC's
and LVS, and generate mask data.
(f) A final design review will be held at [ * ] before masks are made.
(g) [ * ] shall generate masks, and start one (1) 24 wafer lot for design
verification (hold-12 @ poly; hold-6 @ contact.) 6 wafers will be completed and
delivered to Sonix. A number of the completed wafers (to be mutually agreed)
will be delivered without passivation. The remainder of the lot will be
completed after evaluation of the initial 6 wafers, possibly with mask changes
as provided for in Exhibit A.
(h) [ * ] shall generate a test program (probe) from customer supplied,test
specification and test vectors.
(i) [ * ] shall perform qualification (per Sonix's specification) and
characterization for release of the Product to production.
(j) [ * ] shall make available to Sonix any applicable future fabrication
process that [ * ] installs into its fabrication facility in [ * ].
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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SECTION 4
ROYALTIES
4.1 Payments. In consideration for the grant of licenses and other
rights by Sonix to [ * ] hereunder, [ * ] agrees to pay Sonix a royalty in the
amount of five percent (5%) of the Net Selling Price of each Product sold by [ *
] or its transferee under Section 2.1 (a) to parties other than Sonix.
4.2 Statement and Payment. Within forty-five (45) days after the end of
each calendar quarter, [ * ] shall finish to Sonix a statement showing for each
Product the number of each such Product which were sold by [ * ] or its
transferee under Section 2.1 (a) during such quarter and the royalty due to
Sonix, which statement shall be accompanied by payment of such royalties in U.S.
Dollars. Late payments shall be subject to a service charge of 1.5% per month or
the maximum rate permitted by applicable law. [ * ] shall keep records of
royalty bearing events for two years. Sonix may have an independent third party
audit such records of [ * ] upon reasonable notice and no more than once a year.
If the audit reveals an underpayment of royalties of 10% or more, then [ * ]
shall pay all costs of the audit in addition to the amount of the underpayment
plus reasonable interest.
SECTION 5
MANUFACTURING
5.1 Manufacturing. [ * ] agrees to manufacture and sell Products to Sonix on
the terms and conditions set forth herein. The terms and conditions of this
Agreement shall control all sales of Products by [ * ] to Sonix, and any
additional or different terms or conditions in either party's purchase order,
acknowledgment, or similar document shall be of no effect.
5.2 Pricing. Sonix shall pay [ * ] for Product and engineering services as set
forth in Exhibit A.
5.3 Payment.
(a) Payment for Products shall be made by Sonix in U.S. Dollars within
thirty (30) days following receipt of [ * ]'s invoice. In the event Sonix fails
to make any payment here-under when due, [ * ] may require, as a condition to
shipping any additional Products to Sonix, prepayment by Sonix for such shipment
or other assurance of payment by Sonix at [ * ]'s discretion. Amounts past due
will be subject to a monthly charge at the rate of 1.5% per month or the maximum
rate permitted by law, whichever is less, to cover [ * ]'s costs of servicing
such past due amounts.
(b) Any purchase by Sonix of any product shall be subject to reasonable
review and approval by [ * ]'s credit department.
(c) Sonix shall pay, in addition to the prices quoted or invoiced, the
amount of any sales, use, excise or other similar tax or duty applicable to the
sale to Sonix of any Products, or Sonix shall supply [ * ] with an appropriate
tax exemption certificate.
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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5.4 Forecasts and Orders.
(a) Forecast. Commencing upon [ * ]'s commercial production of the
Products Sonix shall provide to [ * ] a eighteen (18) month rolling forecast
setting forth its estimated requirements for shipment by month for Products, and
Sonix and [ * ] agree that the current six (6) months of the rolling forecast is
a firm minimum and may be increased for months beyond the cycle time, which is
currently three (3) months, but may change from time to time. Sonix shall submit
purchase orders for products forecasted to be shipped in such six month period,
but shall in any event be liable for payment and [ * ] for shipment with respect
to such products even if Sonix fails to submit such an order to [ * ] provided,
however, if Sonix does not place a purchase order, or cancels a purchase order
prior to completion of the Products, Sonix shall only be liable for costs
incurred to the date of cancellation plus [ * ]'s profit for such Product. This
forecast shall be updated monthly. Such purchase orders may be changed as
mutually agreed to by the parties hereto.
(b) Minimums. Notwithstanding any other provisions of this Agreement,
Sonix agrees to purchase and [ * ] agrees to supply a minimum of the following
quantities:
i) [ * ] die per month ([ * ] die per year) beginning one year after
production release of the first Product manufactured for Sonix;
ii) [ * ] die per month ([ * ] die per year) beginning two years after
production release of the first Product manufactured for Sonix;
iii) [ * ] die per month ([ * ] die per year) beginning three years
after production release of the first Product manufactured for Sonix; and
iv) [ * ] percent ([ * ]%) of all Product sold by [ * ] to parties
other than Sonix shall be counted as applying to the minimums set forth above.
(c) Orders. All Agreement purchases and sales between [ * ] and Sonix
shall be initiated by Sonix's issuance of written purchase orders sent via
courier or facsimile. Such orders shall state unit quantities, unit
descriptions, requested delivery dates, and shipping instructions. The
acceptance by [ * ] of an order shall be indicated by written acknowledgment
thereof by [ * ]. All orders placed by Sonix and accepted by [ * ] shall be non-
cancelable except as set forth in Section 5.4 (a). If in conformance with this
Agreement [ * ] shall accept the purchase order or if not in conformance with
this Agreement, [ * ] shall notify Sonix reasonably promptly to the extent it
does not accept any order placed by Sonix. The terms and conditions of this
Agreement shall prevail over and supersede any conflicting or contravening terms
or condition of any purchase order or acknowledgment for the Product.
5.5 Shipping. All Products delivered pursuant to the terms of this
Agreement shall be suitably packed for shipment in [ * ]'s standard containers,
marked for shipment at Sonix's address set forth above or specified in Sonix's
purchase order, and delivered to a carrier or forwarding agent chosen by Sonix.
Should Sonix fail to designate a carrier, forwarding agent or type of
conveyance, [ * ] shall make such designation in conformance with its standard
shipping practices. Shipment will be F.O.B. [ * ]'s factory, at which time risk
of loss (other than loss or damage due to [ * ]'s failure to properly package
the Products) and title shall pass to Sonix, and all freight, insurance and
other shipping expenses, as well as any special packing expenses, shall be bome
by and charged separately to Sonix. Sonix shall have fifteen days to inspect the
Products and reject any Product that does not meet the applicable
specifications.
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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<PAGE>
5.6 Warranty.
(a) [ * ] warrants that goods delivered hereunder shall conform to the
applicable specifications and shall be free from defects in material and
workmanship under normal use and service for a period of one year from the
applicable date of invoice. For products which are not standard products, such
as dice and wafers, [ * ] warrants to Sonix that such products shall conform to
the applicable specifications and shall be free from defects in material and
workmanship under normal use and service for a period of ninety (90) days from
the date code as set forth on Sonix's end Product. Products which are "samples"
and/or "prototypes" are sold "AS IS", "WITH ALL FAULTS," and with no warranty
whatsoever.
If during such warranty period, (i) [ * ] is notified promptly in writing upon
discovery of any defects in the goods, including a detailed description of such
defect; (ii) such goods are returned to [ * ], FCA
[ * ]'s facility accompanied by [ * ]'s Returned Material Authorization; and
(iii) [ * ]'s reasonable examination of such goods discloses to [ * ]'s
satisfaction that such goods are defective and such defects are not caused by
accident, abuse, misuse, neglect, alteration, improper installation, repair, or
alteration by someone other than [ * ], improper testing, or use contrary to any
instructions issued by [ * ] within a reasonable time, [ * ] shall (at its sole
option) promptly either repair, replace or if not commercially reasonable for
the prior options, credit Sonix the purchase price of such goods.
Prior to any return of goods by Sonix pursuant to this clause, Sonix shall
afford [ * ] the opportunity to inspect such goods at Sonix's location, and any
such goods so inspected shall not be returned to [ * ] without its prior written
consent.
[ * ] shall return any goods repaired or replaced under this warranty to Sonix
transportation prepaid, and reimburse Sonix for the transportation charges paid
by Sonix for such goods. The performance of this warranty shall be tolled during
such repair, replacement and transportation period however the total warranty
period for any goods shall not be beyond that period applicable to the goods
originally delivered.
THE FOREGOING WARRANTY CONSTITUTES [ * ]'S EXCLUSIVE LIABILITY, AND THE
EXCLUSIVE REMEDY OF SONIX, FOR ANY BREACH OF WARRANTY OR OTHER NONCONFORMITY OF
GOODS COVERED BY THIS AGREEMENT. THIS WARRANTY IS EXCLUSIVE, AND IN LIEU OF ALL
OTHER WARRANTIES. [ * ] MAKES NO OTHER WARRANTIES, EXPRESS, IMPLIED, OR
STATUTORY, INCLUDING WITHOUT LIMITATION ANY WARRANTIES OF MERCHANTABILITY AND
FITNESS FOR A PARTICULAR PURPOSE. THE SOLE AND EXCLUSIVE REMEDY FOR ANY BREACH
OF THIS WARRANTY SHALL BE AS EXPRESSLY PROVIDED HEREIN.
SECTION 6
TERM AND TERMINATION
6.1 Term. This Agreement shall become effective upon the Effective Date
and shall remain in force until five (5) years from the Effective Date, and
thereafter shall be automatically extended for additional one (1) year periods,
unless either party gives ninety (90) days written notice prior to the
expiration of the Agreement.
6.2 Termination for Breach. If either party breaches any term or condition
of this Agreement in any material respect and fails to cure that breach within
ninety (90) days after receiving written notice
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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<PAGE>
of the breach, the other party shall have the right to terminate this Agreement
by written notice after the end of such ninety (90) day period.
6.3 Bankruptcy. Either party may terminate this Agreement if the other
becomes the subject of a voluntary or involuntary petition in bankruptcy or any
administrative or legal proceeding relating to insolvency, receivership,
liquidation or composition for the benefit of creditors.
6.4 Survival of Provisions. The provisions of Sections 5, 6, 7, 8, 9 and
10 shall survive the termination of this Agreement for any reason. All other
rights and obligations of the parties shall cease upon termination of this
Agreement, except that in the event of the expiration or the termination of this
Agreement by [ * ] following a material breach by Sonix, the license granted to
[ * ] in Section 2 hereof shall survive and remain in ftill force and effect,
and such license shall thereafter be perpetual, but [ * ] shall continue to pay
royalties as set forth in Section 4 provided, however, that [ * ] may offset any
amounts owed to Sonix by [ * ] against any damage or costs it occurs because of
such breach. In the event of a termination of this Agreement by Sonix following
a material breach by [ * ], the license granted to [ * ] in Section 2 shall
terminate upon the sale of the Products [ * ] has on its backlog as of the date
of termination of the Agreement, and [ * ] shall pay Sonix royalties for such
Products and the licensed granted to Sonix in Section 2.2 shall survive the
termination or expiration of the Agreement. [ * ] shall have no rights to any
Updates made to the Licensed Technology after the expiration of the Agreement.
SECTION 7
INDEMNITY
7.1 Indemnification by Sonix. Sonix represents and warrants that it has
full right and authority to enter into this Agreement and to grant the licenses
granted by it to [ * ] herein and that no third party has any rights of any kind
with respect to the Licensed Technology, the Sonix Patents or the Sonix Know-How
that would conflict with such licenses. Except as set forth in Section 7.2
hereof, Sonix further agrees to defend and indemnify [ * ] against any actions
brought against [ * ] or its customers to the extent based upon a claim that the
Licensed Technology infringes any patent, trade secret or other intellectual
property right of any third party, and to pay any settlements entered into or
damages awarded against [ * ] or its customers to the extent based upon such a
claim; provided, that Sonix is provided reasonably prompt notice of any such
action and reasonable assistance in connection with the defense thereof (at
Sonix's expense) and allows Sonix full control of the defense and settlement
thereof. This Section 7 sets forth [ * ]'s sole remedy for any infringement
claims it may have against Sonix or any breach by Sonix of the above warranty.
7.2 Indemnification by [ * ]. Except as set forth in Section 7.1 hereof, [
* ] agrees to defend and indemnify Sonix against any actions brought against
Sonix or its customers to the extent based upon a claim that a Product or a
process used to manufacture a Product infringes any patent, trade secret or
other intellectual property right of any third party as a result of information
or processes provided to Sonix by [ * ], and agrees to pay any settlements
entered into or damages awarded against Sonix or its customers to the extent
based upon such a claim; provided that [ * ] is provided reasonably prompt
notice of any such action and reasonable assistance in connection with the
defense thereof (at [ * ]'s expense) and allows [ * ] full control of the
defense and settlement
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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thereof. This Section 7 sets forth Sonix's sole remedy for any infringement
claims it may have against [ * ].
7.3 Remedies. If a Product is or becomes the subject of any claim demand,
suit or proceeding for any infringement of any third party patent, trade secret
or other intellectual property right, or if it is adjudicatively determined that
such Product infringes any third party patent, trade secret or other
intellectual property right, then indemnifying party shall, at its option and
expense, either (i) procure for indemnified party and its customers the right
under such third party intellectual property to manufacture, sell or use, as
appropriate, the infringing technology; (ii) replace or modify the infringing
technology with other suitable and reasonably equivalent non-infringing
technology; or (iii) if neither of the foregoing is commercially practical
refund any amounts already paid with respect to those particular Products that
may no longer be sold or otherwise distributed. Sonix's total liability under
this Section 7 shall not exceed the amount of cumulative payments of royalties
Sonix has received from [ * ] pursuant to this Agreement. [ * ]'s total
liability under this Section 7 shall not exceed ten percent (10%) of the Net
Selling Price of each such Product found to be infringing.
7.4 Disclaimer. THE FOREGOING STATES BOTH PARTIES ENTIRE LIABILITY AND
OBLIGATION (EXPRESS, IMPLIED, STATUTORY OR OTHERWISE) WITH RESPECT TO
INTELLECTUAL PROPERTY INFRINGEMENT OR CLAIMS THEREFOR REGARDING ANY OF THE
PRODUCTS OR TECHNOLOGY DEVELOPED, MANUFACTURED OR SOLD PURSUANT TO THIS
AGREEMENT.
SECTION 8
CONFIDENTIALITY
8.1 Confidential Information.
(a) As used in this Section 8. 1, the term "Confidential Information"
shall mean any information disclosed by one party to the other pursuant to this
Agreement which is in written, graphic, machine readable or other tangible form
and is marked "Confidential", "Proprietary" or in some other manner to indicate
its confidential nature. Confidential Information may also include oral
information disclosed by one party to the other pursuant to this Agreement,
provided that such information is designated as confidential at the time of
disclosure and reduced to a written summary by the disclosing party, within
thirty (30) days after its oral disclosure, which is marked in a manner to
indicate its confidential nature and delivered to the receiving party. In
addition, all technical and confidential information exchanged prior to the
Effective Date shall be subject to the terms of this Section 8 after the
Effective Date.
(b) Each party shall treat as confidential all Confidential Information of
the other party, shall not use such Confidential Information except as expressly
set forth herein or otherwise authorized in writing, shall implement reasonable
procedures to prohibit the disclosure, unauthorized duplication, misuse or
removal of the other party's Confidential Information and shall not disclose
such Confidential Information to any third party except as may be necessary and
required in connection with the rights and obligations of such party under this
Agreement, and subject to confidentiality obligations in writing at least as
protective as those set forth herein.
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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Without limiting the foregoing, each of the parties shall use at least the same
procedures and degree of care which it uses to prevent the disclosure of its own
confidential information of like importance to prevent the disclosure of
Confidential Information disclosed to it by the other party under this
Agreement, but in no event less than reasonable care.
(c) Notwithstanding the above, neither party shall have liability to the
other with regard to any Confidential Information of the other which:
(i) was generally known and available in the public domain at the time it
was disclosed or becomes generally known and available in the public
domain through no fault of the receiver;
(ii) was known to the receiver at the time of disclosure;
(iii) is disclosed with the prior written approval of the disclosure;
(iv) was independently developed by the receiver without any use of the
Confidential Information;
(v) becomes known to the receiver from a source other than the disclosure
without breach of this Agreement by the receiver and otherwise not in
violation of the disclosure's rights; or
(vi) is disclosed pursuant to the order or requirement of a court,
administrative agency, or other governmental body; provided, that the
receiver shall provide prompt, advanced notice thereof to enable the
disclosure to seek a protective order or otherwise prevent such
disclosure.
(d) Each party shall obtain the execution of proprietary non-disclosure
agreements with its employees, agents and consultants having access to
Confidential Information of the other party, and shall diligently enforce such
agreements, or shall be responsible for the actions of such employees, agents
and consultants in this respect.
8.2 Publicity. All publicity regarding the announcement of this Agreement
shall be coordinated by both parties. Neither party shall disclose the terms of
this Agreement without the prior written approval of the other party, except as
required as a matter of law or to attorneys, accountants or investment bankers,
if necessary for Sonix to operate or raise funds but each such disclosure shall
have executed a non-disclosure agreement similar in content to Section 8 hereof.
8.3 Return of Information. Upon the written request by either party
following the termination of this Agreement, each party shall return to the
other party any Confidential Information of the other party in its possession,
except that [ * ] shall be permitted to retain any Confidential Information
relating to Sonix Know-How in the event this Agreement is terminated by [ * ] as
a result of a breach by Sonix, but must keep all Confidential Information as set
forth in this Section 8.
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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SECTION 9
LIMITATION OF LIABILITY
EXCEPT IN THE CASE OF AN INTENTIONAL OR GROSSLY NEGLIGENT ACT OR OMISSION OF A
PARTY, NEITHER PARTY SHALL BE LIABLE FOR ANY SPECIAL, CONSEQUENTIAL, INDIRECT,
OR INCIDENTAL DAMAGES, HOWEVER CAUSED, ON ANY THEORY OF LIABILITY AND WHETHER OR
NOT SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, ARISING IN
ANY WAY OUT OF THIS AGREEMENT OR THE DESIGNS, PRODUCTS, INFORMATION OR OTHER
TECHNOLOGY PROVIDED PURSUANT TO THIS AGREEMENT.
SECTION 10
MISCELLANEOUS
10.1 Governing Law. This Agreement shall be governed by and interpreted in
accordance with the laws of the State of California.
10.2 Force Majeure. If the performance of this Agreement or any obligations
hereunder is prevented, restricted or interfered with by reason of fire or other
casualty or accident, strikes or labor disputes, yield problems, war or other
violence, any law, order, proclamation, ordinance, or demand or requirement of
any government agency, the party so affected upon giving prompt notice to the
other party shall be excused from such performance during such prevention,
restriction or interference.
10.3 Assignment. Except as set forth in Section 2, neither party may assign
or delegate this Agreement or any of its licenses, rights or duties under this
Agreement without the prior written consent of the other, except to a person or
entity into which it has merged or which has otherwise succeeded to all or
substantially all of its business and assets, and which has assumed in writing
or by operation of law its obligations under this Agreement.
10.4 Arbitration. Any dispute or claim arising out of or relating to this
Agreement, or the interpretation, making, performance, breach or termination
thereof, shall be finally settled by binding arbitration in Santa Clara County,
California, under the Rules for Commercial Arbitration of the American
Arbitration Association, by three arbitrators (or such lesser number of
arbitrators as the parties hereto shall agree) appointed in accordance with said
Rules. Judgment on the award rendered by the arbitrators may be entered in any
court having jurisdiction thereof. Notwithstanding the foregoing, the parties
may apply to any court of competent jurisdiction for a temporary restraining
order, preliminary injunction, or other interim or conservatory relief, as
necessary, without breach of this arbitration agreement and without any
abridgment of the powers of the arbitrators.
10.5 Notices. All notices and other communications required or permitted
hereunder shall be in writing and shall be mailed by registered or certified
mail, postage prepaid, or otherwise delivered by hand, by messenger or by
telecommunications addressed to the addresses first set forth above or at such
other address furnished with a notice in the manner set forth herein. Such
notices
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shall be deemed to have been served when delivered or, if delivery is not
accomplished by reason of some fault of the addressee, when tendered.
10.6 Partial Invalidity. If any paragraph, provision, or clause the of
shall be found or be held to be invalid or unenforceable in any jurisdiction in
which this Agreement is being performed, the remainder of this Agreement shall
be valid and enforceable and the parties shall negotiate, in good faith, a
substitute, valid and enforceable provision which most nearly effects the
parties' intent in entering into this Agreement.
10.7 Counterparts. This Agreement may be executed in counterparts which,
taken together, shall be regarded as one and the same instrument.
10.8 Waiver. The failure of either party to enforce at any time the
provisions of this Agreement shall in no way be constituted to be a present or
future waiver of such provisions, nor in any way affect the validity of either
party to enforce each and every such provision thereafter.
10.9 Entire Agreement. The terms and conditions herein contained
constitute the entire agreement and supersede all previous agreements and
understandings, whether oral or written, including without limitation the Non-
Disclosure Agreement previously entered into by the parties, between the parties
hereto with respect to the subject matter hereof and no agreement or
understanding varying or extending the same shall be binding upon either party
hereto unless in a written document signed by the party to be bound thereby.
10.10 Section Headings. The section headings contained in this Agreement
are for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be signed
by duly authorized officers or representatives as of the date first above
written.
[ * ] SONIX TECHNOLOGIES, INC.
By: /s/ [ * ] By: /s/ A. Raguskus
----------------------- ----------------------------
[ * ] Name: A. Raguskus
--------------------------
President and CEO Title: President and CEO
-------------------------
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WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
11
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EXHIBIT A
(Pricing)
Non-recurring Engineering (NRE) Charges
- ---------------------------------------
<TABLE>
<CAPTION>
New Designs
- -----------
<S> <C> <C>
1. Design Support EEPROM Cell + Interface Circuits, ESD structures, $[ * ]
final DRC/LVS, Frame, FDR
2. Masks [ * ] process [ * ] masks at [ * ] per layer $[ * ]
3. Test Hardware Design and Build Probe Card and Load Board
-Supply Sonix with two Probe Cards @ $[ * ] each $[ * ]
4. Test Program Sonix to provide digital test vectors and test specs. Jointly debug $[ * ]
5. Wafers Sonix to receive [ * ] wafers with at least [ * ] wafers being without
passivation $[ * ]
------
Total $[ * ]
</TABLE>
Design Revisions
- ----------------
Wafer lots are $[ * ] for [ * ] wafers. Masks are $[ * ] per layer. Engineering
support [ * ]*
Qualifications
- --------------
6. Qualification [ * ]*
7. Characterization [ * ]*
Unit Pricing
- ------------
8. Prototypes are $[ * ] each (Min and Max quantities [ * ]*)
9. Productions Units are $[ * ] each.
Assumptions a) Die Size 100mils x 150mils on [ * ] process;
b) Wafer Sort Test time is 5 seconds; and
c) Deliver tested die (bumping and price adder TBD*).
[ * ]
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE>
EXHIBIT 10.10
PATENT LICENSE AGREEMENT
K/S/ HIMPP, a partnership organized under the laws of Denmark and having
its principal place of business at Ny Vestergaardsvej 25, DK-3500, Vaerlose,
Denmark (hereinafter referred to as "Licensor"), and Sonic Innovations, Inc. a
corporation organized under the laws of the United States of America and having
its principal place of business at 5330 South 900 East, Suite 240, Salt Lake
City, Utah 84117-7261 (hereinafter referred to as "Licensee"), have entered into
the following Agreement, effective January 1, 1997:
1. PREAMBLE
1.1 Licensor is the owner of the entire right, title and interest in certain
patents and patent applications relating to hearing aids.
1.2 Licensee desires to obtain, and Licensor is willing to grant to Licensee, a
non-exclusive license under the patents and patent applications as defined
below and on the terms hereinafter set forth.
2. DEFINITIONS
2.1 "Affiliate" shall mean any corporation or other entity, previously, now or
hereafter existing, that controls a party to this Agreement, is controlled
by a party to this Agreement, or is controlled by the same corporation or
other entity which controls a party to this Agreement, wherein "control"
means direct management control or direct or indirect ownership of at least
50% of the stock entitled to vote for the election of directors or their
equivalent.
2.2 "Conflicting Rights" shall mean any rights previously granted under the
Licensed Patents to another party, including without limitation liens,
conveyances, mortgages, assignments, encumbrances or other agreements to
which Licensor is a party or by which it is bound, relating to the Licensed
Patents, which would prevent or impair the full exercise of all substantive
rights granted to Licensee pursuant to the terms and conditions of this
Agreement.
2.3 "Effective Date" shall mean January 1, 1997.
2.4 "Licensed Patents" shall mean the patents and patent applications listed in
Exhibit A to this Agreement, as well as any patents which are later issued
from any patent applications listed in Exhibit A, and all continuations,
divisions or reissues of any of said patents or applications.
2.5 "Licensed Products" shall mean hearing aids, or any apparatus, device or
system which is designed for use with a hearing aid, made, used, imported,
sold, leased or Otherwise Disposed Of anywhere in the world, by or on
behalf of Licensee, which if unlicensed, would directly infringe an
apparatus or method claim of a Licensed Patent.
<PAGE>
2.6 "Net Selling Price" shall mean the gross invoice price to an unlicensed
party for a Licensed Product, in the first arms-length transaction in the
ordinary course of business, less the following deductions:
(a) Trade or quantity discounts as well as bonuses and incentive
allowances and rebates granted to the customer.
(b) Transportation, packing costs and insurance charges on shipments to
customers.
(c) Sales and use taxes and other duties paid directly on such sale by
Licensee to any governmental agency.
(d) Credits for Licensed Products returned by customer.
Where Licensed Products are Otherwise Disposed Of, the Net Selling Price
thereof shall be deemed to be the Net Selling Price at which the same are being
sold or offered for sale by Licensee or its dealers, distributors or agents to
the trade in the ordinary course of business.
2.7 "Otherwise Dispose Of" shall mean to put into use or to lease, sell or
otherwise transfer title to another party or entity in other than an arms-
length transaction in the ordinary course of business.
2.8 A Licensed Product shall be deemed to be "Sold" on the earlier of the date
of shipment, date of invoice or date of payment.
3. THE PATENTS
3.1 During the term of this Agreement, Licensor in its sole discretion shall
decide what steps shall be taken to obtain Licensed Patents that have been
applied for and to maintain the Licensed Patents already granted. All costs
connected with the maintenance and issuance of Licensed Patents shall be
paid by Licensor.
3.2 Licensee understands that Licensor may at its sole discretion discontinue
the maintenance of any or all of the Licensed Patents, and Licensee agrees
that it shall not have any right of compensation or any other claim against
Licensor based on the fact that the Licensed Patents or some of them may
lapse.
4. RELEASE
4.1 Licensor hereby releases, acquits and forever discharges Licensee and
purchasers and users of Licensed Products from any and all claims or
liability for past infringement or alleged infringement of any Licensed
Patent.
5. LICENSES GRANTED
5.1 Subject to the terms and conditions hereinafter set forth, and subject to
any prior Conflicting Rights that may have been granted under the Licensed
Patents, Licensor hereby grants to Licensee a royalty-bearing, non-
exclusive, non- transferable, world-wide license under the
<PAGE>
Licensed Patents to make, have made, use, import, sell or Otherwise Dispose
Of Licensed Products.
5.2 The grant of license hereunder is for use exclusively by Licensee and its
Affiliates, and Licensee shall not grant to third parties any sub-licenses
or other rights under the Licensed Patents.
5.3 The above non-exclusive rights of the parties may be subject to
restrictions or limitations imposed under mandatory provisions of the EU or
under national law or regulations and such provisions shall apply and be
considered part of this Agreement.
5.4 No right or license is granted hereby by implication or otherwise under any
patent, patent application or patent claim, except as specifically provided
herein, and specifically no license or other right is granted under any
patent or patent application owned or controlled by, or licensed to, any
Licensor partner other than the Licensed Patents.
5.5 Unless otherwise terminated pursuant to Article 9, the duration of the
license granted under this Agreement shall extend from the Effective Date
to and including the expiration date of the last to expire of the Licensed
Patents.
6. LICENSE FEES
6.1 For each Licensed Product which is Sold or Otherwise Disposed Of anywhere
in the world after the Effective Date of this Agreement, Licensee agrees to
pay to Licensor a royalty of 3.0% of the Net Selling Price of each
Licensed Product.
6.2 The payments called for under this Agreement shall be in United States
dollars at a conversion rate as of the end of the fiscal year of Licensee.
Wire transfers of funds may be made to Licensor's bank account as follows:
Den Danske Bank
Lyngby Hovedgade 39
DK-2800 Lyngby
Denmark
Swift code: DABADKKKLYN
USD account No: 4260005553
6.3 Once a royalty is paid on any Licensed Product pursuant to this Agreement,
such constitutes a full release with respect to such Licensed Product from
claims for royalties under any Licensed Patent.
6.4 No royalty is due hereunder with respect to any Licensed Product on which a
royalty has been paid by another licensee of the Licensed Patents.
6.5 Licensee and Licensor agree that the royalty provided for herein is a flat
rate royalty representing the mean value of the expected benefit to the
Licensee of the license under
<PAGE>
such part of the Licensed Patents which would otherwise prevent the
manufacture and sale of Licensed Products regardless of whether Licensee
has any specific use for all Licensed Patents. It is also agreed that the
royalty payable in respect of Licensed Products is based upon the value to
the Licensed Products of those features of the Licensed Products covered by
Licensed Patents.
7. PAYMENTS, REPORTS AND RECORDS
7.1 During the term of this Agreement and within 90 days after the end of each
fiscal year of Licensee - such fiscal year ending on December 31, -
regardless of whether any royalties are due hereunder, Licensee shall
provide to Arthur Andersen, State Authorized Public Accountants, 1
Midtermolen, DK-2100 Copenhagen, Denmark, for the attention of Mr. David
Holm or such other independent auditor appointed by Licensor from time to
time (the Intermediary) a written statement setting forth the amount of the
royalties which shall have become due and payable hereunder as a result of
Licensed Products Sold or Otherwise Disposed Of in the fiscal year just
ended. Each such statement, which shall be duly certified by Licensee's
statutory auditor, shall set forth the commercial product names of the
Licensed Products on which royalties have been paid and the volume of sales
of each Licensed Product, and shall be accompanied by payment of royalties
due. The Intermediary will deliver to Licensor, for each licensee under the
Licensed Patents making payments to that Intermediary, a list of all
Licensed Products on which royalties have been paid, and will deliver to
Licensor a single payment representing the aggregate of all payments made
by licensees of Licensed Patents to the Intermediary in respect of the
relevant fiscal year.
7.2 Licensee shall maintain full and accurate accounts and records of all data
necessary for the preparation of the statements submitted and the
calculation of the royalties paid hereunder and shall retain such accounts
and records relating to each royalty payment made hereunder for a period of
three years after the date of each such payment. Such accounts and records
shall be subject to audit from time to time during normal business hours at
the reasonable convenience of the parties, but no more often than once
during each calendar year, and no more detailed in scope and depth than is
reasonably necessary for the purposes of this Agreement, by an independent
auditor who is a certified public accountant, and who shall be appointed by
Licensor. Such auditor shall disclose no information to Licensor other than
in an audit report, a copy of which shall be provided to Licensee. Such
audit report shall be limited to disclosure of identified Licensed Products
on which royalties are being paid, and the identification of any hearing
aid, or any apparatus, device or system which is designed for use with a
hearing aid and on which royalties are not being paid. The statements
provided pursuant to Article 7.1 and any audit report under Article 7.2
shall be held in strict confidence by Licensor and shall be used solely for
purposes of this Agreement and shall not be used by Licensor for any other
purpose. In the event an audit reveals a deficit in royalty amounts paid by
Licensee greater than 10% for the period covered by the audit, Licensee
shall pay the cost of the audit. Overdue payments hereunder shall be
subject to a late payment charge calculated at an annual rate of eight
percent (8%) during delinquency.
8. WARRANTIES OF LICENSOR
<PAGE>
8.1 Licensor warrants that Licensor is the owner of the entire right, title
and interest in the Licensed Patents and has the right to grant the
license granted herein.
8.2 Licensor warrants that it is not aware of any prior Conflicting Rights
granted under any of the Licensed Patents.
8.3 Nothing in this Agreement shall be construed as a representation or
warranty by Licensor as to the technical or commercial results which can
be obtained by the exploitation of the Licensed Patents.
8.4 Licensor does not warrant that practicing the subject matter of any
Licensed Patent will be free of infringement of patents owned by others
than Licensor, and shall not be liable in whole or in any part for any
claim for compensation which might be brought by any third party as a
consequence of the exploitation of the Licensed Patents by Licensee.
9. TERM AND TERMINATION
9.1 This Agreement shall be considered to have taken effect on January 1,
1997, and shall remain in full force and effect, subject to the
termination provisions of Article 9.2, until the expiration date of the
last to expire of the Licensed Patents.
9.2 If any party shall be in material default of this Agreement and such
material default is not cured within 60 days after written notice of such
material default is received from the other party, such other party shall
have the right to request termination of this Agreement with respect to
the party in material default, and/or other relief, in arbitration
pursuant to Article 17. If successful in obtaining termination of this
Agreement as relief in arbitration, such other party may then terminate
this Agreement forthwith with respect to the party in material default
upon written notice to that effect to the party in material default.
9.3 Notwithstanding the provisions of Article 9.2, if Licensee fails to make
royalty payments pursuant to Articles 6 and 7, and such failure is not
cured within 60 days after written notice of such failure is received from
Licensor, Licensor shall have the right to terminate this Agreement on
written notice to Licensee, without proceeding to arbitration.
9.4 Upon termination of this Agreement pursuant to Article 9.2, all licenses,
rights, duties and obligations set forth in this Agreement shall terminate
forthwith except that Licensee shall be liable to fulfil its obligations
under Articles 6 and 7 with respect to royalties which have accrued prior
to such termination.
10. NOTICES
10.1 All notices to, demands, consents or communications which any party may
desire or may be required to give to the other must be in writing, shall
be effective upon receipt after having been delivered prepaid to a
reputable international delivery service or courier or sent by facsimile
transmission and addressed to such address as shall have been designated
by notice from the addressee for addressing of notices to it, or if no
such designation shall have been made, then to the address of the party
appearing above. Receipt shall be presumed on
<PAGE>
the date of proper transmission as to facsimile transmission and otherwise
within five (5) days.
11. INFRINGEMENT
11.1 In the case of any third party infringing the Licensed Patents, Licensor
shall in its sole discretion decide whether legal proceedings shall be
initiated to prevent such infringement. If legal proceedings are
initiated, Licensee shall, if requested, cooperate with Licensor in this
regard to the extent not contrary to the interest of Licensee.
11.2 Costs incurred in connection with legal proceedings pursuant to this
Article 11 shall be borne by Licensor.
12. PRODUCT LIABILITY AND COMPLIANCE
12.1 Licensee shall observe and comply with all local laws, rules and
regulations applicable to the exploitation of the Licensed Patents, and
shall at its own cost obtain any necessary governmental permit or approval
necessary for the exploitation of the Licensed Patents.
13. ASSIGNMENT AND TRANSFER
13.1 Neither this Agreement nor any right granted hereunder may be assigned,
extended or otherwise transferred in whole or in part by either party
hereto, whether voluntarily, by operation of law or otherwise, nor shall
this Agreement or any right granted hereunder inure to the benefit of any
successor of either party hereto, whether by operation of law or
otherwise, and notwithstanding any bankruptcy, insolvency or other
proceeding, without the prior written consent of the other party hereto,
which consent shall not be unreasonably withheld, and any assignment,
extension or transfer without such consent shall be null and void. The
parties acknowledge that the benefits accorded to each party under this
Agreement, including, without limitation, the license and releases, are
personal to such party and shall in no event extend to any other person.
13.2 This Agreement shall inure to the benefit of and be binding upon each of
the parties hereto and their respective Affiliates and permitted
successors and assigns.
14. SECRECY
14.1 The parties hereto acknowledge that each party has an interest in
maintaining the confidentiality of the parties' business and trade
practices. Therefore, the parties shall treat as secret and confidential
all information relating to the other party's business and products
(collectively, the "Confidential Information"). The parties each agree to
use their best efforts to prevent the unauthorized use and disclosure of
the Confidential Information, which shall include requiring all third
parties to whom the Confidential Information is disclosed to execute
confidentiality agreements containing terms similar to those contained in
this Article 14.1. Notwithstanding the foregoing, the parties may disclose
any Confidential Information which has been independently acquired from a
third party, that does not have an obligation of confidentiality to any of
the parties, which is made public incident to the filing of patent
applications or the issuance of patents, which has otherwise
<PAGE>
become generally known in the industry in which the parties operate other
than as a result of wrongdoing by the party disclosing such information,
or the disclosure is required pursuant to judicial order or the mandate of
any governmental agency or authority.
14.2 Except as provided in Article 14.4, the parties hereto shall keep this
Agreement confidential and shall not now or hereafter divulge the terms of
this Agreement or any part thereof to any third party except:
(a) with the prior written consent of the other party; or
(b) to any governmental body having jurisdiction to call therefor; or
(c) as otherwise may be required by law or contract; or
(d) to legal counsel representing either party; or
(e) to the auditors appointed pursuant to Articles 7.2 and 18.1.
14.3 For purposes of Article 14 only, partners of HIMPP and affiliates of
Licensee shall not be considered to be third parties.
14.4 The parties agree to a mutually acceptable press release to announce the
execution of this Agreement.
14.5 The obligations of confidentiality hereunder shall continue after the
expiration of this Agreement, irrespective of the cause and irrespective
of which of the parties might terminate the Agreement.
15. MISCELLANEOUS PROVISIONS
15.1 Payments of any royalties under this Agreement are not admissions of
infringement of any Licensed Patent.
15.2 No failure or delay to act upon any default or to exercise any right,
power or remedy hereunder will operate as a waiver of any such default,
right power, or remedy.
15.3 If any provision of this Agreement is or becomes or is deemed invalid,
illegal or unenforceable under the applicable laws or regulations of any
jurisdiction, such provision will be deemed amended in that jurisdiction
to the extent necessary to conform to applicable laws or regulations or,
if it cannot be so amended without materially altering the intention of
the parties, it will be stricken, and the remainder of this Agreement will
remain in full force and effect.
15.4 Nothing contained herein shall constitute a license for either party to
utilise in the marketing of its products, the trademarks, tradenames, or
identifying code numbers of the other party.
15.5 This Agreement does not constitute either party hereto the agent of the
other party for any purpose whatsoever, nor does either party hereto have
the right or authority to assume,
<PAGE>
create or incur any liability of any kind, express or implied, against or
in the name or on behalf of the other party.
15.6 The parties agree that should a patent not issue from any of the
applications listed in Exhibit A hereto, the terms hereof inclusive of
Licensee's obligations hereunder shall be otherwise unaffected by such
occurrence.
16. FORCE MAJEURE
16.1 Neither party shall be under any liability to the other party hereunder
due to circumstances that such party shows is beyond its control, such as
change of legislation, government prohibition, or other kind of force
majeure. The parties undertake to notify the other party if any force
majeure circumstances should occur.
17. APPLICABLE LAW AND ARBITRATION
17.1 This Agreement shall be governed and construed and the relations between
the parties determined in all respects by the substantive law of Denmark.
17.2 The parties shall seek to resolve amicably all disputes, controversies or
differences which may arise between them relating to the subject matter of
this Agreement. If, despite the good faith effort of the parties, an
amicable resolution cannot be reached, any controversy or claim between or
among the parties arising out of this Agreement, excluding controversies
relating to the scope or validity of the Licensed Patents as provided for
in article 17.3, shall be resolved by binding arbitration in Copenhagen.
17.3 Any controversy which the parties are unable to amicably resolve relating
to the scope or validity of any of the Licensed Patents shall be resolved
in a court of law in the country in which that Licensed Patent was issued.
17.4 The party intending to convene the arbitration tribunal shall notify the
other party by registered letter of such intent providing a short
description of the issues which shall be before the arbitration tribunal.
Each party shall then within four weeks appoint an arbitrator. These
arbitrators shall within two weeks appoint a third arbitrator who shall be
educated as a lawyer. If the arbitrators have not agreed upon the third
arbitrator within two weeks or if a party fails within the time given to
appoint an arbitrator, the relevant arbitrator shall be appointed if a
party shall so direct by the President of the Maritime and Commercial
Court in Copenhagen.
17.5 The arbitration tribunal shall itself decide its rules of procedure and
shall when handing down its ruling, order the distribution of costs
involved in the matter including costs to legal counsel and, if necessary,
accountants.
17.6 To the extent that they have not been varied by the contents of this
Article 17, the provision of the Danish Arbitration Act shall apply. The
arbitration tribunal shall conduct its proceedings in the English
language.
<PAGE>
17.7 The arbitration tribunal is empowered to award damages and any other
relief which would be available in a judicial proceeding. The arbitration
tribunal shall have the discretion to conduct hearings, to hear witnesses,
and if it deems appropriate, to order an exchange of information by the
parties.
17.8 All decisions of the arbitration panel within the scope of its authority
shall be final and binding on the parties and may be executed and enforced
in any court having competent jurisdiction. The parties stipulate that the
Court of Copenhagen shall have jurisdiction over the parties and subject
matter for purposes of enforcing this provision.
18. MOST FAVORED TERMS
18.1 If, after the Effective Date hereof, Licensor grants to any third party, a
right or license under any or all of the Licensed Patents to make, have
made, import, use sell and/or otherwise dispose of Licensed Products on
terms more favorable to such third party than those set forth herein,
Licensor shall give prompt written notice to Licensee to that effect and
Licensee shall have the option of acquiring a right, license or grant
under such more favorable tern-Ls subject to the same terms as those
licensed or granted to such third party. Licensee may request periodically
that an independent auditor (which may be the same auditor appointed
pursuant to Article 7.2) at the cost of Licensee audit Licensor's licenses
under the Licensed Patents and provide a certification of Licensor's
compliance with this article.
19. ENTIRE AGREEMENT AND AMENDMENTS
19.1 This Agreement sets forth the entire understanding of the parties relating
to the subject matter hereof and cancels and supersedes all prior or
contemporaneous oral or written negotiations, agreements or understandings
relating to such subject matter. No amendment or modification of this
Agreement shall be valid or binding upon the parties unless made in
writing and signed on behalf of the parties by their respective duly
authorized representatives.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective duly authorized officers effective as of the date
first written above.
K/S HIMPP
Date: September 10, 1998 By: /s/ illegible
------------ ------------------------------
Title: Mar. Div.
-----------------
Licensee
Date: August 27, 1998 By: /s/ William S. Barth
--------- ------------------------------
Title: CFO
----------------
<PAGE>
Exhibit A
Calibration Device and Auditory Prosthesis
Having Calibration Information (widin et al)
Country Serial Patent Number
United States 192,213 4,992,966
EPO 89304712.6 EP 0 341 995 B
Australia 32674/89 614,825
Canada 596,199 1,321,260
Denmark 1764/89
Japan 115926/89 1-319398 (Publ. No.)
South Korea 6179/89
Malaysia 8900593 MY103710A
Austria EPO 123708
France EPO 341995
Germany EPO 68923991
Netherlands EPO
Sweden EPO
Switzerland EPO
United Kingdom EPO
<PAGE>
Method and Apparatus for Determining Acoustic Parameters of an Auditory
Prosthesis Using Software Model (Widin et al)
Country Serial 4 Patent Number
United States 07/888,148 Re 34,961
United States 192,214 4,953,112
Malaysia 8900543 MY104085
South Korea 6181/89
Japan 114895/89 1-319397 (Publ. No.)
Denmark 1766/89
Canada 596,743 1,321,635
Brazil 8902172
Australia 33033/89 619,275
EPO 89304711.8 EP 0 396 831 B
Austria EPO 114103
United Kingdom EPO 396 831
Switzerland EPO 396 831
Sweden EPO 396 831
Netherlands EPO 396 831
Germany EPO 68919349
France EPO 396 831
Hearing Aid Programming interface (Rising)
Country Serial Patent Number
United States 192,242 4,961,230
Canada 599,068 1,301,305
Germany EPO 68918327
EPO 89304486.7 EP 0 341 902
Australia 34056/89 616,264
Japan 1-053836
France EPO
United Kingdom EPO
Netherlands EPO
Sweden EPO
South Korea 6087/89
<PAGE>
Hearing Aid Programming interface and Method (Mangold)
Country Serial Patent Number
United States 192,259 4,989,251
Canada 599069/89 1,331,651
Germany EPO 68919270
EPO 89304487.5 EP 0 341 903
Japan 117187/89 2-057100 (Publ. No.)
Australia 34057/89 610391
France EPO
United Kingdom EPO
Netherlands EPO
Sweden EPO
Auditory Prosthesis using Fitting Vectors (Widin)
Country Serial # Patent Number
United States 07/192,351 4,901,353
Malaysia 8900594 MY103711
Austria EPO 111289
France EPO 341997
Germany EPO 68917980
EPO 89304714.2 EP 0 341 997
Australia 32789/89 621,101
Brazil 8902175
Canada 596414/89 1,300,732
Denmark 1765/89
Japan 115928/89
South Korea 6180/89
United Kingdom EPO 341 997
Switzerland EPO 341 997
Sweden EPO 341 997
Netherlands EPO 341 997
Italy EPO 341 997
<PAGE>
Auditory Prosthesis With Datalogging Capability (Mangold et al)
Country Serial Patent Number
United States 353,220 4,972,487
Canada 594962/89 1,317,6,66
Germany EPO 68920060
Denmark 1523/89
EPO 89302689.8 EP 0 335 542
Japan 80196/89 2-043900 (Publ. No.)
Australia 31420/89 610,705
CH EPO
France EPO
Sweden EPO
Netherlands EPO
United Kingdom EPO
Malaysia MY103858
South Korea 4156/89
Method, Apparatus, System and Interface Unit for Programming a Hearing Aid
(Platt)
Country Serial Patent Number
United States 525,901 5,226,086
Germany G9106237.3 91062373 G
Australia 75912/91 641,239
Japan 34867/91
<PAGE>
Hearing Aid and Method For Preparing Same (Woodfill, Jr.)
Country Serial Patent Number
United States 887,592 5,321,757
Australia 82039/91 647,510
Canada 2087263
EPO 91912842.1 EP 0 544 687
PCT US91/04955 WO92/03894 (pub.)
Japan 512130/91 5-509210 (Publ. No.)
Sweden EPO 544 687
Denmark EPO 544 687
Netherlands EPO 544 687
Germany EPO 69112407
France EPO 544 687
Auditory Prosthesis, Noise Suppression Apparatus and Feedback Suppression
Apparatus having Focused Adaptive Filtering (Soli et al)
Country Serial Patent Number
United States 912,886 5,402,496
United States 08/317,164
Japan 172767/93
Canada 2098679
Australia 41424/93 661,158
EPO 93111138.9
Germany
Denmark
France
United Kingdom
Sweden
<PAGE>
Auditory Prosthesis With User-Controlled Feedback Cancellation (Soli et al)
Country Serial 9 Patent Number
United States 07/922,013
United States 08/201,883
United States 08/279,685
EPO 93112049.7 EP-A- 0 581 261
Japan 188302/93
Canada 2100015
Australia 41832/93 660,818
Germany
Denmark
France
United Kingdom
Sweden
Activation and Method For Doing Same (Soli et al)
Country Serial # Patent Number
United States 07/921,508
EPO 93112050.3 EP-A-0 581 262
Canada 2100110
Japan 188281/93
Germany
Denmark
France
United Kingdom
<PAGE>
External Ear Canal Pressure Regulating Device and Tinnitus Suppression Device
(Van den Honert et al)
Country Serial 4 Patent Number
United States 359,025 5,024,612
Australia 54873/90 630,187
EPO 90305676.0 EP 0 400 900
Canada 2016256
Japan 139564/90 3-018359 (Publ. No.)
Belgium EPO 400 900
France EPO 400 900
Germany EPO 69024408
Sweden EPO 400 900
United Kingdom EPO 400 900
External Ear Canal Electrode to be Placed Proximate the Tympanic Membrane and
Method of Stimulating/Recording Utilizing External Ear Canal, Etc. (Stypulkowski
et al)
Country Serial Patent Number
United States 07/036,209
United States 767,324 4,706,682
Canada 514029/86 1,292,265
EPO 86111568 EP 0 214 527
Austria EPO 60502
France EPO
Germany EPO
United Kingdom EPO
Sweden EPO
Denmark 3730/86 .
Norway 86-3310
Australia 605261/86 591,690
Japan 193020/86 62-044250 (Publ. No.)
China 86105171
<PAGE>
Attachment Device For a Probe Microphone (Rising et al)
Country Serial Patent Number
United States 192,354 4,827,525
Magnetic Attachment Apparatus for Ear-Level Microphone (Rising)
Country Serial Patent Number
United States 181,222 4,827,524
Canada EPO
Germany
Denmark
Japan
Apparatus and Method For Suppressing Tinnitus (Stypulkowski et al)
Country Serial Patent Number
United States 07/286,744
Australia 45376/89 629,872
Canada 2003452
Japan 328110/89 2-220680 (Publ. No.)
Australia 30087/92 656,045
EPO 89311877
<PAGE>
US 4,548,082 Hearing aids, signal supplying apparatus, system for compensating
hearing deficiencies and methods, (Engebretson et al.) prio 84.08.28
COUNTRY Application Patent
US 645,004 US 4,548,082
Canada 4488699 CA 1240029
EP 85904203.8 EP 0 191 075
Netherlands EP 191 075
Austria EP AT76549
Belgium EP 191 075
Switzerland EP 191 075
Germany EP DE3586098
France EP 191 075
GB EP 191 075
Italy EP 191 075
Sweden EP 191 075
Denmark 1880/86
Japan 503667/85 8-024399
Australia 47261/85 AU 579890
Australia 31102/89 AU 623379
Israel 76031 IL76031
US 5,016,280 Electronic filters, hearing aids and methods, (Engebretson et al.)
prio 88.03.23
COUNTRY Application Patent
US 172,266 US 5,016,280
US 059,800 US 5,475,759
Canada 594441 CA 1326285
EP 89302762.3
Denmark 1445/89
Australia 31421/89 AU 611781
JP 70283/89
South Korea 3688/989
Malaysia 8900349 MY103857-A
<PAGE>
US 5,111,419 Electronic Filters, signal conversion apparatus, hearing aids and
methods
prio 92.05.05
COUNTRY Application Patent
US 180,170 US 5,111,419
US 792,706 US 5,225,836
US 056,054 US 5,357,251
Canada 595860 CA 1335674
EP 89303482.7 EP 0 339 819
Switzerland EP 339 819
Germany EP DE6891974.1
France EP 339 819
GB EP 339 819
Netherlands EP 339 819
Sweden EP 339 819
Australia 32458/89 AU 621100
Denmark 1707/89
Japan 91715/89
South Korea 4781/89
Malaysia 8900455
Taiwan 78103077 CR43643
US 5,412,735 Adaptive noise reduction circuit for a sound reproduction system,
(Engebretson et al.) prio 92.02.27
COUNTRY Application Patent
US 842,566 US 5,412,735
Canada 2090297
EP 93301401.1
Australia AU 658476
Japan 40303/93
South Korea 2836/93
Malaysia 9300335
<PAGE>
Adaptive gain and filtering circuit for a sound reproductive system
(Engebretson et al.) prio 93.04.07
COUNTRY Application Patent
US 044,246
US 477,621
Canada 2160133
EP 94914764.9
Japan 522504/94
<PAGE>
Rider to
Patent License Agreement
dated August 27,1998
between
K/S HIMPP
and
Sonic Innovations, Inc.
