<PAGE>
As filed with the Securities and Exchange Commission on March 22, 2000
Registration No. 333-30566
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 1 to
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>
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- --------------------------------------------------------------------------------------------
<CAPTION>
Proposed Proposed
Title of Each Class Number of Maximum Maximum
of Securities to be Shares Offering Aggregate Amount of
Registered Registered(1) Price Per Unit(2) Offering Price(2) Registration Fee
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par
value................ 4,140,000 $14.00 $57,960,000 $15,302(3)
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
(1) Includes 540,000 shares subject to the underwriters' over-allotment option.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(a) under the Securities Act of 1933.
(3) A registration fee of $12,144 was paid with the initial filing.
---------------
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 March 22, 2000.
3,600,000 Shares
[SONIC INNOVATIONS, INC. LOGO]
Common Stock
-----------
This is an initial public offering of shares of common stock of Sonic
Innovations, Inc. All of the 3,600,000 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 $12.00 and $14.00. 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 3,600,000 shares of common
stock, the underwriters have the option to purchase up to an additional 540,000
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. 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] * advanced technology enables individual
personalization; core technology developed by world-renowned experts.
Middle of page: HEALTH never sounded so good. [photo of hearing aid and
dime and brand logos] * NATURA and CONFORMA offer superior sound quality
and improved comfort.
Right of page: COMMUNICATION never sounded so good. [photo of couple at
dinner] * more natural, lifelike listening and communication.
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.
In the U.S. call 1-888-678-HEAR, and in Europe call +45 38 88 84 00.
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 and a net loss of $1.8 million in the fourth quarter
of 1999. We introduced our second brand, CONFORMA, 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
comfortable, instant-fit capability. 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.
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 hearing-
impaired people worldwide, including nearly 30 million in North America.
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, according to
MarkeTrack, a leading industry publication, only approximately 20% of the
hearing impaired have purchased hearing aids, and only half of these hearing
aid owners routinely wear their hearing aids.
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.
We anticipate that demographic trends, such as the aging of "baby boomers,"
will accelerate the growth in the size of the hearing impaired population.
3
<PAGE>
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. 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. 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. Moreover, our proprietary
EXPRESSfit software automates the process of programming our hearing aids. As a
result, our hearing aids can be individually calibrated to the unique needs of
the wearer so that specific sounds are ampified appropriately in the right
contrast to other sounds, resulting in improved speech recognition and more
natural sound.
Our Products
Our products, built around our proprietary DSP platform, offer superior sound
quality, comfort and reliability with an attractive price/value relationship.
In addition, our products make significant advances in cosmetic appeal and ease
of fitting.
. 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, in-the-canal and in-the-ear--as well as in a
behind-the-ear model.
. Our CONFORMA product 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, a
programmable completely-in-the-canal model, introduces a new, innovative
hearing aid configuration that delivers a fast, comfortable fit in the
smallest hearing aid available. This small size allows it to be placed
deep in the ear canal, virtually eliminating the stigma of wearing a
hearing aid.
CONFORMA 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
wearer's ear canal. This compressible, foam tip eliminates the need to
custom mold a hard plastic shell to fit the wearer's ear canal, both
increasing comfort for the wearer and enabling a custom fit in a single
visit. We expect CONFORMA to eliminate the need to "remake" a hearing
aid, reduce product returns, improve reliability and save considerable
time for both the wearer and the hearing care professional.
. We are capitalizing on the rapid growth of the digital segment of the
hearing impaired market not only by selling our branded products, but
also by selling hearing aid components consisting of our DSP platform to
established hearing aid companies that lack a satisfactory digital
product line. These companies incorporate our DSP platform into hearing
aids of their own design that they then sell under their own brand
names.
4
<PAGE>
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 approximately 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. We intend to continue to
invest significantly in research and development to introduce new
products and product improvements more rapidly than is typical in our
industry.
. Expand Our Distribution. We are expanding our sales force in the United
States and pursuing additional distribution partners outside the United
States. We believe that the evolution of the current distribution
channel, combined with the characteristics of our branded products, will
create new distribution opportunities such as selling through large
hearing care chains and other chain-based retailers.
. Sell Our DSP Platform. We will continue to 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.
. Achieve Economies of Scale. As sales volumes increase, per unit
production costs should 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..... 3,600,000 shares
Shares outstanding after the offering......... 18,914,572 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 and investments.
</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 $13.00 per share, given effect to a 1-for-1.9 reverse stock split to
be effected prior to this offering 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
12,532,786 shares of our common stock;
. the conversion of $4.5 million of convertible promissory notes (plus
accrued interest) into 355,056 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 330,851 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 248,139 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 230,769
shares of our common stock at a conversion price equal to 100% of the
IPO price; and
. the exercise, at an exercise price of $3.80 per share, of outstanding
warrants to purchase 167,604 shares of our common stock (net of shares
surrendered in lieu of cash payment of the exercise price, assuming
cashless exercises)
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:
. 2,580,844 shares of our common stock issuable, at a weighted average
exercise price of $2.23 per share, upon exercise of stock options
outstanding on December 31, 1999;
. 17,258 shares of our common stock issuable, at an exercise price of
$3.04 per share, upon exercise of warrants outstanding on December 31,
1999;
. 20,706 shares of our common stock issuable, at an exercise price of
$3.80 per share, upon exercise of warrants outstanding at December 31,
1999; and
. 2,177,787 shares of our common stock that were available for future
grant as of December 31, 1999 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. (See note 13 to consolidated financial
statements.) In the pro forma column in the balance sheet data below, we have
assumed that such conversions and exercises and the repayment after
December 31, 1999 of $1,966,000 of line of credit borrowings and $811,000 of
capital lease obligations 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............ $ (2.26) $ (3.21) $ (8.23) $ (15.61) $ (12.72)
Weighted average number of
common shares outstanding... 487,857 539,364 708,403 988,844 1,363,221
Pro forma basic and diluted
net loss per common share... $ (1.02)
Pro forma weighted average
number of common shares
outstanding................. 14,110,227
</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 $ 9,162 $49,748
Working capital (deficit)..................... (5,119) 8,261 49,585
Total assets.................................. 18,462 21,685 62,271
Long-term obligations......................... 2,085 1,400 150
Convertible promissory notes.................. 8,064 -- --
Mandatorily redeemable convertible preferred
stock........................................ 36,130 -- --
Total stockholders' equity (deficit).......... (38,801) 11,393 53,967
</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 Business
We have a history of losses and negative cash flows from operating activities,
and we expect our operating expenses to continue to increase
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.
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 significantly, which may cause our
stock price to decline
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 have
caused fluctuations in our operating results in the past, and may do so in the
future, include the following:
. demand for and market acceptance of our products;
. manufacturing problems;
. high levels of returns, remakes and repairs; and
. changes in our product or customer mix.
8
<PAGE>
Factors that have not significantly affected our operating results in the
past, but may do so in the future, include the following:
. 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;
. unanticipated delays or problems in the introduction of new products;
. 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 may be unable to retain our current customers,
and we may be unable to recruit replacement or additional customers.