(the License Agreement)
<PAGE>
The Parties to the License Agreement have agreed to amend the License
Agreement as follows:
1. The following is added to art. 7.1, line 12 (after ..... royalties due.)
"The above statement of Licensee duly certified by Licensee's statutory
auditor shall further identify any hearing aid, or any apparatus, device
or system manufactured or sold by Licensee, which is designed for use with
a hearing aid and on which royalties are not being paid".
2. The following is deleted from art. 7.2
"and the identification of any hearing aid, or any apparatus, device or
system which is designed for use with a hearing aid and on which royalties
are not being paid".
3. The following is added to art. 9.2
"This agreement may be terminated by licensee on three months' written
notice to Licensor with effect as from the end of the second consecutive
fiscal year of Licensee after all manufacture and/or sale of Licensed
Products has been discontinued and Licensee has informed Licensor of its
intention not to resume such manufacture or sale in the future".
4. The following is added to art. 14.2
"f. the statutory auditors of Licensee mentioned in art. 7.1.
g. any third party performing a due diligence review with regard to
Licensee's business".
IN WITNESS WHEREOF, the parties hereto have caused this Rider to Agreement
to be executed by their respective duly authorized officers effective as of
January 1, 1997.
K/S HIMPP
Date: September 10, 1998 By: /s/ illegible
------------ --------------------------------
Title: Man. Dir..
---------------------
Licensee
Date: August 27, 1998 By: /s/ William S. Barth
--------- --------------------------------
Title: CFO
---------------------
<PAGE>
EXHIBIT 10.11
DISTRIBUTION AGREEMENT
SONIC INNOVATIONS, INC.
and
HOYA HEALTHCARE CORPORATION
________________________________________
DISTRIBUTION AGREEMENT
________________________________________
[ * ]= CERTAIN INFORMATION IN THIS DOCUMENT HAS BEEN OMITTED AND FILED
SEPARATELY WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH
RESPECT TO THE OMITTED PORTIONS.
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DISTRIBUTION AGREEMENT
This Distribution Agreement is made and entered into as of December
30, 1999, by and between Sonic Innovations, Inc. ("SUPPLIER"), a Delaware
corporation with offices located at 2795 East Cottonwood Parkway, Salt Lake
City, Utah 84121, U.S.A. and Hoya Healthcare Corporation ("DISTRIBUTOR"), a
Japanese Corporation, with offices located at Shinjuku i - Land Tower, 8F. 5-1,
Nishi-Shinjuku 6-chome, Shinjuku-ku, Toyko 163-1308, Japan.
SUPPLIER and DISTRIBUTOR are hereinafter referred to collectively as
the "Parties" and individually as a "Party".
In consideration of the mutual promises herein contained, SUPPLIER and
DISTRIBUTOR agree as follow:
1. Certain Definitions
1.1 In this Agreement, the following terms shall have the
following meanings:
(a) "Products" shall mean any and all Supplier products
specified in Exhibit 1 attached hereto, and all other products which Supplier
may offer for sale to third parties at any time in the future during the term of
this Agreement, including any renewals, including all spare parts for such
Products. Supplier represents and warrants that all Products listed presently on
Exhibit 1 represent all the products presently offered by it for sale to third
parties. Any Product listed in Exhibit 1 may be deleted from the list by
Supplier by giving Distributor one (1) month prior written notice, provided and
on the condition that Supplier withdraws such Product from sale to all other
third parties at the same time.
(b) "Territory" shall mean the geographic territory
described in Exhibit 1.
(c) "Effective Date" shall mean the later of January 1,
2000 or the date on which this Agreement and the Quality Management Agreement
attached hereto as Exhibit 2 have both been signed by the Parties.
(d) "Termination Date" shall mean the date on which this
Agreement is cancelled or terminated, as provided in Section 14 below.
(e) "Distributor's Affiliates" shall mean a company
directly or indirectly controlled by Distributor.
2. Appointment as Distributor; Exclusivity
2.1 Supplier hereby appoints Distributor and Distributor
hereby agrees to act as the exclusive distributor of the Products in the
Territory. subject to the terms and conditions of this Agreement.
2.2 Supplier will refer all orders and inquiries concerning
the Products from customers situated within the Territory to Distributor.
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2.3 Supplier expects to have two lines of Products, one which
shall consist of complete hearing aid instruments except for the molded
earpiece, which shall be sold as Supplier's branded Products ("Branded
Products"), and one which shall consist of electronic components for earpieces
but which are sold without the microphone, receiver, fitting software,
connecting cables and mountings, on an OEM basis, to manufacturers which intend
to incorporate them in their own branded hearing aid instruments ("Electronic
Components"). Supplier agrees (i) All new generation Electronic Components which
it offers to sell as such will not contain all the features which are included
in Branded Products, and will be inferior to the Branded Products in terms of
overall functionality, (ii) Supplier will not knowingly offer, license or sell
any Branded Products to any third parties other than Distributor for resale in
the Territory; and (iii) Supplier will not sell new generation Electronic
Components to customers that sell in the Territory until six months after such
new generation Electronic Components are first made available to Distributor.
2.4 Distributor shall not sell Products outside the Territory
without prior written consent from the Supplier.
2.5 The relationship of Supplier and Distributor established
by this Agreement is that of independent contractors, and nothing contained in
this Agreement shall be construed to (i) give either Party the power to direct
and control the day-to-day activities of the other, (ii) constitute the Parties
as partners, joint ventures, co-owners or otherwise as participants in a joint
or common undertaking, or (iii) allow Distributor to create or assume any
obligation on behalf of Supplier for any purpose whatsoever. All obligations
including financial obligations associated with Distributor's business are the
sole responsibility of Distributor. All sales and other agreements between
Distributor and its customers are Distributor's exclusive responsibility and
shall have no effect on Supplier's obligations under this Agreement.
3. Prices
3.1 The current prices at which Supplier shall sell the
Products to Distributor are set forth in Exhibit 1. Supplier represents and
warrants to Distributor that (i) the current prices are no higher than the
prices at which the same Products are sold by Supplier to any other third party;
and (ii) at all times during the term of this Agreement, Supplier's prices to
Distributor for each of the Products shall be at least as favorable as the price
at which Supplier then sells such Product to any third party operating in
commercial circumstances which are comparable to those in which Distributor
operates (which would not be the case, by way of example, in countries such as
Brazil, where more aggressive pricing is critical to market acceptance). All
prices shall be in US dollars and call for payment F.O.B. Supplier's U.S.
domestic facilities.
3.2 Supplier reserves the right at its sole discretion to
change prices for the Products upon its giving reasonable prior notice to
Distributor, which notice in any event will not be less than thirty (30) days
nor more frequently than once each six (6) months.
3.3 Any changes in prices shall not affect orders placed by
Distributor and accepted by Supplier prior to Distributor's receipt of
Supplier's notice of changes in prices.
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3.4 Distributor's selling prices shall be set by Distributor
in its sole discretion. Distributor agrees to provide Supplier with information
concerning its selling prices.
4. Payment Terms
4.1 All payments shall be made in US dollars within forty-
five (45) days after invoice date. Supplier shall date its invoices no earlier
than the actual date of shipment. Payments not made when due shall be subject to
an interest charge of one and a half percent (1 1/2 %) per month on the overdue
amount.
5. Risk and Title
5.1 All Products delivered pursuant to the terms of this
Agreement shall be suitably packed for air freight shipment in Supplier's
standard shipping cartons, marked for shipment to Distributor's address set
forth above, and delivered to Distributor or its carrier agent F.O.B. Supplier's
domestic facility, at which time title to such Products and risk of loss shall
pass to Distributor. Unless otherwise instructed in writing by Distributor,
Supplier shall select the carrier. All freight, insurance, and other shipping
expenses, as well as any special packing expense, shall be paid by Distributor.
Distributor shall also bear all applicable taxes, duties, and similar charges
that may be assessed against the Products.
6. Minimum Purchase Quantities; Sales Promotion
6.1 For each calendar year during the initial eight years of
this Agreement, Distributor expects to (but shall not be contractually bound to)
purchase at least the number of Products as set forth in Exhibit 1. For this
purpose, a "purchase" shall mean a committed purchase order is placed with
Supplier during the calendar year, with no requested delay in shipment. If
Distributor does not fulfill this minimum purchase obligation, Supplier shall be
entitled to immediately terminate this Agreement.
6.2 Distributor shall use its best efforts to develop
increasing customer demand for the Products. Distributor shall maintain adequate
working capital, sufficient stock of Products, facilities and personnel to
accomplish this purpose.
6.3 Distributor shall obtain all necessary import licenses
and permits, pay any import duties applicable to the Products and comply with
all obligations imposed in connection with import, shell making, assembly and
sale of the Products in the Territory by any governmental authority. Distributor
understands that Supplier is subject to regulation by agencies of the U.S.
government, including the U.S. Department of Commerce, which prohibit export or
diversion of certain technical products to certain countries. Distributor
warrants that it will comply in all respects with the export and re-export
restrictions set forth in the export license for Products shipped to
Distributor.
6.4 Distributor shall not make any false or misleading
representations to customers or others regarding Supplier or the Products.
Distributor shall not make any representations, warranties or guarantees with
respect to the specifications, features or capabilities of the Products that are
not consistent with Supplier's documentation accompanying
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the Products or Supplier's literature describing the Products, including the
limited warranty and disclaimers.
6.5 Distributor shall at its own expense (a) place the
Products in Distributor's catalogues as soon as possible and feature the
Products in any applicable trade show that it attends; (b) contact existing and
potential customers within the Territory on a regular basis, consistent with
good business practice; (c) assist Supplier in assessing customer requirements
for the Products, including quality, design, functional capability and other
features; and (d) submit market research information, as reasonably requested by
Supplier, regarding competition and changes in the market within the Territory.
6.6 Supplier shall, at its expense, provide Distributor with
reasonable quantities of all sales literature, brochures and other publications
relating to the Products or any of them, which documents Supplier generally
makes available to its dealers and distributors. All such documentation shall
be in the English language.
6.7 The Products will be offered for sale and are sold by
Supplier subject in every case to the condition that such sale does not convey
any license, expressly or by implication, to manufacture, duplicate or otherwise
copy or reproduce any of the Products. Distributor shall take appropriate steps
with its customers, as Supplier may request, to inform them of and assure
compliance with this condition.
7. Noncompetition
7.1 During the term of this Agreement, Distributor and
Distributor's Affiliates shall not manufacture, sell, distribute or promote in
the Territory instruments, goods or products which compete directly or
indirectly with the Products without prior written consent from Supplier.
7.2 As of the Effective Date, Supplier consents to
Distributor's manufacture, sale, distribution and promotion of those products
listed in Exhibit 1 to this Agreement.
8. Ordering Procedure; Obligation to Supply
8.1 Distributor's purchase orders for Products shall specify
(a) quantities of Products ordered; (b) preferred delivery date for Products
ordered; (c) delivery address for Products ordered; and (d) other information as
agreed upon from time to time between the Parties.
8.2 Supplier shall accept all conforming purchase orders,
unless it is unable to ship to any dealers or distributors, or OEM customers,
the Products ordered by Distributor.
8.3 Supplier shall ship the ordered Products to the address
specified in the purchase order within the delivery date specified in the
purchase order. Unless otherwise agreed, or unless Supplier is unable to ship
within such timeframe due to the unavailability of outsourced components or
supplies, Supplier shall always be allowed a delivery time of not less than
eight (8) nor more than twelve (12) weeks from the date of the purchase order.
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8.4 Supplier shall confirm each purchase order within one (1)
week of receipt of the order. No purchase order shall be binding upon Supplier
until accepted by Supplier in writing, and Supplier shall have no liability to
Distributor with respect to purchase orders that are not accepted in conformance
with the terms of this Agreement.
8.5 Distributor's purchase orders submitted to Supplier from
time to time with respect to Products to be purchased hereunder shall be
governed by the terms of this Agreement, and nothing contained in any purchase
order shall in any way modify the terms of this Agreement.
9. Trademarks; Trade Names; Trade Secrets
9.1 Distributor agrees that Supplier owns all rights, title
and interest in the Products and in all of Supplier's patents, trademarks, trade
names, inventions, copyrights, know-how and trade secrets relating to the
design, manufacture, operation or service of the Products. The use by
Distributor of any of these rights is authorized only for the purposes herein
set forth, and upon termination of this Agreement such authorization shall
immediately cease.
9.2 The Products shall be manufactured by Supplier and
Supplier's subcontractors under Supplier's trademarks, trade names and/or
symbols ("Supplier's Trademarks").
9.3 Distributor may utilize, in the promotion, marketing and
sale by it of the Products, its own trademarks, trade names and symbols, but
shall not alter or remove any of Supplier's Trademarks applied to the Products.
9.4 Distributor shall neither register, nor have registered,
any of Supplier's Trademarks, or any trade names or symbols identical or similar
to Supplier's Trademarks.
9.5 Distributor shall not, even after the expiration of this
Agreement, use or communicate to third parties any know-how or trade secrets
related to the Products or Supplier.
10. Warranty
10.1 Supplier warrants that to the best of Supplier's
knowledge the Products do not violate any third party intellectual property
rights.
10.2 Supplier warrants that the Products are in conformity
with Supplier's published specifications and free of defects in workmanship and
materials for a period of ninety (90) days from Distributor's ACTS test, not to
exceed 180 days from date of invoice (the "Warranty Period").
10.3 Distributor shall promptly notify Supplier of any Product
defects. If Distributor fails to notify Supplier of such defects within thirty
(30) days of inspection, the Products shall be deemed acceptable, except for
defects that are not reasonably discoverable on inspection. Supplier shall be
entitled at its discretion to refuse to accept any warranty claims relating to
Product defects which should have been reasonably discoverable on inspection.
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10.4 Supplier agrees that if any of the Products sold to
Distributor are defective in workmanship or materials, and such defect (save
where it is reasonably discoverable on inspection in which case the time limit
in Section 10.3. shall apply) is reported to Supplier within the Warranty
Period, the Supplier shall, at its discretion, either repair or replace such
defective Products, in either case at its expense, including the costs of
shipment to and from Supplier.
11. Liability
11.1 Supplier's liability arising out of this Agreement shall
be limited to the amount paid by Distributor for the Products. In no event shall
Supplier be liable for costs of procurement of substitute goods. In no event
shall either Party be liable to the other Party or any other entity for damage
to property, loss of production or any special, consequential, incidental, or
indirect damages, however caused or under any theory of liability.
11.2 Except for any strict liability imposed by law upon the
manufacturer, Supplier shall only be liable for personal injury caused by the
Products if such injury results from the gross negligence on the part of
Supplier.
11.3 Distributor shall use limiting liability clauses
corresponding to Section 11.1 and Section 11.2 above with its customers, and
agrees to indemnify Supplier against any liability if such limiting liability
clauses are not used with its customers.
11.4 Supplier shall use its best effort to supply Products. In
no event shall Supplier be liable for delay or nonperformance of its obligations
under the Agreement due to shortage or unavailability of Products caused other
than by its own negligence or breach.
11.5 If a third party makes a Product related claim against
one of the Parties, the affected Party shall immediately inform the other Party.
11.6 Each Party shall defend, indemnify, and hold the other
Party or others for whom the other Party is responsible harmless from any and
all claims, damages or lawsuits (including the other Party's attorneys' fees)
arising out of any acts of the indemnifying Party, its employees or its agents.
12. Patent; Copyright; and Trademark Indemnity
12.1 Distributor agrees that Supplier has at its sole
discretion the right to defend, or at its option to settle, any claim, suit or
proceeding brought against Distributor or its customer regarding infringement of
any patent, copyright or Supplier's Trademarks related to the Products. Supplier
shall have sole control over any defense or settlement activities, and Supplier
agrees to pay any final judgement entered against Distributor or its customer
regarding such infringement issues. Distributor shall cooperate fully with
Supplier regarding such infringement issues.
13. Assignment
13.1 This Agreement and all rights and obligations hereunder
shall not be assigned without the prior written consent of the other Party.
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13.2 The sale or other transfer of stock constituting a
majority of the issued and outstanding capital stock of Distributor, or the sale
or transfer of voting control over such stock, by the shareholders of
Distributor to any unrelated third party which is itself a manufacturer or
distributor of hearing aid devices shall be deemed, for the purposes of this
Agreement, to constitute an assignment of this Agreement, and shall only be
permissible with the prior written consent of Supplier, which it shall not
unreasonably delay or refuse.
14. Term and Termination
14.1 The initial term of this Agreement shall be for the
period from the Effective Date through December 31, 2007. Automatic renewal of
the Agreement for additional two (2) year terms will occur unless notice is
given by either Party at least one hundred eighty (180) days prior to the next
renewal date. This Agreement may be terminated earlier under the circumstances
set out in Section 6.1, Section 14.2 or Section 14.3.
14.2 Supplier may in its sole discretion terminate this
Agreement by notice in writing to Distributor if there is any material breach of
Distributor's obligations as set forth in the Quality Management Agreement.
14.3 Either Party may terminate this Agreement by notice in
writing to the other Party if any of the following events occur: (i) if a Party
fails to make any payments due under this Agreement or breaches its obligations
under this Agreement and does not remedy the same within thirty (30) days of
written notice of such failure or breach; or (ii) if a Party goes bankrupt or
enters into receivership.
14.4 The termination of this Agreement for any reason shall be
without prejudice to the rights and obligations of the Parties up to and
including the date of such termination.
14.5 Neither Party shall make claims for any compensation
whatsoever as a result of termination of this Agreement in accordance with its
terms.
14.6 All trademarks, trade names, patents, copyrights,
designs, drawings, formulas or other data, photographs, samples, literature, and
sales aids of every kind shall remain the property of Supplier. Within thirty
(30) days after the termination of this Agreement, Distributor shall prepare all
such items in its possession for return to Supplier, as Supplier may direct, at
Supplier's expense.
14.7 The provisions of the following sections shall survive
the termination of this Agreement for any reason: 2.5, 4, 6.4, 9.1, 9.3, 9.4,
9.5, 10, 11, 12, 18 and 19. All other rights and obligations of the parties
shall cease upon termination of this Agreement.
15. Entire Agreement
15.1 This Agreement constitutes the entire Agreement between
the Parties and supersedes any prior agreement between the Parties. No party has
relied upon any representation save for any representation expressly set out in
this Agreement. To the extent the content of this
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Agreement is in contradiction with any document to which it refers, the language
of this Agreement shall prevail.
16. Waiver; Amendment
16.1 No term, provision or condition of this Agreement shall
be waived unless such waiver is evidenced in writing and signed by the waiving
Party.
16.2 An omission or delay by any Party to the Agreement in
exercising any right, power or privilege shall not operate as a waiver of this
right, power or privilege. Any single or partial exercise of any such right,
power or privilege shall not preclude any other or further exercise thereof or
of any other right, power or privilege. The rights and remedies provided in the
Agreement are cumulative with and not exclusive of any rights or remedies
provided by law.
16.3 No variation to this Agreement shall be effective unless
made in writing and signed by both Parties.
17. Notices
17.1 Notices, etc. Any notice, demand, offer, request or other
communication required or permitted to be given by either Supplier or
Distributor pursuant to the terms of this Agreement shall be in writing and
shall be deemed effectively given the earlier of (i) when delivered personally,
(ii) one (1) business day after being delivered by facsimile (with receipt of
appropriate confirmation), (iii) one (1) business day after being deposited with
an overnight courier service or (iv) four (4) days after being deposited in the
mail, First Class with postage prepaid, and addressed to the other party at the
address provided to the Company or such other address as a party may request by
notifying the other in writing.
Supplier's Fax. No.: 001-801-365-3002
Distributor's Fax. No.: 011-81-3-3345-6472
18. Governing Law
18.1 This Agreement and all acts and transactions pursuant
hereto and the rights and obligations of the parties hereto shall be governed,
construed and interpreted in accordance with the laws of the State of Utah,
U.S.A. without reference to rules or choice of laws.
19. Arbitration
19.1 If a dispute arises between the parties relating to the
interpretation or performances of this Agreement or the grounds for the
termination thereof, representatives of the Parties with decision-making
authority shall meet to attempt in good faith to negotiate a resolution of the
dispute prior to pursuing other available remedies. If within thirty (30) days
after such meeting the parties have not succeeded in negotiating a resolution of
the dispute, such dispute shall be submitted to final and binding arbitration
under the then current Commercial
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Arbitration Rules of the American Arbitration Association ("AAA") by one (1)
arbitrator in Seattle, Washington, USA. Such arbitrator shall be selected by the
mutual agreement of the Parties or, failing such agreement, shall be selected
according to the aforesaid AAA rules. The arbitrator will be instructed to
prepare and deliver a written, reasoned opinion stating his decision within
thirty (30) days of the completion of the arbitration. Such arbitration shall be
concluded within six (6) months following the filing of the initial request for
arbitration. The Parties shall bear the costs of arbitration equally and shall
bear their own expenses, including professional fees. The decision of the
arbitrator shall be final and nonappealable and may be enforced in any court of
competent jurisdiction.
IN WITNESS whereof this Agreement has been duly executed on behalf of
the Parties hereto as of December 30, 1999, to be effective as of the Effective
Date:
SONIC INNOVATIONS, INC. HOYA HEALTHCARE CORPORATION
/s/ Jorgen Heide /s/ Matsuo Horie
- -------------------------------------- --------------------------------
(Signature) (Signature)
Name: Name Matsuo Horie
Jorgen Heide ----------------------------
Vice President, Title Director and Sales
International and Licensing Division Division Director
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Exhibit 1
To Distribution Agreement between Sonic Innovations, Inc. and Hoya
Healthcare Corporation, dated December 30, 1999.
Present Products (including spare parts and components)
and Prices
Natura ITE Faceplate Kit [ * ]
Natura ITC Faceplate Kit [ * ]
Natura CIC Faceplate Kit [ * ]
Natura Express [ * ]
Natura BTE [ * ]
Conforma [ * ]
ExpressFit Folio (Palm Pilot) [ * ]
ExpressFit for NOAH [ * ]
Territory
Japan
Minimum Purchase Requirements by Calendar Year
Year 2000 [ * ] Complete hearing aids or faceplate kits
Year 2001 [ * ] Complete hearing aids or faceplate kits
Year 2002 [ * ] Complete hearing aids or faceplate kits
Year 2003 [ * ] Complete hearing aids or faceplate kits
Year 2004 [ * ] Complete hearing aids or faceplate kits
Year 2005 [ * ] Complete hearing aids or faceplate kits
Year 2006 [ * ] Complete hearing aids or faceplate kits
Year 2007 [ * ] Complete hearing aids or faceplate kits
Other Products Distributed by Distributor
Distributor distributes the following hearing instruments and/or hearing
instrument like products to which Supplier consents:
Hearing aid products manufactured by GN Resound.
Hearing aid products manufactured by Miracle Ear (Dahlberg), not to exceed
the sale of up to 150 units during the year 2000, and post sales service
and repair thereafter.
[ * ]= CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY
WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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Exhibit 2 to the Distribution Agreement dated December 30, 1999 between Sonic
Innovations, Inc. ("Supplier") and Hoya Healthcare Corporation ("Distributor").
QUALITY MANAGEMENT AGREEMENT
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Supplier and Distributor agree as follows:
1. QUALITY SYSTEM; AUDIT
1.1 Distributor has a quality system which Supplier has reviewed Distributor
shall maintain such quality system to the satisfaction of Supplier
throughout the term of this Agreement. Supplier shall be entitled to
conduct audits of Distributor's quality system at its cost at appropriate
intervals as determined by Supplier.
2. MANUFACTURING MANUAL; FINAL TEST
2.1 Supplier shall provide Distributor a manufacturing manual (the "Manual"),
which Supplier shall maintain and update. The Manual shall provide
procedures for the manufacture of custom hearing devices and will also
provide details of the type of materials to be used in the manufacture of
the shell of custom hearing devices.
2.2 Distributor agrees at all times to manufacture custom hearing devices in
accordance with the procedures and standards set out in the Manual.
Specifically, the shell shall be manufactured in accordance with the
procedures and standards set out in Manual, or according to other generally
accepted industry standards. Distributor shall have access to Supplier's
essential requirements, risk analysis and technical file for custom hearing
devices as defined in the Manual if such is required by a competent
authority.
2.3 Distributor shall perform a final test of all custom hearing devices prior
to their being released for sale. Such final test shall be carried out in
accordance with the procedures and standards set out in the Manual and in
conjunction with the latest revision of final test software that shall be
furnished to Distributor by Supplier. Supplier shall be responsible for
maintaining and updating final test software.
3. COMPLAINT HANDLING
3.1 Distributor shall have a process for maintaining effective post-marketing
surveillance of Products and agrees to maintain and update such process to
handle complaints and to take such corrective or preventative actions as
may be necessary to the satisfaction of Supplier. Distributor agrees to
establish a system for recording product or service complaints as a basis
for analysis, response and corrective action. Complaints shall be recorded,
reviewed, evaluated, investigated, responded to and resolved by
Distributor.
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3.2 A "complaint" is any written, electronic or oral communication that alleges
deficiencies related to the identity, quality, durability, reliability,
safety, effectiveness or performance of a sold Product. Any complaints
involving the possible failure of a Product, including device defects,
improper labeling or packaging, failure to meet specifications or any
failure of a Product to meet customer or user expectations for quality, or
a Product related injury are subject to U.S. Food and Drug Administration
("FDA") Regulations. Sources of complaints may include telephone calls,
facsimile transmissions, written correspondence, credit memos, returned
goods forms, service or repair requests, internal analyses or industry
journal articles. Complaints may be submitted by health care professionals,
audiologists, consumers, hearing aid facilities, distributors, sales
representatives or service personnel.
3.3 A Product defect which is expected to occur with a given degree of
frequency because of the nature of the Product may not be considered a
complaint. However, even these types of complaints may be reportable if
they meet the FDA's Medical Device Report (MDR) reporting criteria. The
same would be true of complaints resulting from user error if the event
which led to the complaint meets the MDR reporting criteria. Service and
repair requests resulting from misapplication, normal wear or handling
damage generally are not considered as complaints, although instances of
misapplication may indicate the need for additional instructions for use.
Furthermore, when requests for maintenance, adjustment, or repair reflect a
trend, or when a request involves Product failure from an "unanticipated"
cause, such requests must be evaluated to determine if they are complaints
under the MDR reporting criteria.
3.4 Complaint records shall include the following: sequential number of the
complaint; date complaint was received; origin of the complaint (name,
address, phone number of the complaintant) end-user information; product
information/device identification; nature and details of the complain;
assignment of responsibility for resolution of the complaint; dates and
results of any investigation; resolution of the complaint; any
corrective/preventive action(s) or other action(s) taken; any reply to the
complainant or others and indication that complaint is closed.
Complaints and records of investigation shall be maintained in a complaint file
and retained by Distributor for no less than five (5) years. Records shall be
accessible for audits by Supplier and duly authorized agents of the FDA and any
competent authority.
4. POST-MARKETING SURVEILLANCE; MEDICAL DEVICE REPORT; RECALL
4.1 It is the responsibility of Distributor to (i) maintain a program for
marketing surveillance of the Products in the field; (ii) evaluate reports
of device failure or malfunction that have caused or may cause patient
injury; (iii) forward complaint reports to Supplier; (iv) trace defective
or potentially defective Products to the end user; (v) maintain a process
for issuing advisory notice; and (vi) implement effective corrective and
prevention action(s) or recall of Product, if necessary.
4.2 Definitions of terms used above are as follows:
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. "Malfunction" means the failure of a device to meet any of its
performance specifications or otherwise to perform as intended.
. "Patient injury" mains a condition necessitating medical or surgical
intervention to prevent permanent impairment of a body function or
permanent damage to a body structure.
. "Corrective action" includes, but may not be confined to, device recall,
issue of advisory notice, additional surveillance, modification of
devices in use, repair or adjustment of devices in use, inspection of
devices, modification to future device design, components or
manufacturing process and modification to labeling or instructions for
use. Corrective action is any action other than routine maintenance or
servicing of a device where such action is necessary to prevent
recurrence of a reportable event (complaint).
. "Recall" includes the return of a medical device to the Supplier, its
modification by the supplier at the site of installation or its exchange
or destruction in instances where there is risk of serious patient
injury. A recall may be undertaken voluntarily or at the request of the
FDA or competent authority.
4.3 If any Product is believed to have caused or contributed to a death,
serious injury or any other potential adverse event resulting in a
condition necessitating medical or surgical intervention to prevent
permanent impairment of a body function or permanent damage to a body
structure, Distributor shall immediately report the information to
Supplier's regulatory department.
4.4 Supplier shall file all reports of adverse events with the relevant
governmental agencies. Distributor will provide access by Supplier to all
relevant records and information relating to adverse events. Supplier shall
make all decisions relating to any recall, field correction or purchaser
notification, after discussion with Distributor and evaluation of all
relevant information.
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Identification of incidents to be reported by Distributor and Supplier under the
MDR system can be made as follows:
[GRAPH APPEARS HERE]
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5. SONIC INNOVATIONS COMPANY NAME AND BRANDING
5.1 Distributor may, provided that it complies in all respects with the terms
of this Agreement, place on the Products the Sonic Innovations company
name and appropriate trade name (e.g. NATURA, EXPRESS FIT, etc.).
6. LIABILITY
6.1 Supplier shall not under any circumstances be liable for Products which do
not carry the Sonic Innovations company name and trade name, or for
Products that do not fully comply with Supplier's Manual, particularly
regarding shell manufacturing. Distributor shall indemnify and hold
Supplier harmless from and against any loss, damage or expense resulting
under this Section 6.1
7. SERIALIZATION
7.1 Distributor shall comply with Supplier's serial number format, unless
there is written agreement between Supplier and Distributor that supports
another format. Distributor shall forward to Supplier for review and
acceptance a sample of its serial number format.
8. TRACEABILITY
8.1 Distributor shall maintain Product records of traceability from faceplate
to finished product to end-user. Traceability records shall be maintained
for a period of not less than five years and Supplier shall have access to
these records.
9. LABELING; MANUALS
9.1 Distributor shall comply with all governmental and Supplier labeling
requirement, including these included in the Manual.
10. PRODUCTION RECORDS
10.1 All records pertaining to the production of Products shall be retained by
Distributor for a period of no less than five years from the date of sale
of the Products. These records shall include test results, statement of
conformity, rework, production data and any other information required to
insure traceability.
11. TERMINATION
11.1 Upon termination of the Agreement for any reason whatsoever, Distributor
shall (i) continue to retain all records for at least 5 years from the
date of manufacture or sale of the Products and provide. Supplier with
copies of records upon Supplier's reasonable request, and (ii) continue to
maintain its post-marketing surveillance program referenced in Section 4.1
for a period of at least 5 years.
-6-
<PAGE>
11.2 Supplier shall not be liable in any way for any Product sold by the
Distributor following the termination of the Agreement
12. ARBITRATION
12.1 If a dispute arises between the parties relating to the interpretation or
performances of this Agreement or the grounds for the termination thereof,
representatives of the parties with decision-making authority shall meet
to attempt in good faith to negotiate a resolution of the dispute prior to
pursuing other available remedies. IF within thirty (30) days after such
meeting the parties have not succeeded in negotiating a resolution of the
dispute, such dispute shall be submitted to final and binding arbitration
under the then current Commercial Arbitration Rules of the American
Arbitration Association ("AAA") by one (1) arbitrator in Seattle,
Washington. Such arbitrator shall be selected by the mutual agreement of
the parties or, failing such agreement, shall be selected according to the
aforesaid AAA rules. The arbitrator will be instructed to prepare and
deliver a written, reasoned opinion stating his decision within thirty
(30) days of the completion of the arbitration. Such arbitration shall be
concluded within nine (9) months following the filing of the initial
request for arbitration. The parties hall bear the costs of arbitration
equally and shall bear their own expenses, including professional fees.
The decision of the arbitrator shall be final and non-appealable and may
be enforced in any court of competent jurisdiction.
SIGNED FOR AND ON BEHALF OF SIGNED FOR AND ON BEHALF OF
Sonic Innovations, Inc. Hoya Healthcare Corporation
(SUPPLIER) (DISTRIBUTOR)
By: /s/ Jorgen Heide By: /s/ Matsuo Horie
------------------------ ----------------------------
Jorgen Heide, Vice President Matsuo Horie
International and Licensing Division Director and Sales Division Director
-7-
<PAGE>
EXHIBIT 10.12
April 28, 1999
LEASE AGREEMENT BETWEEN
2795 E. COTTONWOOD PARKWAY, L.C., as
Landlord
and
SONIC INNOVATIONS, INC.,
a Delaware corporation, as
Tenant
DATED April 28, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION> Page
----
<S> <C>
PART I
SUMMARY OF BASIC LEASE INFORMATION..................................................................... 1
A. PREMISES (Lease Provisions, Paragraph 2)........................................... 1
B. LEASE TERM (Lease Provisions, Paragraph 3)......................................... 1
C. BASE RENT (Lease Provisions, Paragraph 5) ......................................... 1
D. ADDITIONAL RENT (Lease Provisions, Paragraph 5.3).................................. 2
E. LETTER OF CREDIT / SECURITY DEPOSIT (Lease Provisions, Paragraph 5.8).............. 2
F. PARKING CHARGE (Lease Provisions, Paragraph 5.5)................................... 2
G. ADDRESSES FOR NOTICES (Lease Provisions, Paragraph 27.7)........................... 2
H. TENANT IMPROVEMENT ALLOWANCE AND SPACE PLAN (Work Letter Agreement)................ 2
PART II
LEASE PROVISIONS........................................................................................ 3
1. DEFINITIONS........................................................................ 3
2. PREMISES........................................................................... 3
3. TERM............................................................................... 3
3.1 Tenant's Right to Terminate Lease......................................... 3
4. USE................................................................................ 3
5. RENT............................................................................... 4
5.1 Base Rent................................................................. 4
5.2 No Other Adjustment of Base Rent.......................................... 4
5.3 Additional Rent........................................................... 4
5.4 Operating Expenses........................................................ 5
5.5 Parking Charge............................................................ 8
5.6 Payment of Rent........................................................... 9
5.7 Delinquent Payments and Handling Charge................................... 9
5.8 Letter of Credit / Security Deposit....................................... 9
5.9 Holding Over.............................................................. 11
6. CONSTRUCTION OF IMPROVEMENTS....................................................... 11
6.1 General................................................................... 11
6.2 Access by Tenant Prior to Commencement of Term............................ 11
6.3 Commencement Date; Adjustments to Commencement Date....................... 11
6.4 Removal of Certain Tenant Improvements and Restoration of the Premises
to Its Original Condition................................................................... 12
7. SERVICES TO BE FURNISHED BY LANDLORD............................................... 12
7.1 General................................................................... 12
7.2 Keys and/or Access Cards.................................................. 13
7.3 Tenant Identity, Signs and Other Matters.................................. 13
7.4 Charges................................................................... 14
7.5 Operating Hours........................................................... 14
8. REPAIR AND MAINTENANCE............................................................. 14
8.1 By Landlord............................................................... 14
8.2 By Tenant................................................................. 14
9. TAXES ON TENANT'S PROPERTY......................................................... 15
10. TRANSFER BY TENANT................................................................. 15
10.1 General................................................................... 15
10.2 Conditions................................................................ 15
10.3 Liens..................................................................... 16
10.4 Assignments in Bankruptcy................................................. 16
11. ALTERATIONS........................................................................ 16
12. PROHIBITED USES.................................................................... 17
12.1 General................................................................... 17
12.2 Hazardous Materials....................................................... 17
12.3 Overstandard Tenant Use................................................... 18
13. ACCESS BY LANDLORD................................................................. 18
14. CONDEMNATION....................................................................... 18
15. CASUALTY........................................................................... 19
15.1 General................................................................... 19
15.2 Intentionally Left Blank.................................................. 19
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
16. SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT...................................... 19
16.1 General................................................................... 19
16.2 Attornment................................................................ 20
17. INSURANCE.......................................................................... 20
17.1 General................................................................... 20
17.2 Waiver of Subrogation..................................................... 21
17.3 Landlord's Insurance...................................................... 21
18. INDEMNITY.......................................................................... 21
19. THIRD PARTIES; ACTS OF FORCE MAJEURE; EXCULPATION.................................. 21
20. INTENTIONALLY LEFT BLANK........................................................... 22
21. CONTROL OF COMMON AREAS............................................................ 22
22. INTENTIONALLY LEFT BLANK........................................................... 22
23. QUIET ENJOYMENT.................................................................... 22
24. DEFAULT BY TENANT.................................................................. 22
24.1 Events of Default......................................................... 22
24.2 Remedies of Landlord...................................................... 23
24.3 Payment by Tenant......................................................... 23
24.4 Reletting................................................................. 24
24.5 Landlord's Right to Pay or Perform........................................ 24
24.6 No Waiver; No Implied Surrender........................................... 24
25. DEFAULTS BY LANDLORD............................................................... 24
26. RIGHT OF REENTRY................................................................... 24
27. MISCELLANEOUS...................................................................... 25
27.1 Independent Obligations; No Offset........................................ 25
27.2 Time of Essence........................................................... 25
27.3 Applicable Law............................................................ 25
27.4 Assignment by Landlord.................................................... 25
27.5 Estoppel Certificates; Financial Statements............................... 25
27.6 Signs, Building Name and Building Address................................. 26
27.7 Notices................................................................... 26
27.8 Entire Agreement, Amendment and Binding Effect............................ 26
27.9 Severability.............................................................. 26
27.10 Number and Gender, Captions and References................................ 26
27.11 Attorneys' Fees........................................................... 26
27.12 Brokers................................................................... 27
27.13 Interest on Tenant's Obligations.......................................... 27
27.14 Authority................................................................. 27
27.15 Recording................................................................. 27
27.16 Exhibits.................................................................. 27
27.17 Multiple Counterparts..................................................... 27
27.18 Survival of Indemnities................................................... 27
27.19 Miscellaneous............................................................. 27
27.20 Smoking Shelter........................................................... 27
27.21 Security Guard............................................................ 28
28. GENERATOR.......................................................................... 28
28.1 Grant of License.......................................................... 28
28.2 Relocation of System...................................................... 28
28.3 Tenant Responsibilities................................................... 28
28.4 Compliance with Laws...................................................... 28
28.5 Tenant Representations and Warranties..................................... 28
29. SATELLITE SPACE.................................................................... 29
29.1 Satellite Space........................................................... 29
29.2 Restrictions.............................................................. 29
29.3 Expenses.................................................................. 30
29.4 Use of Satellite Dish..................................................... 30
</TABLE>
ii
<PAGE>
EXHIBITS
- --------
Exhibit A: Glossary of Defined Terms
Exhibit B: Description of Premises
Exhibit B-1: Smoking Shelter Location
Exhibit C: Building Rules and Regulations
Exhibit D: Work Letter Agreement
Exhibit D1: Pricing Agreement Letter
Exhibit D2: Building Standard Tenant Improvements
Exhibit E: Legal Description of Land
Exhibit F: Lease Extension Addendum
Exhibit G: Acknowledgment of Lease Commencement Date
Exhibit H: Estoppel Certificate, Subordination, Non-Disturbance and
Attornment Agreement
Monument Sign Addendum
Building Sign Addendum
iii
<PAGE>
LEASE AGREEMENT
---------------
THIS LEASE AGREEMENT (the "Agreement") is entered into as of the ______ day
of April, 1999, between 2795 E. COTTONWOOD PARKWAY, L.C. as Landlord, and SONIC
--------
INNOVATIONS, INC., a Delaware corporation, as Tenant.
------
PART I
------
SUMMARY OF BASIC LEASE INFORMATION
----------------------------------
Each reference in this Summary of Basic Lease Information to the Lease
Provisions contained in PART II shall be construed to incorporate all the terms
provided in said Lease Provisions, and reference in the Lease Provisions to the
Summary contained in this PART I shall be construed to incorporate the
provisions of this Summary. In the event of any conflict between the provisions
of this Summary and the provisions in the balance of the Lease, the latter shall
control. The basic terms of this Lease are as follows:
A. PREMISES (Lease Provisions, Paragraph 2):
----------------------------------------
1. Premises Location: Suites 100, 500 and 660, consisting of
approximately 18,892 square feet of Rentable Area (16,428 usable square feet),
located on the first floor of the Building; approximately 22,157 square feet of
Rentable Area (20,611 usable square feet) located on the fifth floor of the
Building; and approximately 14,218 square feet of Rentable Area (12,363 usable
square feet) located on the sixth floor of the Building; with a total of
approximately 55,267 square feet of Rentable Area (49,402 usable square feet)
(as outlined on the floor plans attached to this Lease as Exhibit B), the street
address of which is 2795 E. Cottonwood Parkway, as constructed on the Land which
is further described on Exhibit E hereto. Tenant reserves the right to confirm
the measurement of the premises prior to the Lease Commencement Date.
2. Number of Approximate Square Feet of Rentable Area in the Building
measured consistently throughout the Building: Approximately One Hundred Thirty
Thousand Seven Hundred Eighty (130,780) square feet.
B. LEASE TERM (Lease Provisions, Paragraph 3):
------------------------------------------
1. Duration: Five (5) years, Two (2) months.
2. Lease Commencement Date (Lease Provisions, Paragraph 6.3): The
earliest to occur of the following events: (a) the date of Substantial
Completion (as defined in the Work Letter Agreement) of the Landlord's Work on
the Phase One Space, or (b) the date on which Landlord would have substantially
completed the Landlord's Work on the Phase One Space and tendered possession of
the Phase One Space to Tenant but for certain delays attributable to Tenant as
provided in Paragraph 6.3, or (c) the date on which Tenant takes possession of
the Premises or any portion thereof (including the Phase One Space). Subject to
the Lease being executed and delivered by Tenant to Landlord on or before April
28, 1999, the Lease Commencement Date is scheduled to be July 1, 1999.
Following the Commencement Date, the Phase II Move-In Date is defined and set
forth in Section 6.3(b) below.
3. Lease Expiration Date (Lease Provisions, Paragraph 3): The Lease
Expiration Date shall be August 31, 2004, unless further extended or earlier
terminated as provided in this Lease.
C. BASE RENT (Lease Provisions, Paragraph 5):
------------------------------------------
<TABLE>
<CAPTION>
Lease Year Monthly Base Rent Annual Base Rent
---------- ----------------- ----------------
<S> <C> <C>
July 1, 1999 - to, but not including, the $ 72,994.17 N/A
Phase II Move-In Date
From, and including, the Phase II $101,322.83 $1,215.874.00
Move-In Date - August 31, 2000
September 1, 2000 - August 31, 2001 $104,316.46 $1,251,797.55
September 1, 2001 - August 31, 2002 $107,310.09 $1,287,721.10
September 1, 2002 - August 31, 2003 $110,303.72 $1,323,644.65
September 1, 2003 - August 31, 2004 $113,297.35 $1,359,568.20
</TABLE>
<PAGE>
D. ADDITIONAL RENT (Lease Provisions, Paragraph 5.3):
-------------------------------------------------
1. Base Year (Lease Provisions, Paragraph 5.3.1): The Fiscal Year
commencing January 1 through December 31,1999 (with Operating Expenses for 1999
being annualized); provided, however, that real property taxes levied on the
Building and Parking Facility included in the Operating Expenses applicable to
the Base Year shall be determined as provided in paragraph 5.3.2(a) hereof.
2. Tenant's Share (Lease Provisions, Paragraph 5.3.1): Tenant's Share for
Tenant's payment of Operating Expenses means Forty-two and 26/100 percent
(42.26%).
E. LETTER OF CREDIT / SECURITY DEPOSIT (Lease Provisions, Paragraph 5.8):
---------------------------------------------------------------------
Means a Five Hundred Sixty Thousand and 00/100 Dollars ($560,000.00),
Letter of Credit, subject to reduction and replacement by a cash Security
Deposit, as provided in Paragraph 5.8.
F. PARKING CHARGE (Lease Provisions, Paragraph 5.5):
------------------------------------------------
Tenant shall throughout the Term, lease from Landlord up to a total of Two
Hundred Forty-Seven (247) automobile parking spaces, of which total Tenant may
elect to lease up to twenty (20) assigned and covered automobile parking spaces
at an initial cost of Zero Dollars ($0.00) per month per space for the initial
Lease Term. The remainder of the automobile parking spaces leased by Tenant
which Tenant does not elect to have assigned and covered shall be unassigned
parking spaces at a cost of Zero Dollars ($0.00) per month per space for the
initial Term of the Lease. The above notwithstanding, Landlord shall, with 3-day
advance notice from Tenant, make arrangements to accommodate Tenant's
requirement for 30 additional stalls (in the covered parking area, if possible)
once every 45-60 days for Tenant's board meetings.
G. ADDRESSES FOR NOTICES (Lease Provisions, Paragraph 27.7):
--------------------------------------------------------
1. Tenant's Address:
(a) Before Lease Commencement Date:
5330 South 900 East, Suite 240
Salt Lake City, UT 84117
(b) After Lease Commencement Date:
2795 E. Cottonwood Parkway
Salt Lake City, UT 84121
2. Landlord's Address:
2795 E. Cottonwood Parkway, L.C.
c/o John L. West
2855 E. Cottonwood Parkway, Suite 560
Salt Lake City, Utah 84121
3. Address of Landlord's Lender or Mortgagee:
U. S. Bank National Association
15 West South Temple, Suite 600
Salt Lake City, UT 84101
H. TENANT IMPROVEMENT ALLOWANCE AND SPACE PLAN (Work Letter Agreement):
-------------------------------------------------------------------
1. Space Plan Delivery Date: The initial Space Plan of Tenant's Premises
was delivered to Landlord on or before March 18, 1999.
2. Tenant Improvement Allowance: A Tenant Improvement Allowance shall be
in the amount of ONE MILLION THREE HUNDRED FORTY-FOUR THOUSAND SIX HUNDRED
THIRTY-FOUR AND 35/100 DOLLARS ($1,344,634.35) for the design, modification and
construction of the Tenant Improvements.
2
<PAGE>
PART II
-------
LEASE PROVISIONS
----------------
1. DEFINITIONS. The definitions of certain of the capitalized terms used
-----------
in this Lease are set forth in the Glossary of Defined Terms attached as Exhibit
A.
2. PREMISES. Subject to the provisions of this Lease, Landlord hereby
--------
leases to Tenant, and Tenant hereby leases from Landlord, the premises described
in the Summary of Basic Lease Information, Section "A", as outlined on the floor
plan attached hereto as Exhibit B (the "Premises"). In connection with such
--------
demise and subject to paragraph 21 herein, Landlord hereby grants to Tenant the
nonexclusive right to use during the Term, all Common Areas designed for the use
of all tenants in the Building, in common with all tenants in the Building and
their invitees, for the purposes for which the Common Areas are designed and in
accordance with all Legal Requirements. Landlord, however, has the sole
discretion, subject to the requirements of Paragraph 21 hereof, to determine the
manner in which the Common Areas are maintained and operated, and the use of the
Common Areas shall be subject to the Building Rules and Regulations. Tenant
acknowledges that Landlord has made no representation or warranty regarding the
Building or Premises except as specifically stated in this Lease. By occupying
the Premises, Tenant accepts the Premises as being suitable for Tenant's
intended use of the Premises. Landlord represents that, to the best of its
knowledge, upon occupancy, the Building will be in compliance with the Americans
with Disabilities Act of 1990. Landlord further represents that, to the best of
its knowledge, the Building is in compliance with all Legal Requirements.
Landlord further represents and warrants that, to the best of its knowledge, the
Complex and this Lease are in full compliance with all requirements under any
Landlord's Mortgage as well as under all other documents, instruments, or
agreements relating to the Complex or to which the Complex may be bound or
encumbered.
3. TERM. The provisions of this Lease shall be effective only as of the
----
date this Lease is executed by both Landlord and Tenant. The duration of the
term of this Lease shall be for the period stated in the Summary of Basic Lease
Information, Section "B," commencing on the Commencement Date set forth in
paragraph 6.3 below, and expiring at 5:00 p.m. on the day stated in Section "B"
of the Summary of Basic Lease Information, unless earlier terminated as provided
herein (the "Term"). Tenant shall have the right to extend the Term of the
----
Lease as provided in the Lease Extension Addendum attached as Exhibit F.
3.1 Tenant's Right to Terminate Lease. Tenant shall have the right
---------------------------------
to terminate this Lease if, and only if, Tenant fulfills all of the
following conditions:
(a) Tenant sends or delivers to Landlord a written notice signed by
Tenant exercising this right to terminate, and Landlord receives the notice
no earlier than 30 months after the Lease Commencement Date and no later
than 31 months after the Lease Commencement Date.
(b) No earlier than 42 months after the Lease Commencement Date and
no later than 42 months and five calendar days after the Lease Commencement
Date, (i) Tenant pays to Landlord, and Landlord receives from Tenant, the
sum of $200,000, in the form of a cashier's check and (ii) Tenant vacates
at least one-half of the Premises.
(c) Tenant vacates the remainder of the Premises no earlier than 48
months after the Lease Commencement Date and no later than 48 months and
five calendar days after the Lease Commencement Date.
(d) When it vacates the Premises, Tenant is not in default of any
provision of this Lease, including the payment of Rent.
Upon the occurrence of the Commencement Date, the parties will execute
and deliver a certificate in the form of Exhibit G attached hereto stating
and acknowledging the specific dates described in the Section 3.1 above.
Time is of the essence in the fulfillment of the foregoing conditions. If
Tenant fails to fulfill any of the foregoing conditions, Tenant's right to
terminate shall automatically and irrevocably cease. Except as set forth
in this Section or as otherwise expressly provided in this Lease, Tenant
shall have no right to terminate the Lease before the Lease Expiration
Date.
4. USE. Tenant shall occupy and use the Premises solely for lawful,
---
general business office purposes, for light manufacturing and assembling, and
for purposes incidental to such uses, all in strict compliance with the Building
Rules and Regulations from time to time in effect. Tenant shall, and Tenant
agrees to cause its agents, servants, employees, invitees and licensees to
observe and comply fully and faithfully with the Building Rules and Regulations
attached hereto as Exhibit C, and incorporated herein by this reference, or such
reasonable modifications, rules and regulations which may be hereafter adopted
by Landlord for the care, protection, cleanliness and operation of the Premises
and Complex. Any modifications to the Building Rules and
3
<PAGE>
Regulations will only be effective against Tenant to the extent they do not
materially adversely affect Tenant's use of the Premises, to the extent that
they are applied to all tenants in the Building in a non-discriminatory manner,
and to the extent that Tenant is given reasonable advance notice thereof. Tenant
shall also comply with all Legal Requirements and other restrictions on use of
the Premises as provided in this Lease, including, without limitation, paragraph
12 hereof. The Landlord represents that the Premises are properly zoned for the
permitted uses set forth herein.
5. RENT.
----
5.1 Base Rent. In consideration of Landlord's leasing the Premises
---------
to Tenant, Tenant shall pay to Landlord the base rent ("Base Rent") at the
time(s) and in the manner stated in paragraph 5.6 below, as stated in
Section "C" of the Summary of Basic Lease Information.
5.2 No Other Adjustment of Base Rent. The stipulation of Rentable
--------------------------------
Area set forth in paragraph 2 above and in the Summary of Basic Lease
Information, shall be conclusive and binding on the parties.
Notwithstanding the foregoing, the Base Rent set forth in paragraph 5.1
above and in the Summary of Basic Lease Information is a negotiated amount
and there shall be no adjustment to the Base Rent or Additional Rent
without the prior written consent of Landlord and Tenant. Tenant shall
have no right to withhold, deduct or offset any amount of the monthly Base
Rent, Additional Rent or any other sum due hereunder even if the actual
rentable square footage or Rentable Area of the Premises is less than set
forth in paragraph 2 hereof. The measurement of space shall be consistent
throughout the Building.
5.3 Additional Rent. In addition to paying the Base Rent specified
---------------
in paragraph 5.1 above, Tenant shall pay as additional rent the Tenant's
Share (as defined in subparagraph 5.3.1(b) below) of the Operating Expenses
(as defined in subparagraph 5.4 below) for each Fiscal Year, or portion
thereof, that are in excess of the amount of Operating Expenses applicable
to the Base Year (as defined in subparagraph 5.3.1(a) below). Said
additional rent, together with other amounts of any kind (other than Base
Rent) payable by Tenant to Landlord under the terms of this Lease, shall be
collectively referred to in this Lease as "Additional Rent." Operating
Expenses which are normally and reasonably allocable to more than one
Fiscal Year shall be prorated and allocated over such period(s). All
amounts due under this paragraph 5.3 as Additional Rent are payable for the
same periods and in the same manner, time and place as the Base Rent as
provided in paragraph 5.6 below. Without limitation on any other
obligation of Tenant that may survive the expiration of the Lease Term,
Tenant's obligations to pay the Additional Rent provided for in this
paragraph 5.3 shall survive the expiration of the Lease Term.
5.3.1 Additional Rent Definitions. The following definitions apply
---------------------------
to this paragraph 5:
(a) Base Year. "Base Year" means the Fiscal Year commencing
---------
January 1 through December 31 of the year stated in Section "D" of the
Summary of Basic Lease Information.
(b) Tenant's Share. "Tenant's Share" for Tenant's payment of
--------------
Operating Expenses means the percentage stated in Section "D" of the
Summary of Basic Lease Information.
5.3.2 Calculation and Payment of Additional Rent. Tenant's Share of
------------------------------------------
Operating Expenses for any Fiscal Year, or portion thereof, shall be
calculated and paid as follows:
(a) Calculation of Excess. If Tenant's Share of Operating
---------------------
Expenses for any Fiscal Year, commencing with the Fiscal Year
immediately following the Base Year, exceeds Tenant's Share of the
amount of Operating Expenses applicable to the Base Year (with
Operating Expenses for the Base Year 1999 being annualized), Tenant
shall pay as Additional Rent to Landlord an amount equal to that
excess (the "Excess") in the manner stated in subparagraphs 5.3.2(b)
and (c) below. Notwithstanding the foregoing, the Landlord
acknowledges that the Building and Parking Facility may not be fully
assessed for property taxes levied during the Base Year because of
incomplete construction. Therefore, for purposes of calculating the
Additional Rent, the Landlord will make an adjustment to the property
taxes applicable to the Base Year at the time the Building and Parking
Facility are fully assessed.
(b) Statement of Estimated Operating Expenses and Payment by
--------------------------------------------------------
Tenant. On or before the last day of the Fiscal Year in which the
------
Lease Commencement Date occurs and for each Fiscal Year thereafter,
Landlord shall endeavor to deliver to Tenant an estimate statement
(the "Estimate Statement") of Additional Rent to be due by Tenant for
the forthcoming Fiscal Year. The Estimate Statement will be based on
good faith estimates, reasonably determined,
4
<PAGE>
and will set forth in reasonable detail the calculation of estimated
expenses and Additional Rent. Thereafter, unless Landlord delivers to
Tenant a revision of the Estimate Statement, Tenant shall pay to
Landlord monthly, coincident with Tenant's payment of Base Rent, an
amount equal to the estimated Additional Rent set forth on the
Estimate Statement for such Fiscal Year divided by twelve (12) months.
On no more than two occasions during any Fiscal Year, Landlord may
estimate and re-estimate the Additional Rent to be due by Tenant for
that Fiscal Year and deliver a copy of the revised Estimate Statement
to Tenant. Thereafter, the monthly installments of Additional Rent
payable by Tenant shall be appropriately adjusted in accordance with
the revised Estimate Statement so that, by the end of any Fiscal Year,
Tenant shall have paid all of the Additional Rent as estimated by
Landlord on the revised Estimate Statement. Landlord's failure to
furnish the Estimate Statement for any Fiscal Year in a timely manner
shall not preclude Landlord from enforcing its rights to collect any
Additional Rent.
(c) Statement of Actual Operating Expenses and Payment by
-----------------------------------------------------
Tenant. Landlord shall provide to Tenant a budget of anticipated
------
Operating Expenses for the current year by March 31 each year.
Landlord shall endeavor to give to Tenant as soon as available
following the end of each Fiscal Year, but in no event later than June
30, a statement (the "Statement of Actual Operating Expenses") stating
the Operating Expenses incurred or accrued for that preceding Fiscal
Year and indicating the amount, if any, of any Excess due to Landlord
or overpayment by Tenant. Landlord's Statement of Actual Operating
Expenses will show in reasonable detail the amount and computation of
Operating Expenses for the applicable Fiscal Year, a statement as to
any Operating Expense which is not final and the amount of Tenant's
obligations hereunder and application of Tenant's estimated payments.
Except for Operating Expense items identified by Landlord as not being
final or adjustments to Operating Expense items not reasonably
foreseeable by Landlord, no adjustment will be made by Landlord to the
Statement of Actual Operating Expenses for any Fiscal Year subsequent
to June 30 following the end of the Fiscal Year to which the Statement
of Actual Operating Expenses relates. On receipt of the Statement of
Actual Operating Expenses for each Fiscal Year for which an Excess
exists, Tenant shall pay, with its next installment of Base Rent due,
the full amount of the Excess, less the estimated amounts (if any)
paid during the Fiscal Year pursuant to an Estimate Statement (as
defined in subparagraph 5.3.2(b) above). In the event there is an
overpayment of Additional Rent set forth on a Statement of Actual
Operating Expenses for any Fiscal Year, the amount of overpayment
shall be credited against payments of Additional Rent as they become
due. If it is determined that there is an overpayment of Additional
Rent by Tenant for the Fiscal year in which the Lease Term expires,
such overpayment shall be promptly refunded to Tenant within 60 days
following expiration of the Term. Landlord's failure to furnish the
Statement of Actual Operating Expenses for any Fiscal Year in a timely
manner shall not prejudice Landlord from enforcing its rights
hereunder. Even if the Lease Term is expired and Tenant has vacated
the Premises, if an Excess exists when final determination is made of
Tenant's Share of the Operating Expenses for the Fiscal Year in which
the Lease terminates, Tenant shall immediately pay to Landlord the
amount calculated under this subparagraph (c) within 15 days of
receipt of the Statement of Actual Operating Expenses for such Fiscal
Year. Provisions of this subparagraph (c) shall survive the expiration
or earlier termination of the Lease Term.
5.4 Operating Expenses shall mean all costs and expenses which
------------------
Landlord pays or accrues by virtue of the management, maintenance, service
or operation of the Land and all improvements thereon, including, without
limitation, the Building and Parking Facility, during a particular Fiscal
Year or portion thereof as determined by Landlord or its accountant in
accordance with generally accepted accounting principles (which shall be
consistently applied), subject to the exclusions contained in Section
5.4.2(a) below. The parties acknowledge and intend that the Lease of the
Premises to the Tenant be a full-service Lease. The present Estimate
Statement of Operating Expenses for the 1999 Fiscal Year has been delivered
to Tenant. The Operating Expenses shall be net and for that purpose shall
be deemed reduced by the amount of any insurance reimbursement, other
reimbursement, recoupment, payment, discount, credit, reduction, allowance,
or the like received or receivable by Landlord in connection with such
Operating Expenses.
5.4.1 Examples. "Operating Expenses" shall include, but shall not be
--------
limited to, the following to the extent they relate to the Complex or are
chargeable to the Complex in connection with the operation and maintenance
of the Cottonwood Corporate Center generally:
(a) all Impositions;
(b) all insurance premiums charged for policies obtained by
Landlord for the Land, Building and Parking Facility, which may
include without limitation, at Landlord's election, (i)
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fire and extended coverage insurance, including earthquake, windstorm,
hail, explosion, riot, strike, civil commotion, aircraft, vehicle and
smoke insurance, (ii) public liability and property damage insurance,
(iii) elevator insurance, (iv) workers' compensation insurance for the
employees covered by clause (h), (v) boiler, machinery, sprinkler,
water damage, and legal liability insurance, (vi) rental loss
insurance, and (vii) such other insurance as Landlord may elect to
obtain;
(c) all deductible amounts incurred in any Fiscal Year relating
to an insurable loss;
(d) all maintenance, repair, replacement, restoration and
painting costs, including, without limitation, the cost of operating,
managing, maintaining and repairing the following systems: utility,
mechanical, sanitary, drainage, escalator and elevator;
(e) environmental compliance costs up to $2,500 per year, and
all janitorial, snow removal, custodial, cleaning, washing,
landscaping, landscape maintenance, access systems, trash removal, and
pest control costs;
(f) all security costs;
(g) all electrical, energy monitoring, water, water treatment,
gas, sewer, telephone and other utility and utility-related charges;
(h) all wages, salaries, employee benefits, payroll taxes,
Social Security and insurance and other, similar salary charges
payable to all employees of Landlord or its affiliates, up to and
including the regional manager for performing services rendered in
connection with the repair, maintenance and operation of the Complex
(or an equitable pro rata portion of such expenses, if such employees
are engaged in the management, maintenance or operations of other
buildings) in connection with the Complex;
(i) all costs of leasing or purchasing supplies, tools,
equipment and materials in connection with the normal operation and
maintenance of the Complex;
(j) all fees and assessments of the Cottonwood Corporate Center
park applicable to the Complex;
(k) the cost of licenses, certificates, permits and inspections;
(l) the cost of contesting the validity or applicability of any
governmental enactments that may affect the Operating Expenses;
(m) the cost of Parking Facility maintenance and repair,
including, without limitation, resurfacing, repainting, restriping and
cleaning;
(n) all fees and other charges paid under all maintenance and
service agreements, including but not limited to window cleaning,
elevator and HVAC maintenance;
(o) All reasonable and customary fees, charges, management fees
(or amounts in lieu of such fees) up to a maximum of three percent
(3%) of gross rentals at the Complex, consulting fees, legal fees (but
excluding legal fees associated with dealings with individual tenants)
and accounting fees of all persons engaged by Landlord, together with
all other associated costs or other charges reasonably incurred by
Landlord in connection with the management office and the operation,
management, maintenance and repair of the Complex;
(p) all costs of monitoring services, including, without
limitation, any monitoring or control devices used by Landlord in
regulating the Parking Facility;
(q) amortization of the cost of acquiring, financing and
installing capital items which are intended to reduce (or avoid
increases in) operating expenses. Such costs shall be amortized over
the reasonable life of the items in accordance with generally accepted
accounting principles, but not beyond the reasonable life of the
Building; and
(r) such other expenses and costs reasonably necessary to be
incurred for the purpose of operating and maintaining the Complex in a
condition substantially similar to its condition as on the
Commencement Date of this Lease, reasonable wear and tear excepted;
and
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(s) any such reasonable expenses and reasonable costs
resulting from a substitution of work, labor, material or services in
lieu of any of the above itemizations, or for any such additional
work, labor services or material resulting from compliance with any
governmental laws, rules, regulations or orders applicable to the
Complex or any parts thereof which shall, at the time of any such
substitution and/or addition, be considered operating expenses in
accordance with generally accepted accounting principles as applied to
real estate.
5.4.2 Adjustments. Operating Expenses shall be adjusted as follows:
-----------
(a) Exclusions. "Operating Expenses" shall not include (i)
----------
expenditures classified as capital expenditures for federal income tax
purposes except as set forth in clause 5.4.1(q), (ii) costs for which
Landlord is entitled to specific reimbursement by Tenant, by any other
tenant of the Building or by any other third party, (iii) allowances
specified in the Work Letter for expenses incurred by Landlord for
improvements to the Premises, (iv) leasing commissions and all noncash
expenses (including amortization and depreciation), except for the
amortized costs specified in clause 5.4.1(q), (v) land or ground rent,
if applicable, and (vi) the excess cost of any work or service
performed for or facilities furnished to any tenant of the Building to
a substantially greater extent or in a manner materially more
favorable to such tenant than that performed for or furnished to
Tenant hereunder; (vii) sums which constitute insured repairs or other
work necessitated by fire or other casualty; (viii) sums incurred for
the alteration or renovation of vacant or vacated space in the
Building; (ix) expenditures paid to a related corporation, entity or
persons which are in excess of the amount which would be paid in the
absence of such relationship; (x) expenditures resulting from the
relocation or moving of tenants in the Building to another location
within the Building; (xi) any income, franchise or corporate tax, any
leasehold taxes on other tenants' personal property, sales, capital
levy, capital stock, excess profits, transfer, revenue, or any other
tax, assessment or charge upon or measured by rent payable to
Landlord; (xii) overhead and administrative costs of Landlord not
directly incurred in the operation and maintenance of the Complex;
provided, however, that expenses which benefit the Complex and which
are allocated on part to the Complex (such as the cost of blanket
insurance, and expenses of a regional manager) are not excludable
under this paragraph 5.4.2(a); (xiii) interest, amortization or other
costs, including legal fees, associated with any loan or refinancing;
(xiv) expenses incurred for any necessary replacement of any item to
the extent that it is paid under warranty; (xv) the cost of any item
or service which Tenant separately reimburses Landlord or pays to
third parties; (xvi) the cost of correcting defects in the
construction of the Tenant Improvements; provided however, that
repairs resulting from ordinary wear and tear shall not be deemed to
be defects; (xvii) all expenses directly resulting from the negligence
or willful misconduct of the Landlord, its agents, servants or other
employees; (xviii) all costs associated with ensuring that the Complex
operating and management systems and computer controlled facility
components have been designed or upgraded to accurately process
data/time data from, into and between the twentieth (20/th/) and
twenty-first (21/st/) centuries and the years 1999, 200, and all leap
years; (xix) any item specified in this Lease to be at Landlord's
expense, unless also specifically stated to be reimbursable as a
component of Operating Expenses; (xx) advertising and promotional
expenses; (xxi) all bad debt loss, rent loss, or reserve for bad debt
or rent loss; (xxii) rentals, if any, incurred in leasing items to the
extent that the leasing of such items is commercially unreasonable and
the cost of the purchase of that item would not be included as a
permitted capital expenditure hereunder; (xxiii) the cost of
correcting any applicable building or fire code violation(s) (other
than violations resulting from acts of Tenant; and (xxiv) any item
excluded from Operating Expenses pursuant to paragraph 5.4.1.
Operating Expenses shall not exceed the reasonable, customary and
ordinary cost for such items.
(b) Gross-Up Adjustments. If the occupancy of the Building
--------------------
during any part of any Fiscal Year (including the Base Year) is less
than ninety-five percent (95%), Landlord shall make an appropriate
adjustment of the Operating Expenses that vary according to occupancy
for that Fiscal Year, as reasonably determined by Landlord using sound
accounting and management principles, to determine the amount of
Operating Expenses that would have been incurred had the Building been
ninety-five percent (95%) occupied. This amount shall be considered
to have been the amount of Operating Expenses for that Fiscal Year.
5.4.3 Landlord's Books and Records. If Tenant disputes the amount of
----------------------------
the Additional Rent due hereunder, Tenant may designate, within one hundred
twenty (120) days after receipt of the Statement of Actual Operating
Expenses, an independent certified public accountant or qualified third-
party management company to inspect Landlord's records. Tenant is not
entitled to request that
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inspection, however, if Tenant is then in default under this Lease. The
accountant must be a member of a nationally recognized accounting firm and
must not charge a fee based on the amount of Additional Rent that the
accountant is able to save Tenant by the inspection. Any inspection must be
conducted in Landlord's offices at a reasonable time or times. If, after
such an inspection, Tenant still disputes the Additional Rent, Landlord and
Tenant shall each designate an independent certified public accountant,
which shall in turn jointly select a third independent certified public
accountant (the "Third CPA"). A certification of the proper amount shall be
made, at Tenant's sole expense, by the Third CPA. That certification shall
be final and conclusive. If as a result of such audit and certification, it
is determined that Tenant was overcharged by more than five percent (5%)
during any period covered by such audit and certification, then Landlord
will pay the costs and expenses of such audit. Any deficiency or
overpayment disclosed by such audit shall be promptly paid or refunded, as
the case may be.
5.5 Parking Charge. Tenant shall throughout the Term, lease from
--------------
Landlord the number of unassigned and assigned automobile parking spaces,
at such prices per month, as stated in Section "F" of the Summary of Basic
Lease Information. Such monthly parking charges shall be considered
Additional Rent and shall be due and payable without notice or demand, on
or before the first day of each calendar month. Landlord shall have the
right from time to time during the Extension Renewal Term (if applicable),
to increase the monthly parking charges for assigned parking spaces to the
then prevailing market rate. From time to time during the Extension
Renewal Term, the Landlord shall also have the right to increase the
monthly parking charges for unassigned parking spaces to the prevailing
market rate. Landlord shall also have the right to establish such
reasonable rules and regulations as may be deemed desirable, at Landlord's
reasonable discretion, for the proper and efficient operation and
maintenance of said Parking Facility; provided, however, that such rules
and regulations will only be effective against Tenant to the extent they do
not materially adversely affect this Lease, to the extent that they are
applied to all tenants in the Building in a non-discriminatory manner, and
to the extent that Tenant is given reasonable advance notice thereof. Such
rules and regulations may include, without limitation, (i) subject to the
provisions of this paragraph, the establishment of charges for parking
therein, and (ii) the use of parking gates, cards, permits and other
control devices to regulate the use of the parking areas. The rights of
Tenant and its employees, customers, service suppliers and invitees to use
the Parking Facility shall, to the extent such rules and regulations are
not inconsistent with the other terms of this Lease, at all times be
subject to (a) Landlord's right to establish reasonable rules and
regulations applicable to such use and to exclude any person therefrom who
is not authorized to use the same or who violates such rules and
regulations; (b) the rights of Landlord and other tenants in the Building
to use the same in common with Tenant; (c) other than with respect to
Tenant's assigned parking spaces, the availability of parking spaces in
said Parking Facility; and (d) Landlord's right to change the configuration
of the parking areas and any unassigned parking spaces as shall be
determined at Landlord's reasonable discretion. Tenant agrees to limit its
use of the Parking Facility to the number and type of parking spaces
specified in this paragraph above. Notwithstanding the foregoing, nothing
contained herein shall be deemed to impose liability upon Landlord for
personal injury or theft, for damage to any motor vehicle, or for loss of
property from within any motor vehicle, which is suffered by Tenant or any
of its employees, customers, service suppliers or other invitees in
connection with their use of the Parking Facility. Tenant understands and
agrees that, while the Parking Facility will be open to Tenant on a 24-hour
basis, other than spaces that are assigned for Tenant and other tenants,
all parking spaces in the parking area may be leased to members of the
general public between the hours of 6:30 p.m. through 7:00 a.m. Monday
through Saturday morning, after 1:30 p.m. on Saturday, and all day on
Sunday.
5.6 Payment of Rent. Except as otherwise expressly provided in this
---------------
Lease, all Base Rent and Additional Rent shall be due in advance monthly
installments on the first day of each calendar month during the Term. Rent
shall be paid to Landlord at its address recited in Section 27.7, or to
such other person or at such other address in the United States as Landlord
may from time to time designate in writing. Rent shall be paid without
notice, demand, abatement, deduction or offset in legal tender of the
United States of America. The Base Rent for the first full calendar month
of the Lease Term shall be paid on the Commencement Date of the Lease. In
addition, if the Term commences or ends on other than the first or the last
day of a calendar month, the Base Rent for the partial month shall be
prorated on the basis of the number of days during the applicable month.
If the Lease Term commences or ends on other than the first or the last day
of a Fiscal Year, the Additional Rent for the partial Fiscal Year
calculated as provided in paragraph 5.3 above shall be prorated on the
basis of the number of days during the applicable Fiscal Year. All
payments received by Landlord from Tenant shall be applied to the oldest
payment obligation owed by Tenant to Landlord. No designation by Tenant,
either in a separate or on a check or money order, shall modify this clause
or have any force or effect. The Rent to be paid by Tenant or any
Transferee hereunder shall not be based, in whole or in part, on the income
or profits derived from the lease, use or occupancy of the Premises. In
the event Landlord's Mortgagee succeeds to the Landlord's interests under
this Lease and determines that all or any portion of the Rent payable
hereunder is or may be deemed to be unrelated business income within the
meaning of the United States
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Internal Revenue Code or regulations issued thereunder, Landlord's
Mortgagee may elect unilaterally to amend the calculation of Rent such that
none of the Rent payable under this Lease will constitute unrelated
business income; provided, however, that any such amendment shall not
increase Tenant's payment obligations or other liabilities, or reduce the
obligations of Landlord, under this Lease.
5.7 Delinquent Payments and Handling Charge. All Rent and other
---------------------------------------
payments required of Tenant hereunder shall bear interest from the date due
until the date paid at the rate of interest specified in Section 27.13.
Any amount payable by Landlord to Tenant shall bear interest from the date
due until paid at the rate of interest specified in Section 27.13. In
addition, Tenant shall pay to Landlord a late charge of two and one-half
percent (2.5%) of the delinquent payment if (a) any Base Rent, Additional
Rent or other payments required of Tenant hereunder are not received by
Landlord within 5 days of when due; or (b) any Base Rent, Additional rent
or other payments required of Tenant hereunder are not received by Landlord
when due on more than three (3) occasions in any Lease Year to reimburse
Landlord for its costs and inconvenience incurred as a consequence of
Tenant's delinquency (other than interest, attorneys' fees and costs). The
parties agree that this late charge represents a reasonable estimate of the
expenses that Landlord will incur because of any late payment (other than
interest, attorneys' fees and costs). Landlord's acceptance of any late
charge shall not constitute a waiver of Tenant's default with respect to
the overdue amount or prevent Landlord from exercising any of the rights
and remedies available to Landlord under this Lease. Tenant shall pay the
late charge as Additional Rent with the next installment of Additional
Rent. In no event, however, shall the charges permitted under this Section
5.7 or elsewhere in this Lease, to the extent the same are considered to be
interest under applicable law, exceed the maximum rate of interest
allowable under applicable law. If any two noncash payments made by Tenant
are not paid by the bank or other institution on which they are drawn,
Landlord shall have the right, exercised by notice to Tenant, to require
that Tenant make all future payments by certified funds or cashier's check.
5.8 Letter of Credit / Security Deposit. In addition to the
-----------------------------------
foregoing, on or before the execution date of this Lease, Tenant shall
provide Landlord an irrevocable letter of credit in the aggregate amount of
$560,000 ("Letter of Credit") in a form and from a financial institution
(the "Issuing Bank") satisfactory to Landlord, in its sole discretion,
unconditionally payable to Landlord upon presentation as security for the
faithful performance by Tenant under this Lease.
The Letter of Credit shall be reduced to $420,000 upon receipt of the
following financial information that has been certified by the Chief
Financial Officer of Sonic Innovations:
Cash Balance: $1,000,000 minimum
Current Ratio: 1.1 to 1 minimum
Stockholders' Equity: $3,000,000 minimum
Net Income Before Taxes: $1,500,000 for the trailing three months
("Current Ratio", for purposes of this Section 5.8,
shall mean current assets divided by current
liabilities)
The required amount of the Letter of Credit shall be further reduced
to $280,000 upon receipt of the following financial information that has
been certified by the Chief Financial Officer of Sonic Innovations:
Cash Balance: $2,000,000 minimum
Current Ratio: 1.2 to 1 minimum
Stockholders' Equity: $5,000,000 minimum
Net Income Before Taxes: $3,000,000 for the trailing three months
The Letter of Credit requirement shall be replaced with a cash
Security Deposit equal to one months rent upon receipt of the cash deposit
and the following financial information that has been certified by the
Chief Financial Officer of Sonic Innovations:
Cash Balance: $3,000,000 minimum
Current Ratio: 1.25 to 1 minimum
Stockholders' Equity: $6,000,000 minimum
Net Income Before Taxes: $12,000,000 for the trailing twelve
months
OR
Evidence of an initial public offering that raised a minimum of
$20,000,000 in new stockholder's equity.
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At a minimum and without limiting the provisions of this Section 5.8
above, the Letter of Credit shall be valid for successive one year periods,
automatically renewed on each anniversary date of the Letter of Credit
during the Term of this Lease unless, thirty(30) days prior to any
expiration date, Tenant and the Issuing Bank provide Landlord with written
notice, in the manner provided in Section 27.7 of this Agreement, that the
Letter of Credit will not be renewed for any reason. Notwithstanding the
foregoing, in the event that (i) Landlord determines, in its sole
discretion, that either (a) Tenant has failed to timely make any payment or
perform any obligation under this Lease, or (b) there has occurred, or with
the passage time there would be, a default by Tenant under the Lease
Agreement; or (ii) the Landlord has not received satisfactory evidence that
the Letter of Credit has been renewed at least thirty (30) days prior to
any annual or other expiration date during the Term of this Lease, Landlord
may, prior to, concurrently with, in addition to or subsequent to
exercising any other right or remedy, draw upon the Letter of Credit for
the payment of any obligation due under this Lease, or to compensate
Landlord for any other expense, loss or damage which Landlord may incur by
reason of Tenant's failure to fully perform its obligations hereunder. The
Letter of Credit is not a limitation on Landlord's damages or other rights
under this Lease, and shall not be applied by Tenant to the Rent for the
last (or any) month of the Term. If this Lease is terminated due to any
default of Tenant or if Landlord determines to draw upon the Letter of
Credit as provided herein, the Landlord shall be authorized and entitled to
draw and apply the proceeds of the Letter of Credit as partial or whole
compensation, as the case may be, for the costs and expenses incurred by
Landlord in connection with this Lease, and such action shall be in
addition to any other damages or remedy to which Landlord is otherwise
entitled. Without in any way limiting the foregoing, Landlord may draw on
the Letter of Credit up to and including any expiration date, whether or
not notice has been provided to Landlord that the Letter of Credit will not
be renewed.
5.9 Holding Over. Any holding over by Tenant in the possession of
------------
the Premises, or any portion thereof, after the expiration of the Term,
with or without the consent of Landlord, shall require Tenant to pay one
hundred fifty percent (150%) of the Base Rent and Additional Rent herein
specified for the last month of the Term (prorated on a monthly basis),
unless Landlord shall specify a lesser amount for Rent in its sole
discretion. If Tenant holds over with Landlord's consent, such occupancy
shall be deemed a month-to-month tenancy and such tenancy shall otherwise
be on the terms and conditions herein specified in this Lease as far as
applicable. Notwithstanding the foregoing provisions or the acceptance by
Landlord of any payment by Tenant, any holding over without Landlord's
consent shall constitute a default by Tenant and shall entitle Landlord to
pursue all remedies provided in this Lease, or otherwise, and Tenant shall
be liable for any and all direct or consequential damages or losses of
Landlord resulting from Tenant's holding over without Landlord's consent.
6. CONSTRUCTION OF IMPROVEMENTS.
----------------------------
6.1 General. Subject to events of Force Majeure, Landlord and Tenant
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agree that Landlord shall construct, install, furnish, perform and supply
the Tenant Improvements in accordance with the parties' respective payment
and other obligations as specified in the Work Letter Agreement ("Work
Letter Agreement") attached hereto as Exhibit D and incorporated herein by
this reference. The Tenant Improvements shall meet or exceed the Building
Standard Tenant Improvements as specified in the Work Letter Agreement
6.2 Access by Tenant Prior to Commencement of Term. Provided that
----------------------------------------------
Tenant obtains and delivers to Landlord the certificates or policies of
insurance called for in Section 17.1, Landlord, in its sole discretion, may
permit Tenant and its employees, agents, contractors and suppliers to enter
the Phase One Space before the Lease Commencement Date or to enter the
Phase Two Space before the Phase Two Move-In Date (and such entry alone
shall not constitute Tenant's taking possession of the Phase One or Phase
Two Space for the purpose of Section 6.3(c) below), to perform certain work
on such Phase One or Phase Two Space on behalf of Tenant not contrary to
the provisions of the Work
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Letter Agreement. Tenant and each other person or firm who or which enters the
Premises before the Commencement Date shall conduct itself so as to not
interfere with Landlord or other occupants of the Building. Landlord may
withdraw any permission granted under this Section 6.2 upon twenty-four (24)
hours' notice to Tenant if Landlord, in its reasonable discretion, determines
that any such interference has been or may be caused. Any prior entry shall be
under all of the terms of this Lease (other than the obligation to pay Base Rent
and Additional Rent) and at Tenant's sole risk. Tenant hereby releases and
agrees to indemnify Landlord and Landlord's contractors, agents, employees and
representatives from and against any and all personal injury, death or property
damage (including damage to any personal property which Tenant may bring into,
or any work which Tenant may perform in, the Premises) which may occur in or
about the Complex in connection with or as the result of said entry by Tenant or
its employees, agents, contractors and suppliers unless caused by or resulting
from the gross negligence or wilful misconduct of Landlord, its contractors,
agents, employees, suppliers, or representatives or from a breach of this Lease
by Landlord. Landlord and Tenant acknowledge that coordination and cooperation
between Landlord and Tenant and their respective architects, engineers,
contractors and consultants will be required in order to complete the Landlord's
Work and the installation of Tenant's furniture, fixtures, and equipment.
Landlord and Tenant agree to use good faith efforts to coordinate and cooperate
to accomplish the completion of the Landlord's Work and the installation of
Tenant's furniture, fixtures and equipment and otherwise ready the Premises for
occupancy by Tenant on schedule.
6.3 Commencement Date; Adjustments to Commencement Date.
---------------------------------------------------
(a) For purposes of this Lease, the "Commencement Date" shall mean
-----------------
the earliest to occur of the following events (the "Lease Commencement
Events"): (a) the date of Substantial Completion of the Landlord's Work on
the Phase One Space, or (b) the date on which Landlord would have
substantially completed the Landlord's Work on the Phase One Space and
tendered possession of the Phase One Space to Tenant but for Net Tenant
Delay, as provided in the Work Letter Agreement, or (c) the date on which
Tenant takes possession of the Premises or any portion thereof, including
the Phase One Space. Subject to events of Force Majeure and the provisions
of this paragraph 6.3, the Lease Commencement Date is scheduled to be as
stated in Section "B" of the Summary of Basic Lease Information. Upon the
occurrence of the Commencement Date, the parties will execute and deliver a
certificate in the form of Exhibit G attached hereto stating and
acknowledging the Commencement Date.
(b) For purposes of this Lease, the "Phase II Move-In Date" shall
mean the earliest to occur of the following events (the "Phase II Move-In
Date Events"): (a) the date of Substantial Completion of the Landlord's
Work on the Phase Two Space, or (b) the date on which the Landlord would
have substantially completed the Landlord's Work on the Phase Two Space and
tendered possession of that space to Tenant but for Net Tenant Delay, as
provided in the Work Letter Agreement, or (c) the date on which Tenant
takes possession of the Phase Two Space. Subject to events of Force Majeure
and the provisions of this paragraph 6.3, the Phase II Move-In Date is
scheduled to be September 1, 1999.
(c) If by the scheduled Commencement Date or, as applicable, the
Phase II Move-In Date there is not Substantial Completion of the applicable
Tenant Improvements for any reason, and such failure to substantially
complete renders the Phase One Space or Phase Two Space, as applicable,
untenantable for their intended purpose, all as reasonably determined by
Landlord, or Landlord is unable to tender possession of the applicable
space to Tenant, then the Landlord may elect (in addition to all other
remedies available to Landlord) to postpone the Commencement Date or the
Phase II Move-In Date, as applicable, until the earliest to occur of the
Lease Commencement Events or the Phase II Move-In Events, as applicable.
Such postponement shall extend the scheduled expiration of the Term for a
number of days equal to the postponement. Whether or not Landlord makes
such an election and notwithstanding any provision in this Lease or any
exhibit to the contrary, the potential postponement of the payment of Base
Rent and Additional Rent shall be Tenant's sole and exclusive remedy for
Landlord's delay in completing the Landlord's Work, the Tenant Improvements
or tendering possession of the Premises to Tenant. The Landlord shall not
be subject to any liability, including, without limitation, lost profits or
incidental or consequential damages for any delay or inability to deliver
possession of the Premises to the Tenant. Such a delay or failure shall not
affect the validity of this Lease or the obligations of the Tenant
hereunder, other than the postponement of the Lease Term.
6.4 Removal of Certain Tenant Improvements and Restoration of the
-------------------------------------------------------------
Premises to Its Original Condition. Within 30 days after the termination of this
- ----------------------------------
Lease, Tenant shall remove such portions of the Tenant Improvements as the Work
Letter
11
<PAGE>
Agreement specifies must be removed upon Lease termination, shall repair all
damage caused by such removal, and shall restore to its original condition,
reasonable wear and tear and insured casualty loss excepted, (A) the portions of
the Premises affected by the removal and (B) such other portions of the Premises
as the Work Letter Agreement specifies. All such removal, repair, and
restoration shall be at Tenant's expense and shall be in accordance with the
Work Letter Agreement.
7. SERVICES TO BE FURNISHED BY LANDLORD.
------------------------------------
7.1 General. Subject to applicable Legal Requirements, governmental
-------
standards for energy conservation, and Tenant's performance of its obligations
hereunder, Landlord shall use all reasonable efforts to furnish the following
services:
(a) Subject to the charges provided in Section 7.4 below, HVAC to
the Premises during Building Operating Hours, at such temperatures and in
such amounts as are reasonably suitable and standard [thus excluding air
conditioning or heating for electronic data processing or other specialized
equipment or specialized (nonstandard) Tenant requirements];
(b) hot and cold water at those points of supply common to all floors
for lavatory and drinking purposes only;
(c) janitorial service five (5) days per week; however Tenant shall
provide any specialized janitorial service needed in the following areas:
production/assembly, shell lab and shipping/receiving;
(d) periodic window washing in and about the Building and the
Premises, anticipated to be accomplished approximately every 3 or 4
months for outside windows and every 2 or 3 months for inside windows;
(e) elevator service, if necessary, to provide access to and egress
from the Premises twenty-four hours per day, seven days per week;
(f) electric current twenty-four hours per day, seven days per week
for normal office machines and other machines of low electrical consumption
of not less than six (6) watts per square foot of Rentable Area of the
Premises available for Tenant's use; and
(g) replacement of fluorescent lamps in Building Standard light
fixtures installed by Landlord and of incandescent bulbs or fluorescent
lamps in all public rest rooms, stairwells and other Common Areas in the
Building.
If any of the services described above or elsewhere in this Lease are
interrupted, Landlord shall use reasonable diligence to promptly restore the
same; provided, however, if as a result of any interruption of services the
Premises will be uninhabitable or unusable by Tenant for five (5) consecutive
business days, then Base Rent and Additional Rent shall be abated to the extent
to which such condition interferes with Tenant's use of the Premises commencing
on the first day of such condition and continuing until such condition is
corrected. However, unless resulting from Landlord's gross negligence or wilful
misconduct, neither the interruption nor cessation of such services, nor the
failure of Landlord to restore same, shall render Landlord liable for damages to
person or property, or be construed as an eviction of Tenant, or work an
abatement of Rent or relieve Tenant from fulfilling any of its other obligations
hereunder. Other than in the case of a casualty, if such services are
interrupted for more than sixty (60) consecutive days, Tenant may terminate this
Lease upon written notice to Landlord.
If not previously installed, Landlord may cause an electric and/or water
meter(s) to be installed in the Premises of the Tenant in order to measure the
amount of electricity and/or water consumed for any such use, and the cost of
such meter(s) shall be paid promptly by Tenant.
Certain security measures (both by electronic equipment and personnel)
may be provided by Landlord in connection with the Building. However, Tenant
hereby acknowledges that any such security is intended to be solely for the
benefit of the Landlord and protecting its property, and while certain
incidental benefits may accrue to the Tenant therefrom, any such security is not
for the purpose of protecting either the property of Tenant or the safety of its
employees, agents or invitees. By providing any such security, Landlord assumes
no obligation to Tenant and shall have no liability arising therefrom.
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7.2 Keys and/or Access Cards. Landlord shall furnish Tenant, at Landlord's
------------------------
expense, with up to Two Hundred Fifty (250) keys and access cards, and at
Tenant's expense with such additional keys and access cards as Tenant may
request, to unlock or allow access to the Building and each corridor door
entering the Premises. Tenant shall not install, or permit to be installed, any
additional lock on any corridor door into or in the Premises or make, or permit
to be made, any duplicates of keys or access cards to the Premises without
Landlord's prior consent. Landlord shall be entitled at all times to possession
of a duplicate of all keys and access cards to all doors to or inside of the
Premises. Tenant shall designate in writing any rooms within the Premises to
which Tenant will not allow Landlord access and Landlord shall only have access
to such rooms (except in emergency situations) with the advance permission of
Tenant. All keys and access cards referred to in this Section 7.2 shall remain
the property of the Landlord. Upon the expiration or termination of the Term,
Tenant shall surrender all such keys and access cards to Landlord and shall
deliver to Landlord the combination to all locks on all safes, cabinets and
vaults which will remain in the Premises. Landlord shall be entitled to install,
operate and maintain a card reader and after-hours access card system, security
systems and other control devices in or about the Premises and the Complex which
regulate entry into the Building (or portions thereof) and monitor, by closed
circuit television or otherwise, all persons leaving or entering the Complex,
the Building and the Premises.
7.3 Tenant Identity, Signs and Other Matters. Landlord shall disburse a
----------------------------------------
portion of the Tenant Improvement Allowance, as defined in the Work Letter
Agreement attached as Exhibit D, to provide and install, in Building Standard
graphics, letters or numerals identifying Tenant's name and suite number
adjacent to Tenant's entry door at one location per floor of the Building
occupied by Tenant. Tenant's name, as set forth on the first page of this Lease,
or as otherwise provided by Tenant in writing upon execution of this Lease,
shall also be placed in the Building Directory located on the main level of the
Building. Any subsequent modification to the listing of Tenant's name in the
Building Directory shall be at Tenant's cost. Without Landlord's prior written
consent, no other signs, numerals, letters, graphics, symbols or marks
identifying Tenant shall be placed on the exterior, or in the interior if they
are visible from the exterior, of the Premises.
Tenant shall not place or suffer to be placed on any exterior door, wall or
window of the Premises, on any part of the inside of the Premises which is
visible from outside of the Premises, or elsewhere on the Complex, any sign,
decoration, notice, logo, picture, lettering, attachment, advertising matter or
other thing of any kind, without first obtaining Landlord's prior written
approval, which Landlord may, in its discretion, grant or withhold. Landlord
may, at Tenant's cost, and without notice or liability to Tenant, enter the
Premises and remove any item erected in violation of this Section. Landlord, as
part of Building Rules and Regulations, may establish rules and regulations
governing the size, type and design of all such items and Tenant shall abide by
such rules and regulations subject to the provisions of this Lease applicable to
Building Rules and Regulations.
7.4 Charges. Tenant shall pay to Landlord monthly as billed, as Additional
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Rent, such charges as may be separately metered or as Landlord may compute for
(a) any utility services utilized by Tenant for computers, data processing
equipment or other electrical equipment in excess of that agreed to be furnished
by Landlord pursuant to Section 7.1, (b) lighting installed in the Premises in
excess of Building Standard lighting, (c) HVAC and other services in excess of
that stated in Section 7.1(a) or provided at times other than Building Operating
Hours, and (d) janitorial services required with respect to Above Standard
Tenant Improvements within the Premises. If Tenant wishes to use HVAC or
electrical services to the Premises during hours other than Building Operating
Hours, Landlord shall supply such HVAC, electrical and utility services at an
hourly cost to Tenant of $17.50 per Service Area (defined below), as adjusted
from time to time by Landlord consistent with prevailing market charges for such
use. A "Service Area", as used in this Lease, shall be defined as the separate
portions of the Premises as outlined on Exhibit B hereto (Two Service Areas on
Floor 1, Three Service Areas on Floor 5, and Two Service Areas on Floor 6).
Tenant will not be required to pay the hourly cost for services set forth above
for any Service Area unless said services are separately utilized by Tenant in
the Service Area. Landlord may utilize a lighting and utility occupancy sensor
in order to automatically determine and control use of HVAC, electrical and
other utility services. Landlord may elect to estimate the charges to be paid by
Tenant under this Section 7.4 and bill such charges to Tenant monthly in
advance, in which event Tenant shall promptly pay the estimated charges. When
the actual charges are determined by Landlord, an appropriate cash adjustment
shall be made between Landlord and Tenant to account for any underpayment or
overpayment by Tenant.
7.5 Operating Hours. Subject to Building Rules and Regulations and such
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security standards as Landlord may from time to time adopt, the Building shall
be open to the public during the Building Operating Hours and the Premises shall
be open to Tenant during hours other than Building Operating Hours.
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8. REPAIR AND MAINTENANCE.
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8.1 By Landlord. Landlord shall provide the services to the Premises
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set forth in paragraph 7.1 above and shall maintain the Complex (excepting
the Premises, but not Building systems therein (which Building systems
Landlord shall maintain), and portions of the Building leased by persons
not affiliated with Landlord) at all times in accordance with the standards
of similar office buildings and developments in the Salt Lake suburban
area, making such repairs and replacements as may be required to maintain
the Building in such condition. This Section 8.1 shall not apply to damage
resulting from a Taking (as to which Section 14 shall apply), or damage
resulting from a casualty (as to which Section 15.1 shall apply), or to
damage for which Tenant is otherwise responsible under this Lease. Tenant
hereby waives and releases any right it may have to make repairs to the
Premises or Building at Landlord's expense under any law, statute,
ordinance, rules and regulations now or hereafter in effect in any
jurisdiction in which the Building is located.
8.2 By Tenant. Tenant, at Tenant's sole cost, shall maintain the
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nonstructural components of the Premises and every part of the Premises
(including, without limitation, all floor, wall and ceiling coverings,
doors and locks, furnishings, trade fixtures, signage, leasehold
improvements, equipment and other personal property from time to time
situated in or on the Premises but excluding Building systems therein) in
good order, condition and repair, and in a clean, safe, operable,
attractive and sanitary condition. Tenant will not commit or allow to
remain any waste or damage to any portion of the Premises. Tenant shall
repair or replace, subject to Landlord's direction and supervision, any
damage to the Complex caused by Tenant or Tenant's agents, contractors or
invitees. If Tenant fails to make such repairs or replacements, Landlord
may, upon at least 5 days advance notice to Tenant, make the same at
Tenant's cost. Such cost shall be payable to Landlord by Tenant on demand
as Additional Rent. All contractors, workmen, artisans and other persons
which or whom Tenant proposes to retain to perform work in the Premises (or
the Complex, pursuant to the second sentence of this Section 8.2) pursuant
to this Section 8.2 or Section 11 shall be approved by Landlord, in
Landlord's reasonable discretion, prior to the commencement of any such
work.
9. TAXES ON TENANT'S PROPERTY. Tenant shall be liable for and shall pay,
--------------------------
before they become delinquent, all taxes and assessments levied against any
personal property placed by Tenant in the Premises (even if same becomes a
fixture by operation of law or the property of Landlord by operation of this
Lease), including any additional Impositions which may be assessed, levied,
charged or imposed against Landlord or the Building by reason of non-Building
Standard Items in the Premises. Tenant may withhold payments of any taxes and
assessments described in this Section 9 so long as Tenant contests its
obligation to pay in accordance with applicable law and the nonpayment thereof
does not pose a threat of loss or seizure of the Building or any interest of
Landlord therein.
10. TRANSFER BY TENANT.
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10.1 General. Except as specifically provided in this Section 10.1
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below, Tenant shall not directly or indirectly, voluntarily or by operation
of law, sell, assign, encumber, pledge or otherwise Transfer or hypothecate
all or any part of the Premises or Tenant's leasehold estate hereunder, or
permit the Premises to be occupied by anyone other than Tenant or sublet
the Premises or any portion thereof without Landlord's prior written
consent in Landlord's discretion (such consent not to be unreasonably
withheld, conditioned or delayed), being obtained in each instance, subject
to the terms and conditions contained in this paragraph. Notwithstanding
the foregoing, but without waiving any other requirement for a Transfer as
contained in this Section 10, Tenant shall have the right, without the
prior consent of Landlord, to assign the Lease or sublet the whole or any
part of the Premises to a corporation or entity (a "Related Entity") which:
(i) is Tenant's parent organization, or (ii) is a wholly-owned subsidiary
of Tenant or Tenant's parent organization, or (iii) is an organization of
which Tenant or Tenant's parent owns in excess of fifty percent (50%) of
the outstanding capital stock or has in excess of fifty percent (50%)
ownership or control interest, or (iv) is the result of a consolidation,
merger or reorganization with Tenant and/or Tenant's parent organization,
or (v) is the Transferee of substantially all of Tenant's assets. Except
as provided above, any attempted Transfer without Landlord's consent shall
be void. If Tenant desires to effect a Transfer, it shall deliver to
Landlord written notice thereof in advance of the date on which Tenant
proposes to make the Transfer, together with all of the terms of the
proposed Transfer and the identity of the proposed Transferee. Upon
request by Landlord, such notice shall contain financial information
concerning the proposed Transferee and other reasonable information
regarding the transaction which Landlord may specify. Landlord shall have
fifteen (15) days following receipt of the notice and information within
which to notify Tenant in writing whether Landlord elects (a) to refuse to
consent to the Transfer and to continue this Lease in full force, or (b) to
consent to the proposed Transfer. If Landlord fails to notify Tenant of
its election within said fifteen (15) day period,
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Landlord shall be deemed to have elected option (a). The consent by
Landlord to a particular Transfer shall not be deemed a consent to any
other Transfer. If a Transfer occurs without the prior written consent of
Landlord as provided herein, Landlord may nevertheless collect rent from
the Transferee and apply the net amount collected to the Rent payable
hereunder, but such collection and application shall not constitute a
waiver of the provisions hereof or a release of Tenant from the further
performance of its obligations hereunder.
10.2 Conditions. The following conditions shall automatically apply
----------
to each Transfer, without the necessity of same being stated or referred to
in Landlord's written consent:
(a) Tenant shall execute, have acknowledged and deliver to
Landlord, and cause the Transferee to execute, have acknowledged and
deliver to Landlord, an instrument in form and substance acceptable to
Landlord in which (i) the Transferee adopts this Lease and agrees to
perform, jointly and severally with Tenant, all of the obligations of
Tenant hereunder, as to the space Transferred to it, including,
without limitation, the prohibition against rent based on the income
or profits derived from the Premises (any purported lease to the
contrary being null and void), (ii) Tenant subordinates to Landlord's
statutory lien and security interest any liens, security interests or
other rights which Tenant may claim with respect to any property of
the Transferee, (iii) Tenant agrees with Landlord that, if the rent or
other consideration due by the Transferee exceeds the Rent for the
transferred space, then Tenant shall pay Landlord as Additional Rent
hereunder 75% of such excess Rent and other consideration, net of
reasonable leasing commissions and tenant improvement costs directly
required in connection with such Transfer actually paid by Tenant,
immediately upon Tenant's receipt thereof, (iv) if the transferred
space is less than the entire portion of the premises on a particular
floor and unless direct access to the transferred space from a public
corridor is already available, Tenant and the Transferee agree to
provide to Landlord, at their expense, direct access from a public
corridor in the Building to the transferred space, (v) the Transferee
agrees to use and occupy the Transferred space solely for the purpose
specified in Section 4 and otherwise in strict accordance with this
Lease, and (vi) Tenant acknowledges that, notwithstanding the
Transfer, Tenant remains directly and primarily liable for the
performance of all the obligations of Tenant hereunder (including,
without limitation, the obligation to pay all Rent), and Landlord
shall be permitted to enforce this Lease against Tenant or the
Transferee, or all of them, without prior demand upon or proceeding in
any way against any other persons; and
(b) Tenant shall deliver to Landlord a counterpart of all
instruments relative to the Transfer executed by all parties to such
transaction (except Landlord).
(c) If Tenant requests Landlord to consent to a proposed
Transfer, Tenant shall pay to Landlord, whether or not consent is
given, Landlord's reasonable costs, including, without limitation,
reasonable attorneys' fees, incurred in connection with such request.
10.3 Liens. Without in any way limiting the generality of the
-----
foregoing, Tenant shall not grant, place or suffer, or permit to be
granted, placed or suffered, against the Complex or any portion thereof,
any lien, security interest, pledge, conditional sale contract, claim,
charge or encumbrance (whether constitutional, statutory, contractual or
otherwise) and, if any of the aforesaid does arise or is asserted, Tenant
will, promptly upon demand by Landlord and at Tenant's expense, cause the
same to be released.
10.4 Assignments in Bankruptcy. If this Lease is assigned to any
-------------------------
person or entity pursuant to the provisions of the Bankruptcy Code, 11
U.S.C. (S) 101 et seq. (the "Bankruptcy Code"), any and all monies or other
-- ---
consideration payable or otherwise to be delivered in connection with such
assignment shall be paid or delivered to Landlord, shall be and remain the
exclusive property of Landlord and shall not constitute property of Tenant
or of the Estate of Tenant within the meaning of the Bankruptcy Code.
11. ALTERATIONS. Tenant shall not make (or permit to be made) any change,
-----------
addition or improvement to the Premises (including, without limitation, the
attachment of any fixture or equipment) unless such change, addition or
improvement (a) equals or exceeds the Building Standard and utilizes only new
and first-grade materials, (b) is in conformity with all Legal Requirements, and
is made after obtaining any required permits and licenses, (c) is made with the
prior written consent of Landlord not to be unreasonably withheld, conditioned
or delayed, (d) is made pursuant to plans and specifications approved in writing
in advance by Landlord, (e) is made after Tenant has provided to Landlord such
reasonable indemnification and/or bonds requested by Landlord, including,
without limitation, a performance and completion bond in such form and amount as
may be satisfactory to Landlord to protect against claims and liens for labor
performed and materials furnished, and to insure the completion of any change,
addition or improvement, (f) is carried out by persons
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approved in writing by Landlord who, if required by Landlord, deliver to
Landlord before commencement of their work proof of such insurance coverage as
Landlord may require, with Landlord named as an additional insured, and (g) is
done only at such time and in such manner as Landlord may reasonably specify.
Notwithstanding the foregoing, changes, additions, and improvements which cost
less than $10,000 and do not alter the exterior or any structural elements of
the Complex shall not be subject to the requirements of subsections (c), (d),
(e), or (f) above; provided, however, that any such alterations shall not be
made without Landlord's prior written consent to the Contractor selected to do
the work. All such alterations, improvements and additions (including all
articles attached to the floor, wall or ceiling of the Premises) shall become
the property of Landlord and shall, at Landlord's election, be (i) surrendered
with the Premises as part thereof at the termination or expiration of the Term,
without any payment, reimbursement or compensation therefor, or (ii) removed by
Tenant, at Tenant's expense, with all damage caused by such removal repaired by
Tenant. Tenant may remove Tenant's trade fixtures, office supplies, movable
office furniture and equipment not attached to the Building, provided such
removal is made prior to the expiration of the Term, no uncured Event of Default
has occurred and Tenant promptly repairs all damage caused by such removal.