9
<PAGE>
We rely on several sole source or limited source suppliers and manufacturers,
and our production will be seriously harmed if these suppliers and
manufacturers are not able to meet our demand and alternative sources are not
available
A number of key components used in our products are currently available only
from a single or limited number of suppliers. For example, our proprietary
digital signal processing, or DSP, chips are manufactured by a single supplier.
Our relationship with this supplier is critical to our business because our
proprietary DSP chip is integral to our products and because only a small
number of suppliers would be able or willing to produce our chip in the
relatively small quantities and with the exacting specifications we require.
Under our agreement with this supplier, 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, and our operating results will suffer if our products do
not gain market share as rapidly as we anticipate
We launched NATURA, our first hearing aid product, in September 1998 and
introduced CONFORMA in March 2000. We have been generating revenue from selling
hearing aid components for approximately one year. 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
suffer.
We have high levels of product returns, remakes and repairs, and our net sales
and operating results will be lower if these levels remain high or increase
The hearing aid industry experiences high levels 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 levels of returns, remakes and repairs. We experienced product
quality issues during the first half of 1999, which added to these high levels
of returns, remakes and repairs. Our provision for sales returns was $0.7
million in 1998 and $10.1 million in 1999. Our provision for warranty (remake
and repair) costs was $0.2 million in 1998 and $1.3 million in 1999. Although
we have taken measures to reduce the levels of returns, remakes and repairs on
our products, we may not be able to attain lower levels and these levels may
increase, either of which could reduce our net sales and operating results.
We face aggressive competition in our business, and if we do not compete
effectively our net sales and operating results 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
10
<PAGE>
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, some of our 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 net sales
and operating results will suffer. For instance, we may have to reduce the
prices of our products to stay competitive.
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 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 increase their
competitive position relative to ours if they design and manufacture more
competitive hearing aids or market their products more effectively than we
market ours
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 or to find third parties to manufacture
our products, which would limit our ability to develop and deliver sufficient
quantities of products in a timely manner
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
11
<PAGE>
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.
If we are unable to successfully outsource the production of CONFORMA, we may
be unable to deliver sufficient quantities of CONFORMA in a timely manner
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 meet customer demand for CONFORMA, our net sales and operating
results would be negatively affected.
Our entry into additional distribution channels could harm our relationships
with existing customers and cause them to purchase fewer of our products, which
would reduce our net sales and operating results
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. In such a scenario the resulting loss of
revenue may not be offset by our revenue from new distribution channels, and we
may choose not to continue using any of these new channels. Should hearing care
professionals react unfavorably to our strategy, they would likely purchase
fewer of our products, which would reduce our net sales and operating results.
We are dependent on international sales and operations, which exposes us to
foreign and political risks, including the burden of complying with a variety
of quality assurance and other regulatory requirements, that could result in
lower international sales
International sales accounted for $8.0 million, or 28% 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;
12
<PAGE>
. 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.
Competition for qualified personnel is intense in technology industries such as
ours, and we may not be able to maintain or expand our business if we are
unable to hire and retain sufficient technical, sales, marketing and
manufacturing personnel
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.
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.
Complications may result from hearing aid use, and we may incur significant
expense if we are 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
result in significant expense, which would harm our operating results.
13
<PAGE>
Third parties have claimed and may claim in the future that we are infringing
their intellectual property, and we could suffer significant expense or be
prevented from selling products if these claims are successful
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 all of
our products infringed patents it held. 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.
Because our success depends on our proprietary technology, if third parties
infringe our intellectual property, we may be forced to 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.
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, we may suffer
fines, injunctions or other penalties
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
14
<PAGE>
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 significantly reduce our net sales and operating
results.
Risks Related to This Offering and Our Stock
Technology stocks have experienced extreme volatility, and our stock price
could be extremely volatile. Consequently, 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.
There may be sales of a substantial amount of our common stock 180 days after
this offering, or earlier, by our stockholders, and these sales could cause our
stock price to fall
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 18,914,572 shares to be outstanding after
the offering, 3,600,000 shares offered by this prospectus will be eligible for
immediate sale in the public market without restriction by persons other than
our
15
<PAGE>
affiliates. The remaining 81.0%, or 15,314,572 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>
65,871.............. Immediately
14,438,942.......... (180 days after this offering, or earlier in Goldman,
Sachs & Co.'s sole discretion)
809,759............. Various dates beginning in December 2000
</TABLE>
Beginning 180 days after this offering, holders of 12,931,560 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 4,758,631
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."
Insiders will continue to have substantial control over us after this offering,
which could delay or prevent a change in control and may negatively affect your
investment
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 58.5% 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 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.
16
<PAGE>
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, 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.
17
<PAGE>
USE OF PROCEEDS
Our net proceeds from the sale of 3,600,000 shares of common stock in this
offering at an assumed initial public offering price of $13.00 per share are
estimated to be approximately $42.6 million (approximately $49.1 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 capital lease obligations;
. working capital; and
. possible acquisitions or investments
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 future.
18
<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 the repayment after December
31, 1999 of $1,966,000 of line of credit borrowings and $811,000 of
capital lease obligations; and
. On a "pro forma as adjusted" basis to reflect the sale of 3,600,000
shares of common stock in this offering at an assumed initial public
offering price of $13.00 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 1,988 --
-------- ------- --------
Other long-term obligations................... 150 150 150
-------- ------- --------
Mandatorily redeemable convertible preferred
stock, Series B, C, and D $.001 par value;
12,178,591 shares designated; 12,083,509
shares outstanding; none pro forma and pro
forma as adjusted............................ 36,130 -- --
-------- ------- --------
Stockholders' equity (deficit):
Preferred stock, Series A convertible $.001
par value; 449,277 shares designated and
outstanding--none pro forma and pro forma
as adjusted................................ 342 -- --
Common stock, $.001 par value; 70,000,000
shares authorized; 1,449,367 shares issued
and outstanding 15,314,572 pro forma and
18,914,572 pro forma as adjusted........... 3 15 19
Additional paid-in capital.................. 6,256 56,780 99,350
Deferred stock-based compensation........... (3,613) (3,613) (3,613)
Accumulated deficit......................... (41,778) (41,778) (41,778)
Accumulated other comprehensive loss........ (11) (11) (11)
-------- ------- --------
Total stockholders' equity (deficit)...... (38,801) 11,393 53,967
-------- ------- --------
Total capitalization...................... $ 10,308 $13,531 $ 54,117
======== ======= ========
</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 March 21, 2000), the Board of
Directors granted options to purchase an additional 57,895 shares of common
stock at a weighted average exercise price of $13.30 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.