Tenant shall indemnify, defend and hold harmless Landlord from and against all
liens, claims, damages, losses, liabilities and expenses, including attorneys'
fees, which may arise out of, or be connected in any way with, any such change,
addition or improvement. Within twenty (20) days following the imposition of any
lien resulting from any such change, addition or improvement, Tenant shall cause
such lien to be released of record by payment of money or posting of a proper
bond.
12. PROHIBITED USES.
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12.1 General. Tenant will not (a) use, occupy or permit the use or
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occupancy of the Complex or Premises for any purpose or in any manner which
is or may be, directly or indirectly, violative of any Legal Requirement,
or contrary to Building Rules and Regulations, or dangerous to life or
property, or a public or private nuisance, or disrupt, obstruct or
unreasonably annoy the owners or any other tenant of the Building or
adjacent buildings, (b) keep or permit to be kept any substance in, or
conduct or permit to be conducted any operation from, the Premises which
might emit offensive odors or conditions into other portions of the
Building, or make undue noise or create undue vibrations, (c) commit or
permit to remain any waste to the Complex or Premises, (d) install or
permit to remain any improvements to the Complex or Premises, window
coverings or other items (other than window coverings which have first been
approved by Landlord) which are visible from the outside of the Premises,
or exceed the structural loads of floors or walls of the Building, or
adversely affect the mechanical, plumbing or electrical systems of the
Building, or affect the structural integrity of the Building in any way,
(e) permit the occupancy of the Premises at any time during the Lease Term
to exceed one person (including visitors) per two hundred (200) square feet
Rentable Area of space in the Premises, or (f) commit or permit to be
committed any action or circumstance in or about the Complex or Building
which, directly or indirectly, would or might justify any insurance carrier
in cancelling or increasing the premium on the fire and extended coverage
insurance policy maintained by Landlord on the Complex or Building or
contents, and if any increase results from any act of Tenant, then Tenant
shall pay such increase promptly upon demand therefor by Landlord.
12.2 Hazardous Materials.
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(a) Without limiting the foregoing, Tenant shall not cause or
permit any Hazardous Material (defined below) to be brought upon, kept
or used in or about the Premises or Complex by Tenant, its agents,
employees, contractors or invitees, without the prior written consent
of Landlord. Notwithstanding the foregoing, Tenant may use and store
types and quantities of materials and substances which may be or
contain Hazardous Materials, provided that the same are of the type
and in the quantities customarily found or used in offices for use of
similar businesses, including packaging materials, commercial cleaning
fluids and photocopier fluids. If Tenant breaches the obligations
stated in the preceding sentence, or if the presence of Hazardous
Materials on the Premises or Complex caused or permitted by Tenant
results in contamination of the Premises or Complex, or if
contamination of the Premises or Complex by Hazardous Material
otherwise occurs for which Tenant is legally liable to Landlord for
damage resulting therefrom, then Tenant shall indemnify, defend and
hold Landlord harmless from any and all claims, judgments, damages,
penalties, fines, costs, liabilities or losses (including, without
limitation, diminution in value of the Premises or Complex, damages
for the loss or restriction on use of rentable or usable space or any
amenity of the Premises or Complex, damages arising from any adverse
impact on marketing of space in the Building, and sums paid in
settlement of claims, attorneys' fees, consultant fees and expert
fees) which arise during or after the Lease Term as a result of such
contamination. This indemnification of Landlord includes, without
limitation, the obligation to reimburse Landlord for costs incurred in
connection with any cleanup, remedial, removal or restoration work
required by any federal, state or local governmental agency or
political subdivision. Without limiting the foregoing, if
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the presence of any Hazardous Material in, on or about the Premises or
Complex caused by or permitted by Tenant results in any contamination
of the Premises or Complex, Tenant shall promptly take all actions at
its sole expense as are necessary to return the Premises or Complex to
the condition existing prior to the introduction of any Hazardous
Material; provided, however, that Landlord's approval of such action
shall first be obtained. "Hazardous Material" shall mean, in the
broadest sense, any petroleum-based products, pesticides, paints,
insolvents, polychlorinated, biphenyl, lead, cyanide, DDT, acids,
ammonium compounds and other chemical products and any substance or
material defined or designated as a hazardous or toxic, or other
similar term, by any federal, state or local environmental statute,
regulation or ordinance affecting the Premises or Complex presently in
effect or that may be promulgated in the future, as such statutes,
regulations and ordinances may be amended from time to time. In
addition, Tenant shall execute affidavits, representations and the
like from time to time at Landlord's request concerning Tenant's best
knowledge and belief regarding the presence of hazardous substances or
materials on the Premises. In all events, Tenant shall indemnify
Landlord in the manner elsewhere provided in this Lease from any
release of hazardous materials on the Premises to the extent caused
by, or resulting from the acts of, Tenant or Tenant's employees,
directors, partners, shareholders, contractors, agents, invitees or
representatives occurring while Tenant is in possession, or elsewhere
if caused by Tenant or persons acting under Tenant.
(b) Landlord represents and warrants that, to the best of its
knowledge: (i) no part of the Premises or the Complex has ever been
used as a sanitary landfill, waste dump site or for the treatment,
storage or disposal of Hazardous Materials; and (ii) Landlord has not
received any notice of any action or proceeding relating to any
Hazardous Material or Release thereof on, under or at the Complex.
(c) The within covenants shall survive the expiration or
earlier termination of the lease term.
12.3 Overstandard Tenant Use. Tenant shall not, without Landlord's
-----------------------
prior written consent, use heat-generating machines, other than standard
equipment or lighting, or machines other than normal fractional horsepower
office or light manufacturing machines, in the Premises that may affect the
temperature otherwise maintained by the air conditioning system or increase
the water normally furnished to the Premises by Landlord.
13. ACCESS BY LANDLORD. Upon reasonable prior notice (except in case of
------------------
emergency or to perform janitorial services), Landlord, its employees,
contractors, agents and representatives, shall have the right (and Landlord, for
itself and such persons and firms, hereby reserves the right) to enter the
Premises at all hours (a) to inspect, clean, maintain, repair, replace or alter
the Premises or the Building (as otherwise permitted by this Lease), (b) to show
the Premises to prospective purchasers (or, during the last twelve (12) months
of the Term, to prospective tenants), (c) to determine whether Tenant is
performing its obligations hereunder and, if it is not, upon 5 days prior
written notice to Tenant, to perform same at Landlord's option and Tenant's
expense, or (d) for any other reasonable purpose. In an emergency, Landlord (and
such persons and firms) may use any means to open any door into or in the
Premises without any liability therefor. Landlord shall use reasonable efforts
to minimize interference with Tenant's use of the Premises. Entry into the
Premises by Landlord or any other person or firm named in the first sentence of
this Section 13 for any purpose permitted herein shall not constitute a trespass
or an eviction (constructive or otherwise), or entitle Tenant to any abatement
or reduction of Rent, or constitute grounds for any claim (and Tenant hereby
waives any claim) for damages for any injury to or interference with Tenant's
business, for loss of occupancy or quiet enjoyment, or for consequential
damages.
14. CONDEMNATION. If all of the Complex is Taken, or if so much of the
------------
Complex is Taken that, in Landlord's opinion, the remainder cannot be restored
to an economically viable, quality office building, or if the awards payable to
Landlord as a result of any Taking are, in Landlord's opinion, inadequate to
restore the remainder to an economically viable, quality office building,
Landlord may, at its election, exercisable by the giving of written notice to
Tenant within sixty (60) days after the date of the Taking, terminate this Lease
as of the date of the Taking or the date Tenant is deprived of possession of the
Premises (whichever is later). Tenant may, at its election, exercisable by
giving sixty (60) days' written notice to Landlord, terminate this Lease in the
event a substantial (greater than 50%) portion of the Premises is taken
rendering the Premises inadequate for its continued use and occupancy by Tenant.
If this Lease is not terminated as a result of a Taking, Landlord shall restore
the Premises remaining after the Taking to the condition prior to the Taking.
During the period of restoration, Base Rent shall be abated to the extent the
Premises are rendered untenantable and, after the period of restoration, Base
Rent and Tenant's Share shall be reduced in the proportion that the area of the
Premises Taken or otherwise rendered untenantable bears to the area of the
Premises just prior to the Taking. If any portion of Base Rent is abated under
this Section 14, either Tenant or Landlord may elect to extend the expiration
date of the Term for the period of the abatement. All awards, proceeds,
compensation or other payments from
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or with respect to any Taking of the Complex or any portion thereof shall belong
to Landlord, and Tenant hereby assigns to Landlord all of its right, title,
interest and claim to same. Whether or not this Lease is terminated as a
consequence of a Taking, all damages or compensation awarded for a partial or
total Taking, including any award for severance damage, shall be the sole and
exclusive property of Landlord. Tenant may assert a claim for and recover from
the condemning authority, but not from Landlord, such compensation as may be
awarded on account of Tenant's moving and relocation expenses, and depreciation
to and loss of Tenant's moveable personal property, trade fixtures, and
diminution in the value of or deprivation of the leasehold estate under this
Lease. Tenant shall have no claim against Landlord for the occurrence of any
Taking, or for the termination of this Lease or a reduction in the Premises as a
result of any Taking.
15. CASUALTY.
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15.1 General. Tenant shall give prompt written notice to Landlord of
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any casualty to the Complex of which Tenant is aware and any casualty to
the Premises. If (a) the Complex or the Premises are totally destroyed, or
(b) if the Complex or the Premises are partially destroyed but in
Landlord's opinion they cannot be restored to an economically viable,
quality office building, or (c) if the insurance proceeds payable to
Landlord as a result of any casualty are, in Landlord's opinion, inadequate
to restore the portion remaining to an economically viable, quality office
building, or (d) if the damage or destruction occurs within twelve (12)
months of the expiration of the Term, or (e) Landlord's Mortgagee requires
insurance proceeds be applied to pay or reduce indebtedness rather than
repair the Premises, Landlord may, at its election exercisable by the
giving of written notice to Tenant within forty-five (45) days after the
casualty, terminate this Lease as of the date of the casualty or the date
Tenant is deprived of possession of the Premises (whichever is later). If
this Lease is not terminated by Landlord as a result of a casualty,
Landlord shall (subject to Section 15.2) restore the Premises to the
condition prior to the casualty. If restoration of the Premises to a
Building Standard Condition is not completed, or estimated by Landlord or
its agents to be completed, within a period of one hundred sixty (160)
days, Tenant may elect to terminate this Lease by providing written notice
to Landlord within thirty (30) days after expiration of the one hundred
sixty (160) day period, or, as applicable, within thirty (30) days after
receipt by Tenant of a written estimate from Landlord of a time in excess
of one hundred sixty (160) days to complete the restoration. If Tenant
does not elect to terminate within this 30-day period, Tenant shall be
deemed to have waived the option to terminate. During the period of
restoration, Base Rent and Additional Rent shall be abated to the extent
the Premises are rendered untenantable and, after the period of
restoration, Base Rent and Tenant's Share shall be reduced in the
proportion that the area of the Premises remaining tenantable after the
casualty bears to the area of the Premises just prior to the casualty.
Except for abatement of Base Rent, if any, Tenant shall have no claim
against Landlord for any loss suffered by reason of any such damage,
destruction, repair or restoration, nor may Tenant terminate this Lease as
the result of any statutory provision in effect on or after the date of
this Lease pertaining to the damage and destruction of the Premises or the
Building. Landlord shall not be required to repair any damage or to make
any restoration or replacement of any furnishings, trade fixtures,
leasehold improvements, equipment, merchandise and other personal property
installed in the Premises by Tenant or at the direct or indirect expense of
Tenant.
15.2 Intentionally Left Blank.
------------------------
16. SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT.
---------------------------------------------
16.1 General. This Lease, Tenant's leasehold estate created hereby,
-------
and all of Tenant's rights, titles and interests hereunder and in and to
the Premises are hereby made subject and subordinate to any Mortgage
presently existing or hereafter placed upon all or any portion of the
Complex, and to any and all renewals, extensions, modifications,
consolidations and replacements of any Mortgage and all advances made or
hereafter to be made on the security of any Mortgage. Notwithstanding the
foregoing, Landlord and Landlord's Mortgagee may, at any time upon the
giving of written notice to Tenant and without any compensation or
consideration being payable to Tenant, make this Lease, and the aforesaid
leasehold estate and rights, titles and interests, superior to any
Mortgage. In order to confirm the subordination (or, at the election of
Landlord or Landlord's Mortgagee, the superiority of this Lease), upon the
written request by Landlord or by Landlord's Mortgagee to Tenant, and
within ten (10) days of the date of such request, and without any
compensation or consideration being payable to Tenant, Tenant shall
execute, have acknowledged and deliver a recordable instrument
substantially in the form of Exhibit H hereto. Without limiting the
foregoing, upon request by Landlord's Mortgagee, the Landlord and Tenant
shall execute such documents as Landlord's Mortgagee deems necessary to
effect an amendment of this Lease; provided, however, any such amendment
may not materially adversely affect any of Tenant's rights, privileges, and
remedies provided for in this Lease, the amounts payable by Tenant under
this Lease, Tenant's use, occupancy and quiet enjoyment of the Premises as
18
<PAGE>
set forth herein. Tenant's failure to execute and deliver such
instrument(s) as required in this Section 16 shall constitute a default
under this Lease.
16.2 Attornment. Upon the written request of any person or party
----------
succeeding to the interest of Landlord under this Lease, Tenant shall
automatically become the tenant of and attorn to such successor in interest
without any change in any of the terms of this Lease. No successor in
interest shall be (a) bound by any payment of Rent for more than one month
in advance, except payments of security for the performance by Tenant of
Tenant's obligations under this Lease, or (b) subject to any offset,
defense or damages arising out of a default or any obligations of any
preceding Landlord. Neither Landlord's Mortgagee nor its successor in
interest shall be bound by any amendment of this Lease entered into after
Tenant has been given written notice of the name and address of Landlord's
Mortgagee and without the written consent of Landlord's Mortgagee or such
successor in interest, not to be unreasonably withheld or delayed. Any
transferee or successor-in-interest shall not be liable for any acts,
omissions or defaults of Landlord that occurred before the sale or
conveyance, or the return of any security deposit except for deposits
actually paid to the successor or transferee. Tenant agrees to give
written notice of any default by Landlord to the holder of any Mortgage.
Tenant further agrees that, before it exercises any rights or remedies
under the Lease, other than Rent abatement as expressly provided herein,
the holder of any Mortgage or other successor-in-interest shall have the
right, but not the obligation, to cure the default within the same time, if
any, given to Landlord to cure the default, plus an additional thirty (30)
days. The subordination, attornment and mortgagee protection clauses of
this Section 16 shall be self-operative and no further instruments of
subordination, attornment or mortgagee protection need be required by any
Landlord's Mortgagee or successor in interest thereto. Nevertheless, upon
the written request therefor and without any compensation or consideration
being payable to Tenant, Tenant agrees to execute, have acknowledged and
deliver such instruments substantially in the form of Exhibit H hereto to
confirm the same.
17. INSURANCE.
---------
17.1 General. Tenant shall obtain and maintain throughout the Term
-------
the following policies of insurance:
(a) commercial general liability insurance with a combined
single limit for bodily injury and property damage of not less than
One Million Dollars ($1,000,000) per occurrence, including, without
limitation, contractual liability coverage for the performance by
Tenant of the indemnity agreements set forth in Section 18;
(b) hazard insurance with special causes of loss, including
theft coverage, insuring against fire, extended coverage risks,
vandalism and malicious mischief, and including boiler and sprinkler
leakage coverage, in an amount equal to the full replacement cost
(without deduction for depreciation) of all furnishings, trade
fixtures, leasehold improvements, equipment, merchandise and other
personal property from time to time situated in or on the Premises;
(c) workers' compensation insurance satisfying Tenant's
obligations under the workers' compensation laws of the State of Utah;
and
(d) such other policy or policies of insurance as Landlord may
reasonably require or as Landlord is then generally requiring from
other tenants in the Building.
Such minimum limits shall in no event limit the liability of Tenant under
this Lease except as otherwise provided in Section 17.2. Such liability
insurance shall name Landlord, and any other person specified from time to
time by Landlord, as an additional insured; such property insurance shall
name Landlord as a loss payee as Landlord's interests may appear; and both
such liability and property insurance shall be with companies acceptable to
Landlord, having a rating of not less than A:XII in the most recent issue
of Best's Key Rating Guide, Property-Casualty. All liability policies
------------------------------------------
maintained by Tenant shall contain a provision that Landlord and any other
additional insured, although named as an insured, shall nevertheless be
entitled to recover under such policies for any loss sustained by Landlord
and Landlord's agents and employees as a result of the acts or omissions of
Tenant. Tenant shall furnish Landlord with certificates of coverage. No
such policy shall be cancelable or subject to reduction of coverage or
other modification except after thirty (30) days' prior written notice to
Landlord by the insurer. All such policies shall be written as primary
policies, not contributing with and not in excess of the coverage which
Landlord may carry, and shall only be subject to such deductibles as may be
approved in writing in advance by Landlord. Tenant shall, at least ten
(10) days prior to the expiration of such policies, furnish Landlord with
renewals of, or binders for, such policies. Landlord and Tenant waive all
rights
19
<PAGE>
to recover against each other, against any other tenant or occupant of the
Complex, and against the officers, directors, shareholders, partners, joint
venturers, employees, agents, customers, invitees or business visitors of
each other, or of any other tenant or occupant of the Building, for any
loss or damage arising from any cause covered by any insurance carried by
the waiving party, to the extent that such loss or damage is actually
covered. Tenant shall cause all other occupants of the Premises claiming
by, through or under Tenant to execute and deliver to Landlord a waiver of
claims similar to the waiver contained in this Section and to obtain such
waiver of subrogation rights endorsements. Any Landlord's Mortgagee may, at
Landlord's option, be afforded coverage under any policy required to be
secured by Tenant under this Lease by use of a mortgagee's endorsement to
the policy concerned.
17.2 Waiver of Subrogation. Landlord and Tenant hereby waive all
---------------------
claims, rights of recovery and causes of action that either party or any
party claiming by, through or under such party may now or hereafter have by
subrogation or otherwise against the other party or against any of the
other party's officers, directors, shareholders, partners or employees for
any loss or damage that may occur to the Complex, the Premises, Tenant's
improvements or any of the contents of any of the foregoing by reason of
fire or other casualty, or by reason of any other cause except gross
negligence or willful misconduct (thus including simple negligence of the
parties hereto or their officers, directors, shareholders, partners or
employees), that could have been insured against under the terms of (a) in
the case of Landlord, the fire and extended coverage insurance policies
required to be obtained and maintained by Landlord under Section 17.3, and
(b) in the case of Tenant, the fire and extended coverage insurance
policies required to be obtained and maintained under Section 17.1;
provided, however, that the waiver set forth in this Section 17.2 shall not
apply to any deductibles of more than $ on insurance policies carried
by Landlord. Landlord and Tenant shall cause an endorsement to be issued
to their respective insurance policies recognizing this waiver of
subrogation.
17.3 Landlord's Insurance. Landlord shall obtain and maintain
--------------------
throughout the Term the following policies of insurance:
(a) All-risk property damage insurance on the Complex, all
improvements thereto, and personal property owned by Landlord in the
amount of the full replacement values thereof, as the values may exist
from time to time; and
(b) General liability insurance covering Landlord's operations
and the Complex with combined single limits of not less than
$1,000,000 per occurrence for bodily injury and property damage;
(c) Worker's compensation for all of Landlord's employees; and
(d) All policies shall be issued by reasonable insurance
companies authorized to do business in the state in which the Premises
are located.
18. INDEMNITY. Subject to paragraph 17.2 and 17.1, and except to the
---------
extent caused by the gross negligence, willful misconduct or breach of this
Lease by Landlord, its employees, representatives or contractors, Tenant agrees
to indemnify, defend and hold Landlord and its officers, directors, partners and
employees entirely harmless from and against all liabilities, losses, demands,
actions, expenses or claims, including reasonable attorneys' fees and court
costs, and including consequential damages, for injury to or death of any person
or for damages to any property or for violation of law arising out of or in any
manner connected with (i) the use, occupancy or enjoyment of the Premises and
Complex by Tenant or Tenant's agents, employees or contractors, or the clients
and other invitees of Tenant, (ii) any work, activity or other thing allowed or
suffered by Tenant or Tenant's agents, employees or contractors to be done in or
about the Premises or Complex, other than Landlord's Work, (iii) any breach or
default in the performance of any obligation of Tenant under this Lease, and
(iv) any negligent or otherwise tortious act or failure to act by Tenant or
Tenant's agents, employees or contractors on or about the Premises or Complex.
19. THIRD PARTIES; ACTS OF FORCE MAJEURE; EXCULPATION. Except to the
-------------------------------------------------
extent caused by the gross negligence or willful misconduct of Landlord, its
employees, representatives or contractors, Landlord shall have no liability to
Tenant, or to Tenant's officers, directors, shareholders, partners, employees,
agents, contractors or invitees, for bodily injury, death, property damage,
business interruption, loss of profits, loss of trade secrets or other direct or
consequential damages occasioned by (a) the acts or omissions of any other
tenant or such other tenant's officers, directors, shareholders, partners,
employees, agents, contractors or other invitees within the Complex, (b) Force
Majeure, (c) vandalism, theft, burglary and other criminal acts (other than
those committed by Landlord and its employees), (d) water leakage, or (e) the
repair, replacement, maintenance, damage, destruction or relocation of the
Premises. Except to the extent an injury, loss, damage or destruction was
proximately caused by Landlord's gross negligence, fraud, willful act or
violation of law, Tenant waives all claims
20
<PAGE>
against Landlord arising out of injury to or death of any person or loss of,
injury or damage to, or destruction of any property of Tenant.
20. INTENTIONALLY LEFT BLANK.
------------------------
21. CONTROL OF COMMON AREAS. Subject to the terms of the Lease, Landlord
-----------------------
shall have the exclusive control over the Common Areas. Landlord may, from time
to time, create different Common Areas, close or otherwise modify the Common
Areas, and reasonably modify the Building Rules and Regulations with respect
thereto; provided, however, that the use by Tenant of the Building and Premises
for the purposes intended shall not be materially adversely impacted.
22. INTENTIONALLY LEFT BLANK.
------------------------
23. QUIET ENJOYMENT. Provided Tenant has performed all its obligations
---------------
under this Lease, Tenant shall and may peaceably and quietly have, hold, occupy,
use and enjoy the Premises during the Term subject to the provisions of this
Lease. Landlord shall warrant and forever defend Tenant's right to occupancy of
the Premises against the claims of any and all persons whosoever lawfully
claiming the same or any part thereof, by, through or under Landlord, but not
otherwise, subject to the provisions of this Lease.
24. DEFAULT BY TENANT.
-----------------
24.1 Events of Default. Each of the following occurrences shall
-----------------
constitute an Event of Default (herein so called):
(a) the failure of Tenant to pay Base Rent, Additional Rent or
any other amount due under this Lease as and when due hereunder and
the continuance of such failure for a period of five (5) days after
written notice from Landlord to Tenant specifying the failure;
provided, however, after Landlord has given Tenant written notice
pursuant to this clause 24.1(a) on two separate occasions in any
calendar year, Landlord shall not be required to give Tenant any
further notice under this clause 24.1(a) in such calendar year;
provided, however, that the obligation of Tenant to pay a late charge
or interest pursuant to this Lease shall commence as of the due date
of the Rent or other monetary obligation and not on the expiration of
any grace period;
(b) the failure of Tenant to perform, comply with or observe
any other agreement, obligation or undertaking of Tenant, or any other
term, condition or provision in this Lease, and the continuance of
such failure for a period of thirty (30) days after written notice
from Landlord to Tenant specifying the failure, or, if reasonably
required, such longer period (not to exceed 120 days) so long as
Tenant timely and diligently commences and continues to completion the
required cure;
(c) the involuntary transfer by Tenant of Tenant's interest in
this Lease or other than specifically permitted pursuant to Section 10
hereof, the voluntary attempt to or actual transfer of its interest in
this Lease, without Landlord's prior written consent;
(d) the failure of Tenant to discharge any lien placed as a
result of Tenant's action or inaction upon the Premises or Building as
set forth hereunder;
(e) the occurrence of a Net Tenant Delay, as defined in the
Work Letter Agreement, of thirty (30) calendar days or more;
(f) the filing of a petition by or against Tenant (the term
"Tenant" also meaning, for the purpose of this clause 24.1(d), any
guarantor of the named Tenant's obligations hereunder) (i) in any
bankruptcy or other insolvency proceeding, (ii) seeking any relief
under the Bankruptcy Code or any similar debtor relief law, (iii) for
the appointment of a liquidator or receiver for all or substantially
all of Tenant's property or for Tenant's interest in this Lease, or
(iv) to reorganize or modify Tenant's capital structure provided,
however, that if such action is involuntary, then it shall not be an
Event of Default unless Tenant acquiesces in such action or such
action is not discharged within 60 calendar days of the filing
thereof; and
(g) the admission by Tenant in writing that it cannot meet its
obligations as they become due or the making by Tenant of an
assignment for the benefit of its creditors.
21
<PAGE>
24.2 Remedies of Landlord. Upon any Event of Default, Landlord may,
--------------------
at Landlord's option in its sole discretion, and in addition to all other
rights, remedies and recourses afforded Landlord hereunder or by law or
equity, do any one or more of the following:
(a) terminate this Lease by the giving of written notice to
Tenant; reenter the Premises, with or without process of law; eject
all parties in possession thereof; repossess and enjoy the Premises
and all Tenant Improvements; and recover from Tenant all of the
following: (i) all Rent and other amounts accrued hereunder to the
date of termination, (ii) all amounts due under Section 24.3, and
(iii) liquidated damages in an amount equal to (A) the total Rent that
Tenant would have been required to pay for the remainder of the Term
discounted to present value at the prime lending rate (or equivalent
rate, however denominated) in effect on the date of termination at the
largest national bank in the state where the Complex is located, minus
(B) the then-present fair rental value of the Premises for such
period, similarly discounted, plus any other amount necessary to
compensate Landlord for all the detriment proximately caused by
Tenant's failure to perform its obligations under this Lease or which
would be likely to result therefrom, including, without limitation,
reasonable attorneys' fees, brokers' commissions or finder's fees;
(b) terminate Tenant's right to possession of the Premises
without terminating this Lease by the giving of written notice to
Tenant, in which event Tenant shall pay to Landlord (i) all Rent and
other amounts accrued hereunder to the date of termination of
possession, (ii) all amounts due from time to time under Section 24.3,
and (iii) all Rent and other sums required hereunder to be paid by
Tenant during the remainder of the Term, diminished by any net sums
thereafter received by Landlord through reletting the Premises during
said period. Reentry by Landlord in the Premises will not affect the
obligations of Tenant hereunder for the unexpired Term. Landlord may
bring action against Tenant to collect amounts due by Tenant on one or
more occasions, without the necessity of Landlord's waiting until
expiration of the Term. If Landlord elects to proceed under this
Section 24.2(b), it may at any time elect to terminate this Lease
pursuant to Section 24.2(a);
(c) with reasonable prior notice to Tenant, alter any and all
locks and other security devices at the Premises without being
obligated to deliver new keys to the Premises, unless Tenant has cured
all Events of Default before Landlord has terminated this Lease under
Section 24.2(a) or has entered into a lease to relet all or a portion
of the Premises;
(d) if an Event of Default specified in Section 24.1(c) occurs,
Landlord may remove and store any property that remains on the
Premises and, if Tenant does not claim such property within thirty
(30) days after Landlord has delivered to Tenant notice of such
storage, Landlord may appropriate, sell, destroy or otherwise dispose
of the property in question without notice to Tenant or any other
person, and without any obligation to account for such property;
and/or
(e) no taking possession of the Premises by Landlord shall be
construed as Landlord's acceptance of a surrender of the Premises by
Tenant or an election of Landlord to terminate this Lease unless
written notice of such intention is given to Tenant. Notwithstanding
any leasing or subletting without termination of the Lease, Landlord
may at any time thereafter elect to terminate the Lease for Tenant's
previous breach.
24.3 Payment by Tenant. Upon any Event of Default, Tenant shall also
-----------------
pay to Landlord all costs and expenses incurred by Landlord, including
court costs and reasonable attorneys' fees, in (a) retaking or otherwise
obtaining possession of the Premises, (b) removing and storing Tenant's or
any other occupant's property, (c) constructing the Tenant Improvements or
otherwise incurred in connection with the Tenant Improvement Allowance
Items as defined in the Work Letter Agreement; provided, however, that the
amount recoverable by Landlord shall be limited to the unamortized portion
of such costs determined on a straight-line basis, (d) repairing,
restoring, altering, remodeling or otherwise putting the Premises into
condition acceptable to a new tenant or tenants, (e) reletting all or any
part of the Premises, (f) paying or performing the underlying obligation
which Tenant failed to pay or perform, and (g) enforcing any of Landlord's
rights, remedies or recourses arising as a consequence of the Event of
Default.
24.4 Reletting. Upon termination of this Lease or upon termination
---------
of Tenant's right to possession of the Premises, Landlord shall use
reasonable efforts to relet the Premises on such terms and conditions as
Landlord in its reasonable discretion may determine (including a term
different than the Term, rental concessions, and alterations to and
improvements of the Premises); however, Landlord shall
22
<PAGE>
not be obligated to relet the Premises before leasing other portions of the
Building. Landlord shall not be liable for, nor shall Tenant's obligations
hereunder be diminished because of, Landlord's failure to relet the
Premises or collect rent due with respect to such reletting. If Landlord
relets the Premises, rent Landlord receives from such reletting shall be
applied to the payment of: first, any indebtedness from Tenant to Landlord
other than Rent (if any); second, all costs, including for maintenance and
alterations, incurred by Landlord in reletting; and third, Rent due and
unpaid. In no event shall Tenant be entitled to the excess of any rent
obtained by reletting over the Rent herein reserved.
24.5 Landlord's Right to Pay or Perform. Upon an Event of Default,
----------------------------------
Landlord may, but without obligation to do so and without thereby waiving
or curing such Event of Default, pay or perform the underlying obligation
for the account of Tenant, and enter the Premises and expend the Security
Deposit and any other sums for such purpose.
24.6 No Waiver; No Implied Surrender. Provisions of this Lease may
-------------------------------
only be waived by the party entitled to the benefit of the provision
evidencing the waiver in writing. Thus, neither the acceptance of Rent by
Landlord following an Event of Default (whether known to Landlord or not),
nor any other custom or practice followed in connection with this Lease,
shall constitute a waiver by Landlord of such Event of Default or any other
Event of Default. Further, the failure by Landlord to complain of any
action or inaction by Tenant, or to assert that any action or inaction by
Tenant constitutes (or would constitute, with the giving of notice and the
passage of time) an Event of Default, regardless of how long such failure
continues, shall not extinguish, waive or in any way diminish the rights,
remedies and recourses of Landlord with respect to such action or inaction.
No waiver by Landlord of any provision of this Lease or of any breach by
Tenant of any obligation of Tenant hereunder shall be deemed to be a waiver
of any other provision hereof, or of any subsequent breach by Tenant of the
same or any other provision hereof. Landlord's consent to any act by
Tenant requiring Landlord's consent shall not be deemed to render
unnecessary the obtaining of Landlord's consent to any subsequent act of
Tenant. No act or omission by Landlord (other than Landlord's execution of
a document acknowledging such surrender) or Landlord's agents, including
the delivery of the keys to the Premises, shall constitute an acceptance of
a surrender of the Premises.
25. DEFAULTS BY LANDLORD. Landlord shall not be in default under this
--------------------
Lease, and Tenant shall not be entitled to exercise any right, remedy or
recourse against Landlord or otherwise as a consequence of any alleged default
by Landlord under this Lease, unless Landlord fails to perform any of its
obligations hereunder and said failure continues for a period of thirty (30)
days after Tenant gives Landlord and (provided that Tenant shall have been given
the name and address of Landlord's Mortgagee) Landlord's Mortgagee written
notice thereof specifying, with reasonable particularity, the nature of
Landlord's failure. If, however, the failure cannot reasonably be cured within
the thirty (30) day period, Landlord shall not be in default hereunder if
Landlord or Landlord's Mortgagee commences to cure the failure within the thirty
(30) days and thereafter pursues the curing of same diligently to completion.
If Tenant recovers a money judgment against Landlord for Landlord's default of
its obligations hereunder or otherwise, the judgment shall be limited to
Tenant's actual direct, but not consequential, damages therefor and shall be
satisfied only out of the interest of Landlord in the Complex as the same may
then be encumbered, and Landlord shall not otherwise be liable for any
deficiency. In no event shall Tenant have the right to levy execution against
any property of Landlord other than its interest in the Complex. The foregoing
shall not limit any right that Tenant might have to obtain specific performance
of Landlord's obligations hereunder.
26. RIGHT OF REENTRY. Upon the expiration or termination of the Term for
----------------
whatever cause, or upon the exercise by Landlord of its right to reenter the
Premises without terminating this Lease, Tenant shall immediately, quietly and
peaceably surrender to Landlord possession of the Premises in "broom clean" and
good order, condition and repair, except only for ordinary wear and tear,
condemnation, damage by casualty not covered by Section 15.2 and repairs to be
made by Landlord pursuant to Section 15.1. If Tenant is in default under this
Lease, Landlord shall have a lien on such personal property, trade fixtures and
other property as set forth in Section 38-3-1, et seq., of the Utah Code Ann.
-- ---
(or any replacement provision). Landlord may require Tenant to remove any
personal property, trade fixtures, other property, alterations, additions and
improvements made to the Premises by Tenant without Landlord's prior written
consent, and to restore the Premises to their condition on the date of this
Lease. All personal property, trade fixtures and other property of Tenant not
removed from the Premises on the abandonment of the Premises or on the
expiration of the Term or sooner termination of this Lease for any cause shall
conclusively be deemed to have been abandoned and may be appropriated, sold,
stored, destroyed or otherwise disposed of by Landlord without notice to, and
without any obligation to account to, Tenant or any other person. Tenant shall
pay to Landlord all expenses incurred in connection with the disposition of such
property in excess of any amount received by Landlord from such disposition.
Tenant shall not be released from Tenant's obligations under this Lease in
connection with surrender of the Premises until Landlord has inspected the
Premises and delivered to Tenant a written release. While Tenant remains in
possession of the Premises after such expiration, termination or exercise by
Landlord of its
23
<PAGE>
reentry right, Tenant shall be deemed to be occupying the Premises as a tenant-
at-sufferance, subject to all of the obligations of Tenant under this Lease,
except that the daily Rent shall be one hundred fifty percent (150%) of the per-
day Rent in effect immediately before such expiration, termination or exercise
by Landlord. No such holding over shall extend the Term. If Tenant fails to
surrender possession of the Premises in the condition herein required, Landlord
may, at Tenant's expense, restore the Premises to such condition.
27. MISCELLANEOUS.
-------------
27.1 Independent Obligations; No Offset. The obligations of Tenant
----------------------------------
to pay Rent and to perform the other undertakings of Tenant hereunder
constitute independent unconditional obligations to be performed at the
times specified hereunder, regardless of any breach or default by Landlord
hereunder. Tenant shall have no right, and Tenant hereby waives and
relinquishes all rights which Tenant might otherwise have, to claim any
nature of lien against the Complex or to withhold, deduct from or offset
against any Rent or other sums to be paid to Landlord by Tenant.
27.2 Time of Essence. Time is of the essence with respect to each
---------------
date or time specified in this Lease by which an event is to occur;
provided, however, that if either Landlord or Tenant is delayed or
hindered in or prevented from the performance of any act required under
this Lease by reason of inability to procure materials, failure of power,
acts of God, riots, insurrection, war or other reason of a like nature
(other than labor disputes) not the fault of the party delayed in
performing work or doing acts required under the terms of this Lease or
other Force Majeure events, then performance of such act will be excused
for the period of delay and the time for the performance of any such act
will be extended for a period equivalent to the period of such delay. The
provisions of this Section 27.2 will not operate to excuse Tenant from the
prompt payment of Base Rent, Additional Rent or any other payments required
by the terms of this Lease.
27.3 Applicable Law. This Lease shall be governed by, and construed
--------------
in accordance with, the laws of the State of Utah. All monetary and other
obligations of Landlord and Tenant are performable in the county where the
Complex is located.
27.4 Assignment by Landlord. Landlord shall have the right to assign
----------------------
without notice or consent, in whole or in part, any or all of its rights,
titles or interests in and to the Complex or this Lease and, upon any such
assignment, Landlord shall be relieved of all unaccrued liabilities and
obligations hereunder to the extent of the interest so assigned arising
after the date of such transfer.
27.5 Estoppel Certificates; Financial Statements. From time to time
-------------------------------------------
at the request of Landlord or Landlord's Mortgagee, Tenant will within
seven (7) calendar days, and without compensation or consideration execute,
have acknowledged and deliver a certificate substantially in the form of
Exhibit H hereto, setting forth the following: (a) a ratification of this
Lease; (b) the Commencement Date, expiration date and other Lease
information; (c) that this Lease is in full force and effect and has not
been assigned, modified, supplemented or amended (except by such writing as
shall be stated); (d) that all conditions under this Lease to be performed
by Landlord have been satisfied or, in the alternative, those claimed by
Tenant to be unsatisfied; (e) that no defenses or offsets exist against the
enforcement of this Lease by Landlord or, in the alternative, those claimed
by Tenant to exist; (f) whether within the knowledge of Tenant there are
any existing breaches or defaults by Landlord hereunder and, if so, stating
the defaults with reasonable particularity; (g) the amount of advance Rent,
if any (or none if such is the case), paid by Tenant; (h) the date to which
Rent has been paid; (i) the amount of the Security Deposit; and (j) such
other information as Landlord or Landlord's Mortgagee may reasonably
request. Landlord's Mortgagee and purchasers shall be entitled to rely on
any estoppel certificate executed by Tenant. Tenant shall, within twenty
(20) calendar days after Landlord's request, furnish to Landlord current
financial statements for Tenant, prepared in accordance with generally
accepted accounting principles consistently applied and certified by Tenant
to be true and correct.
27.6 Signs, Building Name and Building Address. Landlord may, from
-----------------------------------------
time to time at its discretion, place any and all signs anywhere in the
Complex. Notwithstanding the foregoing, Landlord shall not voluntarily
change the street address of the Complex without Tenant's prior consent.
Tenant shall not, without Landlord's prior written consent, use the name of
the Building for any purpose other than as the address of the business to
be conducted by Tenant from the Premises.
27.7 Notices. All notices and other communications given pursuant to
-------
this Lease shall be in writing and shall either be sent by overnight
courier or mailed by first class United States mail, postage prepaid,
registered or certified with return receipt requested, and addressed as set
forth in Section "G" of the Basic Lease Information, or delivered in person
to the intended addressee. Notice sent by overnight courier shall become
effective one (1) business day after being sent. Notice mailed in the
24
<PAGE>
aforesaid manner shall become effective five (5) business days after
deposit. Notice given in any other manner, and any notice given to
Landlord, shall be effective only upon receipt by the intended addressee.
Each party shall have the continuing right to change its address for notice
hereunder by the giving of fifteen (15) days' prior written notice to the
other party in accordance with this Section 27.7.
27.8 Entire Agreement, Amendment and Binding Effect. This Lease
----------------------------------------------
constitutes the entire agreement between Landlord and Tenant relating to
the subject matter hereof, and all prior agreements relative hereto which
are not contained herein are terminated. This Lease may be amended only by
a written document duly executed by Landlord and Tenant (and, if a Mortgage
is then in effect, by the Landlord's Mortgagee entitled to the benefits
thereof), and any alleged amendment which is not so documented shall not be
effective as to either party. The provisions of this Lease shall be
binding upon and inure to the benefit of the parties hereto and their
heirs, executors, administrators, successors and assigns; provided,
however, that this Section 27.8 shall not negate, diminish or alter the
restrictions on Transfers applicable to Tenant set forth elsewhere in this
Lease.
27.9 Severability. This Lease is intended to be performed in
------------
accordance with and only to the extent permitted by all Legal Requirements.
If any provision of this Lease or the application thereof to any person or
circumstance shall, for any reason and to any extent, be invalid or
unenforceable, but the extent of the invalidity or unenforceability does
not destroy the basis of the bargain between the parties as contained
herein, the remainder of this Lease and the application of such provision
to other persons or circumstances shall not be affected thereby, but rather
shall be enforced to the greatest extent permitted by law.
27.10 Number and Gender, Captions and References. As the context of
------------------------------------------
this Lease may require, pronouns shall include natural persons and legal
entities of every kind and character, the singular number shall include the
plural, and the neuter shall include the masculine and the feminine gender.
Section headings in this Lease are for convenience of reference only and
are not intended, to any extent and for any purpose, to limit or define any
section hereof. Whenever the terms "hereof," "hereby," "herein,"
"hereunder" or words of similar import are used in this Lease, they shall
be construed as referring to this Lease in its entirety rather than to a
particular section or provision, unless the context specifically indicates
to the contrary. Any reference to a particular "Section" shall be
construed as referring to the indicated section of this Lease.
27.11 Attorneys' Fees. In the event either party commences a legal
---------------
proceeding to enforce any of the terms of this Lease, the prevailing party
in such action shall have the right to recover reasonable attorneys' fees
and costs from the other party, to be fixed by the court in the same
action. "Legal proceedings" includes appeals from a lower court judgment
as well as proceedings in the Federal Bankruptcy Court ("Bankruptcy
Court"), whether or not they are adversary proceedings or contested
matters. The "prevailing party" (i) as used in the context of proceedings
in the Bankruptcy Court means the prevailing party in an adversary
proceeding or contested matter, or any other actions taken by the non-
bankrupt party which are reasonably necessary to protect its rights under
this Lease, and (ii) as used in the context of proceedings in any court
other than the Bankruptcy Court means the party that prevails in obtaining
a remedy or relief which most nearly reflects the remedy or relief which
the party sought.
27.12 Brokers. Tenant and Landlord hereby warrant and represent unto
-------
the other that it has not incurred or authorized any brokerage commission,
finder's fees or similar payments in connection with this Lease, other than
that which is due pursuant to a separate written agreement between the
Landlord and Landlord's agents and subagents. Each party shall defend,
indemnify and hold the other harmless from and against any claim for
brokerage commission, finder's fees or similar payment arising by virtue of
authorization of such party, or any Affiliate of such party, in connection
with this Lease. Landlord shall be responsible for the payment of Greg
Gunn.
27.13 Interest on Tenant's Obligations. Any amount due from Tenant
--------------------------------
to Landlord which is not paid when due shall bear interest at the lesser of
ten percent (10%) per annum or the maximum rate allowed by law from the
date such payment is due until paid, but the payment of such interest shall
not excuse or cure the default in payment.
27.14 Authority. Each person executing this Lease on behalf of
---------
Tenant personally warrants and represents that (a) Tenant is a duly
organized and existing legal entity, in good standing in the State of Utah,
(b) Tenant has full right and authority to execute, deliver and perform
this Lease, (c) this Lease is binding upon and enforceable against Tenant
in accordance with its terms, (d) the person executing and delivering this
Lease on behalf of Tenant was duly authorized to do so, and (d) upon
request of Landlord, such person will deliver to Landlord satisfactory
evidence of his or her authority to execute this Lease on behalf of Tenant.
Each person executing this Lease on behalf of Landlord personally
25
<PAGE>
warrants and represents that (a) Landlord is a duly organized and existing
legal entity, in good standing in the State of Utah, (b) Landlord has full
right and authority to execute, deliver and perform this Lease, (c) this
Lease is binding upon and enforceable against Landlord in accordance with
its terms, (d) the person executing and delivering this Lease on behalf of
Landlord was duly authorized to do so, and (d) upon request of Tenant, such
person will deliver to Tenant satisfactory evidence of his or her authority
to execute this Lease on behalf of Landlord.
27.15 Recording. Neither this Lease (including any Exhibit hereto)
---------
nor any memorandum hereof shall be recorded without the prior written
consent of Landlord (such consent not to be unreasonably withheld).
27.16 Exhibits. All Exhibits and written addenda hereto are
--------
incorporated herein for any and all purposes.
27.17 Multiple Counterparts. This Lease may be executed in two or
---------------------
more counterparts, each of which shall be an original, but all of which
shall constitute but one instrument.
27.18 Survival of Indemnities. The indemnity obligations of Tenant
-----------------------
and (if any) of Landlord contained in this Lease shall survive the
expiration or earlier termination of this Lease to and until the last to
occur of (a) the last day permitted by law for the bringing of any claim or
action with respect to which indemnification may be claimed, or (b) the
date on which any claim or action for which indemnification may be claimed
under such provision is fully and finally resolved and any compromise
thereof or judgment or award thereon is paid in full. Payment shall not be
a condition precedent to recovery upon any indemnification provision
contained herein.
27.19 Miscellaneous. Any guaranty delivered in connection with this
-------------
Lease is an integral part of this Lease and constitutes consideration given
to Landlord to enter into this Lease. No amendment to this Lease shall be
binding on Landlord or Tenant unless reduced to writing and signed by both
parties. Each provision to be performed by Tenant shall be construed to be
both a covenant and a condition. Venue on any action arising out of this
Lease shall be proper only in the District Court of Salt Lake County, State
of Utah. Landlord and Tenant waive trial by jury in any action, proceeding
or counterclaim brought by either of them against the other on all matters
arising out of this Lease or the use and occupancy of the Premises. The
submission of this Lease to Tenant is not an offer to lease the Premises or
an agreement by Landlord to reserve the Premises for Tenant. Landlord
shall not be bound to Tenant until Tenant has duly executed and delivered
duplicate original copies of this Lease to Landlord and Landlord has duly
executed and delivered one of those duplicate original copies to Tenant.
27.20 Smoking Shelter. Landlord shall provide a smoking shelter at
---------------
the location shown on Exhibit B-1 attached hereto. Landlord shall have the
right to relocate the smoking shelter without Tenant's consent.
27.21 Security Guard. Tenant shall have the right, with Landlord's
--------------
approval, to provide at its sole cost and expense a security guard in the
main corridor on the first floor of the Building.
28. GENERATOR
---------
28.1 Grant of License. Landlord hereby grants to Tenant a license
----------------
(the "License") during the Term of the Lease Agreement to own, operate and
maintain an alternate power source (the "Generator") for the Premises in
the event of a power outage in the Building or to the Premises, all at
Tenant's sole cost and expense. Landlord shall provide Tenant an area
within or about the Building for location of the Generator.
(a) Landlord shall not be liable for damage to the Generator or
theft, misappropriation or loss thereof.
(b) Landlord hereby reserves the right to grant, renew or
extend similar licenses to other parties.
(c) In the event any third party or another licensee shall
interfere with the enjoyment by Tenant of the rights hereunder, then
Tenant shall have the right to take appropriate action against such
interfering party, but not against Landlord, or to terminate this
26
<PAGE>
License upon one hundred twenty (120) days' written notice to
Landlord. Landlord shall not be liable in any manner to Tenant for
any expenses or damages which Tenant may suffer as a result of such
interference and premature termination of this License.
28.2 Relocation of System. Landlord reserves the right to require
--------------------
Tenant to relocate the Generator to other areas within or about the
Building during the Term at Landlord's reasonable discretion. In such
event, Landlord shall reimburse Tenant for its reasonable expenses incurred
in connection with any such relocation. Should Landlord request the
relocation of the Generator, Landlord agrees to allow Tenant reasonable
time for such relocation.
28.3 Tenant Responsibilities. Tenant shall be responsible for any
-----------------------
and all cost, damage or expense arising from the installation, operation,
maintenance or repair of the Generator by Tenant or Tenant's agents,
employees, subcontractors, or representatives and any and all cost, damage
or expense to the Premises or the Building or the property of Landlord or
other licensees or tenants of the Building arising from such installation,
operation, maintenance, or repair thereof. Tenant shall indemnify and hold
Landlord harmless from and against any and all claims, costs, damages,
expenses, liens, claims of liens or expenses (including, without
limitation, reasonable attorneys' fees) arising out of, or in connection
with, Tenant's installation, operation, maintenance or repair of the
Generator, except for any loss, cost, damage or expense arising from the
gross negligence or willful misconduct of Landlord, its agents or
employees. This indemnity is in addition to and not in substitution of any
other indemnity in the Lease Agreement.
28.4 Compliance with Laws. Tenant shall comply with all local, state
--------------------
and federal laws and regulations governing such installation, operation,
maintenance and repair, including the sole and exclusive responsibility for
obtaining all applicable federal, state, or local construction and building
permits required in connection with the installation of the Generator. In
addition, Tenant shall provide Landlord with copies of such permits prior
to the installation of the Generator. Landlord shall render Tenant all
reasonable assistance and cooperation in Tenant's endeavors to obtain such
permits. Tenant shall also have the sole and exclusive responsibility for
complying with all applicable tests required by federal, state and local
laws and ordinances.
28.5 Tenant Representations and Warranties. Tenant represents and
-------------------------------------
warrants to Landlord that:
(a) all obligations rendered by Tenant or by a representative
of Tenant under this Section 28 shall meet or exceed industry
standards in force at the time and to also be in conformance and
compliance with applicable federal, state and local laws,
administrative and regulatory requirements and any other authorities
having jurisdiction over the subject matter herein and shall be
responsible for applying for, obtaining and maintaining all
registrations and certifications which may be required by such
authorities.
(b) the Generator, and the installation, operation, maintenance
and repair of the Generator will in no way damage the Building, or
interfere with the use of the Building by Landlord, other tenants,
invitees or otherwise. If such damage shall occur, Landlord shall
give Tenant written notice thereof and Tenant shall take immediate
action to correct the same. Landlord reserves the right to disconnect
power to the Generator in the event Tenant fails to correct after
proper notification and cure period.
(c) Tenant shall take all reasonable measures necessary to
insure that the Generator does not interfere with or disturb the
operation of any other equipment, system or business of Landlord or of
any other tenant or occupant of the Building.
29. SATELLITE SPACE.
---------------
29.1 Satellite Space. Subject to the provisions of the Lease
---------------
Agreement, and as part of the Premises leased to Tenant hereunder, Landlord
does hereby grant Tenant the right to the following space ("Space"):
(a) Space on the roof of the Building to place Tenant's
satellite dish, as reasonably and specifically described and
designated by Landlord (the "Satellite Space"); and
27
<PAGE>
(b) At the location and in the manner designated by Landlord,
space for cabling attendant to Tenant's satellite dish from its
location on the roof of the Building to its Premises on the first,
fifth and sixth floors of the Building.
29.2 Restrictions. Tenant's rights as contained in this Section 29
------------
shall be subject to the following requirements:
(a) the use and occupancy of the Satellite Space by Tenant
shall be subject to all of the terms and provisions of the Lease
Agreement;
(b) The occupancy by Tenant of the entire Premises during the
Lease Term;
(c) Compliance with all applicable governmental laws, statutes,
regulations, rules, codes and ordinances;
(d) Compliance with the provisions of the Lease Agreement in
connection with the satellite dish and Satellite Space;
(e) All expenses in connection with the construction,
installation and maintenance of the satellite dish and attendant
cabling shall be paid by Tenant;
(f) The design, size, location and materials of the satellite
dish and Satellite Space shall be reasonably approved in writing by
Landlord;
(g) Payment by Tenant to Landlord, from time to time upon
request from Landlord, of all expenses incurred by Landlord that are
directly attributable to the satellite dish;
(h) Tenant's rights under this Section 29 may not be assigned
or transferred to any assignee, subtenant or other Transferee, other
than a Related Entity, of the Lease Agreement without Landlord's prior
written consent; and
(i) Upon termination or expiration of the Term of the Lease
Agreement, Landlord shall have the right to permanently remove
Tenant's satellite dish and attendant cabling at Tenant's expense.
29.3 Expenses. Tenant shall bear all expenses relating to the costs
--------
associated with the repair or removal of the satellite dish and restoration
of the Satellite Space to the condition in which those portions of the
Building existed before installation of Tenant's satellite dish, reasonable
wear and tear and insured casualty loss excepted. Tenant's payment and
other obligations under this paragraph shall survive any expiration or
earlier termination of the Lease Term.
29.4 Use of Satellite Dish. Tenant will not use the satellite dish
---------------------
or the Satellite Space for any purpose or in any manner which violates the
provisions of the Lease Agreement, or might make undue noise or create
undue vibrations, or exceed the structural loads of the Building. It will
be the responsibility of the Tenant to resolve all interference problems
with other tenants of the Building, and Landlord shall have no
responsibility or liability in connection therewith, regardless of cause.
Tenant shall not operate the satellite dish in any manner which will
conflict or interfere with the activities of, or cause electrical or other
interference to, the Landlord or any other tenant of the Building.
Notwithstanding any other provision in the Lease Agreement to the contrary,
Landlord shall not be liable or responsible to correct any interference
problem created by any tenant, customer, invitee, or third party to the
transmission or other use of the satellite dish by Tenant.
EXECUTED as of the date and year above first written.
28
<PAGE>
TENANT ACKNOWLEDGES THAT LANDLORD HAS MADE NO WARRANTIES TO TENANT, EITHER
EXPRESS OR IMPLIED, AND LANDLORD AND TENANT EXPRESSLY DISCLAIM ANY IMPLIED
WARRANTY THAT THE PREMISES ARE SUITABLE FOR TENANT'S INTENDED COMMERCIAL
PURPOSE.
TENANT: SONIC INNOVATIONS, INC., a Delaware corporation
By: /s/ William S. Barth
---------------------------------------------
Name: William S. Barth
---------------------------------------------
Title: VP of Finance & CFO
---------------------------------------------
Date: 4/28/99
---------------------------------------------
LANDLORD: 2795 E. COTTONWOOD PARKWAY, L.C., a Utah limited
liability company, by its Manager,
COTTONWOOD PARTNERS MANAGEMENT, LTD., a Utah limited
partnership, by CotNet Management, Inc. its general
partner
By: /s/ John L. West
---------------------------------------------
JOHN L. WEST, President
29
<PAGE>
EXHIBIT A
GLOSSARY OF DEFINED TERMS
-------------------------
a. "Addendum" shall mean all the addenda, exhibits and attachments, if any,
--------
attached to the Lease or to any exhibit to the Lease. All addenda are by
definition incorporated into the Lease Agreement. Unless otherwise
specifically provided, terms and phrases in any Addendum shall have the
meaning of such terms and phrases as provided in the Lease Agreement and
this Glossary of Defined Terms.
b. "Affiliate" shall mean a person or party who or which controls, is
---------
controlled by or is under common control with, another person or party.
c. "Building" shall mean that certain office building and garage structure
--------
constructed on the Land, the street address of which is 2795 E. Cottonwood
Parkway, Salt Lake County, Utah. The term "Building" shall include, without
limitation, all fixtures and appurtenances in and to the aforesaid
structure, including specifically but without limitation all above-grade
walkways and all electrical, mechanical, plumbing, security, elevator,
boiler, HVAC, telephone, water, gas, storm sewer, sanitary sewer and all
other utility systems and connections, all life support systems,
sprinklers, smoke detection and other fire protection systems, and all
equipment, machinery, shafts, flues, piping, wiring, ducts, duct work,
panels, instrumentation and other appurtenances relating thereto.
d "Building Operating Hours" shall mean 7:30 a.m. to 6:00 p.m. Monday through
------------------------
Friday, and Saturday 8:00 a.m. to 1:00 p.m., exclusive of Sundays and
Holidays.
e. "Building Rules and Regulations" shall mean the rules and regulations
------------------------------
governing the Complex promulgated by Landlord from time to time. The
current Building Rules and Regulations maintained by Landlord are attached
as Exhibit C hereto.
---------
f. "Building Standard", when applied to an item, shall mean such item as has
-----------------
been designated by Landlord (orally or in writing) as generally applicable
throughout the leased portions of the Building, as more fully set forth on
Exhibit D2 hereto.
g. "Commencement Date" shall mean the date of the commencement of the Term as
-----------------
determined pursuant to Section 6.3.
h. "Common Areas" shall mean all areas and facilities within the Complex which
------------
have been constructed and are being maintained by Landlord for the common,
general, nonexclusive use of all tenants in the Building, as revised from
time to time in Landlord's discretion (subject to paragraph 21 of the
Lease), and shall include rest rooms, lobbies, corridors, service areas,
elevators, stairs and stairwells, the Parking Facility, driveways, loading
areas, ramps, walkways and landscaped areas.
i. "Complex" shall mean the Land and all improvements thereon, including the
-------
Building and the Parking Facility.
j. "Fiscal Year" shall mean each fiscal year (or portion thereof) as
-----------
designated by Landlord, in which any portion of the Lease Term falls,
through and including the Fiscal Year in which the Lease Term expires. The
Fiscal Year currently commences on January 1. Landlord may change the
Fiscal Year at any time or times; provided, however, that Landlord may not
change the Fiscal Year so as to materially adversely impact Tenant's
expense reimbursement obligation.
k. "Force Majeure" shall mean the occurrence of any event which hinders,
-------------
prevents or delays the performance a party of any of its obligations
hereunder and which is beyond the reasonable control of such party.
l. "Holidays" shall mean (a) New Year's Day, Memorial Day, Independence Day,
--------
Labor Day, Thanksgiving Day and Christmas Day, and (b) other days which are
commonly observed as Holidays by the majority of tenants (by square
footage) of the Building. If the Holiday occurs on a Saturday or Sunday,
the Friday preceding or the Monday following may, at Landlord's discretion,
be observed as a Holiday.
m.. "HVAC" shall mean the heating, ventilation and air conditioning systems in
----
the Building.
A-1
<PAGE>
n. "Impositions" shall mean (a) all real estate, personal property, rental,
-----------
water, sewer, transit, use, occupancy and other taxes, assessments,
charges, excises and levies (including any interest, costs or penalties
with respect thereto), general and special, ordinary and extraordinary,
foreseen and unforeseen, of any kind and nature whatsoever which are
assessed, levied, charged or imposed upon or with respect to the Complex,
or any portion thereof, or the sidewalks, streets or alleyways adjacent
thereto, or the ownership, use, occupancy or enjoyment thereof , and (b)
all charges for any easement, license, permit or agreement maintained for
the benefit of the Complex. "Impositions" shall not include income taxes,
estate and inheritance taxes, excess profit taxes, franchise taxes, taxes
imposed on or measured by the income of Landlord from the operation of the
Complex, and taxes imposed on account of the transfer of ownership of the
Complex or the Land. If any or all of the Impositions shall be
discontinued and, in substitution therefor, taxes, assessments, charges,
excises or impositions shall be assessed, levied, charged or imposed wholly
or partially on the Rents received or payable hereunder (a "Substitute
----------
Imposition"), then the Substitute Imposition shall be deemed to be included
----------
within the term "Impositions."
o. "Land" shall mean the real property on which the Building is constructed
----
and which is further described in Exhibit E hereto.
---------
p. "Landlord's Consent or Landlord's Approval" as used in this Agreement,
-----------------------------------------
shall mean the prior written consent or written approval of Landlord to the
particular item or request. Unless otherwise provided in this Lease, the
Landlord's consent or approval shall be determined in Landlord's reasonable
discretion.
q. "Landlord's Mortgagee" shall mean the mortgagee of any mortgage, the
--------------------
beneficiary of any deed of trust, the pledgee of any pledge, the secured
party of any security interest, the assignee of any assignment and the
transferee of any other instrument of transfer (including the ground lessor
of any ground lease on the Land) now or hereafter in existence on all or
any portion of the Complex, and their successors, assigns and purchasers.
"Mortgage" shall mean any such mortgage, deed of trust, pledge, security
--------
agreement, assignment or transfer instrument, including all renewals,
extensions and rearrangements thereof and of all debts secured thereby.
r. "Landlord's Work" shall mean all improvements, components, assemblies,
---------------
installations, finish, labor, materials and services that Landlord is
required to furnish, install, perform, provide or apply to the Premises as
specified in the Work Letter Agreement.
s. "Legal Requirements" shall mean any and all (a) judicial decisions, orders,
------------------
injunctions, writs, statutes, rulings, rules, regulations, promulgations,
directives, permits, certificates or ordinances of any governmental
authority in any way applicable to Tenant or the Complex, including but not
limited to the Building Rules and Regulations, zoning, environmental and
utility conservation matters, and (b) insurance requirements.
t. "Parking Facility" shall mean (a) any parking garage and any other parking
----------------
lot or facility adjacent to or in the Complex servicing the Building, and
(b) any parking area, open or covered, leased by Landlord to service the
Building.
u. "Permitted Use" means only the uses described in Paragraph 4 of this Lease,
-------------
and no other purpose, in strict compliance with the Building Rules and
Regulations from time to time in effect and all other Legal Requirements.
v. "Premises" shall mean the area leased by Tenant pursuant to this Lease as
--------
outlined on the floor plan drawing attached as Exhibit B hereto and all
---------
other space added to the Premises pursuant to the terms of this Lease. The
Premises includes the space between the interior surface of the walls and
the top surface of the floor slab of the outlined area and the finished
surface of the ceiling immediately above.
w. "Rent" shall mean Base Rent, Additional Rent, the parking charge called for
----
in Section 5.4 and all other amounts provided for under this Lease to be
paid by Tenant, whether as Additional Rent or otherwise. "Base Rent" shall
---------
mean the base rent specified in Section 5.1. "Additional Rent" shall mean
---------------
the additional rent specified in Section 5.3.
x. "Rentable Area" shall mean the Rentable Area of the Premises and the
-------------
Rentable Area of the Building as stated in Section "A" of the Summary of
Basic Lease Information.
y. "Security Deposit" shall be defined as stated in Section 5.8 of the of the
----------------
Lease.
A-2
<PAGE>
z. "Substantial Completion" of the Premises shall occur at such time as the
----------------------
Premises are "Ready for Occupancy" as defined in the Work Letter Agreement.
aa. "Taking" or "Taken" shall mean the actual or constructive condemnation, or
------ -----
the actual or constructive acquisition by or under threat of condemnation,
eminent domain or similar proceeding, by or at the direction of any
governmental authority or agency.
bb. "Tenant's Share" shall mean the percentage of Operating Expenses to be paid
--------------
by Tenant in accordance with the provisions of Section 5.3.1(b) of the
Lease. Landlord and Tenant stipulate that "Tenant's Share" shall mean the
percentage stated in Section "D" of the Summary of Basic Lease Information.
cc. "Transfer" shall mean (a) an assignment (direct or indirect, absolute or
--------
conditional, by operation of law or otherwise) by Tenant of all or any
portion of Tenant's interest in this Lease or the leasehold estate created
hereby, (b) a sublease of all or any portion of the Premises, or (c) the
grant or conveyance by Tenant of any concession or license within the
Premises. If Tenant is a corporation, then any transfer of this Lease by
merger, consolidation or dissolution, or by any change in ownership or
power to vote a majority (excluding a public offering of securities) of the
voting stock (being the shares of stock regularly entitled to vote for the
election of directors) in Tenant outstanding at the time of execution of
this Lease shall constitute a Transfer. If Tenant is a partnership having
one or more corporations as general partners, the preceding sentence shall
apply to each corporation as if the corporation alone had been the Tenant
hereunder. If Tenant is a general or limited partnership, joint venture or
other form of association, the Transfer of a majority of the ownership
interests therein shall constitute a Transfer. "Transferee" shall mean the
----------
assignee, sublessee, pledgee, concessionaire, licensee or other transferee
of all or any portion of Tenant's interest in this Lease, the leasehold
estate created hereby or the Premises.
dd. "Work Letter Agreement" shall mean the agreement, if any, attached as
---------------------
Exhibit D hereto between Landlord and Tenant for the construction of
---------
improvements in the Premises.
ee. "Phase One Space" shall mean the portion of Premises on floors 5, 6 and
---------------
3,440 square feet of Rentable Area (2,991 usable square feet) of the first
floor.
ff. "Phase Two Space" shall mean the portion of the Premises on the remainder
---------------
of the first floor (15,452 square feet of Rentable Area; 13,437 usable
square feet) not included in the Phase One Space.
A-3
<PAGE>
EXHIBIT B
PREMISES
--------
Attach floor plan of the Premises.
[Diagram]
B-1
<PAGE>
EXHIBIT B-1
SMOKING SHELTER LOCATION
------------------------
[Diagram]
B-2
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
---------------------
Tenant shall comply with the following Rules and Regulations.
Landlord shall not be responsible to Tenant for the nonperformance of any of
these Rules and Regulations by Tenant, any other tenant, or any visitor,
licensee, agent, or other person or entity.
1. Security; Admission to Building. Landlord may from time to time adopt
-------------------------------
appropriate systems and procedures for the security or safety of the Building,
any persons occupying, using or entering the Building, or any equipment,
finishings or contents of the Building, and each tenant shall comply with such
systems and procedures. Landlord shall in no case be liable for damages for any
error with regard to the admission to or exclusion from the Building of any
person. In the event of an invasion, mob, riot, public excitement or other
commotion, Landlord reserves the right to prevent access to the Building during
the continuance of the same by closing of the doors of the Building or any other
reasonable method, for the safety of the tenants and protection of the Building
and property in the Building.
2. Conduct and Exclusion or Expulsion. Tenant's employees, visitors, and
----------------------------------
licensees shall not loiter in or interfere with the use of the Parking Facility
or the Complex's driveway or parking areas, nor consume alcohol in the Common
Areas of the Complex or the Parking Facility. The sidewalks, halls, passages,
exits, entrances, elevators, escalators, and stairways of the Building will not
be obstructed by any tenants or used by any of them for any purpose other than
for ingress to and egress from their respective premises. The halls, passages,
exits, entrances, elevators, escalators, and stairways are not for the general
public, and Landlord may control and prevent access to them by all persons whose
presence, in the reasonable judgment of Landlord, would be prejudicial to the
safety, character, reputation and interests of the Building and its tenants. In
determining whether access will be denied, Landlord may consider attire worn by
a person and its appropriateness for an office building, whether shoes are being
worn, use of profanity, either verbally or on clothing, actions of a person
(including without limitation spitting, verbal abusiveness, and the like), and
such other matters as Landlord may reasonably consider appropriate.
3. Signs, Notices and Decorations. No sign, placard, picture,
------------------------------
decoration, name, advertisement or notice (collectively "Material") visible from
the exterior of any tenant's premises shall be inscribed, painted, affixed or
otherwise displayed by any tenant on any part of the Building without the prior
written consent of Landlord. All approved signs or lettering will be printed,
painted, affixed or inscribed at the expense of the tenant desiring such by a
person approved by Landlord. Material visible from outside the Building will
not be permitted. Landlord may remove such Material without any liability, and
may charge the expense incurred by such removal to the tenant in question.
4. Curtains and Decorations. No awnings, curtains, draperies, blinds,
------------------------
shutters, shades, screens, or other coverings, hangings or decorations will be
attached to, hung or placed in, or used in connection with any window of the
Building or a tenant's premises without Landlord's prior written consent.
5. Non-obstruction of Light. The sashes, sash doors, skylights, windows,
------------------------
heating, ventilating, and air conditioning vents and doors that reflect or admit
light and air into the halls, passageways, tenant premises, or other public
places in the Building shall not be covered or obstructed by any tenant, nor
will any bottles, parcels or other articles or decorations be placed on any
window sills.
6. Showcases. No showcases or other articles will be put in front of or
---------
affixed to any part of the exterior of the Building, nor placed in the public
halls, corridors or vestibules without the prior written consent of Landlord.
7. Cooking; Use of Premises for Improper Purposes. No tenant will permit
----------------------------------------------
its premises to be used for lodging or sleeping. No cooking will be done or
permitted by any tenant on its premises, except in areas of the premises which
are specially constructed for cooking as specifically provided in working
drawings approved by Landlord, so long as such use is in accordance with all
applicable federal, state, and city laws, codes, ordinances, rules and
regulations. Notwithstanding the foregoing, microwave ovens and other
Underwriters' Laboratory (UL)-approved equipment may be used in the premises for
heating food and brewing coffee, tea, and similar beverages for employees and
visitors. The premises shall not be used for any improper, reasonably
objectionable, or immoral purpose.
8. Janitorial Service. No tenant will employ any person or persons other
------------------
than the cleaning service of Landlord for the purpose of cleaning the premises,
unless otherwise agreed by Landlord in writing. If any tenant's actions result
in any increased expense for any required cleaning, Landlord may assess such
tenant for
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<PAGE>
such expenses. Janitorial service will not be furnished on nights to offices
which are occupied after business hours on those nights unless, by prior written
agreement of Landlord, service is extended to a later hour for specifically
designated offices.
9. Use of Restrooms. The toilets, urinals, wash bowls and other plumbing
----------------
fixtures will not be used for any purposes other than those for which they were
constructed, and no sweepings, rubbish, rags or other foreign substances will be
thrown in them. All damages resulting from any misuse of the fixtures will be
borne by the tenant who, or whose servants, employees, agents, visitors or
licensees, have caused the damage.
10. Defacement of Premises or Building. No tenant will deface any part of
----------------------------------
such tenant's premises or the Building. Without the prior written consent of
Landlord, no tenant will lay linoleum or other similar floor covering so that it
comes in direct contact with the floor of such tenant's premises. If linoleum
or other similar floor covering is to be used, an interlining of builder's
deadening felt will be first affixed to the floor by a paste or other material
soluble in water. The use of cement or other similar adhesive material is
expressly prohibited. Except as permitted by Landlord by prior written consent,
Tenant shall not mark on, paint signs on, cut, drill into, drive nails or screws
into, or in any way deface the walls, ceilings, partitions or floors of the
premises or of the Building, and any defacement, damage or injury directly or
indirectly caused by Tenant shall be paid for by Tenant. Pictures or diplomas
shall be hung on tacks or small nails; Tenant shall not use adhesive hooks for
such purposes.
11. Locks; Keys. No tenant will alter, change, replace or rekey any lock
-----------
or install a new lock or a knocker on any door of such tenant's premises.
Landlord, its agent or employee will retain a master key to all door locks on
the premises, subject to the provisions of 7.2 of the Lease. Any new door locks
required by a tenant or any change in keying of existing locks will be installed
or changed by Landlord following such tenant's written request to Landlord and
will be at such tenant's expense. All new locks and rekeyed locks will remain
operable by Landlord's master key. Landlord will furnish to each tenant, free
of charge keys to each door lock on its premises, and Building access cards as
stated in Section 7.2 of each tenant's lease. Landlord will have the right to
collect a reasonable charge for additional keys and cards requested by any
tenant. Each tenant, upon termination of its tenancy, will deliver to Landlord
all keys and access cards for the premises and Building which have been
furnished to such tenant. Tenant shall keep the doors of the premises closed
and securely locked when Tenant is not at the premises.
12. Furniture, Freight and Equipment. No furniture, freight, packages,
--------------------------------
merchandise, or equipment of any kind may be brought into the Building or
carried up or down in the elevators, except between those hours and in that
specific elevator designated by Landlord or otherwise upon consent of the
Landlord, without prior notice to and consent of Landlord. Landlord may at any
time restrict the elevators and areas of the Building into which deliveries or
messengers may enter. The elevator designated for freight by Landlord will be
available for use by all tenants in the Building during the hours and pursuant
to such procedures as Landlord reasonably may determine from time to time. The
persons employed to move Tenant's equipment, material, furniture or other
property in or out of the Building must be reasonably acceptable to Landlord;
unless otherwise approved by Landlord, such persons must be a locally recognized
professional mover whose primary business is the performing of relocation
services, and must be bonded and fully insured. Unless waived by Landlord in
writing, a certificate or other verification of such insurance must be received
and approved by Landlord prior to the start of any moving operations. Insurance
must be sufficient, in Landlord's sole opinion, to cover all personal liability,
theft or damage to the Building, including without limitation floor coverings,
doors, walls, elevators, stairs, foliage and landscaping. All moving operations
will be conducted at such times and in such a manner as Landlord may direct, and
all moving will take place during nonbusiness hours unless Landlord otherwise
agrees in writing. The moving tenant shall be responsible for the provision of
Building security during all moving operations, and shall be liable for all
losses and damages sustained by any party as a result of the failure to supply
adequate security. Landlord may prescribe the weight, size and position of all
equipment, materials, furniture or other property brought into the Building.
Heavy objects will, if considered necessary by Landlord, stand on wood strips of
such thickness as is necessary to distribute the weight properly. Landlord will
not be responsible for loss of or damage to any such property from any cause,
and all damage done to the Building by moving or maintaining such property will
be repaired at the expense of the moving tenant. Landlord may inspect all such
property to be brought into the Building and to exclude from the Building all
such property which violates any of these rules and regulations or the lease of
which these rules and regulations are a part. Supplies, goods, materials,
packages, furniture and all other items of every kind delivered to or taken from
the Premises will be delivered or removed through the entrance and route
designated by Landlord.
13. Inflammable or Combustible Fluids or Materials; Noninterference of
------------------------------------------------------------------
Others. No tenant will use or keep in the Premises or the Building any
- ------
kerosene, gasoline, inflammable, combustible or explosive fluid or material, or
chemical substance other than limited quantities of them reasonably necessary
for the operation or maintenance of office equipment or limited quantities of
cleaning fluids and solvents required in the normal operation of the Premises.
Without Landlord's prior written approval, no tenant will use any method of
heating
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<PAGE>
or air conditioning other than that supplied by Landlord. Tenant shall not waste
electricity, water, or air conditioning and shall cooperate fully with Landlord
to insure the most effective operation of the Building's heating and air
conditioning system. No tenant will keep any firearms within the Premises. No
tenant will use or keep, or permit to be used or kept, any foul or noxious gas
or substance in the Premises, or permit or suffer the Premises to be occupied or
used in any manner offensive or objectionable to Landlord or other occupants of
the Building by reason of noise, odors or vibrations, nor interfere in any way
with other tenants or those having business in the Building.
14. Address of Building. Landlord shall not voluntarily change the street
-------------------
address of the Building without the prior consent of Tenant.
15. Use of Building Name or Likeness. Landlord will have the right to
--------------------------------
prohibit any advertising by Tenant mentioning the Building which, in Landlord's
reasonable opinion, tends to impair the reputation of the Building or its
desirability as a Building for offices and, upon written notice from Landlord,
Tenant will discontinue such advertising.
16. Animals, Birds and Vehicles. Tenant will not bring any animals or
---------------------------
birds into the Premises or Building, and will not permit bicycles or other
vehicles inside or on the sidewalks outside the Building, except in areas
designated from time to time by Landlord for such purposes.
17. Off-Hour Access. All persons entering or leaving the Building at any
---------------
time other than the Building's business hours shall comply with such off-hour
regulations as Landlord may establish and modify from time to time. Landlord
may limit or restrict access to the Building during such periods and shall not
be liable for any error with regard to the admission or exclusion of any person.
18. Disposal of Trash. Each tenant will store all its trash and garbage
-----------------
within its premises. No material will be placed in the trash boxes or
receptacles if such material is of such nature that it may not be disposed of in
the ordinary and customary manner of removing and disposing of trash and garbage
without being in violation of any law or ordinance governing such disposal. All
garbage and refuse disposal will be made only through entryways and elevators
provided for such purposes and at such times as Landlord may designate. No
furniture, appliances, equipment or flammable products of any type may be
disposed of in the Building trash receptacles.
19. Disturbance of Tenants. Canvassing, peddling, soliciting and
----------------------
distribution of handbills or any other written materials in the Building or
Parking Facility are prohibited, and each tenant will cooperate to prevent same.
20. Doors to Public Corridors. Each tenant shall keep the doors of the
-------------------------
Premises closed and locked, and shall shut off all water faucets, water
apparatus, and utilities before tenant or tenant's employees leave the Premises,
so as to prevent waste or damage, and for any default or carelessness in this
regard Tenant shall be liable for all injuries sustained by other tenants or
occupants of the Building or Landlord. On multiple-tenancy floors, all tenants
will keep the doors to the Building corridors closed at all times except for
ingress and egress.
21. Concessions. Tenant shall not grant any concessions, licenses or
-----------
permission for the sale or taking of orders for food or services or merchandise
in the Premises, install or permit the installation or use of any machine or
equipment for dispensing food or beverage in the Building, nor permit the
preparation, serving, distribution or delivery of food or beverages in the
Premises, without the prior written approval of Landlord and only in compliance
with arrangements prescribed by Landlord; provided, however, Tenant shall be
allowed reasonable equipment for dispensing coffee/beverage services, candy and
a microwave oven. Only persons approved by Landlord shall be permitted to
serve, distribute or deliver food and beverage within the Building or to use the
public areas of the Building for that purpose.
22. Telecommunication and Other Wires. Tenant may not introduce
---------------------------------
Telecommunication wires or other wires into the Premises without first obtaining
Landlord's approval of the method and location of such introduction.
23. Rules Changes; Waivers. Subject to Section 4 of the Lease, Landlord
----------------------
reserves the right at any time to reasonably change or rescind any one or more
of these Rules and Regulations or to make any additional reasonable Rules and
Regulations that, in Landlord's judgment, may be necessary or helpful for the
management, safety or cleanliness of the Premises or Building; the preservation
of good order; or the convenience of occupants and tenants of the Building
generally. Landlord may waive any one or more of these Rules and Regulations
for the benefit of any particular tenant. No waiver by Landlord shall be
construed as a waiver of those Rules and Regulations in favor of any other
tenant, and no waiver shall prevent Landlord from enforcing those Rules and
C-3
<PAGE>
Regulations against a tenant or any other tenant in the future. Tenant
shall be considered to have read these Rules and Regulations and to have agreed
to abide by them as a condition of Tenant's occupancy of the Premises.
C-4
<PAGE>
EXHIBIT D
WORK LETTER AGREEMENT
---------------------
This Work Letter Agreement is attached to and made a part of the Lease.
All terms used in this Work Letter Agreement which have been defined in the
Lease have the same meaning as set forth in the Lease. This Work Letter
Agreement shall set forth the terms and conditions relating to the construction
of Tenant Improvements in the Premises.
I. Landlord and Tenant Construction Obligations
--------------------------------------------
A. Space Plan Preparation. Tenant shall assist and fully cooperate with
----------------------
the space planner/architect (the "Space Planner") designated by Landlord to
prepare a detailed space plan ("Space Plan") containing all information listed
in Section II of this Work Letter Agreement for all tenant improvements ("Tenant
Improvements") proposed by Tenant in the Premises. The Space Plan shall be
delivered to Landlord on or before the date specified in the Summary of Basic
Lease Information, Section "H." If the Space Plan is not delivered by the date
listed above, then each calendar day of delay in delivery shall constitute one
day of "Tenant Delay" hereunder.
B. Space Plan Approval and Tenant Improvement Allowance. Landlord will
----------------------------------------------------
review the Space Plan upon receipt from Tenant and shall thereafter meet with
Tenant and advise Tenant as to the matters set forth in this Section IB below.
In connection with construction of the Tenant Improvements, Tenant shall be
entitled to a one-time tenant improvement allowance (the "Tenant Improvement
Allowance") in the amount specified in the Summary of Basic Lease Information,
Section "H" for the costs relating to the design, modification and construction
of the Tenant Improvements as provided herein. The Tenant Improvement Allowance
shall be disbursed by Landlord (pursuant to Landlord's disbursement process) for
the following items, each of which shall be applied against and reduce the
Tenant Improvement Allowance: (i) the cost of materials, labor and other costs
related to the construction of the Tenant Improvements, (ii) the cost of
preparation and one modification of the Space Plan at a fee of seventeen cents
($.17) per usable square foot of the Premises, together with additional charges
for any additional modifications, (iii) the cost of the preparation of
construction plans or Working Drawings at a fee of fifty-two cents ($.52) per
usable square foot of the Premises, together with additional charges for any
additional modifications, (iv) a construction management and administration fee
of fifty cents ($.50) per usable square foot of the Premises, and (v) payment of
architectural and engineering fees associated with the Space Plan and Working
Drawings not otherwise included within the items specified above (collectively
the "Tenant Improvement Allowance Items"). In no event shall Landlord be
obligated to make disbursements for Tenant Improvements pursuant to this Work
Letter Agreement in excess of the Tenant Improvement Allowance, plus sums paid
by Tenant in accordance with the Pricing Agreement Letter (defined below).
If the Landlord determines that the Space Plan does not conform to the
requirements of Section II below, or Tenant determines that the estimated costs
of Tenant Improvements which are in excess of the Tenant Improvement Allowance
are not within the scope of its budget, the Space Plan will be returned to
Tenant for review by Tenant with the Space Planner and for corrections or
revisions. The cost of any correction or revision to the Space Plan shall be
included within the Tenant Improvement Allowance and borne by Tenant. Tenant
will deliver a corrected Space Plan within the scope of its budget to Landlord
no later than ten (10) calendar days after the initial proposed Space Plan has
been returned to Tenant. Each calendar day after the day the initial proposed
Space Plan is returned to Tenant until a revised and corrected Space Plan is
redelivered to Landlord shall constitute one day of Tenant Delay. This process
will be repeated, as required, until mutual approval of Tenant's Space Plan and
estimated Tenant Improvement costs. Upon approval of the final Space Plan and
estimated Tenant Improvement costs, Tenant will notify Landlord in writing of
such approval and that the preparation of working drawings may commence.
C. Preparation of Working Drawings. Upon final approval of the Space
-------------------------------
Plan and estimated Tenant Improvement costs, Landlord shall direct the Space
Planner to prepare working drawings ("Working Drawings") based on the approved
Space Plan. When prepared, the Working Drawings consistent with the Space Plan
shall be delivered by the Space Planner to the Tenant for approval. If the
Tenant fails to deliver the Working Drawings, together with its written approval
thereof, to the Landlord within ten (10) calendar days after delivery of the
Working Drawings by the Space Planner to Tenant, then each day of delay in
delivery of the approved Working Drawings shall constitute one day of Tenant
Delay.
D. Pricing Agreement Letter. Upon receipt of Working Drawings approved
------------------------
by Tenant, Landlord shall price the cost of the Tenant Improvements in
accordance with the Working Drawings, and furnish Tenant a Pricing Agreement
Letter in the form of Exhibit D1 hereto ("Pricing Agreement Letter") within
fourteen (14) calendar days from the receipt of approved Working Drawings. The
Pricing Agreement Letter shall provide for
D-1
<PAGE>
the Tenant Improvement Allowance to be paid by the Landlord and all Tenant
Improvement costs in excess of the Tenant Improvement Allowance to be paid by
the Tenant. If a Pricing Agreement Letter is not delivered to Tenant on or
before such date, then each day of delay in delivery shall constitute one day of
"Landlord Delay" hereunder; provided, however, that if a Pricing Agreement
Letter cannot be delivered within fourteen (14) calendar days due to the
complexity or amount of Above Standard Tenant Improvements, Landlord shall so
notify Tenant, and any delay associated therewith shall not constitute a
Landlord Delay.
E. Tenant Approval of Pricing Agreement Letter. Tenant shall promptly
-------------------------------------------
review the Pricing Agreement Letter and shall approve, execute and return same
to Landlord within ten (10) calendar days after delivery thereof to Tenant. If
the Tenant fails to execute and deliver the Pricing Agreement Letter within said
ten (10) calendar day period, then each day of delay in delivery shall
constitute one day of Tenant Delay. The Pricing Agreement Letter shall require
that Tenant pay fifty percent (50%) of all Tenant Improvement costs in excess of
the Tenant Improvement Allowance presented in the Pricing Agreement Letter upon
execution of the Pricing Agreement Letter. Landlord reserves the right to bill
Tenant up to ninety-five percent (95%) of the Tenant Improvement costs in excess
of the Tenant Improvement Allowance during the construction period in proportion
to the amount of work completed or materials purchased, with the final five
percent (5%) due upon acceptance of the completed Premises and in any event no
later than one (1) day before occupancy by Tenant.
F. Installation of Tenant Improvements. Upon approval and execution of
-----------------------------------
the Pricing Agreement Letter by Tenant, Landlord or Landlord's designee shall
install the Tenant Improvements in the Premises in accordance with the Lease
Agreement, this Work Letter Agreement, the executed Pricing Agreement Letter and
the Working Drawings. Landlord shall meet with Tenant and advise Tenant which
Tenant Improvements in the Working Drawings are in excess of Building Standard
Tenant Improvements as set forth in Exhibit D2 attached hereto and incorporated
herein by this reference. Any Tenant Improvements which are determined by
Landlord to be in excess of the Building Standard Tenant Improvements shall be
referred to as "Above Standard Tenant Improvements." The excess of time
required to complete the Above Standard Tenant Improvements over the time which
would have been required to complete the Premises for occupancy had only
Building Standard Tenant Improvements been used shall constitute Tenant Delay.
Landlord's Work will be performed in a good workmanlike manner and will be
adequate to deliver possession of the Premises Substantially Completed as
provided in this Work Letter Agreement. Landlord will retain a general
contractor for the construction of Landlord's Work, and the general contractor
will supervise, construct and complete all Landlord's Work in accordance with
the Working Drawings. The general contractor may be paid a general contractor's
fee, not to exceed sixteen percent (16%) of the costs of labor and material for
Landlord's Work, as set forth in the Pricing Agreement Letter, and such fee will
be applied against the Tenant Improvement Allowance. Other than the fee
described in Paragraph I.B(iv), Landlord will not receive any fees or profit or
reimbursement for overhead or general conditions in connection with Landlord's
Work. Landlord will supervise, bid and secure all permits and licenses
necessary to complete Landlord's Work, and Landlord will assume responsibility
for ensuring that all Landlord's Work and other construction work in the
Premises undertaken by or on behalf of Landlord is in compliance with all Legal
Requirements. Changes in Landlord's Work will be authorized only by mutual
written agreement between the parties setting forth any additional cost and
expense and additional time required to complete the Premises as a result
thereof.
G. Payment by Tenant for All Costs in Excess of Tenant Improvement
---------------------------------------------------------------
Allowance. Tenant shall pay all costs incurred in connection with the Tenant
- ---------
Improvements in excess of the Tenant Improvement Allowance, including, without
limitation, the costs of labor and materials. To the extent that the actual
cost of any element of Landlord's Work is less than the amount budgeted therefor
in the Pricing Agreement Letter, the cost savings shall inure to the benefit of
Tenant.
H. Change Orders. In the event that Tenant desires to change the Tenant
-------------
Improvements as provided in the approved Working Drawings, Tenant shall deliver
notice of the same to Landlord, setting forth in detail the changes Tenant
desires to make. Landlord may disapprove of said Tenant Changes in the event
that Landlord, in its sole discretion, determines that the changes would
constitute design problems for the Premises or Building. In the event that
Landlord approves of the proposed Tenant Changes, Landlord shall provide Tenant
with an amendment to the Pricing Agreement Letter setting forth the costs and
the period of Tenant Delay necessitated by the Tenant Changes. Thereafter, the
Tenant shall, within five (5) calendar days of receipt of Landlord's approval,
deliver written notice to Landlord stating whether or not Tenant elects to cause
Landlord to make such Tenant Changes. Tenant shall bear the full costs for any
and all such changes in the Tenant Improvements and any delays associated with
such changes shall constitute Tenant Delay. The costs for any and all change
orders shall be determined by the same pricing structure as the Tenant
Improvements as set forth in the Pricing Agreement Letter.
I. Net Tenant Delay. Net Tenant Delay shall mean the total number of
----------------
days of Tenant Delay minus the total number of days of Landlord Delay. If the
Premises are not ready for occupancy on or before the scheduled date specified
in paragraph 6 of this Lease, and there exists Net Tenant Delay, then,
notwithstanding
<PAGE>
anything to the contrary set forth in the Lease or this Work Letter Agreement,
and regardless of the actual date of the Substantial Completion of the Premises,
the Lease Commencement Date shall be deemed to be the date the Lease
Commencement Date would have occurred without the Net Tenant Delay and Tenant
shall timely pay to Landlord Base Rent and all other charges provided for in the
Lease commencing as of the Lease Commencement Date determined as if the Net
Tenant Delay had not occurred. In addition, a Net Tenant Delay of thirty (30)
calendar days or more shall constitute a default and breach by Tenant of the
Lease.
J. Warranties and Guaranties. Landlord hereby assigns to Tenant all
-------------------------
warranties and guaranties by the Space Planner relating to the Working Drawings
and by the contractor who constructs the Tenant Improvements relating to the
Tenant Improvements and, in consideration therefor, Tenant hereby waives,
releases and agrees to indemnify Landlord from all loss, damages, delays and
claims relating to, or arising out of (i) the design, code compliance, quality,
omissions or errors and other like matters contained in the Working Drawings,
and (ii) the construction of the Tenant Improvements, including, without
limitation, lost profits and all incidental or consequential damages.
II. Tenant Space Plan Must Contain, as a Minimum, the Following Information:
-----------------------------------------------------------------------
A. Floor plan showing:
1. Partitions: indicate location and type of all
partitions.
2. Doors: indicate location, swing and type of all doors.
Also indicate hardware.
3. Standard Electrical Items: indicate the location of all
building standard electrical items listed herein (wall-
mounted 110 volt duplex outlets, single-pole light
switches and building standard light fixtures).
4. Standard Telephone Outlets: indicate the location of all
building standard telephone wall outlets, as listed
herein.
5. "Above Standard" Electrical Items: indicate the location
and type of all "above standard" electrical items,
including lighting.
6. Special Electrical Equipment and Requirements: indicate
the location and type of equipment that will have
special requirements and indicate the location and type
of special electrical equipment to be purchased.
7. Telephone and Data Equipment Location: indicate location
of telephone equipment room, if any.
8. Glass Items: indicate location, dimensions and type of
glass partitions, windows and doors. Include details if
not building standard.
9. Heavy Items: indicate location, dimensions, weight per
square foot and description of any heavy equipment or
filing system exceeding fifty (50) pounds per square
foot live load.
10. Special HVAC Requirements: Indicate location and
specific requirements for any special and/or
concentrated heating and/or air conditioning
requirements beyond that provided by the building HVAC
system and/or distribution network.
11. Floor Covering: indicate location, type and color of all
floor covering.
12. Wall Covering: indicate location, type and color of all
wall coverings.
13. Paint: indicate location, type and color of paint
finishes.
14. Millwork: indicate location, type and basic dimensions
of all cabinets, shelving and other millwork items.
15. Plumbing: indicate location and type of all plumbing
items.
16. Appliances: indicate location, type, dimensions and
special requirements of all appliances.
D-3
<PAGE>
17. Critical Dimensions: indicate all critical dimensions
necessary for construction.
18. Fire Sprinkler Requirements: indicate location and type
of all fire sprinkling and/or special fire suppression
requirements.
19. Ceiling System and Finishes: indicate location, type and
color of all ceiling finishes and/or systems.
20. Security Requirements: indicate the location, type and
special requirements for any security system and/or
requirements.
21. Furniture System Requirements: indicate all interfacing
requirements with furniture systems (i.e., electrical,
telephone, data, anchoring, etc.).
III. Other Provisions.
----------------
A. Substantial Completion. For purposes of this Lease,
----------------------
"Substantial Completion" (and correlative terms) of the Premises shall occur at
such time as the Premises are "Ready for Occupancy". The Premises shall be
"Ready for Occupancy" at such time as all of the following conditions have been
satisfied:
1. Landlord will have completed the Landlord's Work
substantially in accordance with the Working Drawings;
2. The Premises will be sufficiently complete so that Tenant
can reasonably occupy and utilize them for the use for which they
are intended without interference to the conduct of Tenant's
business;
3. Landlord will have received any governmental approvals
which are necessary in order for Tenant to occupy the Premises including a
use and occupancy permit, if the same is required; and
4. The Architect's Certificate has been given.
The following procedure will be followed to obtain the Architect's
Certificate. As soon as Landlord determines that all of the conditions in
clauses (i), (ii), and (iii) (the "Occupancy Conditions") have been satisfied,
it will give Tenant notice of such determination. Tenant will then cause
Tenant's architect, within three (3) days thereafter, to inspect the Premises
and certify as to whether the Occupancy Conditions have been satisfied (the
"Architect's Certificate"). Unless Tenant's architect notifies Landlord within
such 3-day period that, in the reasonable judgment of such architect, that the
Occupancy Conditions have not been satisfied and the reasons therefor, the
Occupancy conditions will be deemed satisfied and the Architect's Certificate
deemed given. If Tenant's architect notifies Landlord that the Occupancy
conditions have not been satisfied in the reasonable judgment of such architect,
Landlord will make any required adjustments and Tenant's architect will again
determine whether the Occupancy Conditions are satisfied in accordance with the
foregoing procedure. As soon as it is determined by Tenant's architect that all
of the Occupancy Conditions have been completed and the Architect"s Certificate
is given or deemed given, Landlord and Tenant will jointly conduct an inspection
of the Premises. Landlord and Tenant will in good faith prepare any necessary
punchlist of items (the "First Punchlist") to be completed for the Premises
together with a completion date for each item. Landlord will proceed promptly to
remedy all of the items of the First Punchlist. Sixty (60) days after the
Commencement Date, Landlord and Tenant will jointly conduct a second inspection
of the Premises and will prepare a punchlist (the "Second Punchlist") of items
to be completed for the Premises together with a completion date for each item.
No items will be included on the list which are the result of damage caused by
Tenant or its agents, employees, servants or contractors. Landlord agrees to
promptly remedy any items on the Second Punchlist. If Landlord fails to complete
any item on the First Punchlist or Second Punchlist by its completion date,
Tenant may proceed to complete such item at Landlord's expense. Preparation of
punchlists and completion of any punchlist items are not a condition precedent
to Lease Term Commencement and will not delay the Commencement Date.
B. Time of the Essence. Unless otherwise indicated, all references
-------------------
herein to "number of days" shall mean and refer to calendar days. In all
instances where Tenant is required to approve or deliver an item, if no written
notice of approval is given or the item is not delivered within the stated time
period, at Landlord's sole option, at the end of such period the item shall
automatically be deemed approved or delivered by Tenant and the next succeeding
time period shall commence.
C. Tenant's Lease Default. Notwithstanding any provision to the
----------------------
contrary contained in the Lease or this Work Letter Agreement, if an event of
default has occurred as set forth in the Lease or in this Work Letter
D-4
<PAGE>
Agreement at any time on or before the Substantial Completion of the Premises,
then, (i) in addition to all other rights and remedies granted to Landlord
pursuant to the Lease, Landlord shall have the right to cease the construction
of the Premises (in which case, Tenant shall be responsible for any delay in the
Substantial Completion of the Premises caused by such work stoppage), (ii) all
other obligations of Landlord under the terms of this Work Letter Agreement
shall be suspended until such time as such default is cured pursuant to the
terms of the Lease, and (iii) Landlord shall have the right to recover from
Tenant the costs incurred for the Tenant Improvement Allowance Items, and
otherwise in connection with the construction of the Tenant Improvements.
D. Construction of Certain Improvements. The construction of
------------------------------------
certain Tenant Improvement items specified below shall be completed in
accordance with the following provisions:
1. "Above Standard"
Electrical Items: Tenant shall advise Landlord of
locations and types of all
"above standard" electrical
items, including lighting.
2. Special Electrical
Equipment and
Requirements: Tenant shall advise Landlord of
locations and types of all
special electrical equipment.
3. Appliances: Tenant shall advise Landlord of
locations, types, dimensions
and special requirements of all
appliances.
4. Telephone and Data
Equipment Location: Tenant shall advise Landlord of
location, of telephone
equipment room, if any.
5. Heavy Items: Tenant shall advise Landlord of
location, dimensions, weight
per square foot and description
of heavy equipment or filing
systems exceeding 50 pounds/SF
live load.
6. Millwork: Tenant shall advise Landlord of
location, type and basic
dimensions of all cabinets,
shelving and other millwork
items. Standard Plastic
Laminate Specifications:
Countertops: Wilsonart #1573-
60. Cabinets: Pionite #AT301-S.
7. Plumbing: Tenant shall advise Landlord of
location and type of all
plumbing fixtures. Standard
Sink Specification: Kohler,
stainless #K-3287-H with
stainless faucet #K-15176.
8. Special HVAC: Tenant shall advise Landlord of
special HVAC requirements.
9. Critical Dimensions: Tenant shall advise Landlord of
all critical dimensions
necessary for construction.
10. Security Requirements: Tenant shall advise Landlord of
the location, type and any
special requirements.
11. Furniture Systems: Tenant shall advise Landlord of
all interfacing requirements
between furniture and systems
for electrical, telephones,
data, anchoring, etc.
E. Removal of Certain Tenant Improvements; Repair and Restoration
--------------------------------------------------------------
of the Affected Premises. Pursuant to Section 6.4 of the Lease Agreement, Tenant
- ------------------------
shall:
1. Replace with Building Standard windows the two mechanical
vents that vent to the outside, one of which is located in
the manufacturing lab and the other of which is located in
the shell lab.
D-5
<PAGE>
2. Remove auditory labs one and two and pour a concrete floor
where the labs were located.
D-6
<PAGE>
EXHIBIT D1
PRICING AGREEMENT LETTER
------------------------
This Pricing Agreement Letter dated ___________, 19___, is entered into
by and between 2795 E. COTTONWOOD PARKWAY, L.C. ("Landlord") and SONIC
INNOVATIONS, INC., a Delaware corporation ("Tenant").
R E C I T A L S :
- - - - - - - -
A. Pursuant to that certain Lease Agreement between Landlord and
Tenant, and the Work Letter Agreement which is an Exhibit thereto (collectively
the "Lease Agreement"), Tenant has leased from Landlord commercial office space
in the building ("Building") constructed on certain real property owned by
Landlord, as more particularly described in the Lease Agreement.
B. Landlord and Tenant have agreed to construct certain Tenant
Improvements in the Building as set forth in the Lease Agreement, and more
particularly in the Work Letter Agreement and this Pricing Agreement Letter
which are exhibits thereto.
C. Landlord and Tenant now agree as to the pricing and payment of the
construction of the Tenant Improvements as set forth in this Pricing Agreement
Letter and the Itemization of Tenant Improvement Costs (hereinafter defined)
attached hereto as Exhibit "A."
NOW, THEREFORE, for and in consideration of the parties' covenants
and agreements contained herein and in the Lease Agreement, Landlord and Tenant
covenant and agree as follows:
1. Landlord and Tenant have approved the Working Drawings for the
Tenant Improvements, dated , 19__, signed copies of
--------------------------------------
which have been delivered to Landlord and Tenant. Landlord agrees to construct
the Tenant Improvements in accordance with the approved Working Drawings;
provided, however, the costs of Tenant Improvements shall be paid as provided
herein.
2. If the actual cost of the Tenant Improvements exceeds the Tenant
Improvement Allowance (as defined in the Work Letter Agreement between the
parties), Tenant shall pay Landlord all amounts in excess of the Tenant
Improvement Allowance. The Tenant and Landlord acknowledge and agree that the
Tenant Improvement Allowance shall be disbursed for the Tenant Improvement
Allowance Items as set forth in the Work Letter Agreement. Any other provision
of the Lease, the Work Letter Agreement, or this Pricing Agreement Letter to the
contrary notwithstanding, the Tenant Improvement Allowance is to be considered
as a "pool", even though it is designated for certain categories as stated in
Paragraph 1.B. of the Work Letter Agreement, and may be transferred from one
allowance category to another, i.e., an unused portion of the Space Plan
allowance could be used for materials and labor for construction of the Tenant
Improvements. Further, any unused portion of the Tenant Improvement Allowance
may be taken in cash (with 30 days prior written notice to Landlord), on the
Phase II Move-In Date, or in free rent, commencing on the Phase II Move-In Date,
at Tenant's option.
3. Attached to this Pricing Agreement Letter is an itemization of
Tenant Improvement costs ("Itemization of Tenant Improvement Costs") which sets
forth the cost of all Tenant Improvement Allowance Items and other costs to be
incurred in connection with the initial design and construction of the Tenant
Improvements in accordance with the Working Drawings. Concurrent with the
execution of this Pricing Agreement Letter, Tenant shall provide its written
consent and approval to the Itemization of Tenant Improvement Costs and deliver
the same to the Landlord. Upon receipt of the Itemization of Tenant Improvement
Costs and this Pricing Agreement Letter, executed by Tenant, Landlord shall be
released by Tenant to commence the construction of the Tenant Improvements in
accordance with the Working Drawings, this Pricing Agreement Letter and the
Itemization of Tenant Improvement Costs attached hereto.
4. Concurrently with the approval and execution by Tenant of this
Pricing Agreement Letter and the Itemization of Tenant Improvement Costs, Tenant
shall pay fifty percent (50%) of all Tenant Improvement costs in excess of the
Tenant Improvement Allowance as presented on the Itemization of Tenant
Improvement Costs. Landlord reserves the right to bill Tenant up to ninety-five
percent (95%) of the costs in excess of the Tenant Improvement Allowance during
the construction period in proportion to the amount of work completed or
materials purchased, with the final five percent (5%) due upon acceptance of the
completed Premises and in any event no later than one (1) day before occupancy
by Tenant. In the event that any revisions, changes or substitutions shall be
made to the Working Drawings or the Tenant Improvements after execution by
D1-1
<PAGE>
Tenant of this Pricing Agreement Letter and the Itemization of Tenant
Improvement Costs, any additional costs which arise in connection with such
revisions, changes or substitutions, or any other additional costs, shall be
paid by Tenant to Landlord immediately upon Landlord's request.
DATED effective as of the date first above written.
LANDLORD:
2795 E. COTTONWOOD PARKWAY, L.C., a Utah
limited liability company, by its Manager,
COTTONWOOD PARTNERS MANAGEMENT, LTD., a Utah
limited partnership, by CotNet Management,
Inc. its general partner
By:__________________________________________
JOHN L. WEST, President
TENANT:
SONIC INNOVATIONS, INC., a Delaware corporation
By:__________________________________________
Title: ___________________________________
D1-2
<PAGE>
EXHIBIT "A"
TO PRICING AGREEMENT LETTER
ITEMIZATION OF TENANT IMPROVEMENT COSTS
---------------------------------------
D1-3
<PAGE>
EXHIBIT D2
BUILDING STANDARD TENANT IMPROVEMENTS
-------------------------------------
1. The "Building Standard Tenant Improvements" (herein so called) are the
following:
A. Flooring: Grade and quality of carpeting to be selected by
Landlord, with color to be selected by Tenant from
those offered by Landlord.