19
<PAGE>
DILUTION
Our pro forma net tangible book value as of December 31, 1999 was $11.4
million, or $0.74 per share of common stock. Pro forma net tangible book value
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 3,600,000 shares of common stock offered
by this prospectus at an assumed initial public offering price of $13.00 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 $54.0 million, or $2.85 per share. This represents an immediate increase
in the pro forma net tangible book value to existing stockholders of $2.11 per
share and an immediate dilution to new investors of $10.15 per share. The
following table illustrates this dilution on a per share basis:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Pro forma net tangible book value per share as of
December 31, 1999.......................................... $0.74
Increase per share attributable to public investors......... 2.11
-----
Pro forma net tangible book value per share after the
offering..................................................... 2.85
------
Dilution per share to public investors........................ $10.15
======
</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 Purchased Total Consideration Average
------------------ ------------------- Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders (1).. 15,314,572 81.0% $46,654,458 49.9% $ 3.05
New public investors ...... 3,600,000 19.0 46,800,000 50.1 13.00
---------- ----- ----------- -----
Total.................... 18,914,572 100.0% $93,454,458 100.0%
========== ===== =========== =====
</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. Assuming the exercise of all options and
warrants outstanding as of December 31, 1999, the number of shares purchased by
existing stockholders would be 17,933,380, or 83.3%, and the total
consideration paid by existing stockholders would be $52,535,442, or 52.9%, for
an average price per share of $2.93.
20
<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)......... 944 455 1,471 8,444 17,343
Research and development
(1)........................ 136 1,090 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................. $ (2.26) $ (3.21) $ (8.23) $ (15.61) $ (12.72)
======= ======= ======= ======== =========
Weighted average number of
common shares outstanding.... 487,857 539,364 708,403 988,844 1,363,221
======= ======= ======= ======== =========
</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>
21
<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 digital signal processing,
or DSP, platform to established hearing aid companies and partially completed
hearing aids, or faceplates, to distributors who market finished hearing aids
under our brand name.
In reporting our financial condition and results of operations, we report two
geographic operating segments. We generally evaluate our operating results on a
company-wide basis because the principal components of all of our products are
sourced from the United States and all research and development and
considerable marketing and administrative support are globally provided from
the United States. However, management reviews the operating results of our
Denmark-based subsidiary, Sonic Innovations A/S, to make decisions about
resource allocation and to assess performance.
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 behind-the-ear 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 level of product returns due to factors such as statutorily
required liberal return policies and product performance inconsistent with
consumers' expectations. We believe our return levels 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 of our non-CONFORMA products to
continue at historical levels. We believe that our CONFORMA product has
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<PAGE>
the potential to experience lower levels of returns in the future. However,
because our experience with CONFORMA at this point is very limited, we are
unable to predict whether our return levels on our CONFORMA product will
achieve lower levels of returns at some future time.
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 relative to our manufacturing capacity
and fixed manufacturing overhead. In addition, during the 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. 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 resulting
largely from the lack of a Salt Lake City-based work force skilled in hearing
aid manufacturing.
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. In addition, we
believe we have improved our manufacturing processes as we have increased our
production capacity.
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
($2.8 million), increased marketing expenditures related to the introduction of
new products ($2.3 million) and increased selling expenses related mainly to
the hiring of additional direct sales and sales support personnel to increase
sales and improve customer service ($2.5 million).
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 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.
23
<PAGE>
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 behind-the-ear 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.
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 $2.14 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 $2.06 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
24
<PAGE>
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.
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.
25
<PAGE>
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
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 line of credit borrowings 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 and $0.8 million of capital lease obligations were repaid after
December 31, 1999. 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, which we estimate will not exceed $2.0 million of capital lease
obligations at the time of the offering, with a portion of the net proceeds
from this offering. See "Use of Proceeds" and "Capitalization."
We have issued warrants for the purchase of our common stock in connection
with various financing arrangements based on the requirements of those who
provided us with financing. We issued warrants to purchase 236,853 shares,
exercisable at $3.80 per share, to our existing investors in connection with
their purchase of $4.5 million of our 6% convertible promissory notes in July
and August 1999. We issued warrants to our bank for 17,258 shares, exercisable
at $3.04 per share, in May 1998 in connection with equipment financing and
20,706 shares, exercisable at $3.80 per share, in December 1999 in connection
with establishing a new line of credit.
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<PAGE>
We have utilized stock options as a means of attracting and retaining
talented managers, and we also grant stock options to all employees upon their
employment with us. Options generally vest over a four-year period. At December
31, 1999, we had 2,580,844 options outstanding at a weighted average exercise
price of $2.23 per share, of which 774,278 were exercisable at a weighted
average exercise price of $0.70 per share.
We expect to experience growth in our operating expenses 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 for at least the next twelve months. 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 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.
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 evaluated the potential
impact of these provisions on our ability to utilize
27
<PAGE>
the net operating loss carryforwards. See Note 7 of Notes to Consolidated
Financial Statements for a detailed discussion of the limitations. 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.
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<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 and a net loss of $1.8 million in the fourth
quarter of 1999. We introduced our second brand, CONFORMA, 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.
Based on industry data provided by the Hearing Industries Association, we
believe that 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.]
29
<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.
According to The Carnegie Group, 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 North America, who have hearing
deficits sufficiently severe to interfere with their understanding of normal,
everyday speech. However, according to MarkeTrack, a leading industry
publication, only approximately 20% of these persons have purchased a hearing
aid, and only half of these hearing aid owners routinely wear their hearing
aids. Company-sponsored surveys conducted by a third-party research firm
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.
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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>
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 MarkeTrak, 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, a limited part 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;
. in-the-canal;
. in-the-ear; and
. behind-the-ear.
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.
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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 beyond a specified level 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.
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.
We believe that 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 $750 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.
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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 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.
According to the Hearing Review, an industry publication, approximately 20%
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.
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Our experience shows 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
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
proprietary digital sound processing, or 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 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, completely-in-the-canal, in-
the-canal, in-the-ear and behind-the-ear. Due to the smaller than usual DSP
chip used, NATURA products are smaller than most traditional hearing aids.
CONFORMA. We launched our novel completely-in-the-canal hearing aid,
CONFORMA, 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 behind-the-
ear 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, according to the Better Hearing Institute 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 specified 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 96,843
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 specified "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 portions of the licensed technologies. In connection with the
formation of K/S HIMPP, a number 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 all of our
products infringed on patents it held, 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 completely-in-the-canal, in-the-canal and in-
the-ear 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 behind-the-ear 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 completely-in-the-canal 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.
42
<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 some 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
43
<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.
44
<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....... 46 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)............... 58 Director
Luke B. Evnin,
Ph.D.(2)............... 36 Director
Kevin J. Ryan(2)........ 59 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.
45
<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 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.
46
<PAGE>
Allan M. Wolfe, M.D. has been a director of Sonic Innovations since October
1995. 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 4,211 shares of common stock at an exercise
price of $0.95 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
4,211 shares of common stock at an exercise price of $2.85 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 13,158 shares of common stock
at an exercise price of $2.85 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.
47
<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 $55,000 105,264 $ --
President and Chief Executive
Officer
Jorgen Heide....................... 193,333 45,000 63,158 --
Vice President, International and
OEM Division
Orlando P. Rodrigues............... 190,000 -- 63,158 --
Vice President, Consumer
Development Division
Gregory N. Koskowich............... 176,250 35,000 63,158 --
Vice President, Research and
Development
Michael D. 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 1,087,105
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...... 105,264(1)(2) 9.7% $5.70 11/19/2009 $ 377,340 $ 956,253
Jorgen Heide............ 63,158(1) 5.8 5.70 11/19/2009 226,402 573,748
Orlando P. Rodrigues.... 63,158(2) 5.8 5.70 11/19/2009 226,402 573,748
Gregory N. Koskowich.... 63,158(2) 5.8 5.70 11/19/2009 226,402 573,748
Michael D. Monahan...... -- -- -- -- -- --
</TABLE>
- --------
(1) Options granted to Mr. Heide and options to purchase 52,632 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
52,632 shares granted to Mr. Raguskus vest on November 19, 2005 or earlier
if specified 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...... -- -- 155,625 238,323 $1,119,154 $1,129,671
Jorgen Heide............ 28,948 $47,300 26,841 112,994 182,917 453,983
Orlando P. Rodrigues.... -- -- 47,698 120,724 333,594 511,406
Gregory N. Koskowich.... 6,579 23,250 13,159 109,211 89,749 446,500
Michael D. Monahan...... -- -- 31,580 47,368 216,000 319,500
</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 $7.60
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 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 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 Sonic Innovations, all
of the 78,948 shares of common stock subject to the option granted upon his
employment shall immediately vest. All 63,158 shares of common stock subject
to the option granted to Michael D. Monahan upon his employment will
immediately vest upon an acquisition of Sonic Innovations. 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 Sonic Innovations, 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 granted to our executive officers upon
commencing their employment shall immediately vest in the event of an
acquisition of Sonic Innovations (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
49
<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 2,580,844 shares were outstanding under the 1993 Stock Plan and
335,682 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, if approved by the administrator, 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 1,578,947 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) 789,474 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
263,158 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) 105,263
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, but purchases
may not exceed 5,263 shares of common stock, or 10% of an employee's
compensation. In addition, the right to purchase common stock under all
employee purchase plans may not accrue in excess of $20,000 worth of stock for
in any calendar year. 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
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<PAGE>
such amendment or termination may adversely affect shares previously purchased
under the plan. In addition, our board of directors may not, without
stockholder 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.
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<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.
52
<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
Convertible Subject to
Series B Series C Series D Notes Warrants
-------- --------- --------- ----------- -------------
<S> <C> <C> <C> <C> <C>
Entities affiliated with
Accel Partners......... 437,777 495,855 263,158 $853,876 44,941
Entities affiliated with
Morgenthaler Ventures.. -- 1,315,790 283,012 601,563 31,661
Entities affiliated with
MPM Asset Management... -- -- 1,894,738 850,442 44,760
Entities affiliated with
New Enterprise
Associates (NEA)....... -- 1,315,791 283,012 708,312 37,279
Utah Ventures........... 58,005 93,176 32,895 30,000 1,579
Entities affiliated with
Venrock Associates..... 437,775 495,853 263,159 853,876 44,941
Entities affiliated with
The Travelers Insurance
Company................ 218,888 247,928 161,364 438,145 23,061
</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. The shares of Series B Preferred Stock described in the
table above were issued in May 1997 at a price of $1.35 per share. The shares
of Series C Preferred Stock described in the table above were issued in October
1997 at a price of $3.04 per share. The shares of Series D Preferred Stock
described in the table above were issued in October 1998 at a price of $3.80
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 $13.00 per share, each $1,000 of principal and
interest will convert into 77 shares of common stock. As part of the sale of
the convertible notes, we also issued warrants exercisable for 236,853 shares
of common stock at a per share price of $3.80.
53
<PAGE>
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 specified hearing aid componentry to other companies that
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.
Other Transactions
Ross Ryding, our Vice President of Operations, joined Sonic Innovations in
January 1999. He beneficially owned an information services company that
provided services to us in exchange for $263,536 in 1997, $583,788 in 1998, and
$266,281 in 1999.
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.
54
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth 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........................... 3,368,589 15.5% 12.5%
30 Rockefeller Plaza #5508
New York, NY 10112
Entities affiliated with Accel
Partners (2)......................... 2,371,829 15.5 12.5
428 University Ave.
Palo Alto, CA 94301
Entities affiliated with MPM Asset
Management........................... 1,993,444 13.0 10.5
601 Gateway Blvd., Suite 360
South San Francisco, CA 94080
Entities affiliated with New
Enterprise Associates(2)............. 1,684,347 11.0 8.9
2490 Sand Hill Road
Menlo Park, CA 94025
Entities affiliated with Morgenthaler
Venture Partners(2).................. 1,671,956 10.9 8.8
2730 Sand Hill Road
Menlo Park, CA 94025
Entities affiliated with The Travelers
Insurance Company.................... 1,215,338 7.9 6.4
205 Columbus Blvd.
Hartford, CT 06183
Hoya Healthcare Corporation........... 809,813 5.3 4.3
Shinjuku i-Land Tower
8F. 5-1, Nishi-Shinjuku 6-chome
Shinjuku-ku, Tokyo 163-1308
Japan
Andrew G. Raguskus(3)................. 338,399 2.2 1.8
Jorgen Heide(4)....................... 59,813 * *
Gregory N. Koskowich, Ph.D.(5)........ 63,050 * *
Michael D. Monahan(6)................. 34,868 * *
Orlando P. Rodrigues(7)............... 48,793 * *
Anthony B. Evnin, Ph.D.(8)............ 2,371,922 15.5 12.5
Luke B. Evnin, Ph.D.(9)............... 4,268,164 27.9 22.6
Kevin J. Ryan......................... -- * *
G. Gary Shaffer(10)................... 1,671,956 10.9 8.8
Sigrid Van Bladel, Ph.D.(11).......... 1,684,347 11.0 8.9
Allan M. Wolfe, M.D.(12).............. 675,505 4.4 3.6
All directors and executive officers
as a group(13) (13 persons).......... 11,322,080 71.9 58.5
</TABLE>
55
<PAGE>
- --------
* Represents less than 1% of our outstanding common stock.
(1) Based on 15,314,572 shares outstanding as of December 31, 1999, assuming
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.
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 3,333 shares of common stock within 60
days of December 31, 1999.
(3) Includes options exercisable for 173,135 shares of common stock within 60
days of December 31, 1999. Excludes options that vest upon reaching
specified performance milestones.
(4) Includes shares subject to options exercisable for 30,865 shares of common
stock within 60 days of December 31, 1999.
(5) Includes shares subject to options exercisable for 16,995 shares of common
stock within 60 days of December 31, 1999. Excludes options that vest upon
reaching specified performance milestones.
(6) Represents shares subject to options exercisable within 60 days of
December 31, 1999.
(7) Represents shares subject to options exercisable within 60 days of
December 31, 1999. Excludes options that vest upon reaching specified
performance milestones.
(8) Includes 2,368,589 shares of common stock held by entities associated with
Venrock Associates, of which Dr. Anthony Evnin is a General Partner. Dr.
Anthony Evnin shares the right to vote such shares with other fund-
affiliated entities but disclaims beneficial interest in those shares.
Includes options exercisable for 3,333 shares of common stock exercisable
within 60 days of December 31, 1999.
(9) Includes 1,993,444 shares of common stock held by entities associated with
MPM Asset Management and 2,274,720 shares of common stock held by some of
the entities associated with Accel Partners, all of which Dr. Luke Evnin
is a General Partner. Dr. Luke Evnin shares the right to vote such shares
with other fund-affiliated entities but disclaims beneficial ownership in
those shares. Includes options exercisable for 3,333 shares of common
stock within 60 days of December 31, 1999.