Standard Specification: Shaw Troubador 36, Shaw
Shoal Creek II 36, or Shaw Resolution 29.
Standard Specification for VCT flooring: Armstrong
Premium Excelon, Style: Canvas
B. Base: Carpet base to match carpeting selected by Tenant.
Grade and quality of rubber base, when applicable,
to be selected by Landlord.
Standard Specification: Johnsonite, 4" rubber
base.
C. Partitions: Demising Walls: 3-5/8" metal studs on 24" centers,
blanket sound insulation, 5/8" gypsum board on one
side. Studs and one layer of gypsum board extend
to bottom of steel deck on floor above.
Interior Walls: 3-5/8" metal studs on 24" centers,
5/8" gypsum board on each side. Walls to be
ceiling height and braced as per code
requirements.
All walls to be finished with tape, texture and
paint.
Standard Paint Specification: Kwal-Howells 2800
Series, Eggshell finish or Kwal-Howells 2300
Series, Semi-Gloss.
D. Doors/Side Lights: 3'-0" x 8'-0" solid core interior doors, 3'-0" x
8'-10" exterior solid core flush wood doors with
select white birch rotary cut veneer. Stain to be
selected from finish standards. Door frames are
hollow metal. Glass manufactured as per code
requirements, with hollow metal frames. Standard
hardware is Schlage, 626 series in brushed chrome.
E. Ceiling: Armstrong RH90 Fireguard Tegular Lay-In, 24" x 24"
for use with 15/16" exposed tee grid.
F. Electrical Outlets: Standard 110v duplex wall outlets.
G. Light Switches: Single pole switches.
H. Lighting Occupancy
Sensor: Automatic lighting control device-Uneco conserver
series.
I. Light Fixtures: 2' x 4', (3) lamp, 18-cell parabolic, recessed
ceiling fixture. Grade and quality of fixture
selected by Landlord.
J. Fire Sprinkler
Requirements: Design build per Landlord, except special
requirements, of which the Tenant shall advise the
Landlord.
K. Window Coverings: Mechoshade vertical roller shades.
D2-1
<PAGE>
EXHIBIT E
LEGAL DESCRIPTION OF LAND
-------------------------
BEGINNING at a point North 0 08'51" East along the Section line 908.560 feet,
and North 89 04'36" East 409.306 feet; from the West Quarter Corner of Section
23, Township 2 South, Range 1 East, Salt Lake Base and Meridian: Thence North 89
04'36" East 293.456 feet; thence South 0 03'29" West 169.090 feet; thence South
89 49'14" East 16.454 feet to a point on a 565.000 foot radius Curve to the left
the center of which bears North 0 10'47" East; thence Northeasterly along said
Curve to the left through a central angle of 4 38'05" a distance of 45.704;
thence South 4 27'18" East 269.999 feet to a point on a 835.000 foot radius
Curve to the right the center of which bears North 4 27'18" West; thence South
along said Curve to the right through a central angle of 4 38'05" a distance of
67.544; thence North 89 49'13" West 310.216 feet; thence North 0 10'47" East
433.439 feet to the point of BEGINNING. Contains 147,859 square feet or 3.3944
acres.
E-1
<PAGE>
EXHIBIT F
LEASE EXTENSION ADDENDUM
------------------------
THIS LEASE EXTENSION ADDENDUM ("Addendum") is entered into as of
April 28, 1999, between Landlord and Tenant (as those terms are defined
in that certain Lease Agreement between Landlord and Tenant, dated April 28,
1999 (the "Lease"). Subject to the provisions of the Lease, Landlord hereby
grants to Tenant the option ("Extension Option") to extend the term of the Lease
for ONE successive extension term of FIVE years in accordance with the
provisions set forth in this Addendum (an "Extension Renewal Term"). If the Term
of the Lease is so extended, such extension shall be on the same terms and
conditions as are applicable during the initial Term as set forth in the Lease,
except that the Base Rent during the Extension Renewal Term shall be at the
"Prevailing Rental Rate" which shall mean the rental rate determined for the
most comparable office space located in the Cottonwood Corporate Center Project
as of the date of the Extension Notice (defined below) and taking into account
all relevant factors including, without limitation, any applicable tenant
improvement allowance, Base Year and expense then in effect, but in no event
less than the Rent under the Lease as of the date of the Extension Notice.
1. Exercise. If Tenant desires to exercise an Extension Option, it
--------
shall send notice thereof (an "Extension Notice") to Landlord no more than three
hundred (300) nor less than two hundred seventy (270) calendar days prior to the
expiration of the Term or Extension Renewal Term of the Lease then in effect.
Landlord and Tenant shall endeavor in good faith to determine the Prevailing
Rental Rate within thirty (30) calendar days after Landlord's receipt of
Tenant's Extension Notice. If they cannot agree within thirty (30) calendar
days, each shall appoint an appraiser who shall arrive at an estimate of the
Prevailing Rental Rate within thirty (30) calendar days. If such estimates are
within five percent (5%) of each other, the average of the two shall be the new
Base Rent for the Extension Renewal Term. If the estimates are more than five
percent (5%) apart, each appraiser shall select a third appraiser within five
(5) calendar days or, if they fail to do so, Landlord shall select a third
appraiser. The third appraiser shall prepare an estimate of the Prevailing
Rental Rate as provided above within thirty (30) calendar days and the two
closest of the three estimates shall be averaged to determine the new Base Rent
for the new Extension Renewal Term. No later than one hundred twenty (120)
calendar days prior to the expiration of the Lease Term then in effect, Landlord
and Tenant shall execute an amendment to the Lease (an "Extension Amendment")
stating the new Base Rent and expiration date of the Lease Term. If such an
Extension Amendment is not fully executed by the parties for any reason as
provided above other than Landlord's breach, the Term shall not be extended and
all Extension Option(s) hereunder shall terminate. Notwithstanding the
foregoing, Tenant shall not be entitled to extend this Lease if an uncured Event
of Default has occurred under any term or provision contained in the Lease
Agreement or a condition exists which with the passage of time or the giving of
notice, or both, would constitute an Event of Default pursuant to the Lease
Agreement as of the date of exercise of this Extension Option. The rights
contained in this Addendum shall be personal to the originally named Tenant and
may be exercised only by the originally named Tenant and any Related Entity (and
not any other assignee, sublessee or other Transferee of Tenant's interest in
this Lease) and only if the originally named Tenant or Related Entity occupies
the entire Premises as of the date it exercises the Extension Option in
accordance with the terms of this Addendum. If Tenant properly exercises the
Extension Option and is not in default under this Lease at the end of the
initial Term of the Lease, the Lease Term, as it applies to the entire Premises
then leased by Tenant, shall be extended for the Extension Renewal Term.
2. Other Provisions. If Tenant fails to deliver a timely Extension
----------------
Notice, Tenant shall be considered to have elected not to exercise the Extension
Option. Any termination of the Lease during the initial or applicable Lease Term
or Extension Renewal Term shall terminate all renewal or lease extension rights
hereunder. The extension rights of Tenant hereunder shall not be severable from
the Lease, nor may such rights be assigned or otherwise conveyed in connection
with any permitted assignment of the Lease other than to a Related Entity.
During any Extension Renewal Term all leasehold improvements within the Premises
shall be provided in their then-existing condition (on an "as-is" basis) at the
time the Extension Renewal Term commences.
F-1
<PAGE>
DATED this 28 day of April, 1999.
LANDLORD:
2795 E. COTTONWOOD PARKWAY, L.C., a Utah limited
liability company, by its Manager,
COTTONWOOD PARTNERS MANAGEMENT, LTD., a Utah
limited partnership, by CotNet Management, Inc.
its general partner
By: /s/ John L. West
-----------------------------------------
JOHN L. WEST, President
TENANT:
SONIC INNOVATIONS, INC., a Delaware corporation
By: /s/ William S. Barth
-------------------------------------------
Title: VP of Finance & CFO
------------------------------------
F-2
<PAGE>
EXHIBIT G
ACKNOWLEDGMENT OF LEASE COMMENCEMENT DATE
-----------------------------------------
STATEMENT OF CONFIRMATION AND
-----------------------------
ACKNOWLEDGMENT OF LEASE COMMENCEMENT DATE
-----------------------------------------
In accordance with that certain Lease Agreement between 2795 E. COTTONWOOD
PARKWAY, L.C., as Landlord and the undersigned, as Tenant (the "Lease"), the
Tenant hereby confirms the following:
1. Construction of the Tenant Improvements for the Phase One Space is
Substantially Complete, and the Lease Term shall commence as of
_________________, for a term of _________ years, _________ months, and
_________ days, ending on ________________.
2. In accordance with the Lease, Base Rent shall begin to accrue on
____________, in the amount of _____________________________ DOLLARS
($__________).
3. The dates applicable to Section 3.1 of the Lease for Tenant's right to
terminate the Lease shall be as follows:
(a) Dates for Landlord receipt of Tenant's exercise notice (Section
3.1(a)):
Between __________________ and ______________________.
(b) Dates for payment of $200,000 to Landlord and vacation by Tenant
of at least one-half of Premises (Section 3.1(b)):
Between __________________ and ______________________.
(c) Dates for vacation by Tenant of the remainder of the Premises
(Section 3.1(c)):
Between __________________ and ______________________.
LANDLORD:
2795 E. COTTONWOOD PARKWAY, L.C., a Utah limited
liability company, by its Manager,
COTTONWOOD PARTNERS MANAGEMENT, LTD., a Utah limited
partnership, by CotNet Management, Inc. its general
partner
By:_____________________________________________
JOHN L. WEST, President
TENANT:
SONIC INNOVATIONS, INC., a Delaware corporation
By:_______________________________________________
Title:_________________________________________
G-1
<PAGE>
EXHIBIT H
---------
WHEN RECORDED, RETURN TO:
- ------------------------
U.S. Bank National Association
107 South Main Street
Salt Lake City, Utah 84111
Attn: Commercial Real Estate Division
ESTOPPEL CERTIFICATE,
---------------------
SUBORDINATION, NON-DISTURBANCE
------------------------------
AND ATTORNMENT AGREEMENT
------------------------
THIS AGREEMENT, made and entered into as of the ______ day of
_____________, 199___, by and between U.S. BANK NATIONAL ASSOCIATION, with its
principal office at 107 South Main Street, Salt Lake City, Utah 84111 ("Bank"),
2855 E. COTTONWOOD PARKWAY, L.C., a Utah general limited liability company, with
its principal office at 2855 E. Cottonwood Parkway, Suite 560, Salt Lake City,
Utah 84121 ("Lessor"), and SONIC INNOVATIONS, INC., a Delaware corporation, with
its principal office at ____________________________________________ ("Lessee").
R E C I T A L S:
- - - - - - - -
A. Lessee has by a written lease dated ___________, 19____, and any
future amendments and extensions approved by Bank (the "Lease") leased from
Lessor commercial office space in the improvements constructed on certain real
property owned by Lessor located in Salt Lake County, Utah, as more particularly
described in Exhibit "A" attached to and incorporated in this Agreement by
reference (the "Premises").
B. Lessor has executed in favor of Bank a Deed of Trust which encumbers
the Premises as security for a loan from Bank to Lessor (the "Deed of Trust").
C. Lessee, Lessor and Bank have agreed to the following with respect to
their mutual rights and obligations pursuant to the Lease and the Deed of Trust.
NOW, THEREFORE, for and in consideration of Ten Dollars ($10.00) paid
by each party to the other and the mutual covenants and agreements herein
contained and for other good and valuable consideration, the receipt of which is
hereby acknowledged, Bank, Lessor and Lessee covenant and agree as follows:
1. Lessee represents to and covenants with the Bank that:
(a) Lessee is the tenant under the Lease and the same has not
been modified, changed, altered, or amended in any respect and is the only
lease agreement between Lessee and Lessor relating to the Premises, and the
Lease represents the entire understanding between Lessee and Lessor with
respect to the Premises.
(b) Lessee is not in default under any provision of the Lease,
nor is there any fact or condition which, with notice or lapse of time,
would constitute a default.
(c) The Lease is in full force and effect, and, except as
otherwise provided in the Lease, Lessee is not entitled to any lien,
credit, offset, or reduction in rent.
(d) Lessee's initial monthly installment of rent under the Lease
is to be a minimum of $__________.
(e) Except for a security deposit of $__________ and prepaid
rent in the amount of $_________, Lessee has no other claim against Lessor
for any deposit or prepaid rent.
(f) Except as otherwise permitted under the Lease, Lessee has
not transferred, hypothecated or assigned Lessee's interest under the
Lease. Except for assignments or sublettings which do not require Lessor's
consent under the Lease, Lessee shall not authorize or consent to any
assignment
H-1
<PAGE>
or subletting of the Premises without the prior written consent of the
Bank, which consent shall not be unreasonably withheld.
(g) There are no actions or proceedings, whether voluntary or
otherwise, pending or threatened against Lessee under any bankruptcy or
insolvency laws or under any other laws providing relief to debtors.
(h) To the best of Lessee's knowledge, Lessor is not in default
in any respect of its obligations under the Lease, nor is there now any
fact or condition which, with notice or lapse of time, would constitute a
default.
(i) Other than the possessory rights arising under the Lease,
Lessee has no option to purchase the Premises or otherwise acquire title to
or an interest in the Premises.
(j) Other than the assignment to the Bank described herein,
Lessee has no knowledge of any other assignment, hypothecation, mortgage or
pledge of Lessor's interest in the Lease or the rents payable thereunder,
except as may be disclosed by other recorded instruments.
2. Lessee's interest in the Lease and all rights of Lessee
thereunder, including any purchase option, shall be and are hereby declared
subject and subordinate to the lien and encumbrance of the Deed of Trust. The
term "Deed of Trust" as used in this Agreement shall also include any amendment,
supplement, modification, renewal, refinance or replacement thereof.
3. In the event of any foreclosure of the Deed of Trust or any
conveyance in lieu of foreclosure, provided that the Lessee shall not then be in
default beyond any grace period under the Lease and that the Lease shall then be
in full force and effect, the Lease shall not be terminated nor shall Lessee be
joined in foreclosure proceedings, nor shall Lessee's possession be disturbed,
and the Lease shall continue in full force and effect as a direct lease between
Lessee and Bank.
4. After the receipt by Lessee of notice from Bank of any
foreclosure of the Deed of Trust or any conveyance of the Premises in lieu of
foreclosure, Lessee will thereafter attorn to and recognize Bank or any
purchaser from Bank at any foreclosure sale or otherwise as Lessee's substitute
lessor on the terms and conditions set forth in the Lease.
5. Lessee shall not prepay any of the rents under the Lease more
than one month in advance (except as provided otherwise in the Lease) without
the prior written consent of Bank.
6. In no event shall Bank be liable for any act or omission of the
Lessor, nor shall Bank be subject to any offsets or deficiencies which Lessee
may be entitled to assert against the Lessor as a result of any act or omission
of Lessor occurring prior to Bank's obtaining possession of the Premises.
7. The Lease may not be terminated (except as permitted in the Lease
and except for Landlord's default) without the prior written consent of Bank. No
amendment of the Lease will be binding on Bank unless consented to by Bank which
consent shall not be unreasonably withheld.
8. If the Lease is cancelled or terminated for any reason, if any
purchase option contained in the Lease is exercised, or if the Lessee is
required to pay to Lessor any payment in excess of one calendar month in
advance, including, but not limited to lease termination or purchase option
payments, refund of any type, prepayments of rents, litigation settlements or
settlements of past-due rents (all of which shall be referred to herein
collectively as "Extraordinary Rental Payments"), Lessor and Lessee will notify
Bank and Lessor consents to Lessee remitting and Lessee agrees to remit any
Extraordinary Rental Payments to Bank directly and immediately.
9. This Agreement and its terms shall be binding upon and inure to
the benefit of Bank, Lessor, Lessee and their respective successors and assigns,
including, without limitation, any purchaser at any foreclosure sale.
10. This Agreement may be executed in counterparts, each of which
shall be deemed to be an original, and such counterparts when taken together,
shall constitute but one agreement.
H-2
<PAGE>
DATED effective as of the date first above written.
BANK:
U.S. BANK NATIONAL ASSOCIATION
By:___________________________________________
ROBERT M. BOWEN, Vice President
LESSOR:
2795 E. COTTONWOOD PARKWAY, L.C., a Utah limited
liability company, by its Manager,
COTTONWOOD PARTNERS MANAGEMENT, LTD., a Utah
limited partnership, by CotNet Management, Inc.
its general partner
By:______________________________________
JOHN L. WEST, President
LESSEE:
SONIC INNOVATIONS, INC., a Delaware corporation
By:___________________________________________
Title:_____________________________________
H-3
<PAGE>
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )
The foregoing instrument was acknowledged before me this _____ day of
_____________, 199__, by ROBERT M. BOWEN, who is a Vice President of U.S. BANK
NATIONAL ASSOCIATION.
_________________________________________
NOTARY PUBLIC
Residing at Salt Lake County, Utah
My Commission Expires:
______________________
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )
The foregoing instrument was acknowledged before me this ______ day of
______________, 199__, by JOHN L. WEST, the President of COTNET MANAGEMENT,
INC., General Partner of COTTONWOOD PARTNERS MANAGEMENT, LTD., Manager of 2795
E. COTTONWOOD PARKWAY, L.C., a Utah limited liability company.
_________________________________________
NOTARY PUBLIC
Residing at Salt Lake County, Utah
My Commission Expires:
______________________
STATE OF UTAH )
: ss.
COUNTY OF SALT LAKE )
The foregoing instrument was acknowledged before me this _____ day of
_____________, 19___, by _______________________________, who is a
_____________________________________ of ______________________________________,
a _______________ corporation.
_________________________________________
NOTARY PUBLIC
Residing at Salt Lake County, Utah
My Commission Expires:
______________________
H-4
<PAGE>
EXHIBIT "A"
The following described real property is located in Salt Lake County, Utah:
PARCEL 1 ("COTTONWOOD CORPORATE CENTER PARCEL 9"):
BEGINNING at a point North 0 08'51" East along the Section line 908.560
feet, and North 89 04'36" East 409.306 feet; from the West Quarter Corner
of Section 23, Township 2 South, Range 1 East, Salt Lake Base and Meridian:
Thence North 89 04'36" East 293.456 feet; thence South 0 03'29" West
169.090 feet; thence South 89 49'14" East 16.454 feet to a point on a
565.000 foot radius Curve to the left the center of which bears North 0
10'47" East; thence Northeasterly along said Curve to the left through a
central angle of 4 38'05" a distance of 45.704; thence South 4 27'18" East
269.999 feet to a point on a 835.000 foot radius Curve to the right the
center of which bears North 4 27'18" West; thence South along said Curve to
the right through a central angle of 4 38'05" a distance of 67.544; thence
North 89 49'13" West 310.216 feet; thence North 0 10'47" East 433.439 feet
to the point of BEGINNING. Contains 147,859 square feet or 3.3944 acres.
PARCEL 2 ("COMMON ROADWAY"):
A perpetual, nonexclusive right-of-way and easement for vehicular and
pedestrian ingress and egress, appurtenant to PARCEL 1, as established by a
Declaration of Easements, Covenants and Restrictions recorded January 17,
1996, as Entry No. 6259074, in Book 7311, at page 821 of the official
records of the Salt Lake County Recorder, as amended by a First Amendment
to Declaration of Easements, Covenants and Restrictions, recorded July 3,
1996, as Entry No. 6398547, in Book 7437, at page 265 of the official
records of the Salt Lake County Recorder, over the following described
property:
BEGINNING at a point which is North 0 08'51" East along the Section line
447.50 feet and South 89 49'13" East 50.00 feet from the West Quarter
Corner of Section 23, Township 2 South, Range 1 East, Salt Lake Base and
Meridian, and running thence North 0 08'51" East 71.00 feet; thence South
89 49'13" East 669.22 feet; thence North 0 10'47" East 12.00 feet to a
point of a 787.50 foot radius curve to the left, the chord of which bears
North 72 37'45" East; thence Easterly along the arc of said curve and
through a central angle of 35 06'03" a distance of 482.44 feet to a point
of tangency; thence North 55 04'44" East 161.13 feet to a point of a 257.50
foot radius curve to the right, the chord of which bears South 81 12'57"
East; thence Easterly along the arc of said curve and through a central
angle of 87 24'39" a distance of 392.84 feet to a point of tangency; thence
South 37 30'37" East 388.28 feet to a point of a 282.50 foot radius curve
to the left, the chord of which bears South 57 30'40" East; thence
Southeasterly along the arc of said curve and through a central angle of 40
00'07" a distance of 197.23 feet to a point of tangency; thence South 77
30'44" East 203.08 feet; thence South 35 38'28" East 52.78 feet to the West
right-of-way line of 3000 East Street; thence South 12 27'22" West along
said West line 71.77 feet; thence North 77 30'44" West 147.86 feet to a
point of a 693.16 foot radius curve to the right, the chord of which bears
North 71 09'19" West; thence Northwesterly along the arc of curve and
through a central angle of 13 28'28" a distance of 163.01 feet to a point
of a compound curve to the right, the radius point of which is North 22
43'23" East 377.50 feet; thence Northwesterly along the arc of said curve
and through a central angle of 29 46' a distance of 196.12 feet to a point
of tangency; thence North 37 30'37" West 388.28 feet to a point of a 162.50
foot radius curve to the left, the chord of which bears North 81 12'57"
West; thence Westerly along the arc of said curve and through a central
angle of 87 24'39" a distance of 247.91 feet to a point of tangency; thence
South 55 04'44" West 161.13 feet to a point of a 882.50 foot radius curve
to the right, the chord of which bears South 72 37'45" West; thence
Westerly along the arc of said curve and through a central angle of 35
06'03" a distance of 540.64 feet to a point of tangency; thence North 89
49'13" West 441.91 feet; thence North 0 10'47" East 12.00 feet; thence
North 89 49'13" West 227.27 feet to the point of BEGINNING.
H-5
<PAGE>
MONUMENT SIGN ADDENDUM
----------------------
THIS ADDENDUM ("Addendum"), dated as of even date with, and as an
addendum to, that certain Lease Agreement between 2795 E. COTTONWOOD PARKWAY,
L.C. ("Landlord") and SONIC INNOVATIONS, INC., a Delaware corporation
("Tenant"), dated as of the 28 day of April, 1999 ("Lease Agreement").
R E C I T A L S :
- - - - - - - -
A. Pursuant to the Lease Agreement, Tenant has leased from Landlord
certain commercial office space in the building ("Building") constructed on real
property owned by Landlord located in Salt Lake County, Utah, as more
particularly described in the Lease Agreement.
B. Landlord and Tenant have agreed as set forth in this Addendum to the
nonexclusive right of Tenant to have its name displayed on a monument sign to be
located by Landlord in front of the Building in accordance with the drawing
attached hereto as Exhibit "A" and incorporated herein (the "Monument Sign").
NOW, THEREFORE, for and in consideration of the parties' covenants and
agreements contained herein and in the Lease Agreement, Landlord and Tenant
covenant and agree as follows:
1. Tenant shall have the nonexclusive right to have its name
displayed on the Monument Sign in accordance with Exhibit "A" hereto to be
located in front of the Building. Tenant's right to have its name on the
Monument Sign shall be subject to the following requirements and conditions:
(a) Obtaining all required governmental permits, licenses,
authorizations and approvals for the Monument Sign;
(b) The occupancy by Tenant of no less than 10,000 square feet
of Rentable Area in the Building during the Lease Term;
(c) Tenant shall bear the cost of acquisition and/or preparation
of the panel containing Tenant's name for placement on the Monument Sign;
(d) Compliance with all applicable governmental laws, statutes,
regulations, rules, codes and ordinances;
(e) Compliance with the provisions of the Lease Agreement;
(f) The design, size, location, materials and colors of the
Monument Sign shall be determined by Landlord in Landlord's reasonable
discretion;
(g) Landlord shall have the right to relocate, redesign and/or
reconstruct the Monument Sign from time to time in its sole discretion; and
(h) Tenant's signage rights under this Addendum may not be
assigned to any assignee of this Lease other than a Related Entity or any
subtenant of Tenant without Landlord's prior written consent, exercised in
its sole discretion.
2. The Lease Agreement, as modified hereby, shall remain in full
force and effect, enforceable in accordance with its terms.
3. Upon termination or expiration of the Term of the Lease
Agreement, or upon expiration of Tenant's sign rights under this Addendum,
Landlord shall have the right to permanently remove Tenant's name from the
Monument Sign.
<PAGE>
DATED effective as of even date with the Lease Agreement.
LANDLORD:
2795 E. COTTONWOOD PARKWAY, L.C., a Utah limited
liability company, by its Manager,
COTTONWOOD PARTNERS MANAGEMENT, LTD., a Utah
limited partnership, by CotNet Management, Inc.
its general partner
By: /s/ John L. West
----------------------------------------
JOHN L. WEST, President
TENANT:
SONIC INNOVATIONS, INC., a Delaware corporation
By: /s/ William S. Barth
---------------------------------------
Title: VP of Finance & CFO
---------------------------------
<PAGE>
EXHIBIT "A"
MONUMENT SIGN
-------------
[Diagram]
<PAGE>
BUILDING SIGN ADDENDUM
----------------------
THIS BUILDING SIGN ADDENDUM ("Addendum"), dated as of even date with,
and as an addendum to, that certain Lease Agreement between 2795 E. COTTONWOOD
PARKWAY, L.C. ("Landlord") and SONIC INNOVATIONS, INC., a Delaware corporation
("Tenant"), dated as of the 28 day of April, 1999 ("Lease Agreement").
R E C I T A L S :
- - - - - - - -
C. Pursuant to the Lease Agreement, Tenant has leased from Landlord
certain commercial office space in the building ("Building") constructed on real
property owned by Landlord located in Salt Lake County, Utah, as more
particularly described in the Lease Agreement.
D. Landlord and Tenant have agreed as set forth in this Addendum to the
nonexclusive right of Tenant to have its name displayed on the top fascia of the
Building in accordance with the blue line drawing attached hereto as Exhibit "A"
and incorporated herein by this reference (the "Building Sign").
NOW, THEREFORE, for and in consideration of the parties' covenants and
agreements contained herein and in the Lease Agreement, Landlord and Tenant
covenant and agree as follows:
1. Tenant shall have the nonexclusive right to have its name
displayed on the Building Sign in accordance with Exhibit "A" hereto and as
provided herein, subject to each of the following requirements and conditions:
(a) Obtaining all required governmental permits, licenses,
authorizations and approvals for the Building Sign;
(b) The occupancy by Tenant of no less than 30,000 square feet
of Rentable Area in the Building during the Lease Term;
(c) Compliance with all applicable governmental laws, statutes,
regulations, rules, codes and ordinances;
(d) Compliance with the provisions of the Lease Agreement;
(e) All expenses in connection with the construction,
installation, repair and maintenance of the Building Sign, and Tenant's
name thereon, shall be paid by Tenant;
(f) The design, size, location, materials, colors and lighting
of the Building Sign shall be approved in writing by Landlord, in
Landlord's reasonable discretion; and
(g) Tenant's signage rights under this Addendum may not be
assigned to any assignee of this Lease other than a Related Entity or any
subtenant of Tenant without Landlord's prior written consent, exercised in
its sole discretion.
2. The Lease Agreement as modified hereby shall remain in full force
and effect, enforceable in accordance with its terms.
3. Upon termination or expiration of the Term of the Lease
Agreement, or upon expiration of Tenant's sign rights under this Addendum,
Landlord shall have the right to permanently remove Tenant's Building Sign from
the Building. Tenant shall bear all reasonable expenses relating to the costs
associated with the removal of Tenant's Building Sign, repair of any damage
caused by such removal, and restoration of the site of Tenant's sign on the
Building to the condition in which those portions of the Building existed before
the installation of Tenant's sign. Tenant's obligations under this paragraph, as
well as other provisions of this Addendum, shall survive the expiration or
earlier termination of the Lease Term.
4. Tenant shall at all times during the Lease Term maintain Tenant's
sign in working order and first-class condition.
<PAGE>
DATED effective as of even date with the Lease Agreement.
LANDLORD:
2795 E. COTTONWOOD PARKWAY, L.C., a Utah limited
liability company, by its Manager,
COTTONWOOD PARTNERS MANAGEMENT, LTD., a Utah
limited partnership, by CotNet Management, Inc.
its general partner
By: /s/ John L. West
-------------------------------------
JOHN L. WEST, President
TENANT:
SONIC INNOVATIONS, INC., a Delaware corporation
By: /s/ William S. Barth
--------------------------------------
Title: VP of Finance & CFO
-------------------------------
<PAGE>
EXHIBIT "A"
BUILDING SIGN
-------------
[Diagram]
<PAGE>
EXHIBIT 10.13
Silicon Valley Bank
Loan and Security Agreement
Borrower: Sonic Innovations, Inc.
Address: 2795 East Cottonwood Parkway, Suite 660
Salt Lake City, Utah 84121
Date: December 22, 1999
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
SILICON VALLEY BANK, COMMERCIAL FINANCE DIVISION ("Silicon"), whose address is
3003 Tasman Drive, Santa Clara, California 95054 and the borrower(s) named
above (jointly and severally, the "Borrower"), whose chief executive office is
located at the above address ("Borrower's Address"). The Schedule to this
Agreement (the "Schedule") shall for all purposes be deemed to be a part of this
Agreement, and the same is an integral part of this Agreement. (Definitions of
certain terms used in this Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 Loans. Silicon will make loans to Borrower (the "Loans"), in amounts
determined by Silicon in its sole discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing, and subject to deduction of any Reserves for accrued
interest and such other Reserves as Silicon deems proper from time to time.
1.2 Interest. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Silicon's discretion, be charged to
Borrower's loan account, and the same shall thereafter bear interest at the same
rate as the other Loans. Silicon may, in its discretion, charge interest to
Borrower's Deposit Accounts maintained with Silicon. Regardless of the amount
of Obligations that may be outstanding from time to time, Borrower shall pay
Silicon minimum monthly interest during the term of this Agreement in the amount
set forth on the Schedule (the "Minimum Monthly Interest").
1.3 Overadvances. If at any time or for any reason the total of all
outstanding Loans and all other Obligations exceeds the Credit Limit (an
"Overadvance"), Borrower shall immediately pay the amount of the excess to
Silicon, without notice or demand. Without limiting Borrower's obligation to
repay to Silicon on demand the amount of any Overadvance, Borrower agrees to pay
Silicon interest on the outstanding amount of any Overadvance, on demand, at a
rate equal to the interest rate which would otherwise be applicable to the
Overadvance, plus an additional 2% per annum.
1.4 Fees. Borrower shall pay Silicon the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Silicon and are not
refundable.
1.5 Letters of Credit. At the request of Borrower, Silicon may, in its sole
discretion, issue or arrange for the issuance of letters of credit for the
account of Borrower, in each case in form and substance satisfactory to Silicon
in its sole discretion (collectively, "Letters of Credit"). The aggregate face
amount of all outstanding Letters of Credit from time to time shall not exceed
the amount shown on the Schedule (the "Letter of Credit Sublimit"), and shall be
reserved against Loans which would otherwise be available hereunder. Borrower
shall pay all bank charges (including charges of Silicon) for the issuance of
Letters of Credit, together with such additional fee as Silicon's letter of
credit department shall charge in connection with the issuance of the Letters of
Credit. Any payment by Silicon under or in connection with a Letter of Credit
shall constitute a Loan hereunder on the date such payment is made. Each Letter
of Credit shall have an expiry date no later than thirty days prior to the
Maturity Date regarding the Revolving Loans facility. Borrower hereby agrees to
indemnify, save, and hold Silicon harmless from any loss, cost, expense, or
liability, including payments made by Silicon, expenses, and reasonable
attorneys' fees incurred by Silicon arising out of or in connection with any
Letters of Credit. Borrower agrees to be bound by
-1-
<PAGE>
Silicon Valley Bank Loan and Security Agreement
-------------------------------------------------------------------------
the regulations and interpretations of the issuer of any Letters of Credit
guarantied by Silicon and opened for Borrower's account or by Silicon's
interpretations of any Letter of Credit issued by Silicon for Borrower's
account, and Borrower understands and agrees that Silicon shall not be liable
for any error, negligence, or mistake, whether of omission or commission, in
following Borrower's instructions or those contained in the Letters of Credit or
any modifications, amendments, or supplements thereto. Borrower understands that
Letters of Credit may require Silicon to indemnify the issuing bank for certain
costs or liabilities arising out of claims by Borrower against such issuing
bank. Borrower hereby agrees to indemnify and hold Silicon harmless with respect
to any loss, cost, expense, or liability incurred by Silicon under any Letter of
Credit as a result of Silicon's indemnification of any such issuing bank. The
provisions of this Loan Agreement, as it pertains to Letters of Credit, and any
other present or future documents or agreements between Borrower and Silicon
relating to Letters of Credit are cumulative.
2. SECURITY INTEREST.
2.1 Security Interest. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Silicon a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located: All Inventory, Equipment, Receivables, and
General Intangibles, including, without limitation, all of Borrower's Deposit
Accounts, and all money, and all property now or at any time in the future in
Silicon's possession (including claims and credit balances), and all proceeds
(including proceeds of any insurance policies, proceeds of proceeds and claims
against third parties), all products and all books and records related to any of
the foregoing (all of the foregoing, together with all other property in which
Silicon may now or in the future be granted a lien or security interest, is
referred to herein, collectively, as the "Collateral").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Silicon to enter into this Agreement and to make Loans,
Borrower represents and warrants to Silicon as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
3.1 Corporate Existence and Authority. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will
continue to be qualified and licensed to do business in all jurisdictions in
which any failure to do so would have a material adverse effect on Borrower.
The execution, delivery and performance by Borrower of this Agreement, and all
other documents contemplated hereby (i) have been duly and validly authorized,
(ii) are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (iii) do not violate Borrower's articles or certificate
of incorporation, or Borrower's by-laws, or any law or any material agreement
or instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 Name; Trade Names and Styles. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Silicon 30 days' prior written notice before changing its
name or doing business under any other name. Borrower has complied, and will in
the future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 Place of Business; Location of Collateral. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Silicon at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 Title to Collateral; Permitted Liens. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims, except for Permitted Liens. Silicon now has,
and will continue to have, a first-priority perfected and enforceable security
interest in all of the Collateral, subject only to the Permitted Liens, and
Borrower will at all times defend Silicon and the Collateral against all claims
of others. None of the Collateral now is or will be affixed to any real
property in such a manner, or with such intent, as to become a fixture.
Borrower is not and will not become a lessee under any real property lease
pursuant to which the lessor may obtain any rights in any of the Collateral and
no such lease now prohibits, restrains, impairs or will prohibit, restrain or
impair Borrower's right to remove any Collateral from the leased premises.
Whenever any Collateral is located upon premises in which any third party has an
interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien
or otherwise), Borrower shall, whenever
-2-
<PAGE>
Silicon Valley Bank Loan and Security Agreement
-------------------------------------------------------------------------
requested by Silicon, use its best efforts to cause such third party to execute
and deliver to Silicon, in form acceptable to Silicon, such waivers and
subordinations as Silicon shall specify, so as to ensure that Silicon's rights
in the Collateral are, and will continue to be, superior to the rights of any
such third party. Borrower will keep in full force and effect, and will comply
with all the terms of, any lease of real property where any of the Collateral
now or in the future may be located.
3.5 Maintenance of Collateral. Borrower will maintain the Collateral in good
working condition, and Borrower will not use the Collateral for any unlawful
purpose. Borrower will immediately advise Silicon in writing of any material
loss or damage to the Collateral.
3.6 Books and Records. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 Financial Condition, Statements and Reports. All financial statements
now or in the future delivered to Silicon have been, and will be, prepared in
conformity with generally accepted accounting principles and now and in the
future will completely and accurately reflect the financial condition of
Borrower, at the times and for the periods therein stated. Between the last
date covered by any such statement provided to Silicon and the date hereof,
there has been no material adverse change in the financial condition or business
of Borrower. Borrower is now and will continue to be solvent.
3.8 Tax Returns and Payments; Pension Contributions. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Silicon in
writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a lien upon any of the Collateral. Borrower is
unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
3.9 Compliance with Law. Borrower has complied, and will comply, in all
material respects, with all provisions of all foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrower's business, and all environmental matters.
3.10 Litigation. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Silicon in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation U of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
4. RECEIVABLES.
4.1 Representations Relating to Receivables. Borrower represents and
warrants to Silicon as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made, (i)
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business, and (ii)
meet the Minimum Eligibility Requirements set forth in Section 8 below.
4.2 Representations Relating to Documents and Legal Compliance. Borrower
represents and warrants to Silicon as follows: All statements made and all
unpaid balances appearing in all invoices, instruments and other documents
evidencing the Receivables are and shall be true and correct and all such
invoices, instruments and other documents and all of Borrower's books and
records
-3-
<PAGE>
Silicon Valley Bank Loan and Security Agreement
-------------------------------------------------------------------------
are and shall be genuine and in all respects what they purport to be, and all
signatories and endorsers have the capacity to contract. All sales and other
transactions underlying or giving rise to each Receivable shall fully comply
with all applicable laws and governmental rules and regulations. All signatures
and endorsements on all documents, instruments, and agreements relating to all
Receivables are and shall be genuine, and all such documents, instruments and
agreements are and shall be legally enforceable in accordance with their terms.
4.3 Schedules and Documents relating to Receivables. Borrower shall deliver
to Silicon transaction reports and loan requests, schedules and assignments of
all Receivables, and schedules of collections, all on Silicon's standard forms
*; provided, however, that Borrower's failure to execute and deliver the same
shall not affect or limit Silicon's security interest and other rights in all of
Borrower's Receivables, nor shall Silicon's failure to advance or lend against a
specific Receivable affect or limit Silicon's security interest and other rights
therein. Loan requests received after 12:00 Noon will not be considered by
Silicon until the next Business Day. Together with each such schedule and
assignment, or later if requested by Silicon, Borrower shall furnish Silicon
with copies (or, at Silicon's request, originals) of all contracts, orders,
invoices, and other similar documents, and all original shipping instructions,
delivery receipts, bills of lading, and other evidence of delivery, for any
goods the sale or disposition of which gave rise to such Receivables, and
Borrower warrants the genuineness of all of the foregoing. Borrower shall also
furnish to Silicon an aged accounts receivable trial balance in such form and at
such intervals as Silicon shall request. In addition, Borrower shall deliver
to Silicon the originals of all instruments, chattel paper, security agreements,
guarantees and other documents and property evidencing or securing any
Receivables, immediately upon receipt thereof and in the same form as received,
with all necessary indorsements, all of which shall be with recourse. Borrower
shall also provide Silicon with copies of all credit memos within two days after
the date issued.
* with the understanding that, until an Event of Default has occurred, the
required reporting of the Borrower shall consist of those items set forth in
Section 5.3 of the Schedule to Loan Agreement together with a weekly borrowing
base report, on Silicon's standard form, delivered in a timeframe that is
consistent with the other weekly reporting items set forth in such section
4.4 Collection of Receivables. Borrower shall have the right to collect all
Receivables, unless and until a Default or an Event of Default has occurred.
Borrower shall hold all payments on, and proceeds of, Receivables in trust for
Silicon, and * Borrower shall immediately deliver all such payments and proceeds
to Silicon in their original form, duly endorsed in blank, to be applied to the
Obligations in such order as Silicon shall determine. Silicon may *, in its
discretion, require that all proceeds of Collateral be deposited by Borrower
into a lockbox account, or such other "blocked account" as Silicon may specify,
pursuant to a blocked account agreement in such form as Silicon may specify.
Silicon or its designee may, at any time, notify Account Debtors that the
Receivables have been assigned to Silicon.
* , upon the occurrence of an Event of Default,
4.5. Remittance of Proceeds. All proceeds arising from the disposition of
any Collateral * shall be delivered, in kind, by Borrower to Silicon in the
original form in which received by Borrower not later than the following
Business Day after receipt by Borrower, to be applied to the Obligations in such
order as Silicon shall determine; provided that, if no Default or Event of
Default has occurred, Borrower shall not be obligated to remit to Silicon the
proceeds of the sale of worn out or obsolete equipment disposed of by Borrower
in good faith in an arm's length transaction for an aggregate purchase price of
$25,000 or less (for all such transactions in any fiscal year). Borrower agrees
that it will not commingle proceeds of Collateral with any of Borrower's other
funds or property, but will hold such proceeds separate and apart from such
other funds and property and in an express trust for Silicon. Nothing in this
Section limits the restrictions on disposition of Collateral set forth elsewhere
in this Agreement.
* (other than, prior to an Event of Default, proceeds of Receivables that
Borrower is permitted to retain pursuant to section 4.4 hereof and other
proceeds of any other Collateral that Borrower is otherwise permitted to retain
pursuant to the terms and conditions hereof)
4.6 Disputes. Borrower shall notify Silicon promptly of all disputes or
claims relating to Receivables. Borrower shall not forgive (completely or
partially), compromise or settle any Receivable for less than payment in full,
or agree to do any of the foregoing, except that Borrower may do so, provided
that: (i) Borrower does so in good faith, in a commercially reasonable manner,
in the ordinary course of business, and in arm's length transactions, which are
reported to Silicon on the regular reports provided to Silicon; (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit. Silicon may, at any time after the
occurrence of an Event of Default, settle or adjust disputes or claims directly
with Account Debtors for amounts and upon terms which Silicon considers
advisable in its reasonable credit judgment and, in all cases, Silicon shall
credit Borrower's Loan account with only the net amounts received by Silicon in
payment of any Receivables.
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4.7 Returns. Provided no Event of Default has occurred and is continuing, if
any Account Debtor returns any Inventory to Borrower in the ordinary course of
its business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount (sending a copy to Silicon). In the event any attempted return occurs
after the occurrence of any Event of Default, Borrower shall (i) hold the
returned Inventory in trust for Silicon, (ii) segregate all returned Inventory
from all of Borrower's other property, (iii) conspicuously label the returned
Inventory as Silicon's property, and (iv) immediately notify Silicon of the
return of any Inventory, specifying the reason for such return, the location and
condition of the returned Inventory, and on Silicon's request deliver such
returned Inventory to Silicon.
4.8 Verification. Silicon may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Silicon or such other name as Silicon may choose.
4.9 No Liability. Silicon shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Silicon be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Silicon from liability for
its own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 Financial and Other Covenants. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
5.2 Insurance. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Silicon, in such form and amounts as Silicon
may reasonably require, and Borrower shall provide evidence of such insurance to
Silicon, so that Silicon is satisfied that such insurance is, at all times, in
full force and effect. All such insurance policies shall name Silicon as an
additional loss payee, and shall contain a lenders loss payee endorsement in
form reasonably acceptable to Silicon. Upon receipt of the proceeds of any such
insurance, Silicon shall apply such proceeds in reduction of the Obligations as
Silicon shall determine in its sole discretion, except that, provided no Default
or Event of Default has occurred and is continuing, Silicon shall release to
Borrower insurance proceeds with respect to Equipment totaling less than
$100,000, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Silicon may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Silicon may, but
is not obligated to, obtain the same at Borrower's expense. Borrower shall
promptly deliver to Silicon copies of all reports made to insurance companies.
5.3 Reports. Borrower, at its expense, shall provide Silicon with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Silicon shall from time to time reasonably
specify.
5.4 Access to Collateral, Books and Records. At reasonable times, and on one
Business Day's notice, Silicon, or its agents, shall have the right to inspect
the Collateral, and the right to audit and copy Borrower's books and records *.
Silicon shall take reasonable steps to keep confidential all information
obtained in any such inspection or, but Silicon shall have the right to disclose
any such information to its auditors, regulatory agencies, and attorneys, and
pursuant to any subpoena or other legal process. The foregoing inspections and
audits shall be at Borrower's expense and the charge therefor shall be $600 per
person per day (or such higher amount as shall represent Silicon's then current
standard charge for the same), plus reasonable out of pocket expenses. Borrower
will not enter into any agreement with any accounting firm, service bureau or
third party to store Borrower's books or records at any location other than
Borrower's Address, without first obtaining Silicon's written consent, which may
be conditioned upon such accounting firm, service bureau or other third party
agreeing to give Silicon the same rights with respect to access to books and
records and related rights as Silicon has under this Loan Agreement. Borrower
waives the benefit of any accountant-client privilege or other evidentiary
privilege precluding or limiting the disclosure, divulgence or delivery of any
of its books and records (except that Borrower does not waive any attorney-
client privilege).
* , with such audits to be conducted no less than one time per quarter
5.5 Negative Covenants. Except as may be permitted in the Schedule, Borrower
shall not, without Silicon's prior written consent, do any of the following:
(i) merge or consolidate with another corporation or entity; (ii) acquire any
assets, except in the ordinary course of business; (iii) enter into any other
transaction outside the ordinary course of business; (iv) sell or transfer any
Collateral, except for the sale of finished Inventory in the ordinary course of
Borrower's business, and except for
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Silicon Valley Bank Loan and Security Agreement
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the sale of obsolete or unneeded Equipment in the ordinary course of business;
(v) store any Inventory or other Collateral with any warehouseman or other third
party; (vi) sell any Inventory on a sale-or-return, guaranteed sale,
consignment, or other contingent basis; (vii) make any loans of any money or
other assets; (viii) incur any debts, outside the ordinary course of business,
which would have a material, adverse effect on Borrower or on the prospect of
repayment of the Obligations; (ix) guarantee or otherwise become liable with
respect to the obligations of another party or entity; (x) pay or declare any
dividends on Borrower's stock (except for dividends payable solely in stock of
Borrower); (xi) redeem, retire, purchase or otherwise acquire, directly or
indirectly, any of Borrower's stock; (xii) make any change in Borrower's capital
structure which would have a material adverse effect on Borrower or on the
prospect of repayment of the Obligations; or (xiii) or (xiv) dissolve or elect
to dissolve. Transactions permitted by the foregoing provisions of this Section
are only permitted if no Default or Event of Default would occur as a result of
such transaction.
5.6 Litigation Cooperation. Should any third-party suit or proceeding be
instituted by or against Silicon with respect to any Collateral or in any manner
relating to Borrower, Borrower shall, without expense to Silicon, make available
Borrower and its officers, employees and agents and Borrower's books and
records, to the extent that Silicon may deem them reasonably necessary in order
to prosecute or defend any such suit or proceeding.
5.7 Further Assurances. Borrower agrees, at its expense, on request by
Silicon, to execute all documents and take all actions, as Silicon, may deem
reasonably necessary or useful in order to perfect and maintain Silicon's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 Maturity Date. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"), subject to
Section 6.3 below.
6.2 Early Termination. This Agreement may be terminated prior to the
Maturity Date as follows: (i) by Borrower, effective three Business Days after
written notice of termination is given to Silicon; or (ii) by Silicon at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Silicon under
this Section 6.2, Borrower shall pay to Silicon a termination fee in an amount
equal to two percent (2.0%) of the Maximum Credit Limit *, provided that no
termination fee shall be charged if the credit facility hereunder ** is replaced
with a new facility from another division of Silicon Valley Bank ***. The
termination fee shall be due and payable on the effective date of termination
and thereafter shall bear interest at a rate equal to the highest rate
applicable to any of the Obligations.
* regarding Revolving Loans
** and all other amounts owing to Silicon are
*** , provided, further, that no termination fee shall be payable by Borrower
-------- -------
if the entire credit facility hereunder and all other amounts owing to Silicon
are repaid with proceeds of an equity financing transaction of the Borrower
6.3 Payment of Obligations. On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable. Without
limiting the generality of the foregoing, if on the Maturity Date, or on any
earlier effective date of termination, there are any outstanding Letters of
Credit issued by Silicon or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Silicon,
then on such date Borrower shall provide to Silicon cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Silicon's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Silicon's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Silicon, Silicon may, in its sole discretion, refuse to make any further Loans
after termination. No termination shall in any way affect or impair any right
or remedy of Silicon, nor shall any such termination relieve Borrower of any
Obligation to Silicon, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Silicon shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Silicon's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 Events of Default. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Silicon immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or
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Silicon Valley Bank Loan and Security Agreement
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delivered to Silicon by Borrower or any of Borrower's officers, employees or
agents, now or in the future, shall be untrue or misleading in a material
respect; or (b) Borrower shall fail to pay when due any Loan or any interest
thereon or any other monetary Obligation; or (c) the total Loans and other
Obligations outstanding at any time shall exceed the Credit Limit; or (d)
Borrower shall fail to comply with any of the financial covenants set forth in
the Schedule or shall fail to perform any other non-monetary Obligation which by
its nature cannot be cured; or (e) Borrower shall fail to perform any other non-
monetary Obligation, which failure is not cured within 5 Business Days after the
date due; or (f) any levy, assessment, attachment, seizure, lien or encumbrance
(other than a Permitted Lien) is made on all or any part of the Collateral which
is not cured within 10 days after the occurrence of the same; or (g) any default
or event of default occurs under any obligation secured by a Permitted Lien,
which is not cured within any applicable cure period or waived in writing by the
holder of the Permitted Lien; or (h) Borrower breaches any material contract or
obligation, which has or may reasonably be expected to have a material adverse
effect on Borrower's business or financial condition; or (i) Dissolution,
termination of existence, insolvency or business failure of Borrower; or
appointment of a receiver, trustee or custodian, for all or any part of the
property of, assignment for the benefit of creditors by, or the commencement of
any proceeding by Borrower under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, now or in the future in effect; or (j) the commencement of any
proceeding against Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect, which is not cured by the dismissal thereof within 30 days
after the date commenced; or (k) revocation or termination of, or limitation or
denial of liability upon, any guaranty of the Obligations or any attempt to do
any of the foregoing, or commencement of proceedings by any guarantor of any of
the Obligations under any bankruptcy or insolvency law; or (l) revocation or
termination of, or limitation or denial of liability upon, any pledge of any
certificate of deposit, securities or other property or asset of any kind
pledged by any third party to secure any or all of the Obligations, or any
attempt to do any of the foregoing, or commencement of proceedings by or against
any such third party under any bankruptcy or insolvency law; or (m) Borrower
makes any payment on account of any indebtedness or obligation which has been
subordinated to the Obligations other than as permitted in the applicable
subordination agreement, or if any Person who has subordinated such indebtedness
or obligations terminates or in any way limits his subordination agreement; or
(n) there shall be a change in the record or beneficial ownership of an
aggregate of more than 20% of the outstanding shares of stock of Borrower, in
one or more transactions, compared to the ownership of outstanding shares of
stock of Borrower in effect on the date hereof, without the prior written
consent of Silicon; or (o) Borrower shall generally not pay its debts as they
become due, or Borrower shall conceal, remove or transfer any part of its
property, with intent to hinder, delay or defraud its creditors, or make or
suffer any transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or (p) there shall be a
material adverse change in Borrower's business or financial condition; or (q)
Silicon, acting in good faith and in a commercially reasonable manner, deems
itself insecure because of the occurrence of an event prior to the effective
date hereof of which Silicon had no knowledge on the effective date or because
of the occurrence of an event on or subsequent to the effective date. Silicon
may cease making any Loans hereunder during any of the above cure periods, and
thereafter if an Event of Default has occurred.