(10) Represents shares beneficially owned by entities affiliated with
Morgenthaler Ventures, of which Mr. Shaffer is a General Partner. Mr.
Shaffer shares the right to vote such shares with other fund-affiliated
entities but disclaims beneficial ownership in those shares. Includes
options exercisable for 3,333 shares of common stock within 60 days of
December 31, 1999.
(11) 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 3,333 shares of common stock within 60 days of December
31, 1999.
(12) Represents shares beneficially owned by Utah Ventures, of which Dr. Wolfe
is a General Partner. Dr. Wolfe shares the right to vote such shares with
other fund-affiliated entities but disclaims beneficial ownership in those
shares. Includes options exercisable for 3,333 shares of common stock
within 60 days of December 31, 1999.
(13) Includes options exercisable for 426,584 shares of common stock within 60
days of December 31, 1999.
56
<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 15,314,572 shares of common stock
held of record by 92 stockholders, warrants to purchase 37,964 shares of common
stock and options to purchase 2,580,844 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 with our
bank to purchase 17,258 shares of common stock at $3.04 per share that expire
in May 2003. We also have warrants outstanding with our bank to purchase 20,706
shares of common stock at $3.80 per share, which expire in December 2004. The
bank is entitled to antidilution protection in the event we issue shares of
common stock at a price less than $3.80 per share and is also entitled to
registration rights as described below.
Registration Rights
The holders of 12,931,560 shares of common stock and warrants to purchase
37,964 shares of common stock have the right to require us to register those
shares under the Securities Act of 1933.
57
<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 12,931,560 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
Provisions in 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 investors might be willing to pay in the future for shares
of our common stock. 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 corporate actions and could have the
effect of delaying or preventing a change in control.
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 our common stock will be American Stock
Transfer & Trust Company. The Transfer Agent's telephone number is (718) 921-
8217.
58
<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
18,914,572 shares of common stock, assuming no exercise of options after
December 31, 1999. Of these shares, the 3,600,000 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 15,314,572 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. 15,248,471 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. The 15,314,572 shares
will become eligible for sale as follows:
<TABLE>
<CAPTION>
Date Available for Shares Eligible
Resale For Sale Comment
------------------ --------------- -------
<S> <C> <C>
Immediately............. 65,871 Shares not subject to lock-up agreements
180 days................ 1,781,009 Lock-up released; shares freely tradable
180 days................ 12,657,933 Lock-up released; shares saleable under Rules 144 and 701
Various dates beginning
in December 2000....... 809,813 Shares saleable under Rule 144
</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 4,758,631 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
12,931,560 shares of our common stock, including shares issuable upon
conversion of preferred stock, will be entitled to 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.
59
<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 189,146 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 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.
60
<PAGE>
UNDERWRITING
Sonic Innovations and the underwriters named below have entered into an
underwriting agreement with respect to the shares being offered. Subject to
some 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............................................................ 3,600,000
=========
</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 540,000
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
540,000 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 selected 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 360,000 shares of common stock for
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.
61
<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 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 $950,000.
Sonic Innovations has agreed to indemnify the several underwriters against
specified liabilities, including liabilities under the Securities Act of 1933.
62
<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 7,415 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.
63
<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.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Salt Lake City, Utah
February 3, 2000 (except with respect to the
matters discussed in Note 13 as to
which the date is March 22, 2000)
F-2
<PAGE>
SONIC INNOVATIONS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
Equity at
December 31, December 31,
-------------------------- 1999
1998 1999 (Note 13)
------------ ------------ -------------
(unaudited)
<S> <C> <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' EQUITY
(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, 4,635,378 shares designated
and outstanding (aggregate
liquidation preference of $6,367,561
as of December 31, 1999)-none
outstanding pro forma............... 7,428,356 7,951,574
Series C, 4,161,676 shares
designated, 4,144,434 shares
outstanding (aggregate liquidation
preference of $12,599,034 as of
December 31, 1999)-none outstanding
pro forma........................... 13,619,934 14,609,593
Series D, 3,381,579 shares
designated, 3,294,223 and 3,303,697
shares outstanding, respectively
(aggregate liquidation preference of
$12,554,000 as of December 31,
1999)-none outstanding pro forma.... 12,613,727 13,568,395
------------ ------------
Total mandatorily redeemable
convertible preferred stock........ 33,662,017 36,129,562 --
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, Series A
convertible, $.001 par value;
449,277 shares designated and
outstanding (aggregate liquidation
preference of $356,913 as of
December 31, 1999) none outstanding
pro forma........................... 341,711 341,711 --
Common stock, $.001 par value;
70,000,000 shares authorized,
1,279,857 and 1,449,367 shares
outstanding, respectively--
14,668,060 shares pro forma......... 1,280 1,449 14,668
Additional paid-in capital........... 247,672 6,257,288 50,779,818
Deferred stock-based compensation.... -- (3,612,620) (3,612,620)
Accumulated deficit.................. (24,440,197) (41,777,602) (41,777,602)
Accumulated other comprehensive
loss................................ (3,817) (11,640) (11,640)
------------ ------------ ------------
Total stockholders' equity
(deficit).......................... (23,853,351) (38,801,414) $ 5,392,624
------------ ------------ ------------
Total liabilities and
stockholders' equity (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................................ $ (8.23) $ (15.61) $ (12.72)
=========== ============ ============
Weighted average number of common
shares outstanding................... 708,403 988,844 1,363,221
=========== ============ ============
Unaudited pro forma information (Note
13):
Net loss applicable to common
stockholders....................... $(14,399,610)
============
Basic and diluted net loss per
common share....................... $ (1.02)
============
Weighted average number of common
shares outstanding................. 14,110,227
============
</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............ 3,312,067 $ 4,635,962 400,693 $281,710 681,489 $ 681 $ 88,791 $ -- $ -- $ (3,172,420)
Exercise of
common stock
options......... 34,210 35 6,565
Extension of
life of certain
stock options... 22,400
Series B
preferred stock
issued for
services........ 9,266 24,999
Sale of Series B
preferred stock,
net of issuance
costs........... 1,314,045 1,825,192
Sale of Series C
preferred stock,
net of issuance
costs........... 4,118,421 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............ 8,753,799 19,555,339 400,693 281,710 715,699 716 117,756 $ -- -- (9,000,705)
Exercise of
common stock
options......... 564,158 564 129,916
Exercise of
Series A
preferred stock
warrants........ 48,584 60,001
Series C
preferred stock
issued for
services........ 26,013 79,032
Series D
preferred stock
issued for
services........ 4,737 18,000
Sale of Series D
preferred stock,
net of issuance
costs........... 3,289,486 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............ 12,074,035 33,662,017 449,277 341,711 1,279,857 1,280 247,672 $ -- -- (24,440,197)
Exercise of
common stock
options......... 169,510 169 52,335
Series D
preferred stock
issued for
services........ 9,474 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............ 12,083,509 $36,129,562 449,277 $341,711 1,449,367 $1,449 $6,257,288 $(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 reclassification adjustment
related to an unrealized gain becoming a realized 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
2,580,844 shares; warrants for 285,169 shares (assuming conversion into common
stock of 17,258 shares of Series C preferred stock and 31,058 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 12,532,786 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 31,058
shares of Series D convertible preferred stock at an exercise price of $3.80
per share. The Company can reduce the number of shares issued pursuant to these
warrants to 20,706 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 17,258 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 $3.04 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 $3.80 per share. In connection with selling these notes, the
Company issued warrants for the purchase of 236,853 shares of its common stock
at $3.80 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. The agreement remains in effect
until the expiration of the latest patent right in 2013 and can be terminated
by BYU in the event of circumstances outlined in the agreement. 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 96,843 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. This agreement
may be terminated without cancellation fees. 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 suppression" technologies owned by BYU. The agreement
remains in effect indefinitely, unless terminated by BYU in the event of
circumstances outlined in the agreement. 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. Royalty
payments are to be paid as long as the Company uses this
F-13
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
technology. This agreement may be terminated without cancellation fees. 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 expects to begin selling products incorporating this technology
during the second quarter of 2000. 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.
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. The agreement remains in effect until 2013.
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 purchase 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 Company made purchases totalling approximately $1,239,000 and
$151,000 in 1999 and 1998, respectively. The agreement requires the Company to
make future minimum purchases based on fixed prices 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
F-14
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
(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
Start-up costs capitalized for tax reporting
purposes..................................... 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 Arising Year Expiring
------------ -------------
<C> <S> <C>
1992 2007.............................................. $ 43,000
1993 2008.............................................. 66,000
1994 2009.............................................. 108,000
1995 2010.............................................. 401,000
1996 2011.............................................. 992,000
1997 2012.............................................. 2,708,000
1998 2018.............................................. 8,940,000
1999 2019 ............................................. 11,220,000
-----------
$24,478,000
===========
</TABLE>
F-15
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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. In December 1993 and
September 1995, changes in the ownership of the Company resulted in limitations
on all pre-existing net operating loss carryforwards of the Company. As a
result, management estimates that approximately $103,000 of the Company's net
operating loss carryforwards arising in 1992 and 1993 are limited to
utilization of approximately $15,000 per year, and that approximately $409,000
of the Company's net operating loss carryforwards arising in 1994 and 1995 are
limited to utilization of approximately $140,000 per year. If the annual
limited amount is unutilized in any particular year, it remains available on a
cumulative basis through the expiration date of the applicable net operating
loss carryforwards.
Additionally, the Company anticipates that the public sale of its stock may
result in another ownership change on or about the public sale date depending
upon the number of shares sold and various other factors. If an ownership
change occurs, the Company's net operating loss carryforwards arising in 1996
through the public sale date will be limited to utilization of an annual amount
not to exceed the value of the Company on the ownership change date multiplied
by the Federal long-term tax-exempt rate (the rate is fixed monthly and was
5.73% as of February 2000).
(8) PREFERRED STOCK
The Company's certificate of incorporation authorizes the issuance of
13,907,895 shares of preferred stock with terms and preferences designated
therein. As of December 31, 1999, the Company had designated 449,277 shares as
Series A convertible ("Series A"), 4,635,378 shares as Series B redeemable,
convertible ("Series B"), 4,161,676 shares as Series C redeemable, convertible
("Series C"), and 3,381,579 shares as Series D redeemable, convertible ("Series
D").
During 1997, 1,314,045 shares of Series B were sold for $1,825,192 in cash,
9,266 shares of Series B were issued for services performed totaling $24,999,
and 4,118,421 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 48,584 shares of Series A with an
exercise price of $1.24 per share were exercised for cash totaling $60,001,
26,013 shares of Series C were issued for services performed totaling $79,032,
3,289,486 shares of Series D were sold for $12,500,000 in cash and 4,737 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 9,474 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.
F-16
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $0.13, $0.30 and $0.38, respectively, payable when and if declared
by the Board of Directors. As of December 31, 1999, no dividends had been
declared.
(9) STOCK-BASED COMPENSATION
Stock Options
The Company's 1993 Stock Plan (the "Plan") provides for the issuance of a
maximum of 3,894,737 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, 335,682 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") and
those issued to consultants or nonemployees are accounted for under Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123"). 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. Under
SFAS No. 123, compensation cost is recognized for the fair market value of each
option as estimated on the date of grant using the Black-Scholes option pricing
model. If compensation expense for all stock options had been determined
consistent with 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......................... $ 8.23 $ 15.61 $ 12.72
Pro forma........................... 8.25 15.68 12.88
</TABLE>
F-17
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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............... 1,011,053 $0.23
Granted in 1997................................ 368,947 0.29
Exercised in 1997.............................. (34,210) 0.19
Forfeited or expired in 1997................... (92,105) 0.21
---------
Outstanding at December 31, 1997............... 1,253,685 0.25
Granted in 1998................................ 1,127,789 0.97
Exercised in 1998.............................. (564,158) 0.23
Forfeited or expired in 1998................... (37,933) 0.40
---------
Outstanding at December 31, 1998............... 1,779,383 0.70
Granted in 1999................................ 1,087,105 4.33
Exercised in 1999.............................. (169,510) 0.30
Forfeited or expired in 1999................... (116,134) 1.27
---------
Outstanding at December 31, 1999............... 2,580,844 2.23
=========
</TABLE>
As of December 31, 1999, there were options for 774,278 shares of common
stock exercisable at a weighted average exercise price of $.70 per share.
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>
$0.19.................................. 174,649 3.76 172,895
0.27.................................. 289,399 5.13 126,242
0.48.................................. 174,474 8.03 111,228
0.67.................................. 327,453 8.28 167,779
0.95.................................. 94,559 8.59 40,453
1.14.................................. 169,763 8.78 49,421
1.43.................................. 284,145 8.96 77,949
1.90.................................. 43,158 9.14 1,996
2.85.................................. 202,289 9.41 --
3.80.................................. 415,526 9.79 26,315
5.70.................................. 347,368 9.89 --
7.60.................................. 58,061 9.95 --
--------- -------
2,580,844 774,278
========= =======
</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
F-18
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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) .............................................. 236,853 $3.80
Issued in connection with 1999 bank lending arrangement..... 31,058 3.80
Issued in connection with 1998 bank lending arrangement..... 17,258 3.04
-------
Total warrants outstanding at December 31, 1999............. 285,169
=======
</TABLE>
The warrants issued in connection with the 1999 bank lending arrangement will
be decreased to 20,706 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 48,584
shares of Series A preferred stock at $1.24 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
F-19
<PAGE>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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>
SONIC INNOVATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(13) SUBSEQUENT EVENTS
Reverse Stock Split
On March 22, 2000, the Board of Directors approved a 1 for 1.9 reverse stock
split for the holders of common and preferred stock. This stock split has been
retroactively reflected in the accompanying consolidated financial statements
for all years presented.