7.2 Remedies. Upon the occurrence of any Event of Default, and at any time
thereafter, Silicon, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following: (a) Cease making Loans or otherwise extending credit to
Borrower under this Agreement or any other document or agreement; (b) Accelerate
and declare all or any part of the Obligations to be immediately due, payable,
and performable, notwithstanding any deferred or installment payments allowed by
any instrument evidencing or relating to any Obligation; (c) Take possession of
any or all of the Collateral wherever it may be found, and for that purpose
Borrower hereby authorizes Silicon without judicial process to enter onto any of
Borrower's premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain on the premises or
cause a custodian to remain on the premises in exclusive control thereof,
without charge for so long as Silicon deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should Silicon seek to take possession of any
of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any
bond and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover possession
thereof; and (iii) any requirement that Silicon retain possession of, and not
dispose of, any such Collateral until after trial or final judgment; (d) Require
Borrower to assemble any or all of the Collateral and make it available to
Silicon at places designated by Silicon which are reasonably convenient to
Silicon and Borrower, and to remove the Collateral to such locations as Silicon
may deem advisable; (e)
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Silicon Valley Bank Loan and Security Agreement
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Complete the processing, manufacturing or repair of any Collateral prior to a
disposition thereof and, for such purpose and for the purpose of removal,
Silicon shall have the right to use Borrower's premises, vehicles, hoists,
lifts, cranes, equipment and all other property without charge; (f) Sell, lease
or otherwise dispose of any of the Collateral, in its condition at the time
Silicon obtains possession of it or after further manufacturing, processing or
repair, at one or more public and/or private sales, in lots or in bulk, for
cash, exchange or other property, or on credit, and to adjourn any such sale
from time to time without notice other than oral announcement at the time
scheduled for sale. Silicon shall have the right to conduct such disposition on
Borrower's premises without charge, for such time or times as Silicon deems
reasonable, or on Silicon's premises, or elsewhere and the Collateral need not
be located at the place of disposition. Silicon may directly or through any
affiliated company purchase or lease any Collateral at any such public
disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale; (g) Demand payment
of, and collect any Receivables and General Intangibles comprising Collateral
and, in connection therewith, Borrower irrevocably authorizes Silicon to endorse
or sign Borrower's name on all collections, receipts, instruments and other
documents, to take possession of and open mail addressed to Borrower and remove
therefrom payments made with respect to any item of the Collateral or proceeds
thereof, and, in Silicon's sole discretion, to grant extensions of time to pay,
compromise claims and settle Receivables and the like for less than face value;
(h) Offset against any sums in any of Borrower's general, special or other
Deposit Accounts with Silicon; and (i) Demand and receive possession of any of
Borrower's federal and state income tax returns and the books and records
utilized in the preparation thereof or referring thereto. All reasonable
attorneys' fees, expenses, costs, liabilities and obligations incurred by
Silicon with respect to the foregoing shall be added to and become part of the
Obligations, shall be due on demand, and shall bear interest at a rate equal to
the highest interest rate applicable to any of the Obligations. Without limiting
any of Silicon's rights and remedies, from and after the occurrence of any Event
of Default, the interest rate applicable to the Obligations shall be increased
by an additional four percent per annum.
7.3 Standards for Determining Commercial Reasonableness. Borrower and Silicon
agree that a sale or other disposition (collectively, "sale") of any Collateral
which complies with the following standards will conclusively be deemed to be
commercially reasonable: (i) Notice of the sale is given to Borrower at least
seven days prior to the sale, and, in the case of a public sale, notice of the
sale is published at least seven days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted; (ii) Notice of the
sale describes the collateral in general, non-specific terms; (iii) The sale is
conducted at a place designated by Silicon, with or without the Collateral being
present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m; (v)
Payment of the purchase price in cash or by cashier's check or wire transfer is
required; (vi) With respect to any sale of any of the Collateral, Silicon may
(but is not obligated to) direct any prospective purchaser to ascertain directly
from Borrower any and all information concerning the same. Silicon shall be free
to employ other methods of noticing and selling the Collateral, in its
discretion, if they are commercially reasonable.
7.4 Power of Attorney. Upon the occurrence of any Event of Default, without
limiting Silicon's other rights and remedies, Borrower grants to Silicon an
irrevocable power of attorney coupled with an interest, authorizing and
permitting Silicon (acting through any of its employees, attorneys or agents) at
any time, at its option, but without obligation, with or without notice to
Borrower, and at Borrower's expense, to do any or all of the following, in
Borrower's name or otherwise, but Silicon agrees to exercise the following
powers in a commercially reasonable manner: (a) Execute on behalf of Borrower
any documents that Silicon may, in its sole discretion, deem advisable in order
to perfect and maintain Silicon's security interest in the Collateral, or in
order to exercise a right of Borrower or Silicon, or in order to fully
consummate all the transactions contemplated under this Agreement, and all other
present and future agreements; (b) Execute on behalf of Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property which
is part of Silicon's Collateral or in which Silicon has an interest; (c) Execute
on behalf of Borrower, any invoices relating to any Receivable, any draft
against any Account Debtor and any notice to any Account Debtor, any proof of
claim in bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or
other lien, or assignment or satisfaction of mechanic's, materialman's or other
lien; (d) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into Silicon's
possession; (e) Endorse all checks and other forms of remittances received by
Silicon; (f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; (g)
Grant extensions of time to pay, compromise claims and settle Receivables and
General Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens
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Silicon Valley Bank Loan and Security Agreement
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therefor, or both; (i) Settle and adjust, and give releases of, any insurance
claim that relates to any of the Collateral and obtain payment therefor; (j)
Instruct any third party having custody or control of any books or records
belonging to, or relating to, Borrower to give Silicon the same rights of access
and other rights with respect thereto as Silicon has under this Agreement; and
(k) Take any action or pay any sum required of Borrower pursuant to this
Agreement and any other present or future agreements. Any and all reasonable
sums paid and any and all reasonable costs, expenses, liabilities, obligations
and attorneys' fees incurred by Silicon with respect to the foregoing shall be
added to and become part of the Obligations, shall be payable on demand, and
shall bear interest at a rate equal to the highest interest rate applicable to
any of the Obligations. In no event shall Silicon's rights under the foregoing
power of attorney or any of Silicon's other rights under this Agreement be
deemed to indicate that Silicon is in control of the business, management or
properties of Borrower.
7.5 Application of Proceeds. All proceeds realized as the result of any sale
of the Collateral shall be applied by Silicon first to the reasonable costs,
expenses, liabilities, obligations and attorneys' fees incurred by Silicon in
the exercise of its rights under this Agreement, second to the interest due upon
any of the Obligations, and third to the principal of the Obligations, in such
order as Silicon shall determine in its sole discretion. Any surplus shall be
paid to Borrower or other persons legally entitled thereto; Borrower shall
remain liable to Silicon for any deficiency. If, Silicon, in its sole
discretion, directly or indirectly enters into a deferred payment or other
credit transaction with any purchaser at any sale of Collateral, Silicon shall
have the option, exercisable at any time, in its sole discretion, of either
reducing the Obligations by the principal amount of purchase price or deferring
the reduction of the Obligations until the actual receipt by Silicon of the cash
therefor.
7.6 Remedies Cumulative. In addition to the rights and remedies set forth in
this Agreement, Silicon shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Silicon and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Silicon of one or more of its rights or remedies shall not be deemed an
election, nor bar Silicon from subsequent exercise or partial exercise of any
other rights or remedies. The failure or delay of Silicon to exercise any
rights or remedies shall not operate as a waiver thereof, but all rights and
remedies shall continue in full force and effect until all of the Obligations
have been fully paid and performed.
8.DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable.
--------------
"Affiliate" means, with respect to any Person, a relative, partner,
---------
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Business Day" means a day on which Silicon is open for business.
------------
"Code" means the Uniform Commercial Code as adopted and in effect in the
----
State of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
----------
"Default" means any event which with notice or passage of time or both, would
-------
constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
---------------
"Eligible Inventory" [NOT APPLICABLE].
------------------
"Eligible Receivables" means Receivables arising in the ordinary course of
--------------------
Borrower's business from the sale of goods or rendition of services, which
Silicon, in its sole judgment, shall deem eligible for borrowing, based on such
considerations as Silicon may from time to time deem appropriate. Without
limiting the fact that the determination of which Receivables are eligible for
borrowing is a matter of Silicon's discretion, the following (the "Minimum
-------
Eligibility Requirements") are the minimum requirements for a Receivable to be
- ------------------------
an Eligible Receivable: (i) the Receivable must not be outstanding for more
than 90 days from its invoice date, (ii) the Receivable must not represent
progress billings, or be due under a fulfillment or requirements contract with
the Account Debtor, (iii) the Receivable must not be subject to any
contingencies (including Receivables arising from sales on consignment,
guaranteed sale or other terms pursuant to which payment by the Account Debtor
may be conditional), (iv) the Receivable must not be owing from an Account
Debtor with whom the Borrower has any dispute (whether or not relating to the
particular Receivable), (v) the Receivable must not be owing from an Affiliate
of Borrower, (vi) the Receivable must not be owing from an Account Debtor which
is subject to any insolvency or bankruptcy proceeding, or whose financial
condition is not acceptable to Silicon, or which, fails or goes out of a
material portion of its business, (vii) the Receivable must not be owing from
the United States or any department, agency or instrumentality thereof (unless
there has been compliance, to Silicon's satisfaction, with the United States
Assignment of Claims Act), (viii) the Receivable
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must not be owing from an Account Debtor located outside the United States or
Canada (unless pre-approved by Silicon in its discretion in writing, or backed
by a letter of credit satisfactory to Silicon, or FCIA insured satisfactory to
Silicon)*, (ix) the Receivable must not be owing from an Account Debtor to whom
Borrower is or may be liable for goods purchased from such Account Debtor or
otherwise. Receivables owing from one Account Debtor will not be deemed Eligible
Receivables to the extent they exceed 25% of the total Receivables outstanding
**. In addition, if more than 50% of the Receivables owing from an Account
Debtor are outstanding more than 90 days from their invoice date (without regard
to unapplied credits) or are otherwise not eligible Receivables, then all
Receivables owing from that Account Debtor will be deemed ineligible for
borrowing. Silicon may, from time to time, in its discretion, revise the Minimum
Eligibility Requirements, upon written notice to the Borrower.
* , it being agreed that Hoya Health Care Corporation and Rion Co. Ltd. are
approved Account Debtors located outside of the United Stated provided that the
Accounts relating thereto are other eligible for borrowing hereunder
** , provided that the foregoing percentage shall be considered to be 40% with
respect to Starkey Labs, Inc. only
"Equipment" means all of Borrower's present and hereafter acquired machinery,
---------
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"Event of Default" means any of the events set forth in Section 7.1 of this
----------------
Agreement.
"General Intangibles" means all general intangibles of Borrower, whether now
-------------------
owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in
all litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Silicon, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation life insurance, key
man insurance, credit insurance, liability insurance, property insurance and
other insurance), tax refunds and claims, computer programs, discs, tapes and
tape files, claims under guaranties, security interests or other security held
by or granted to Borrower, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired goods,
---------
merchandise or other personal property, wherever located, to be furnished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit), and
all materials and supplies of every kind, nature and description which are or
might be used or consumed in Borrower's business or used in connection with the
manufacture, packing, shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all warehouse receipts, documents of
title and other documents representing any of the foregoing.
"Obligations" means all present and future Loans, advances, debts,
-----------
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Silicon, whether evidenced by this Agreement or any
note or other instrument or document, whether arising from an extension of
credit, opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Silicon in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, collateral
monitoring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other present or future instrument or agreement between Borrower and
Silicon.
"Permitted Liens" means the following: (i) purchase money security interests
---------------
in specific items of Equipment; (ii) leases of specific items of Equipment;
(iii) liens for taxes not yet payable; (iv) additional security interests and
liens consented to in writing by Silicon, which consent shall not be
unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
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<PAGE>
Silicon Valley Bank Loan and Security Agreement
-------------------------------------------------------------------------
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. Silicon will have
the right to require, as a condition to its consent under subparagraph (iv)
above, that the holder of the additional security interest or lien sign an
intercreditor agreement on Silicon's then standard form, acknowledge that the
security interest is subordinate to the security interest in favor of Silicon,
and agree not to take any action to enforce its subordinate security interest so
long as any Obligations remain outstanding, and that Borrower agree that any
uncured default in any obligation secured by the subordinate security interest
shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired
-----------
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, securities accounts, investment
property, documents and all other forms of obligations at any time owing to
Borrower, all guaranties and other security therefor, all merchandise returned
to or repossessed by Borrower, and all rights of stoppage in transit and all
other rights or remedies of an unpaid vendor, lienor or secured party.
"Reserves" means, as of any date of determination, such amounts as Silicon may
--------
from time to time establish and revise in good faith reducing the amount of
Loans, Letters of Credit and other financial accommodations which would
otherwise be available to Borrower under the lending formula(s) provided in the
Schedule: (a) to reflect events, conditions, contingencies or risks which, as
determined by Silicon in good faith, do or may affect (i) the Collateral or any
other property which is security for the Obligations or its value (including
without limitation any increase in delinquencies of Receivables), (ii) the
assets, business or prospects of Borrower or any Guarantor, or (iii) the
security interests and other rights of Silicon in the Collateral (including the
enforceability, perfection and priority thereof); or (b) to reflect Silicon's
good faith belief that any collateral report or financial information furnished
by or on behalf of Borrower or any Guarantor to Silicon is or may have been
incomplete, inaccurate or misleading in any material respect; or (c) in respect
of any state of facts which Silicon determines in good faith constitutes an
Event of Default or may, with notice or passage of time or both, constitute an
Event of Default.
Other Terms. All accounting terms used in this Agreement, unless otherwise
-----------
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 Interest Computation. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Silicon (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Silicon on account of the Obligations three Business Days after
receipt by Silicon of immediately available funds, and, for purposes of the
foregoing, any such funds received after 12:00 Noon on any day shall be deemed
received on the next Business Day. Silicon shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Silicon in its sole discretion, and Silicon may charge
Borrower's loan account for the amount of any item of payment which is returned
to Silicon unpaid.
9.2 Application of Payments. All payments with respect to the Obligations
may be applied, and in Silicon's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Silicon shall determine in its sole
discretion.
9.3 Charges to Accounts. Silicon may, in its discretion, require that
Borrower pay monetary Obligations in cash to Silicon, or charge them to
Borrower's Loan account, in which event they will bear interest at the same rate
applicable to the Loans. Silicon may also, in its discretion, charge any
monetary Obligations to Borrower's Deposit Accounts maintained with Silicon.
9.4 Monthly Accountings. Silicon shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Silicon), unless Borrower
notifies Silicon in writing to the contrary within thirty days after each
account is rendered, describing the nature of any alleged errors or admissions.
9.5 Notices. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Silicon or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Silicon shall be directed to the
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<PAGE>
Silicon Valley Bank Loan and Security Agreement
------------------------------------------------------------------------
Commercial Finance Division, to the attention of the Division Manager or the
Division Credit Manager. All notices shall be deemed to have been given upon
delivery in the case of notices personally delivered, or at the expiration of
one Business Day following delivery to the private delivery service, or two
Business Days following the deposit thereof in the United States mail, with
postage prepaid.
9.6 Severability. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 Integration. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Silicon and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
---------
no oral understandings, representations or agreements between the parties which
- --------------------------------------------------------------------------------
are not set forth in this Agreement or in other written agreements signed by the
- --------------------------------------------------------------------------------
parties in connection herewith.
- ------------------------------
9.8 Waivers. The failure of Silicon at any time or times to require
Borrower to strictly comply with any of the provisions of this Agreement or any
other present or future agreement between Borrower and Silicon shall not waive
or diminish any right of Silicon later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Silicon shall be deemed to have been
waived by any act or knowledge of Silicon or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Silicon and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Silicon on which Borrower is or may in any way be liable, and notice of any
action taken by Silicon, unless expressly required by this Agreement.
9.9 No Liability for Ordinary Negligence. Neither Silicon, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Silicon, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Silicon, but nothing herein shall relieve Silicon from
liability for its own gross negligence or willful misconduct.
9.10 Amendment. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Silicon.
9.11 Time of Essence. Time is of the essence in the performance by Borrower
of each and every obligation under this Agreement.
9.12 Attorneys Fees and Costs. Borrower shall reimburse Silicon for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Silicon, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Silicon incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; enforce, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Silicon's security interest in, the Collateral; and otherwise represent Silicon
in any litigation relating to Borrower. In satisfying Borrower's obligation
hereunder to reimburse Silicon for attorneys fees, Borrower may, for
convenience, issue checks directly to Silicon's attorneys, Levy, Small & Lallas,
but Borrower acknowledges and agrees that Levy, Small & Lallas is representing
only Silicon and not Borrower in connection with this Agreement. If either
Silicon or Borrower files any lawsuit against the other predicated on a breach
of this Agreement, the prevailing party in such action shall be entitled to
recover its reasonable costs and attorneys' fees, including (but not limited to)
reasonable attorneys' fees and costs incurred in the enforcement of, execution
upon or defense of any order, decree, award or judgment. All attorneys' fees and
costs to which Silicon may be entitled pursuant to this Paragraph shall
immediately become part of Borrower's Obligations, shall be due on demand, and
shall bear interest at a rate equal to the highest interest rate applicable to
any of the Obligations.
9.13 Benefit of Agreement. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Silicon; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Silicon, and any prohibited
assignment shall
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<PAGE>
Silicon Valley Bank Loan and Security Agreement
------------------------------------------------------------------------
be void. No consent by Silicon to any assignment shall release Borrower from its
liability for the Obligations.
9.14 Joint and Several Liability. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.15 Limitation of Actions. Any claim or cause of action by Borrower
against Silicon, its directors, officers, employees, agents, accountants or
attorneys, based upon, arising from, or relating to this Loan Agreement, or any
other present or future document or agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, occurred, done, omitted or suffered to be
done by Silicon, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of an
action or proceeding in a court of competent jurisdiction by the filing of a
complaint within one year after the first act, occurrence or omission upon which
such claim or cause of action, or any part thereof, is based, and the service of
a summons and complaint on an officer of Silicon, or on any other person
authorized to accept service on behalf of Silicon, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Silicon in its sole discretion. This
provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.16 Paragraph Headings; Construction. Paragraph headings are only used in
this Agreement for convenience. Borrower and Silicon acknowledge that the
headings may not describe completely the subject matter of the applicable
paragraph, and the headings shall not be used in any manner to construe, limit,
define or interpret any term or provision of this Agreement. The term
"including", whenever used in this Agreement, shall mean "including (but not
limited to)". This Agreement has been fully reviewed and negotiated between the
parties and no uncertainty or ambiguity in any term or provision of this
Agreement shall be construed strictly against Silicon or Borrower under any rule
of construction or otherwise.
9.17 Governing Law; Jurisdiction; Venue. This Agreement and all acts and
transactions hereunder and all rights and obligations of Silicon and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Silicon to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Silicon's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Santa Clara County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (iii) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
-13-
<PAGE>
Silicon Valley Bank Loan and Security Agreement
------------------------------------------------------------------------
9.18 Mutual Waiver of Jury Trial. BORROWER AND SILICON EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN SILICON AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF SILICON OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH SILICON OR BORROWER, IN
ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
Borrower:
SONIC INNOVATIONS, INC.
By /s/ Andrew G. Raguskus
---------------------------------------
President or Vice President
By /s/ Stephen L. Wilson
---------------------------------------
Secretary or Ass't Secretary
Silicon:
SILICON VALLEY BANK
By /s/ illegible
---------------------------------------
Title
------------------------------------
-14-
<PAGE>
Silicon Valley Bank
Schedule to
Loan and Security Agreement
Borrower: Sonic Innovations, Inc.
Address: 2795 East Cottonwood Parkway, Suite 660
Salt Lake City, Utah 84121
Date: December 22, 1999
This Schedule forms an integral part of the Loan and Security Agreement between
Silicon Valley Bank and the above-borrower of even date.
================================================================================
1. CREDIT LIMIT
(Section 1.1): I. Revolving Facility.
An amount (the "Revolving Loans") not to exceed:
(A) the lesser of: (i) $4,000,000 at any one
time outstanding (the "Maximum Credit Limit");
or (ii) 60% of the amount of Borrower's Eligible
Receivables (as defined in Section 8 above);
LESS (B) the amount of all outstanding Letters
of Credit (including drawn but unreimbursed
Letters of Credit),
LESS (C) the aggregate amount of the FX
Reserves; and
LESS (D) $500,000.
PLUS
II. Existing Term Loan.
Silicon has extended a term loan to the Borrower
and the current principal outstanding thereof is
$1,311,319.93 (the "Term Loan"). Borrower shall
repay the principal amount of the Term Loan in
48 equal monthly installments thereof beginning
on April 1, 2000 and the payment of such
installments shall continue on the first day of
each succeeding month until March 1, 2004, at
which all remaining unpaid Term Loan principal
amounts, all accrued and unpaid interest thereon
and all other unpaid remaining Obligations
relating thereto shall be paid in full. Further,
interest on the Term Loan shall be paid monthly
in arrears on the first day of each month
commencing immediately at the
<PAGE>
LEVY, SMALL, LALLAS
TRANSMITTAL NOTE
________________________________________________________________
Page 2
interest rate per annum as is set forth below in
the Interest Rate section.
PLUS
III. Existing Lease Facility
The obligations under the Lease Agreement. As
used herein the term "Lease Agreement" shall
mean that certain Master Lease Agreement dated
as of May 12, 1998 between Silicon and Borrower,
as amended from time to time. Nothing herein
shall be deemed to modify the terms and
conditions of the Lease Agreement. Any default
or event of default under the Lease Agreement
shall constitute an Event of Default hereunder.
Foreign Exchange Sublimit If there is availability under the Revolving
Loans facility then Borrower may enter in
foreign exchange forward contracts with Silicon
under which Borrower commits to purchase from or
sell to Silicon a set amount of foreign currency
more than one business day after the contract
date (the "FX Forward Contract"). Bank will
subtract 10% of each outstanding FX Forward
Contract (such 10% amount being the "FX
Reserve") from the foreign exchange reserve
aggregate sublimit which is a maximum of
$4,000,000. The total FX Forward Contracts at
any one time may not exceed 10 times the amount
of the FX Reserve. Bank may terminate the FX
Forward Contracts if an Event of Default occurs.
Borrower shall execute all standard form
applications and agreements of Silicon in
connection with the FX Forward Contracts, and
without limiting any of the terms of such
applications and agreements, Borrower shall pay
all standard fees and charges of Silicon in
connection with the FX Forward Contracts.
Without limiting any of the other terms of this
Loan Agreement or any such standard form
applications and agreements of Silicon, Borrower
agrees to indemnify Silicon and hold it
harmless, from and against any and all claims,
debts, liabilities, demands, obligations,
actions, costs and expenses (including, without
limitation, attorneys' fees of counsel of
Silicon's choice), of every nature and
description, which it may sustain or incur,
based upon, arising out of, or in any way
relating to any of the FX Forward Contracts or
any transactions relating thereto or
contemplated thereby.
Credit Card Sublimit Borrower may use up to $50,000 Silicon's
services consisting of business credit cards
(the "Cash Management Services"). All amounts
Silicon pays in connection with any such
services shall be treated as an Loan under the
Revolving Loans facility.
<PAGE>
LEVY, SMALL, LALLAS
TRANSMITTAL NOTE
_________________________________________________________________
Page 3
Letter of Credit Sublimit
(Section 1.5): $4,000,000
================================================================================
2. INTEREST.
Interest Rate (Section 1.2):
Revolving Loans: A rate equal to the
---------------
"Prime Rate" in effect from time to
time, plus 2.00% per annum. Interest
shall be calculated on the basis of a
360-day year for the actual number of
days elapsed. "Prime Rate" means the
rate announced from time to time by
Silicon as its "prime rate;" it is a
base rate upon which other rates charged
by Silicon are based, and it is not
necessarily the best rate available at
Silicon. The interest rate applicable to
the Obligations shall change on each
date there is a change in the Prime
Rate.
Term Loan: A rate equal to the "Prime
---------
Rate" in effect from time to time, plus
2.50% per annum. Interest shall be
calculated on the basis of a 360-day
year for the actual number of days
elapsed. "Prime Rate" means the rate
announced from time to time by Silicon
as its "prime rate;" it is a base rate
upon which other rates charged by
Silicon are based, and it is not
necessarily the best rate available at
Silicon. The interest rate applicable to
the Obligations shall change on each
date there is a change in the Prime
Rate.
Minimum Monthly
Interest (Section 1.2): Not Applicable.
================================================================================
3. FEES (Section 1.4):
Loan Fee: $24,111.11, payable concurrently
herewith.
Collateral Monitoring
Fee: $1,000, per month, payable in arrears
(prorated for any partial month at the
beginning and at termination of this
Agreement).
================================================================================
4. MATURITY DATE
(Section 6.1): See Section 10 below.
<PAGE>
LEVY, SMALL, LALLAS
TRANSMITTAL NOTE
________________________________________________________
Page 4
================================================================================
5. FINANCIAL COVENANTS
(Section 5.1): Borrower shall comply with each of the
following covenant. Compliance shall be
determined as of the end of each month,
except as otherwise specifically
provided below:
Minimum Tangible
Net Worth: Borrower shall maintain a Tangible Net
Worth of not less than - $3,500,000
(that is, negative $3,500,000).
Definitions. For purposes of the foregoing financial
covenants, the following term shall have
the following meaning:
"Current assets", "current liabilities"
and "liabilities" shall have the meaning
ascribed thereto by generally accepted
accounting principles.
"Tangible Net Worth" shall mean the
excess of total assets over total
liabilities, determined in accordance
with generally accepted accounting
principles, with the following
adjustments:
(A) there shall be excluded from
assets: (i) notes, accounts
receivable and other obligations
owing to the Borrower from its
officers or other Affiliates, and
(ii) all assets which would be
classified as intangible assets
under generally accepted accounting
principles, including without
limitation goodwill, licenses,
patents, trademarks, trade names,
copyrights, capitalized software and
organizational costs, licenses and
franchises
(B) there shall be excluded from
liabilities: all indebtedness which
is subordinated to the Obligations
under a subordination agreement in
form specified by Silicon or by
language in the instrument
evidencing the indebtedness which is
acceptable to Silicon in its
discretion.
================================================================================
6. REPORTING.
(Section 5.3):
Borrower shall provide Silicon with the
following:
1. Weekly Receivable agings, aged by
invoice date to be received by Silicon
by Tuesday of each week with respect to
the immediately preceding week.
2. Weekly accounts payable agings, aged by
invoice date, to be received by Silicon
by Tuesday of each week with respect to
the immediately preceding week. At
Silicon's request, upon an Event of
Default,
<PAGE>
LEVY, SMALL, LALLAS
TRANSMITTAL NOTE
_________________________________________________________________
Page 5
Borrower shall also deliver to Silicon
outstanding or held check registers, if
any.
3. Monthly reconciliations of Receivable
agings (aged by invoice date),
transaction reports, and general ledger,
within fifteen days after the end of
each month, provided that Borrower shall
be required to provide the foregoing
only if Borrower is converted to
daily/weekly transaction reporting.
4. [Reserved]
5. Monthly unaudited financial statements,
as soon as available, and in any event
within thirty days after the end of each
month.
6. Monthly Compliance Certificates, within
thirty days after the end of each month,
in such form as Silicon shall reasonably
specify, signed by the Chief Financial
Officer of Borrower, certifying that as
of the end of such month Borrower was in
full compliance with all of the terms
and conditions of this Agreement, and
setting forth calculations showing
compliance with the financial covenants
set forth in this Agreement and such
other information as Silicon shall
reasonably request, including, without
limitation, a statement that at the end
of such month there were no held checks.
7. Quarterly unaudited financial
statements, as soon as available, and in
any event within forty-five days after
the end of each fiscal quarter of
Borrower.
8. Annual operating budgets (including
income statements, balance sheets and
cash flow statements, by month) for the
upcoming fiscal year of Borrower within
thirty days prior to the end of each
fiscal year of Borrower.
9. Annual financial statements, as soon as
available, and in any event within 120
days following the end of Borrower's
fiscal year, certified by independent
certified public accountants acceptable
to Silicon.
================================================================================
7. Compensation
(Section 5.5): [Reserved.]
================================================================================
8. Borrower Information:
Prior Names of
Borrower
(Section 3.2): None
<PAGE>
LEVY, SMALL, LALLAS
TRANSMITTAL NOTE
_________________________________________________________________
Page 6
Prior Trade
Names of Borrower
(Section 3.2): ______________
Existing Trade
Names of Borrower
(Section 3.2): ______________
Other Locations and
Addresses (Section 3.3): See Exhibit A hereto
Material Adverse
Litigation (Section 3.10): None
================================================================================
9. Other Covenants
(Section 5.1): Borrower shall at all times comply with
all of the following additional
covenants:
(1) Banking Relationship. Borrower shall
at all times maintain its primary
banking relationship with Silicon.
(2) Subordination of Inside Debt. All
present and future indebtedness of
the Borrower to its officers,
directors and shareholders ("Inside
Debt") shall, at all times, be
subordinated to the Obligations
pursuant to a subordination
agreement on Silicon's standard
form, other than that Inside Debt
relating to which Silicon has agreed
in writing need not be so
subordinated. Prior to incurring any
Inside Debt in the future, Borrower
shall cause the person to whom such
Inside Debt will be owed to execute
and deliver to Silicon a
subordination agreement on Silicon's
standard form.
<PAGE>
(3) Warrants. Borrower shall provide
Silicon with five-year warrants to
purchase 59,009 shares of Series D
Preferred stock of the Borrower, at
$2.00 per share, on terms acceptable
to Silicon, as set forth in the
Warrant to Purchase Stock and
related documents (including but not
limited to an Anti-Dilution
Agreement and Registration Rights
Agreement) being executed
concurrently with this Agreement,
provided that the number of shares
shall be reduced to 39,340 shares of
Series D Preferred stock of the
Borrower under the conditions set
forth in the Warrant only. Said
warrants shall be deemed fully
earned on the date hereof, shall be
in addition to all interest and
other fees, and shall be non-
refundable.
10. TERM OF REVOLVING LOAN FACILITY AND TERM OF AGREEMENT.
(a) Term of Revolving Loan Facility. The
-------------------------------
period during which Revolving Loans
will be made (the "Revolving Loan
Period") shall be from the date of
this Agreement to June 30, 2000 (the
"Revolving Loan Maturity Date"),
unless sooner terminated in
accordance with the terms of this
Agreement. On the Revolving Loan
Maturity Date or on any earlier
termination of this Agreement, no
further Revolving Loans will be
made, and Borrower shall pay in full
all outstanding Revolving Loans and
all Obligations relating thereto.
(b) Term of Agreement. The term of this
-----------------
Agreement shall be from the date of
this Agreement to the later of the
following (the "Maturity Date"): (i)
the termination of the Revolving
Loan Period, or (ii) the latest date
the last installment of principal on
the Term Loan is due.
(c) Payment of Obligations.
----------------------
Notwithstanding anything herein to
the contrary, Borrower shall have no
right to terminate this Agreement at
any time that any principal of, or
interest on any of the Loans or any
other monetary Obligations are
outstanding, except upon prepayment
of all Obligations and the
satisfaction of all other conditions
set forth in the Loan Agreement,
including, without limitation, the
obligations outstanding under the
Lease Agreement.
<PAGE>
LEVY, SMALL, LALLAS
TRANSMITTAL NOTE
_________________________________________________________________
Page 8
Borrower: Silicon:
Sonic Innovations, Inc. SILICON VALLEY BANK
By /s/ Andrew Raguskus, CEO By /s/ illegible
------------------------------- -------------------------------
President or Vice President Title
_____________________________
By /s/ Stephen L. Wilson
_____________________________
Secretary or Ass't Secretary
<PAGE>
EXHIBIT 10.14
COLLATERAL ASSIGNMENT, PATENT MORTGAGE
AND SECURITY AGREEMENT
This Collateral Assignment, Patent Mortgage and Security Agreement is made
as of December 22, 1999 by and between Sonic Innovations, Inc. ("Assignor"), and
Silicon Valley Bank, a California banking corporation ("Assignee").
RECITALS
--------
A. Assignee has agreed to lend to Assignor certain funds (the "Loans"),
pursuant to a Loan and Security Agreement dated December 22, 1999 (the "Loan
Agreement") and Assignor desires to borrow such funds from Assignee.
B. In order to induce Assignee to make the Loans, Assignor has agreed to
assign certain intangible property to Assignee for purposes of securing the
obligations of Assignor to Assignee.
NOW, THEREFORE, THE PARTIES HERETO AGREE AS FOLLOWS:
1. Assignment, Patent Mortgage and Grant of Security Interest. As
----------------------------------------------------------
collateral security for the prompt and complete payment and performance of all
of Assignor's present or future indebtedness, obligations and liabilities to
Assignee, Assignor hereby assigns, transfers, conveys and grants a security
interest and mortgage to Assignee, as security, but not as an ownership
interest, in and to Assignor's entire right, title and interest in, to and under
the following (all of which shall collectively be called the "Collateral"):
(a) All of present and future United States registered copyrights and
copyright registrations, including, without limitation, the registered
copyrights listed in Exhibit A-1 to this Agreement (and including all of the
-----------
exclusive rights afforded a copyright registrant in the United States under 17
U.S.C. (S)106 and any exclusive rights which may in the future arise by act of
Congress or otherwise) and all present and future applications for copyright
registrations (including applications for copyright registrations of derivative
works and compilations) (collectively, the "Registered Copyrights"), and any and
all royalties, payments, and other amounts payable to Assignor in connection
with the Registered Copyrights, together with all renewals and extensions of the
Registered Copyrights, the right to recover for all past, present, and future
infringements of the Registered Copyrights, and all computer programs, computer
databases, computer program flow diagrams, source codes, object codes and all
tangible property embodying or incorporating the Registered Copyrights, and all
other rights of every kind whatsoever accruing thereunder or pertaining thereto.
(b) All present and future copyrights which are not registered in the
United States Copyright Office (the "Unregistered Copyrights"), whether now
owned or hereafter acquired, including without limitation the Unregistered
Copyrights listed in Exhibit A-2 to this Agreement, and any and all royalties,
-----------
payments, and other amounts payable to Assignor in connection with the
Unregistered Copyrights, together with all renewals and extensions of the
Unregistered Copyrights, the right to recover for all past, present, and future
infringements of the Unregistered Copyrights, and all computer programs,
computer databases, computer program flow diagrams, source codes, object codes
and all tangible property embodying or incorporating
-1-
<PAGE>
the Unregistered Copyrights, and all other rights of every kind whatsoever
accruing thereunder or pertaining thereto. The Registered Copyrights and the
Unregistered Copyrights collectively are referred to herein as the "Copyrights."
(c) All right, title and interest in and to any and all present and
future license agreements with respect to the Copyrights, including without
limitation the license agreements listed in Exhibit A-3 to this Agreement (the
-----------
"Licenses").
(d) All present and future accounts, accounts receivable and other
rights to payment arising from, in connection with or relating to the
Copyrights.
(e) Any and all trade secrets, and any and all intellectual property
rights in computer software and computer software products now or hereafter
existing, created, acquired or held;
(f) Any and all design rights which may be available to Assignor now
or hereafter existing, created, acquired or held;
(g) All patents, patent applications and like protections including,
without limitation, improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same, including without limitation
the patents and patent applications set forth on Exhibit B attached hereto
---------
(collectively, the "Patents");
(h) Any trademark and servicemark rights, whether registered or not,
applications to register and registrations of the same and like protections, and
the entire goodwill of the business of Assignor connected with and symbolized by
such trademarks, including without limitation those set forth on Exhibit C
---------
attached hereto (collectively, the "Trademarks")
(i) Any and all claims for damages by way of past, present and future
infringements of any of the rights included above, with the right, but not the
obligation, to sue for and collect such damages for said use or infringement of
the intellectual property rights identified above;
(j) All licenses or other rights to use any of the Copyrights,
Patents or Trademarks, and all license fees and royalties arising from such use
to the extent permitted by such license or rights;
(k) All amendments, extensions, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and
(l) All proceeds and products of the foregoing, including without
limitation all payments under insurance or any indemnity or warranty payable in
respect of any of the foregoing.
2. Authorization and Request. Assignor authorizes and requests that the
-------------------------
Register of Copyrights and the Commissioner of Patents and Trademarks record
this conditional assignment.
3. Covenants and Warranties. Assignor represents, warrants, covenants and
------------------------
agrees as follows:
-2-
<PAGE>
(a) Assignor is now the sole owner of the Collateral, except for non-
exclusive licenses granted by Assignor to its customers in the ordinary course
of business.
(b) Listed on Exhibits A-1 and A-2 are all copyrights owned by
Assignor, in which Assignor has an interest, or which are used in Assignor's
business.
(c) Each employee, agent and/or independent contractor who has
participated in the creation of the property constituting the Collateral has
either executed an assignment of his or her rights of authorship to Assignor or
is an employee of Assignor acting within the scope of his or her employment and
was such an employee at the time of said creation.
(d) All of Assignor's present and future software, computer programs
and other works of authorship subject to United States copyright protection, the
sale, licensing or other disposition of which results in royalties receivable,
license fees receivable, accounts receivable or other sums owing to Assignor
(collectively, "Receivables"), have been and shall be registered with the United
States Copyright Office prior to the date Assignor requests or accepts any loan
from Assignee with respect to such Receivables and prior to the date Assignor
includes any such Receivables in any accounts receivable aging, borrowing base
report or certificate or other similar report provided to Assignee, and Assignor
shall provide to Assignee copies of all such registrations promptly upon the
receipt of the same.
(e) Assignor shall undertake all reasonable measures to cause its
employees, agents and independent contractors to assign to Assignor all rights
of authorship to any copyrighted material in which Assignor has or may
subsequently acquire any right or interest.
(f) Performance of this Assignment does not conflict with or result
in a breach of any agreement to which Assignor is bound, except to the extent
that certain intellectual property agreements prohibit the assignment of the
rights thereunder to a third party without the licensor's or other party's
consent and this Assignment constitutes an assignment.
(g) During the term of this Agreement, Assignor will not transfer or
otherwise encumber any interest in the Collateral, except for non-exclusive
licenses granted by Assignor in the ordinary course of business or as set forth
in this Assignment;
(h) Each of the Patents is valid and enforceable, and no part of the
Collateral has been judged invalid or unenforceable, in whole or in part, and no
claim has been made that any part of the Collateral violates the rights of any
third party;
(i) Assignor shall promptly advise Assignee of any material adverse
change in the composition of the Collateral, including but not limited to any
subsequent ownership right of the Assignor in or to any Trademark, Patent or
Copyright not specified in this Assignment;
(j) Assignor shall (i) protect, defend and maintain the validity and
enforceability of the Trademarks, Patents and Copyrights, (ii) use its best
efforts to detect infringements of the Trademarks, Patents and Copyrights and
promptly advise Assignee in writing of material infringements detected and (iii)
not allow any Trademarks, Patents, or Copyrights to be abandoned, forfeited or
dedicated to the public without the written consent of Assignee, which shall not
be unreasonably withheld unless Assignor determines that reasonable business
practices
-3-
<PAGE>
suggest that abandonment is appropriate.
(k) Assignor shall promptly register the most recent version of any
of Assignor's Copyrights, if not so already registered, and shall, from time to
time, execute and file such other instruments, and take such further actions as
Assignee may reasonably request from time to time to perfect or continue the
perfection of Assignee's interest in the Collateral;
(l) This Assignment creates, and in the case of after acquired
Collateral, this Assignment will create at the time Assignor first has rights in
such after acquired Collateral, in favor of Assignee a valid and perfected first
priority security interest in the Collateral in the United States securing the
payment and performance of the obligations evidenced by the Loan Agreement upon
making the filings referred to in clause (m) below;
(m) To its knowledge, except for, and upon, the filing with the
United States Patent and Trademark office with respect to the Patents and
Trademarks and the Register of Copyrights with respect to the Copyrights
necessary to perfect the security interests and assignment created hereunder and
except as has been already made or obtained, no authorization, approval or other
action by, and no notice to or filing with, any U.S. governmental authority or
U.S. regulatory body is required either (i) for the grant by Assignor of the
security interest granted hereby or for the execution, delivery or performance
of this Assignment by Assignor in the U.S. or (ii) for the perfection in the
United States or the exercise by Assignee of its rights and remedies thereunder;
(n) All information heretofore, herein or hereafter supplied to
Assignee by or on behalf of Assignor with respect to the Collateral is accurate
and complete in all material respects.
(o) Assignor shall not enter into any agreement that would materially
impair or conflict with Assignor's obligations hereunder without Assignee's
prior written consent, which consent shall not be unreasonably withheld.
Assignor shall not permit the inclusion in any material contract to which it
becomes a party of any provisions that could or might in any way prevent the
creation of a security interest in Assignor's rights and interest in any
property included within the definition of the Collateral acquired under such
contracts, except that certain contracts may contain anti-assignment provisions
that could in effect prohibit the creation of a security interest in such
contracts.
(p) Upon any executive officer of Assignor obtaining actual knowledge
thereof, Assignor will promptly notify Assignee in writing of any event that
materially adversely affects the value of any material Collateral, the ability
of Assignor to dispose of any material Collateral or the rights and remedies of
Assignee in relation thereto, including the levy of any legal process against
any of the Collateral.
4. Assignee's Rights. Assignee shall have the right, but not the
-----------------
obligation, to take, at Assignor's sole expense, any actions that Assignor is
required under this Assignment to take but which Assignor fails to take, after
fifteen (15) days' notice to Assignor. Assignor shall reimburse and indemnify
Assignee for all reasonable costs and reasonable expenses incurred in the
reasonable exercise of its rights under this section 4.
-4-
<PAGE>
5. Inspection Rights. Assignor hereby grants to Assignee and its
-----------------
employees, representatives and agents the right to visit, during reasonable
hours upon prior reasonable written notice to Assignor, and any of Assignor's
plants and facilities that manufacture, install or store products (or that have
done so during the prior six-month period) that are sold utilizing any of the
Collateral, and to inspect the products and quality control records relating
thereto upon reasonable written notice to Assignor and as often as may be
reasonably requested, but not more than one (1) in every six (6) months;
provided, however, nothing herein shall entitle Assignee access to Assignor's
trade secrets and other proprietary information.
6. Further Assurances; Attorney in Fact.
------------------------------------
(a) Upon an Event of Default, on a continuing basis thereafter,
Assignor will, subject to any prior licenses, encumbrances and restrictions and
prospective licenses, make, execute, acknowledge and deliver, and file and
record in the proper filing and recording places in the United States, all such
instruments, including, appropriate financing and continuation statements and
collateral agreements and filings with the United States Patent and Trademarks
Office and the Register of Copyrights, and take all such action as may
reasonably be deemed necessary or advisable, or as requested by Assignee, to
perfect Assignee's security interest in all Copyrights, Patents and Trademarks
and otherwise to carry out the intent and purposes of this Collateral
Assignment, or for assuring and confirming to Assignee the grant or perfection
of a security interest in all Collateral.
(b) Upon an Event of Default, Assignor hereby irrevocably appoints
Assignee as Assignor's attorney-in-fact, with full authority in the place and
stead of Assignor and in the name of Assignor, Assignee or otherwise, from time
to time in Assignee's discretion, upon Assignor's failure or inability to do so,
to take any action and to execute any instrument which Assignee may deem
necessary or advisable to accomplish the purposes of this Collateral Assignment,
including:
(i) To modify, in its sole discretion, this Collateral
Assignment without first obtaining Assignor's approval of or signature to such
modification by amending Exhibit A-1, Exhibit A-2, Exhibit A-3, Exhibit B and
Exhibit C, thereof, as appropriate, to include reference to any right, title or
interest in any Copyrights, Patents or Trademarks acquired by Assignor after the
execution hereof or to delete any reference to any right, title or interest in
any Copyrights, Patents or Trademarks in which Assignor no longer has or claims
any right, title or interest; and
(ii) To file, in its sole discretion, one or more financing or
continuation statements and amendments thereto, relative to any of the
Collateral without the signature of Assignor where permitted by law.
7. Events of Default. The occurrence of any of the following shall
-----------------
constitute an Event of Default under the Assignment:
(a) An Event of Default occurs under the Loan Agreement; or
(b) Assignor breaches any warranty or agreement made by Assignor in
this Assignment.
-5-
<PAGE>
8. Remedies. Upon the occurrence and continuance of an Event of Default,
--------
Assignee shall have the right to exercise all the remedies of a secured
party under the California Uniform Commercial Code, including without limitation
the right to require Assignor to assemble the Collateral and any tangible
property in which Assignee has a security interest and to make it available to
Assignee at a place designated by Assignee. Assignee shall have a nonexclusive,
royalty free license to use the Copyrights, Patents and Trademarks to the extent
reasonably necessary to permit Assignee to exercise its rights and remedies upon
the occurrence of an Event of Default. Assignor will pay any expenses
(including reasonable attorney's fees) incurred by Assignee in connection with
the exercise of any of Assignee's rights hereunder, including without limitation
any expense incurred in disposing of the Collateral. All of Assignee's rights
and remedies with respect to the Collateral shall be cumulative.
9. Indemnity. Assignor agrees to defend, indemnify and hold harmless
---------
Assignee and its officers, employees, and agents against: (a) all obligations,
demands, claims, and liabilities claimed or asserted by any other party in
connection with the transactions contemplated by this Agreement, and (b) all
losses or expenses in any way suffered, incurred, or paid by Assignee as a
result of or in any way arising out of, following or consequential to
transactions between Assignee and Assignor, whether under this Assignment or
otherwise (including without limitation, reasonable attorneys fees and
reasonable expenses), except for losses arising form or out of Assignee's gross
negligence or willful misconduct.
10. Release. At such time as Assignor shall completely satisfy all of the
-------
obligations secured hereunder, Assignee shall execute and deliver to Assignor
all assignments and other instruments as may be reasonably necessary or proper
to terminate Assignee's security interest in the Collateral, subject to any
disposition of the Collateral which may have been made by Assignee pursuant to
this Agreement. For the purpose of this Agreement, the obligations secured
hereunder shall be deemed to continue if Assignor enters into any bankruptcy or
similar proceeding at a time when any amount paid to Assignee could be ordered
to be repaid as a preference or pursuant to a similar theory, and shall continue
until it is finally determined that no such repayment can be ordered.
11. No Waiver. No course of dealing between Assignor and Assignee, nor
--------
any failure to exercise nor any delay in exercising, on the part of Assignee,
any right, power, or privilege under this Agreement or under the Loan Agreement
or any other agreement, shall operate as a waiver. No single or partial exercise
of any right, power, or privilege under this Agreement or under the Loan
Agreement or any other agreement by Assignee shall preclude any other or further
exercise of such right, power, or privilege or the exercise of any other right,
power, or privilege by Assignee.
12. Rights Are Cumulative. All of Assignee's rights and remedies with
---------------------
respect to the Collateral whether established by this Agreement, the Loan
Agreement, or any other documents or agreements, or by law shall be cumulative
and may be exercised concurrently or in any order.
13. Course of Dealing. No course of dealing, nor any failure to exercise,
-----------------
nor any delay in exercising any right, power or privilege hereunder shall
operate as a waiver thereof.
14. Attorneys' Fees. If any action relating to this Assignment is brought
----------------
by either party hereto against the other party, the prevailing party shall be
entitled to recover reasonable
-6-
<PAGE>
attorneys fees, costs and disbursements.
15. Amendments. This Assignment may be amended only by a written
----------
instrument signed by both parties hereto. To the extent that any provision of
this Agreement conflicts with any provision of the Loan Agreement, the provision
giving Assignee greater rights or remedies shall govern, it being understood
that the purpose of this Agreement is to add to, and not detract from, the
rights granted to Assignee under the Loan Agreement. This Agreement, the Loan
Agreement, and the documents relating thereto comprise the entire agreement of
the parties with respect to the matters addressed in this Agreement.
16. Severability. The provisions of this Agreement are severable. If any
------------
provision of this Agreement is held invalid or unenforceable in whole or in part
in any jurisdiction, then such invalidity or unenforceability shall affect only
such provision, or part thereof, in such jurisdiction, and shall not in any
manner affect such provision or part thereof in any other jurisdiction, or any
other provision of this Agreement in any jurisdiction.
17. Counterparts. This Assignment may be executed in two or more
------------
counterparts, each of which shall be deemed an original but all of which
together shall constitute the same instrument.
18. California Law and Jurisdiction. This Assignment shall be governed
-------------------------------
by the laws of the State of California, without regard for choice of law
provisions. Assignor and Assignee consent to the nonexclusive jurisdiction of
any state or federal court located in Santa Clara County, California.
19. Confidentiality. In handling any confidential information, Assignee
----------------
shall exercise the same degree of care that it exercises with respect to its own
proprietary information of the same types to maintain the confidentiality of any
non-public information thereby received or received pursuant to this Assignment
except that the disclosure of this information may be made (i) to the affiliates
of the Assignee, (ii) to prospective transferee or purchasers of an interest in
the obligations secured hereby, provided that they have entered into a
comparable confidentiality agreement in favor of Assignor and have delivered a
copy to Assignor, (iii) as required by law, regulation, rule or order, subpoena
judicial order or similar order and (iv) as may be required in connection with
the examination, audit or similar investigation of Assignee.
20. WAIVER OF RIGHT TO JURY TRIAL. ASSIGNEE AND ASSIGNOR EACH HEREBY
-----------------------------
WAIVE THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING
OUT OF, OR IN ANY WAY RELATING TO: (I) THIS AGREEMENT; OR (II) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN ASSIGNEE AND ASSIGNOR; OR
(III) ANY CONDUCT, ACTS OR OMISSIONS OF ASSIGNEE OR ASSIGNOR OR ANY OF THEIR
DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS
AFFILIATED WITH ASSIGNEE OR ASSIGNOR; IN EACH OF THE FOREGOING CASES, WHETHER
SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
IN WITNESS WHEREOF, the parties hereto have executed this Assignment on the
day and
-7-
<PAGE>
year first above written.
ASSIGNOR:
Sonic Innovations, Inc.
By: /s/ Andrew G. Raguskus
----------------------------
Title: Andrew G. Raguskus
-------------------------
Name (please print):
____________________________
Address of Assignor:
2795 Easy Cotttonwood Parkway, Suite 660
Salt Lake City, Utah 84121
-8-
<PAGE>
STATE OF Utah )
------------------
) ss.
COUNTY OF Salt Lake )
-----------------
On December 27 , 1999, before me, Vicky L. Johnson
---------------------- ---------------------------
_________________________________________, Notary Public, personally appeared
Andrew Raguskus
- ------------------------------------------------------------------------,
personally known to me (or proved to me on the basis of satisfactory evidence)
to be the person(s) whose name(s) is/are subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in his/her/their
authorized capacity(ies), and that by his/her/their signature(s) on the
instrument the person(s), or the entity upon behalf of which the person(s)
acted, executed the instrument.
Witness my hand and official seal.