Unaudited Pro Forma Information
The Board of Directors has authorized the Company to file a Registration
Statement with the Securities and Exchange Commission permitting the Company to
sell shares of common stock in an initial public offering ("IPO"). If the IPO
is consummated as presently anticipated, all of the outstanding preferred
shares will be converted into 12,532,786 shares of common stock. In addition,
the convertible promissory notes and related accrued interest will be converted
into common stock in accordance with the applicable conversion terms as
described in Note 5. Assuming an IPO price of $13 per share, the convertible
promissory notes and accrued interest as of December 31, 1999 would convert
into 685,907 shares of common stock. The conversion amounts will vary depending
upon the actual date of conversion and the IPO price. Also, warrants to
purchase 236,853 common shares at $3.80 per share will expire at the IPO date,
if not exercised.
The unaudited pro forma balance sheet information reflects the conversion of
preferred stock and convertible promissory notes into common stock as if such
conversion had occurred as of December 31, 1999.
The unaudited pro forma income statement information assumes that the
conversions of preferred stock and convertible promissory notes and the
exercise of warrants occurred as of January 1, 1999, or the date of issuance of
the convertible instruments, if later. Reconciliations of the numerator and the
denominator used for purposes of computing the unaudited pro forma basic and
diluted net loss per common share are as follows:
<TABLE>
<S> <C>
Numerator:
Net loss applicable to common stockholders................. $(17,337,405)
Reversal of interest expense on convertible promissory
notes..................................................... 506,250
Reversal of accretion of preferred stock................... 2,431,545
------------
Pro forma net loss applicable to common stockholders....... $(14,399,610)
============
Denominator:
Weighted average number of common shares outstanding....... 1,363,221
Effect of conversion of preferred stock.................... 12,530,385
Effect of conversion of convertible promissory notes....... 146,248
Exercise of warrants....................................... 70,373
------------
Pro forma weighted average number of common shares
outstanding............................................... 14,110,227
============
</TABLE>
F-21
<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............................................... 17
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Dilution................................................................. 20
Selected Consolidated Financial Data..................................... 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 22
Business................................................................. 29
Management............................................................... 45
Certain Transactions..................................................... 53
Principal Stockholders................................................... 55
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Validity of the Common Stock............................................. 63
Experts.................................................................. 63
Where You Can Find Additional Information................................ 63
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,600,000 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............................................... $15,302
NASD filing fee.................................................... 6,296
Nasdaq National Market listing fee................................. 60,000
Printing and engraving costs....................................... 150,000
Legal fees and expenses............................................ 450,000
Accounting fees and expenses....................................... 215,000
Blue sky fees and expenses......................................... 5,000
Transfer Agent and Registrar fees.................................. 10,000
Miscellaneous expenses............................................. 38,402
--------
Total............................................................ $950,000
========
</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 $0.19
to $7.60 under its option plan. Of the options, options for 767,878
shares have been exercised, options for 246,172 shares have been
cancelled and options for 2,580,844 shares remain outstanding.
(2) On May 15, 1997 and in October 1997, the registrant issued an aggregate
of 1,314,045 shares of Series B preferred stock ("Series B") or an
aggregate of $1,825,192 in cash to 28 investors.
II-1
<PAGE>
(3) On September 5, 1997, the registrant issued 9,266 shares of Series B
for services performed totaling $24,999.
(4) On October 31, 1997, the registrant issued an aggregate of 4,118,421
shares of Series C preferred stock ("Series C") for an aggregate of
$12,520,000 in cash, to 25 investors.
(5) On February 2, 1998, the registrant issued 20,091 shares of Series C
to one individual as compensation for recruitment services performed
totaling $61,032.
(6) On May 31, 1998, the registrant issued a warrant to purchase 17,258
shares of Series C at $3.04 in connection with an equipment financing.
(7) On August 5, 1998, the registrant issued an aggregate of 5,922 shares
of Series C to a public relations company for services performed
totaling $18,000.
(8) On August 14, 1998, the registrant issued 48,584 shares of Series A
Preferred Stock ("Series A") pursuant to the exercise of an
outstanding warrant with an aggregate exercise price of $60,001.
(9) In October 1998, the registrant issued 3,289,486 shares of Series D
preferred stock ("Series D") 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 14,211 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 236,853 shares
of common stock at $3.80 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
31,058 shares of Series D Preferred Stock at an exercise price of
$3.80 per share in connection with an equipment financing. The number
of shares may be reduced to 20,706 if the registrant completes the IPO
by May 31, 2000.
All shares of Preferred stock are convertible into common stock on a one-for-
one basis. 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 between
the registrant and Atmel Corporation.
10.8 Amended and Restated License Agreement dated March 21, 2000 between
the registrant and Brigham Young University.
10.9 Amended and Restated Exclusive License Agreement dated March 21, 2000
between the registrant and Brigham Young University.
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 D. 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. (Included in Exhibit 5.1).
24.1* Power of Attorney.
24.2 Power of Attorney of Luke B. Evnin.
27.1* Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** 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 Amendment to 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 22nd day of March, 2000.
Sonic Innovations, Inc.
/s/ Stephen L. Wilson
By: _________________________________
Stephen L. Wilson
Vice President and Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment to
Registration Statement has been signed by the following persons on March 22,
2000 in the capacities indicated:
<TABLE>
<CAPTION>
Signature Title
--------- -----
<S> <C>
* 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)
* Director
___________________________________________
Anthony B. Evnin
* Director
___________________________________________
Luke B. Evnin
* Director
___________________________________________
Kevin J. Ryan
* Director
___________________________________________
G. Gary Shaffer
* Director
___________________________________________
Sigrid Van Bladel
* Director
___________________________________________
Allan M. Wolfe
/s/ Stephen L. Wilson
*By: _________________________________
Stephen L. WIlson, Attorney-in-Fact
</TABLE>
II-5
<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.
/s/ Arthur Andersen LLP
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 between
the registrant and Atmel Corporation.
10.8 Amended and Restated License Agreement dated March 21, 2000 between
the registrant and Brigham Young University.
10.9 Amended and Restated Exclusive License Agreement dated March 21, 2000
between the registrant and Brigham Young University.
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 D. 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. (Included in Exhibit 5.1).
24.1* Power of Attorney.
24.2 Power of Attorney of Luke B. Evnin.
27.1* Financial Data Schedule.
</TABLE>
- --------
* Previously filed.
** To be filed by amendment
+ Confidential treatment requested.
<PAGE>
Exhibit 5.1
[LETTERHEAD OF WILSON SONSINI GOODRICH & ROSATI APPEARS HERE]
March 22, 2000
Sonic Innovations, Inc.
2795 East Cottonwood Parkway, Suite 660
Salt Lake City, Utah 84121
Re: Registration Statement on Form S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1, as amended, filed
by Sonic Innovations, Inc., a Delaware Corporation (the "Company"), with the
Securities and Exchange Commission in connection with the registration under the
Securities Act of 1933, as amended, of up to 4,140,000 shares of the Company's
Common Stock (including an over-allotment of up to 540,000 shares of the
Company's Common Stock granted to the underwriters) (the "Shares"). The Shares
are to be sold to the underwriters for resale to the public as described in the
Registration Statement and pursuant to the Underwriting Agreement to be filed as
an exhibit thereto. As legal counsel to the Company, we have examined the
proceedings proposed to be taken in connection with said sale and issuance of
the Shares .