/s/ Vicky L. Johnson
--------------------------------
(Seal)
-9-
[SEAL OF NOTARY PUBLIC]
<PAGE>
EXHIBIT "A-1"
REGISTERED COPYRIGHTS
---------------------
REG. NO. REG. DATE COPYRIGHT
- ------- --------- ---------
[NONE]
<PAGE>
EXHIBIT "A-2"
UNREGISTERED COPYRIGHTS
-----------------------
DESCRIPTION OF COPYRIGHTS
-------------------------
[NONE]
<PAGE>
EXHIBIT "A-3"
DESCRIPTION OF LICENSE AGREEMENTS
---------------------------------
[NONE]
<PAGE>
EXHIBIT "B"
PATENTS
-------
DOCKET NO. COUNTRY SERIAL NO. FILING DATE STATUS
- --------- ------- --------- ----------- ------
[SEE ATTACHED]
<PAGE>
EXHIBIT "C"
TRADEMARKS
----------
MARK REG/FILE DATE APP./SERIAL NO. STATUS
- ---- ------------- -------------- ------
[SEE ATTACHED]
<PAGE>
[Sonic Letterhead] EXHIBIT 10.15
November 24, 1997
[Sonic Logo]
Mr. Orlando P. Rodrigues
375 Silverwood Circle
Southlake, TX 76092
Dear Orlando:
It is my great pleasure to offer you the position of Vice President of Marketing
for Sonix Technologies, Inc., reporting directly to the President & CEO. Having
full responsibility for setting the marketing direction of the Company and for
executing it, you will also function as a senior member of the executive
management team and apply for a broad range of business skills to run the
enterprise. Together, we will build Sonix Technologies into the most exciting,
customer-satisfying company in the history of hearing health care.
The terms of this offer include the following:
1. Base salary will be $180,000 per year, paid twice-monthly.
2. You will be paid a one time hiring bonus of $40,000 upon the beginning of
your employment with Sonix.
3. Benefits include vacation, holidays, medical insurance for the whole family
(fully paid by Sonix), dental insurance and a 401k plan.
4. At the first Board of Directors meeting after your acceptance of this offer,
I will ask the Board to grant you an option to purchase 150,000 shares of
common stock at the fair market price established by the Board on the date
of grant. The grant will be subject to the standard terms and conditions of
the Company's Stock Option Agreement. Your shares will vest over four years,
the first 25% on the date of your first anniversary of employment at Sonix;
the remainder in equal installments over the subsequent 36 month period.
5. The Company will pay reasonable and customary relocation expenses for your
move to the Salt Lake City area, including real estate commissions on both
ends, moving of household goods, travel for your family, and temporary
housing as appropriate. In addition, should you sell your home for less than
you paid for it (plus improvements), Sonix will reimburse the difference to
you, up to a maximum of $30,000.
6. Employment at Sonix is not for a specific term and can be terminated by you
or by the Company at any time, for any reason, with or without cause and
with or without notice. If Sonix chooses to terminate your employment, there
is no obligation to repay relocation costs
<PAGE>
nor hiring bonus and, except for cause, Sonix will pay you six months salary
as a severance package. If you choose to terminate your employment before
completing one full year at Sonix, you agree to repay the hiring bonus and
relocation costs.
7. It shall be a condition of your employment that you execute the Company's
standard non-disclosure agreement concerning confidentiality and
intellectual property rights, and that you will not bring to Sonix any
proprietary technology or information from any third party.
8. Sonix anticipates your start date to be January 5, 1998. This offer of
employment expires December 1, 1997. Please sign a copy of this letter,
indicating your acceptance, and return it to me at your earliest
convenience.
Orlando, you and I have an opportunity to help the hearing impaired as they have
never been helped before. The underlying technology of the Sonix DSP approach
has proven to be very effective in tests at the Mayo Clinic. While the science
is sound, the execution is a big challenge. Imagine the satisfaction we will
feel in 5 years, having built the best hearing aid company in the world and
having created the most satisfied customers in the history of the industry.
Please join me for the challenge and the fun!
Sincerely,
/s/ Andrew G. Raguskus
Andrew G. Raguskus
President and CEO
I accept the offer: /s/ Orlando Rodrigues Date: 12/1/97
----------------------- ------------
-2-
<PAGE>
[Sonix Letterhead]
December 1, 1997
Mr. Orlando P. Rodrigues
375 Silverwood Circle
Southlake, TX 76092
Dear Orlando:
The Board of Directors, the management team and I are delighted that you have
accepted our offer to join Sonix as the Vice President of Marketing. We look
forward to working with you to grow Sonix into a successful world class
organization. This correspondence is an addendum to our offer letter dated
November 24, 1997.
The Company agrees that, in the event of an acquisition of greater than 50%
ownership by another industrial entity for the purposes of commercial
exploitation of Sonix technology during the option period, shares under the
option agreement indicated in our offer letter shall vest immediately. This
accelerated vesting applies only to that portion of the original option
remaining at the time of acquisition. If no such acquisition occurs as
indicated, you will be bound by the standard, four year vesting provision of the
Sonix Stock Option Agreement.
If you have any questions concerning this addition to your offer letter, please
contact me. I look forward to seeing you and Chris at the Sonix Winter Party on
December 19th. An invitation is enclosed. Our team is excited to begin working
with you in early January.
Sincerely,
/s/ Andrew G. Raguskus
Andrew G. Raguskus
President and CEO
-3-
<PAGE>
[Sonic Letterhead] EXHIBIT 10.16
February 5, 1998
Mr. Michael D. Monahan
1063 Nelson Court
Pleasanton, CA 94566
Dear Mike:
It is my great pleasure to offer you the position of Vice President of Sales for
Sonix Technologies, Inc., reporting directly to the President & CEO. You will
have full responsibility for building and directing the sales force, for
developing a sales strategy and for executing it. Mike, you will also function
as a senior member of the executive management team and apply a broad range of
business skills to help me run the enterprise. Together, we will build Sonix
Technologies into the most exciting, customer-satisfying company in the history
of hearing health care.
The terms of this offer include the following:
1. Base salary will be $140,000 per year, paid twice-monthly.
2. You will be paid a one time hiring bonus of $20,000 upon the beginning of
your employment with Sonix.
3. Benefits include vacation, holidays, medical insurance for you and your
dependents (fully paid by Sonix), dental insurance and a 401k plan.
4. At the first Board of Directors meeting after you begin employment, I will
ask the Board to grant you an option to purchase 110,000 shares of common
stock at the fair market price established by the Board on the date of
grant. The grant will be subject to the standard terms and conditions of the
Company's Stock Option Agreement. Your shares will vest over four years, the
first 25% on the date of your first anniversary of employment at Sonix; the
remainder in equal installments over the subsequent 36 month period.
5. In the event of an acquisition of greater than 50% ownership by another
industrial entity for the purposes of commercial exploitation of the Sonix
technology during the option period, shares described above shall vest
immediately. This accelerated vesting applies only to that portion of the
original option remaining at the time of acquisition. If no such acquisition
occurs as indicated, you will be bound by the standard, four year vesting
provision of the Sonix Stock Option Agreement.
<PAGE>
6. The Company will pay reasonable and customary relocation expenses for your
move to the Salt Lake City area, including real estate commissions on both
ends, moving of household goods, travel, and temporary housing as
appropriate.
7. Employment at Sonix is not for a specific term and can be terminated by you
or by the Company at any time, for any reason, with or without cause and
with or without notice. If you choose to terminate your employment before
completing one full year at Sonix, you agree to repay the hiring bonus and
relocation costs.
8. It shall be a condition of your employment that you execute the Company's
standard non-disclosure agreement concerning confidentiality and
intellectual property rights, and that you will not bring to Sonix any
proprietary technology or information from any third party.
9. Sonix anticipates your start date to be approximately March 2, 1998. This
offer of employment expires February 13, 1998. Please sign a copy of this
letter, indicating your acceptance, and return it to me at your earliest
convenience.
Mike, you and I have an opportunity to help the hearing impaired as they have
never been helped before. Imagine the satisfaction we will feel in 5 years,
having built the best hearing aid company in the world and having created the
most satisfied customers in the history of the industry. Please join me for the
challenge and the fun!
Sincerely,
/s/ Andrew G. Raguskus/ by Debbie Thomas
Andrew G. Raguskus
President and CEO
I accept the offer: /s/ Michael D. Monahan Date: 2/8/98
---------------------- ------------
-2-
<PAGE>
Exhibit 10.17
[SONIX LETTERHEAD]
April 23, 1997
Dr. Gregory N. Koskowich
2635 Torrey Ct.
Pleasanton, CA 94588
Dear Greg:
It is my great pleasure to offer you the position of Vice President of
Engineering and Chief Technical Officer for Sonix Technologies, Inc., reporting
directly to the President & CEO. Having full responsibility for setting the
technical direction of the Company and for executing it, you will also function
as a senior member of the executive management team and apply a broad range of
business skills to run the enterprise. Together, we will build Sonix
Technologies into the most exciting, customer-satisfying company in the history
of hearing health care.
As we have discussed the terms of this offer include the following:
1. Base salary will be $150,000 per year, paid twice-monthly.
2. You will be paid a one time hiring bonus of $50,000, grossed up for taxes,
upon the beginning of your employment with Sonix.
3. Vacation, holiday and medical insurance will be provided according to our
current benefits plan. Until we are able to obtain group coverage for all
of our employees, Sonix will reimburse you for Cobra premiums.
4. At the first Board of Directors meeting after your arrival, I will ask the
Board to grant you an option to purchase 150,000 shares of common stock at
the fair market price established by the Board on the date of grant
(currently $0.14 per share). The grant will be subject to the standard
terms and conditions of the Company's Stock Option Agreement. Your shares
will vest over four years, the first 25% on the date of your first
anniversary of employment at Sonix; the remainder in equal installments
over the subsequent 36 month period.
5. The Company will pay reasonable and customary relocation expenses for your
move to the Salt Lake City area, including real estate commissions, not to
exceed $60,000. The actual reimbursement will be grossed up for taxes.
6. Employment at Sonix is not for a specific term and can be terminated by
you or by the Company at any time, for any reason, with or without cause
and with or without notice. If Sonix chooses to terminate your employment,
there is no obligation to pay relocation costs
-1-
<PAGE>
nor hiring bonus and, in addition, Sonix will pay you six months salary as
a severance package.
7. It shall be a condition of your employment that you execute the Company's
standard non-disclosure agreement concerning confidentiality and
intellectual property rights, and that you will not bring to Sonix any
proprietary technology or information from any third party.
8. Sonix desires your start date to be as soon as possible, consistent with
sufficient notice and a reasonable transition from your current
obligations. This offer of employment expires May 4, 1997. Please sign a
copy of this letter, indicating your acceptance, and return it to me at
your earliest convenience.
Greg, you and I have an opportunity to help the hearing impaired as they have
never been helped before. The underlying technology of the Sonix DSP approach
has proven to be very effective in tests at the Mayo Clinic. While the science
is sound, the execution is a big challenge. Imagine the satisfaction we will
feel in 5 years, having built the hottest high tech hearing aid company in the
world. Please join me for the challenge and the fun!
Sincerely,
/s/ Andrew G. Raguskus
Andrew G. Raguskus
President and CEO
I accept the offer: /s/ Gregory N. Koskowich Date: May 4, 1997
---------------------------- ---------------
-2-
<PAGE>
[Sonic Letterhead] EXHIBIT 10.18
Mr. Stephen L. Wilson
4491 Vieja Drive
Santa Barbara, CA 93110
Dear Steve:
It is my pleasure to offer you the position of Vice President and Chief
Financial Officer (CFO) for SONIC innovations, Inc. (SONIC). This position
reports directly to the President and CEO. The terms of this offer include the
following:
1. Base salary will be $200,000 per year, paid twice monthly.
2. A guaranteed bonus of $82,000 will be paid on March 1, 2000. You will help
me reformulate the executive bonus program for 2000 and beyond, then
participate in that program as well.
3. Benefits include vacation, holidays and personal leave. You will be eligible
for medical insurance for you and your dependents for which the premium is
fully paid by SONIC. Your benefits will include long term disability
insurance for which the premium is also paid 100% by SONIC. You will also be
eligible for dental insurance; our 401k plan and flexible spending
(cafeteria) plan.
4. The Board of Directors has agreed to grant you an option to purchase 550,000
shares of common stock at the current fair market price of $2.00 per share,
provided that you begin employment prior to the next Board of Directors
meeting on October 21, 1999, at which time the price may be adjusted. The
grant will be subject to the standard terms and conditions of SONIC's Stock
Option Agreement, except for the vesting schedule which shall be as follows:
50,000 shares upon employment
150,00 shares on the IPO
200,000 shares at 6 months post employment
250,000 shares at 9 months post employment
300,000 shares at 12 month post employment
350,000 shares at 18 months post employment
450,000 shares at 24 months post employment
500,000 shares at 30 months post employment
550,000 shares at 36 months post employment
These options shall be incentive stock options to the maximum
extent permitted by law.
5. In the event of a change in control (defined as the acquisition by another
person of greater than 50% ownership of SONIC's equity or assets, or a
merger in which less than 50% of the combined company's equity is held by
SONIC shareholders), half of your then outstanding unvested stock options
shall vest immediately. If your employment is terminated or your job is
reduced in scope subsequent to a change in control, then all your then
unvested stock options shall vest immediately and you will receive an
immediate cash payment to your two biggest year's salary and bonus.
<PAGE>
6. Employment at SONIC is not for a specific term and can be terminated by you
or by SONIC at any time, for any reason, with or without cause and with or
without notice. If you choose to terminate your employment before completing
one full year, you agree to repay relocation expenses which SONIC has paid
on your behalf or reimbursed to you. If your employment is terminated by
SONIC at any time, for reasons other than cause (defined as gross
negligence, willful misconduct, or illegal acts which cause material harm to
SONIC), or if your job is reduced in scope, you will receive an immediate
cash payment equal to your highest one year's salary and bonus.
7. It shall be a condition of your employment that you execute SONIC's standard
non-disclosure agreement concerning confidentiality and intellectual
property rights, and that you will not bring to SONIC any proprietary
technology or information from a third party.
8. When you report to work you will be asked to provide proof of eligibility to
legally work in the United States.
9. The Company will pay reasonable and customary relocation expenses for your
move to the Salt Lake City area, including real estate commissions on both
ends, moving of household goods, and travel and temporary housing for your
family. These amounts shall be grossed up for taxes. The Company will pay
reasonable temporary living expenses and travel expenses between Salt Lake
City and Santa Barbara for you for a period of up to 12 months. These
amounts shall be grossed up for taxes.
10. It shall be understood that employment with SONIC requires 100% commitment
by you to SONIC and that you shall not accept outside employment or
consulting agreements, except that you may continue your Board position at
Angeion Corporation, and except as consented to by the President and CEO,
which consent shall not be unreasonably withheld.
11. SONIC anticipates your start date to be on or before October 20, 1999. This
offer of employment expires on September 24, 1999. Please sign a copy of
this letter, indicating your acceptance, and return it to me at your
earliest convenience.
Steve, we have an opportunity to help the hearing impaired, as they have never
been helped before. Please join us for the challenge and for the fun of
building the best hearing aid company in the world!
Sincerely,
/s/ Andrew Raguskus / by Debbie Thomas
Andrew Raguskus
President & CEO
I accept the offer: /s/ Stephen L. Wilson Date: 9/24/99
------------------------- -------------
Stephen L. Wilson
-2-
<PAGE>
Exhibit 10.19
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED, OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL, THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE STOCK
Corporation: Sonic Innovations, Inc., a Delaware corporation
Number of Shares: Silicon Share Number (as defined below)
Class of Stock: Series D Preferred Stock
Initial Exercise Price: $2.00 per share
Issue Date: December 22, 1999
Expiration Date: December 22, 2004
THIS WARRANT CERTIFIES THAT, for the agreed upon value of $1.00 and for
other good and valuable consideration, SILICON VALLEY BANK ("Holder") is
entitled to purchase the number of fully paid and nonassessable shares of the
class of securities (the "Shares") of the corporation (the "Company") at the
initial exercise price per Share (the "Warrant Price") all as set forth above
and as adjusted pursuant to Article 2 of this Warrant, subject to the provisions
and upon the terms and conditions set forth in this Warrant.
"Silicon Share Number" shall mean 59,009, provided that if the Company
--------
consummates an initial public offering of its common stock on or before May 31,
2000, then "Silicon Share Number" shall mean 39,340
ARTICLE 1. EXERCISE.
--------
1.1 Method of Exercise. Holder may exercise this Warrant by
------------------
delivering a duly executed Notice of Exercise in substantially the form attached
as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as
----------------
specified in Section 1.1, Holder may from time to time convert this Warrant, in
whole or in part, into a number of Shares determined by dividing (a) the
aggregate fair market value of the Shares or other securities otherwise issuable
upon exercise of this Warrant minus the aggregate Warrant Price of such Shares
by (b) the fair market value of one Share. The fair market value of the Shares
shall be determined pursuant to Section 1.4.
1.3 Intentionally Omitted
---------------------
<PAGE>
1.4 Fair Market Value. If the Shares are traded in a public market,
-----------------
the fair market value of the Shares shall be the closing price of the Shares (or
the closing price of the Company's stock into which the Shares are convertible)
reported for the business day immediately before Holder delivers its Notice of
Exercise to the Company. If the Shares are not traded in a public market, the
Board of Directors of the Company shall determine fair market value in its
reasonable good faith judgment. The foregoing notwithstanding, if Holder
advises the Board of Directors in writing that Holder disagrees with such
determination, then the Company and Holder shall promptly agree upon a reputable
investment banking firm to undertake such valuation. If the valuation of such
investment banking firm is greater than that determined by the Board of
Directors, then all fees and expenses of such investment banking firm shall be
paid by the Company. In all other circumstances, such fees and expenses shall
be paid by Holder.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
---------------------------------------
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
-----------------------------------------------------------
1.7.1. "Acquisition". For the purpose of this Warrant,
-------------
"Acquisition" means any sale, license, or other disposition of all or
substantially all of the assets of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2. Assumption of Warrant. Upon the closing of any
---------------------
Acquisition the successor entity shall assume the obligations of this Warrant,
and this Warrant shall be exercisable for the same securities, cash, and
property as would be payable for the Shares issuable upon exercise of the
unexercised portion of this Warrant as if such Shares were outstanding on the
record date for the Acquisition and subsequent closing. The Warrant Price shall
be adjusted accordingly.
1.7.3. Purchase Right. Notwithstanding the foregoing, at the
--------------
election of Holder, the Company shall purchase the unexercised portion of this
Warrant for cash upon the closing of any Acquisition for an amount equal to (a)
the fair market value of any consideration that would have been received by
Holder in consideration of the Shares had Holder exercised the unexercised
portion of this Warrant immediately before the record date for determining the
shareholders entitled to participate in the proceeds of the Acquisition, less
(b) the aggregate Warrant Price of the Shares, but in no event less than zero.
2
<PAGE>
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
-------------------------
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
----------------------------
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
2.2 Reclassification, Exchange or Substitution. Upon any
------------------------------------------
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall
provide for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided for in this Article 2 including, without
limitation, adjustments to the Warrant Price and to the number of securities or
property issuable upon exercise of the new Warrant. The provisions of this
Section 2.2 shall similarly apply to successive reclassifications, exchanges,
substitutions, or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares
---------------------------------
are combined or consolidated, by reclassification or otherwise, into a lesser
number of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the
----------------------------------
number of Shares issuable upon exercise of this Warrant or, if the Shares are
Preferred Stock, the number of shares of common stock issuable upon conversion
of the Shares, shall be subject to adjustment, from time to time in the manner
set forth on Exhibit A in the event of Diluting Issuances (as defined on Exhibit
A).
3
<PAGE>
2.5 No Impairment. The Company shall not, by amendment of its
-------------
Articles of Incorporation or through a reorganization, transfer of assets,
consolidation, merger, dissolution, issue, or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed under this Warrant by the Company, but
shall at all times in good faith assist in carrying out of all the provisions of
this Article 2 and in taking all such action as may be necessary or appropriate
to protect Holder's rights under this Article against impairment. If the
Company takes any action affecting the Shares or its common stock other than as
described above that adversely affects Holder's rights under this Warrant, the
Warrant Price shall be adjusted downward and the number of Shares issuable upon
exercise of this Warrant shall be adjusted upward in such a manner that the
aggregate Warrant Price of this Warrant is unchanged.
2.6 Fractional Shares. No fractional Shares shall be issuable upon
-----------------
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share
interest arises upon any exercise or conversion of the Warrant, the Company
shall eliminate such fractional share interest by paying Holder amount computed
by multiplying the fractional interest by the fair market value of a full Share.
2.7 Certificate as to Adjustments. Upon each adjustment of the
-----------------------------
Warrant Price, the Company at its expense shall promptly compute such
adjustment, and furnish Holder with a certificate of its Chief Financial Officer
setting forth such adjustment and the facts upon which such adjustment is based.
The Company shall, upon written request, furnish Holder a certificate setting
forth the Warrant Price in effect upon the date thereof and the series of
adjustments leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
--------------------------------------------
3.1 Representations and Warranties. The Company hereby represents
------------------------------
and warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of
this Warrant is not greater than (i) the price per share at which the Shares
were last issued in an arms-length transaction in which at least $500,000 of the
Shares were sold and (ii) the fair market value of the Shares as of the date of
this Warrant.
(b) All Shares which may be issued upon the exercise of the
purchase right represented by this Warrant, and all securities, if any, issuable
upon conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
(c) The Capitalization Table attached to this Warrant is true
and complete as of the Issue Date.
4
<PAGE>
3.2 Notice of Certain Events. If the Company proposes at any time
------------------------
(a) to declare any dividend or distribution upon its common stock, whether in
cash, property, stock, or other securities and whether or not a regular cash
dividend; (b) to offer for subscription pro rata to the holders of any class or
series of its stock any additional shares of stock of any class or series or
other rights; (c) to effect any reclassification or recapitalization of common
stock; (d) to merge or consolidate with or into any other corporation, or sell,
lease, license, or convey all or substantially all of its assets, or to
liquidate, dissolve or wind up; or (e) offer holders of registration rights the
opportunity to participate in an underwritten public offering of the company's
securities for cash, then, in connection with each such event, the Company shall
give Holder (1) at least 20 days prior written notice of the date on which a
record will be taken for such dividend, distribution, or subscription rights
(and specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 20 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant
------------------
and/or any of the Shares, the Company shall deliver to the Holder (a) promptly
after mailing, copies of all notices or other written communications to the
shareholders of the Company, (b) within ninety (90) days after the end of each
fiscal year of the Company, the annual audited financial statements of the
Company certified by independent public accountants of recognized standing and
(c) such other financial statements required under and in accordance with any
loan documents between Holder and the Company (or if there are no such
requirements [or if the subject loan(s) no longer are outstanding]), then within
forty-five (45) days after the end of each of the first three quarters of each
fiscal year, the Company's quarterly, unaudited financial statements.
3.4 Registration Under Securities Act of 1933, as amended. The
-----------------------------------------------------
Company agrees that the Shares or, if the Shares are convertible into common
stock of the Company, such common stock, shall be subject to the registration
rights set forth on Exhibit B, if attached.
ARTICLE 4. MISCELLANEOUS.
-------------
4.1 Term; Notice of Expiration. This Warrant is exercisable, in
--------------------------
whole or in part, at any time and from time to time on or before the Expiration
Date set forth above. The Company shall give Holder written notice of Holder's
right to exercise this Warrant in the form attached as Appendix 2 not more than
90 days and not less than 30 days before the Expiration Date. If the notice is
not so given, the Expiration Date shall automatically be extended until 30 days
after the date the Company delivers the notice to Holder.
4.2 Legends. This Warrant and the Shares (and the securities
-------
issuable, directly or indirectly, upon conversion of the Shares, if any) shall
be imprinted with a legend in substantially the following form:
5
<PAGE>
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and
-------------------------------------------
the Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may not be
transferred or assigned in whole or in part without compliance with applicable
federal and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of investment representation
letters and legal opinions reasonably satisfactory to the Company, as reasonably
requested by the Company). The Company shall not require Holder to provide an
opinion of counsel if the transfer is to an affiliate of Holder or if there is
no material question as to the availability of current information as referenced
in Rule 144(c), Holder represents that it has complied with Rule 144(d) and (e)
in reasonable detail, the selling broker represents that it has complied with
Rule 144(f), and the Company is provided with a copy of Holder s notice of
proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.3,
------------------
Holder may transfer all or part of this Warrant or the Shares issuable upon
exercise of this Warrant (or the securities issuable, directly or indirectly,
upon conversion of the Shares, if any) by giving the Company notice of the
portion of the Warrant being transferred setting forth the name, address and
taxpayer identification number of the transferee and surrendering the Warrant to
the Company for reissuance to the transferee(s) (and Holder, if applicable);
provided, however, that Holder may transfer all or part of this Warrant to its
- -------- -------
affiliates, including, without limitation, Silicon Valley Bancshares and The
Silicon Valley Bank Foundation, at any time without notice to the Company. The
terms and conditions of this Warrant shall inure to the benefit of, and be
binding upon, the Company and the holders hereof and their respective permitted
successors and assigns.
4.5 Notices. All notices and other communications from the Company
-------
to the Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such holder from time
to time. All notices to Holder should be sent to the following address:
Treasury Department
Silicon Valley Bank
3003 Tasman Drive HG110
Santa Clara, CA 95054
4.6 Waiver. This Warrant and any term hereof may be changed,
------
waived, discharged or terminated only by an instrument in writing signed by the
party against which enforcement of such change, waiver, discharge or termination
is sought.
6
<PAGE>
4.7 Attorneys Fees. In the event of any dispute between the parties
--------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and
-------------
construed in accordance with the laws of the State of California, without giving
effect to its principles regarding conflicts of law.
"COMPANY"
Sonic Innovations, Inc.
By: /s/ Andrew G. Raguskus
---------------------------------
Name: Andrew G. Raguskus
-------------------------------
(Print)
Title: Chairman of the Board, President or
Vice President
By: /s/ S. L. Wilson
---------------------------------
Name: S. L. Wilson
-------------------------------
(Print)
Title: Chief Financial Officer, Secretary,
Assistant Treasurer or Assistant
Secretary
7
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase _____________ shares of the
Common/Series ______ Preferred [strike one] Stock of __________________________
pursuant to the terms of the attached Warrant, and tenders herewith payment of
the purchase price of such shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares/cash [strike one] in the manner specified in the Warrant. This
conversion is exercised with respect to _____________________ of the Shares
covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as is specified below:
___________________________________________
(Name)
___________________________________________
___________________________________________
(Address)
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
____________________________________
(Signature)
____________________
(Date)
<PAGE>
APPENDIX 2
Notice that Warrant Is About to Expire
--------------------------------------
_____________________, ___
(Name of Holder)
(Address of Holder)
Attn: Chief Financial Officer
Dear :_______________________
This is to advise you that the Warrant issued to you described below will
expire on _________________________, 19___.
Issuer:
Issue Date:
Class of Security Issuable:
Exercise Price per Share:
Number of Shares Issuable:
Procedure for Exercise:
Please contact [name of contact person at (phone number)] with any
questions you may have concerning exercise of the Warrant. This is your only
notice of pending expiration.
---------------------------------------------
(Name of Issuer)
By:
_____________________________________________
Its:
_____________________________________________
<PAGE>
EXHIBIT A
---------
Anti-Dilution Provisions
In the event of the issuance (a "Diluting Issuance") by the Company, after
the Issue Date of the Warrant, of securities at a price per share less than the
Warrant Price, or, if the Shares are common stock, less than the then conversion
price of the Company's Series __ Preferred Stock, then the number of shares of
common stock issuable upon conversion of the Shares, or if the Shares are common
stock, the number of Shares issuable upon exercise of the Warrant, shall be
adjusted as a result of Diluting Issuances in accordance with the Holder's
standard form of Anti-Dilution Agreement in effect on the Issue Date.
Under no circumstances shall the aggregate Warrant Price payable by the
Holder upon exercise of the Warrant increase as a result of any adjustment
arising from a Diluting Issuance.
<PAGE>
EXHIBIT B
---------
Registration Rights
-------------------
The Shares (if common stock), or the common stock issuable upon conversion
of the Shares, shall be deemed "registrable securities" or otherwise entitled to
"piggy back" registration rights in accordance with the terms of the following
agreement (the "Agreement") between the Company and its investor(s):
____________________________________________________________
[Identify Agreement by date, title and parties. If no Agreement
exists, indicate by "none".]
The Company agrees that no amendments will be made to the Agreement which
would have an adverse impact on Holder's registration rights thereunder without
the consent of Holder. By acceptance of the Warrant to which this Exhibit B is
attached, Holder shall be deemed to be a party to the Agreement, unless Holder
otherwise elects not to become or to cease being a party thereto.
If no Agreement exists, then the Company and the Holder shall enter into
Holder's standard form of Registration Rights Agreement as in effect on the
Issue Date of the Warrant.
<PAGE>
SILICON VALLEY BANK
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT is entered into as of December 22, 1999,
by and between SILICON VALLEY BANK ("Purchaser") and Sonic Innovations, Inc.
RECITALS
--------
A. Concurrently with the execution of this Agreement, the Purchaser is
purchasing from the Company a Warrant to Purchase Stock (the "Warrant") pursuant
to which Purchaser has the right to acquire from the Company the Shares (as
defined in the Warrant).
B. By this Agreement, the Purchaser and the Company desire to set forth
the registration rights of the Shares all as provided herein.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto mutually agree as follows:
1. Registration Rights. The Company covenants and agrees as follows:
-------------------
1.1 Definitions. For purposes of this Section 1:
-----------
(a) The term "register," "registered," and "registration" refer
to a registration effected by preparing and filing a registration statement or
similar document in compliance with the Securities Act of 1933, as amended (the
"Securities Act"), and the declaration or ordering of effectiveness of such
registration statement or document;
(b) The term "Registrable Securities" means (i) the Shares (if
Common Stock) or all shares of Common Stock of the Company issuable or issued
upon conversion of the Shares and (ii) any Common Stock of the Company issued as
(or issuable upon the conversion or exercise of any warrant, right or other
security which is issued as) a dividend or other distribution with respect to,
or in exchange for or in replacement of, any stock referred to in (i).
(c) The terms "Holder" or "Holders" means the Purchaser or
qualifying transferees under subsection 1.8 hereof who hold Registrable
Securities.
(d) The term "SEC" means the Securities and Exchange Commission.
<PAGE>
1.2 Company Registration.
--------------------
(a) Registration. If at any time or from time to time, the
------------
Company shall determine to register any of its securities, for its own account
or the account of any of its shareholders, other than a registration on Form S-1
or S-8 relating solely to employee stock option or purchase plans, or a
registration on Form S-4 relating solely to an SEC Rule 145 transaction, or a
registration on any other form (other than Form S-1, S-2, S-3 or S-18, or their
successor forms) or any successor to such forms, which does not include
substantially the same information as would be required to be included in a
registration statement covering the sale of Registrable Securities, the Company
will:
(i) promptly give to each Holder written notice thereof
(which shall include a list of the jurisdictions in which the Company intends to
attempt to qualify such securities under the applicable blue sky or other state
securities laws); and
(ii) include in such registration (and compliance), and in
any underwriting involved therein, all the Registrable Securities specified in a
written request or requests, made within 30 days after receipt of such written
notice from the Company, by any Holder or Holders, except as set forth in
subsection 1.2(b) below.
(b) Underwriting. If the registration of which the Company
------------
gives notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to subsection 1.2(a)(i). In such event the right of any Holder to
registration pursuant to this subsection 1.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such underwriting shall
(together with the Company and the other shareholders distributing their
securities through such underwriting) enter into an underwriting agreement in
customary form with the underwriter or underwriters selected for such
underwriting by the Company.
1.3 Expenses of Registration. All expenses incurred in connection
------------------------
with any registration, qualification or compliance pursuant to this Section 1
including without limitation, all registration, filing and qualification fees,
printing expenses, fees and disbursements of counsel for the Company and
expenses of any special audits incidental to or required by such registration,
shall be borne by the Company except the Company shall not be required to pay
underwriters' fees, discounts or commissions relating to Registrable Securities.
All expenses of any registered offering not otherwise borne by the Company shall
be borne pro rata among the Holders participating in the offering and the
Company.
1.4 Registration Procedures. In the case of each registration,
-----------------------
qualification or compliance effected by the Company pursuant to this
Registration Rights Agreement, the Company will keep each Holder participating
therein advised in writing as to the initiation of each registration,
qualification and compliance and as to the completion thereof. Except as
otherwise provided in subsection 1.3, at its expense the Company will:
2
<PAGE>
(a) Prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use its best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for up to 120 days.
(b) Prepare and file with the SEC such amendments and supplements
to such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Securities Act with respect to the disposition of all securities covered by such
registration statement.
(c) Furnish to the Holders such numbers of copies of a
prospectus, including a preliminary prospectus, in conformity with the
requirements of the Securities Act, and such other documents as they may
reasonably request in order to facilitate the disposition of Registrable
Securities owned by them.
(d) Use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or Blue Sky
laws of such jurisdictions as shall be reasonably requested by the Holders,
provided that the Company shall not be required in connection therewith or as a
condition thereto to qualify to do business or to file a general consent to
service of process in any such states or jurisdictions.
(e) In the event of any underwritten public offering, enter into
and perform its obligations under an underwriting agreement, in usual and
customary form, with the managing underwriter of such offering. Each Holder
participating in such underwriting shall also enter into and perform its
obligations under such an agreement.
(f) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act or the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
1.5 Indemnification.
---------------
(a) The Company will indemnify each Holder of Registrable
Securities and each of its officers, directors and partners, and each person
controlling such Holder, with respect to which such registration, qualification
or compliance has been effected pursuant to this Rights Agreement, and each
underwriter, if any, and each person who controls any underwriter of the
Registrable Securities held by or issuable to such Holder, against all claims,
losses, expenses, damages and liabilities (or actions in respect thereto)
arising out of or based on any untrue statement (or alleged untrue statement) of
a material fact contained in any prospectus, offering circular or other document
(including any related registration statement, notification or the like)
incident to any such registration, qualification or compliance, or based on any
omission (or alleged
3
<PAGE>
omission) to state therein a material fact required to be stated therein or
necessary to make the statement therein not misleading, or any violation or
alleged violation by the Company of the Securities Act, the Securities Exchange
Act of 1934, as amended, ("Exchange Act") or any state securities law applicable
to the Company or any rule or regulation promulgated under the Securities Act,
the Exchange Act or any such state law and relating to action or inaction
required of the Company in connection with any such registration, qualification
of compliance, and will reimburse each such Holder, each of its officers,
directors and partners, and each person controlling such Holder, each such
underwriter and each person who controls any such underwriter, within a
reasonable amount of time after incurred for any reasonable legal and any other
expenses incurred in connection with investigating, defending or settling any
such claim, loss, damage, liability or action; provided, however, that the
indemnity agreement contained in this subsection 1.5(a) shall not apply to
amounts paid in settlement of any such claim, loss, damage, liability, or action
if such settlement is effected without the consent of the Company (which consent
shall not be unreasonably withheld); and provided further, that the Company will
not be liable in any such case to the extent that any such claim, loss, damage
or liability arises out of or is based on any untrue statement or omission based
upon written information furnished to the Company by an instrument duly executed
by such Holder or underwriter specifically for use therein.
(b) Each Holder will, if Registrable Securities held by or
issuable to such Holder are included in the securities as to which such
registration, qualification or compliance is being effected, indemnify the
Company, each of its directors and officers, each underwriter, if any, of the
Company's securities covered by such a registration statement, each person who
controls the Company within the meaning of the Securities Act, and each other
such Holder, each of its officers, directors and partners and each person
controlling such Holder, against all claims, losses, expenses, damages and
liabilities (or actions in respect thereof) arising out of or based on any
untrue statement (or alleged untrue statement) of a material fact contained in
any such registration statement, prospectus, offering circular or other
document, or any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company, such Holders, such directors,
officers, partners, persons or underwriters for any reasonable legal or any
other expenses incurred in connection with investigating, defending or settling
any such claim, loss, damage, liability or action, in each case to the extent,
but only to the extent, that such untrue statement (or alleged untrue statement)
or omission (or alleged omission) is made in such registration statement,
prospectus, offering circular or other document in reliance upon and in
conformity with written information furnished to the Company by an instrument
duly executed by such Holder specifically for use therein; provided, however,
that the indemnity agreement contained in this subsection 1.5(b) shall not apply
to amounts paid in settlement of any such claim, loss, damage, liability or
action if such settlement is effected without the consent of the Holder, (which
consent shall not be unreasonably withheld); and provided further, that the
total amount for which any Holder shall be liable under this subsection 1.5(b)
shall not in any event exceed the aggregate proceeds received by such Holder
from the sale of Registrable Securities held by such Holder in such
registration.
4
<PAGE>
(c) Each party entitled to indemnification under this subsection
1.5 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld), and the Indemnified Party may participate in such defense at such
party's expense; and provided further, that the failure of any Indemnified Party
to give notice as provided herein shall not relieve the Indemnifying Party of
its obligations hereunder, unless such failure resulted in prejudice to the
Indemnifying Party; and provided further, that an Indemnified Party (together
with all other Indemnified Parties which may be represented without conflict by
one counsel) shall have the right to retain one separate counsel, with the fees
and expenses to be paid by the Indemnifying Party, if representation of such
Indemnified Party by the counsel retained by the Indemnifying Party would be
inappropriate due to actual or potential differing interests between such
Indemnified Party and any other party represented by such counsel in such
proceeding. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect to such claim or
litigation.
1.6 Information by Holder. Any Holder or Holders of Registrable
---------------------
Securities included in any registration shall promptly furnish to the Company
such information regarding such Holder or Holders and the distribution proposed
by such Holder or Holders as the Company may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to herein.
1.7 Rule 144 Reporting. With a view to making available to Holders
------------------
the benefits of certain rules and regulations of the SEC which may permit the
sale of the Registrable Securities to the public without registration, the
Company agrees at all times to:
(a) make and keep public information available, as those terms
are understood and defined in SEC Rule 144, after 90 days after the effective
date of the first registration filed by the Company for an offering of its
securities to the general public;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act
(at any time after it has become subject to such reporting requirements); and
(c) so long as a Holder owns any Registrable Securities, to
furnish to such Holder forthwith upon request a written statement by the Company
as to its compliance with the reporting requirements of said Rule 144 (at any
time after 90 days after the effective date of the first registration statement
filed by the Company for an offering of its securities to the general public),
and of the Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements), a copy of the most recent annual or
quarterly report of the
5
<PAGE>
Company, and such other reports and documents so filed by the Company as the
Holder may reasonably request in complying with any rule or regulation of the
SEC allowing the Holder to sell any such securities without registration.
1.8 Transfer of Registration Rights. Holders' rights to cause the
-------------------------------
Company to register their securities and keep information available, granted to
them by the Company under subsections 1.2 and 1.7 may be assigned to a
transferee or assignee of a Holder's Registrable Securities not sold to the
public, provided, that the Company is given written notice by such Holder at the
time of or within a reasonable time after said transfer, stating the name and
address of said transferee or assignee and identifying the securities with
respect to which such registration rights are being assigned. The Company may
prohibit the transfer of any Holders' rights under this subsection 1.8 to any
proposed transferee or assignee who the Company reasonably believes is a
competitor of the Company.
2. General.
-------
2.1 Waivers and Amendments. With the written consent of the record
----------------------
or beneficial holders of at least a majority of the Registrable Securities, the
obligations of the Company and the rights of the Holders of the Registrable
Securities under this agreement may be waived (either generally or in a
particular instance, either retroactively or prospectively, and either for a
specified period of time or indefinitely), and with the same consent the
Company, when authorized by resolution of its Board of Directors, may enter into
a supplementary agreement for the purpose of adding any provisions to or
changing in any manner or eliminating any of the provisions of this Agreement;
provided, however, that no such modification, amendment or waiver shall reduce
the aforesaid percentage of Registrable Securities without the consent of all of
the Holders of the Registrable Securities. Upon the effectuation of each such
waiver, consent, agreement of amendment or modification, the Company shall
promptly give written notice thereof to the record holders of the Registrable
Securities who have not previously consented thereto in writing. This Agreement
or any provision hereof may be changed, waived, discharged or terminated only by
a statement in writing signed by the party against which enforcement of the
change, waiver, discharge or termination is sought, except to the extent
provided in this subsection 2.1.
2.2 Governing Law. This Agreement shall be governed in all respects
-------------
by the laws of the State of California as such laws are applied to agreements
between California residents entered into and to be performed entirely within
California.
2.3 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
2.4 Entire Agreement. Except as set forth below, this Agreement and
----------------
the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof.
6
<PAGE>
2.5 Notices, etc. All notices and other communications required or
------------
permitted hereunder shall be in writing and shall be mailed by first class mail,
postage prepaid, certified or registered mail, return receipt requested,
addressed (a) if to Holder, at such Holder's address as set forth below, or at
such other address as such Holder shall have furnished to the Company in
writing, or (b) if to the Company, at the Company's address set forth below, or
at such other address as the Company shall have furnished to the Holder in
writing.
2.6 Severability. In case any provision of this Agreement shall be
------------
invalid, illegal, or unenforceable, the validity, legality and enforceability of
the remaining provisions of this Agreement or any provision of the other
Agreement s shall not in any way be affected or impaired thereby.
2.7 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Agreement.
2.8 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
PURCHASER COMPANY
SILICON VALLEY BANK Sonic Innovations, Inc.
By: /s/ Ron Sherman By: /s/ A. Raguskus
-------------------------- ----------------------------
Name: Ron Sherman Name: Andrew G. Raguskus
-------------------------- ----------------------------
(print) (print)
Title: Title: Chairman of the Board, President or
VP Vice President
- -------------------------------
Address: _____________________ Address:__________________________
_______________________________ __________________________
_______________________________ __________________________
7
<PAGE>
SILICON VALLEY BANK
ANTIDILUTION AGREEMENT
THIS ANTIDILUTION AGREEMENT is entered into as of December 22, 1999, by and
between SILICON VALLEY BANK ("Purchaser") and Sonic Innovations, Inc..
RECITALS
--------
A. Concurrently with the execution of this Antidilution Agreement, the
Purchaser is purchasing from the Company a Warrant to Purchase Stock (the
"Warrant') pursuant to which Purchaser has the right to acquire from the Company
the Shares (as defined in the Warrant).
B. By this Antidilution Agreement, the Purchaser and the Company desire
to set forth the adjustment in the number of Shares issuable upon exercise of
the Warrant as a result of a Diluting Issuance (as defined in Exhibit A to the
Warrant).
C. Capitalized terms used herein shall have the same meaning as set forth
in the Warrant.
NOW, THEREFORE, in consideration of the mutual promises, covenants and
conditions hereinafter set forth, the parties hereto mutually agree as follows:
1. Definitions. As used in this Antidilution Agreement, the
-----------
following terms have the following respective meanings:
(a) "Option" means any right, option, or warrant to subscribe
for, purchase, or otherwise acquire common stock or Convertible Securities.
(b) "Convertible Securities" means any evidences of indebtedness,
shares of stock, or other securities directly or indirectly convertible into or
exchangeable for common stock.
(c) "Issue" means to grant, issue, sell, assume, or fix a record
date for determining persons entitled to receive, any security (including
Options), whichever of the foregoing is the first to occur.
(d) "Additional Common Shares" means all common stock (including
reissued shares) issued (or deemed to be issued pursuant to Section 2) after the
date of the Warrant. Additional Common Shares does not include, however, any
common stock issued in a transaction described in Sections 2.1 and 2.2 of the
Warrant; any common stock Issued upon conversion of preferred stock outstanding
on the date of the Warrant; the Shares; or common stock Issued as incentive or
in a nonfinancing transaction to employees, officers, directors, or consultants
to the Company.
<PAGE>
(e) The shares of common stock ultimately Issuable upon exercise
of an Option (including the shares of common stock ultimately Issuable upon
conversion or exercise of a Convertible Security Issuable pursuant to an Option)
are deemed to be Issued when the Option is Issued. The shares of common stock
ultimately Issuable upon conversion or exercise of a Convertible Security (other
than a Convertible Security Issued pursuant to an Option) shall be deemed Issued
upon Issuance of the Convertible Security.
2. Deemed Issuance of Additional Common Shares. The shares of common
-------------------------------------------
stock ultimately Issuable upon exercise of an Option (including the shares of
common stock ultimately Issuable upon conversion or exercise of a Convertible
Security Issuable pursuant to an Option) are deemed to be Issued when the Option
is Issued. The shares of common stock ultimately Issuable upon conversion or
exercise of a Convertible Security (other than a Convertible Security Issued
pursuant to an Option) shall be deemed Issued upon Issuance of the Convertible
Security. The maximum amount of common stock Issuable is determined without
regard to any future adjustments permitted under the instrument creating the
Options or Convertible Securities.
3. Adjustment of Warrant Price for Diluting Issuances.
--------------------------------------------------
3.1 Weighted Average Adjustment. If the Company issues Additional
---------------------------
Common Shares after the date of the Warrant and the consideration per Additional
Common Share (determined pursuant to Section 9) is less than the Warrant Price
in effect immediately before such Issue, the Warrant Price shall be reduced,
concurrently with such Issue, to a price (calculated to the nearest hundredth of
a cent) determined by multiplying the Warrant Price by a fraction:
(a) the numerator of which is the amount of such common stock
outstanding immediately before such Issue plus the amount of common stock that
the aggregate consideration received by the Company for the Additional Common
Shares would purchase at the Warrant Price in effect immediately before such
Issue, and
(b) the denominator of which is the amount of common stock
outstanding immediately before such Issue plus the number of such Additional
Common Shares.
3.2 Adjustment of Number of Shares. Upon each adjustment of the
------------------------------
Warrant Price, the number of Shares issuable upon exercise of the Warrant shall
be increased to equal the quotient obtained by dividing (a) the product
resulting from multiplying (i) the number of Shares issuable upon exercise of
the Warrant and (ii) the Warrant Price, in each case as in effect immediately
before such adjustment, by (b) the adjusted Warrant Price.
3.3 Securities Deemed Outstanding. For the purpose of this Section
-----------------------------
3, all securities issuable upon exercise of any outstanding Convertible
Securities or Options, warrants, or other rights to acquire securities of the
Company shall be deemed to be outstanding.
4. No Adjustment for Issuances Following Deemed Issuances. No adjustment
------------------------------------------------------
to the Warrant Price shall be made upon the exercise of Options or conversion of
Convertible Securities.
2
<PAGE>
5. Adjustment Following Changes in Terms of Options or Convertible
---------------------------------------------------------------
Securities. If the consideration payable to, or the amount of common stock
- ----------
Issuable by, the Company increases or decreases, respectively, pursuant to the
terms of any outstanding Options or Convertible Securities, the Warrant Price
shall be recomputed to reflect such increase or decrease. The recomputation
shall be made as of the time of the Issuance of the Options or Convertible
Securities. Any changes in the Warrant Price that occurred after such Issuance
because other Additional Common Shares were Issued or deemed Issued shall also
be recomputed.
6. Recomputation Upon Expiration of Options or Convertible Securities.
------------------------------------------------------------------
The Warrant Price computed upon the original Issue of any Options or Convertible
Securities, and any subsequent adjustments based thereon, shall be recomputed
when any Options or rights of conversion under Convertible Securities expire
without having been exercised. In the case of Convertible Securities or Options
for common stock, the Warrant Price shall be recomputed as if the only
Additional Common Shares Issued were the shares of common stock actually Issued
upon the exercise of such securities, if any, and as if the only consideration
received therefor was the consideration actually received upon the Issue,
exercise or conversion of the Options or Convertible Securities. In the case of
Options for Convertible Securities, the Warrant Price shall be recomputed as if
the only Convertible Securities Issued were the Convertible Securities actually
Issued upon the exercise thereof, if any, and as if the only consideration
received therefor was the consideration actually received by the Company
(determined pursuant to Section 9), if any, upon the Issue of the Options for
the Convertible Securities.
7. Limit on Readjustments. No readjustment of the Warrant Price pursuant
----------------------
to Sections 5 or 6 shall increase the Warrant Price more than the amount of any
decrease made in respect of the Issue of any Options or Convertible Securities.
8. 30 Day Options. In the case of any Options that expire by their terms
--------------
not more than 30 days after the date of Issue thereof, no adjustment of the
Warrant Price shall be made until the expiration or exercise of all such
Options.
9. Computation of Consideration. The consideration received by the
----------------------------
Company for the Issue of any Additional Common Shares shall be computed as
follows:
(a) Cash shall be valued at the amount of cash received by the
----
Corporation, excluding amounts paid or payable for accrued interest or accrued
dividends.
(b) Property. Property other than cash shall be computed at the fair
--------
market value thereof at the time of the Issue as determined in good faith by the
Board of Directors of the Company.
(c) Mixed Consideration. The consideration for Additional common
-------------------
Shares Issued together with other property of the Company for consideration that
covers both shall be determined in good faith by the Board of Directors.
3
<PAGE>
(d) Options and Convertible Securities. The consideration per
----------------------------------
Additional Common Share for Options and Convertible Securities shall be
determined by dividing:
(i) the total amount, if any, received or receivable by the
Company for the Issue of the Options or Convertible Securities, plus the minimum
amount of additional consideration (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a subsequent
adjustment of such consideration) payable to the Company upon exercise of the
Options or conversion of the Convertible Securities, by
(ii) the maximum amount of common stock (as set forth in the
instruments relating thereto, without regard to any provision contained therein
for a subsequent adjustment of such number) ultimately Issuable upon the
exercise of such Options or the conversion of such Convertible Securities.
10. General.
-------
10.1 Governing Law. This Antidilution Agreement shall be governed in
-------------
all respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
10.2 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto.
10.3 Entire Agreement. Except as set forth below, this Antidilution
----------------
Agreement and the other documents delivered pursuant hereto constitute the full
and entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
10.4 Notices, etc. All notices and other communications required or
-------------
permitted hereunder shall be in writing and shall be mailed by first class mail,
postage prepaid, certified or registered mail, return receipt requested,
addressed (a) if to Purchaser at Purchaser's address as set forth below, or at
such other address as Purchaser shall have furnished to the Company in writing,
or (b) if to the Company, at the Company's address set forth below, or at such
other address as the Company shall have furnished to the Purchaser in writing.
10.5 Severability. In case any provision of this Antidilution
------------
Agreement shall be invalid, illegal, or unenforceable, the validity, legality
and enforceability of the remaining provisions of this Antidilution Agreement
shall not in any way be affected or impaired thereby.
10.6 Titles and Subtitles. The titles of the sections and subsections
--------------------
of this Agreement are for convenience of reference only and are not to be
considered in construing this Antidilution Agreement.
4
<PAGE>
10.7 Counterparts. This Antidilution Agreement may be executed in any
------------
number of counterparts, each of which shall be an original, but all of which
together shall constitute one instrument.
<TABLE>
<CAPTION>
PURCHASER COMPANY
<S> <C>
SILICON VALLEY BANK Sonic Innovations, Inc.
By: /s/ Ron Sherman By: /s/ Andrew G. Rasguskus
---------------------------------- ---------------------------------------
Name: Ron Sherman Name: Andrew G. Rasguskus
--------------------------------- --------------------------------------
(print) (print)
Title: Title: Chairman of the Board, President or
VP Vice President
- ---------------------------------------
Address: ______________________________ Address: ___________________________________
______________________________ ___________________________________
______________________________ ___________________________________
</TABLE>
5
<PAGE>
EXHIBIT 22.1
SUBSIDIARIES OF REGISTRANT
Sonic Innovations A/S, a Danish corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
Salt Lake City, Utah
February 16, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
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341,711
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