Based upon the foregoing, we are of the opinion that the Shares, when
issued in the manner described in the Registration Statement, will be duly
authorized, validly issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the Prospectus constituting a part thereof,
and any amendment thereto.
Very truly yours,
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
/s/ Wilson Sonsini Goodrich & Rosati
<PAGE>
EXHIBIT 10.2
SONIC INNOVATIONS, INC.
AMENDED AND RESTATED 1993 STOCK PLAN
(as amended November 1999)
1. Purposes of the Plan. The purposes of this Stock Plan are to attract
--------------------
and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to Employees, Directors and
Consultants and to promote the success of the Company's business. Options
granted under the Plan may be Incentive Stock Options or Nonstatutory Stock
Options, as determined by the Administrator at the time of grant. Stock Purchase
Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan in accordance with Section 4 hereof.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any other country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 hereof.
(f) "Common Stock" means the Common Stock of the Company.
------------
(g) "Company" means Sonic Innovations, Inc., a Delaware corporation.
-------
(h) "Consultant" means any person who is engaged by the Company or
----------
any Parent or Subsidiary to render consulting or advisory services to such
entity.
(i) "Director" means a member of the Board of Directors of the
--------
Company.
(j) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
<PAGE>
(k) "Employee" means any person, including Officers and Directors,
--------
employed by the Company or any Parent or Subsidiary of the Company. A Service
Provider shall not cease to be an Employee in the case of (i) any leave of
absence approved by the Company or (ii) transfers between locations of the
Company or between the Company, its Parent, any Subsidiary, or any successor.
For purposes of Incentive Stock Options, no such leave may exceed ninety days,
unless reemployment upon expiration of such leave is guaranteed by statute or
contract. If reemployment upon expiration of a leave of absence approved by the
Company is not so guaranteed, on the 181st day of such leave any Incentive Stock
Option held by the Optionee shall cease to be treated as an Incentive Stock
Option and shall be treated for tax purposes as a Nonstatutory Stock Option.
Neither service as a Director nor payment of a director's fee by the Company
shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean between the high bid and low asked prices for the Common Stock
on the last market trading day prior to the day of determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Administrator.
(n) "Incentive Stock Option" means an Option intended to qualify as an
----------------------
incentive stock option within the meaning of Section 422 of the Code.
(o) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(p) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "Option" means a stock option granted pursuant to the Plan.
------
-2-
<PAGE>
(r) "Option Agreement" means a written or electronic agreement
----------------
between the Company and an Optionee evidencing the terms and conditions of an
individual Option grant. The Option Agreement is subject to the terms and
conditions of the Plan.
(s) "Option Exchange Program" means a program whereby outstanding
-----------------------
Options are exchanged for Options with a lower exercise price.
(t) "Optioned Stock" means the Common Stock subject to an Option or
--------------
a Stock Purchase Right.
(u) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(v) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
(w) "Plan" means this Amended and Restated 1993 Stock Plan.
----
(x) "Restricted Stock" means shares of Common Stock acquired
----------------
pursuant to a grant of a Stock Purchase Right under Section 11 below.
(y) "Service Provider" means an Employee, Director or Consultant.
----------------
(z) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 12 below.
(aa) "Stock Purchase Right" means a right to purchase Common Stock
--------------------
pursuant to Section 11 below.
(bb) "Subsidiary" means a "subsidiary corporation," whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 12 of
-------------------------
the Plan, the maximum aggregate number of Shares which may be subject to option
and sold under the Plan is 7,400,000 Shares. The Shares may be authorized but
unissued, or reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an Option
Exchange Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated). However, Shares that have actually been issued under the Plan, upon
exercise of either an Option or Stock Purchase Right, shall not be returned to
the Plan and shall not become available for future distribution under the Plan,
except that if Shares of Restricted Stock are repurchased by the Company at
their original purchase price, such Shares shall become available for future
grant under the Plan.
-3-
<PAGE>
4. Administration of the Plan.
--------------------------
(a) Administrator. The Plan shall be administered by the Board or a
-------------
Committee appointed by the Board, which Committee shall be constituted to comply
with Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan and, in the case of a Committee, the specific duties delegated by the Board
to such Committee, and subject to the approval of any relevant authorities, the
Administrator shall have the authority in its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may from time to time be granted hereunder;
(iii) to determine the number of Shares to be covered by each
such award granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions of any Option or
Stock Purchase Right granted hereunder. Such terms and conditions include, but
are not limited to, the exercise price, the time or times when Options or Stock
Purchase Rights may be exercised (which may be based on performance criteria),
any vesting acceleration or waiver of forfeiture restrictions, and any
restriction or limitation regarding any Option or Stock Purchase Right or the
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vi) to determine whether and under what circumstances an
Option may be settled in cash under subsection 9(e) instead of Common Stock;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock covered
by such Option has declined since the date the Option was granted;
(viii) to initiate an Option Exchange Program;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(x) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by Optionees to
have Shares
-4-
<PAGE>
withheld for this purpose shall be made in such form and under such conditions
as the Administrator may deem necessary or advisable; and
(xi) to construe and interpret the terms of the Plan and awards
granted pursuant to the Plan.
(c) Effect of Administrator's Decision. All decisions, determinations
----------------------------------
and interpretations of the Administrator shall be final and binding on all
Optionees.
5. Eligibility.
-----------
(a) Nonstatutory Stock Options and Stock Purchase Rights may be
granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
(b) Each Option shall be designated in the Option Agreement as either
an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 5(b), Incentive Stock Options shall be taken into account in the order
in which they were granted. The Fair Market Value of the Shares shall be
determined as of the time the Option with respect to such Shares is granted.
(c) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon any Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall it interfere in
any way with his or her right or the Company's right to terminate such
relationship at any time, with or without cause.
6. Term of Plan. The Plan shall become effective upon its adoption by the
------------
Board. It shall continue in effect for a term of ten (10) years unless sooner
terminated under Section 14 of the Plan.
7. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement; provided, however, that the term shall be no more than ten (10) years
from the date of grant thereof. In the case of an Incentive Stock Option
granted to an Optionee who, at the time the Option is granted, owns stock
representing more than ten percent (10%) of the voting power of all classes of
stock of the Company or any Parent or Subsidiary, the term of the Option shall
be five (5) years from the date of grant or such shorter term as may be provided
in the Option Agreement.
-5-
<PAGE>
8. Option Exercise Price and Consideration.
---------------------------------------
(a) The per share exercise price for the Shares to be issued upon
exercise of an Option shall be such price as is determined by the Administrator,
but shall be subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time of grant of
such Option, owns stock representing more than ten percent (10%) of the voting
power of all classes of stock of the Company or any Parent or Subsidiary, the
exercise price shall be no less than 110% of the Fair Market Value per Share on
the date of grant.
(B) granted to any other Employee, the per Share exercise
price shall be no less than 100% of the Fair Market Value per Share on the date
of grant.
(ii) In the case of a Nonstatutory Stock Option
(A) granted to a Service Provider who, at the time of
grant of such Option, owns stock representing more than ten percent (10%) of the
voting power of all classes of stock of the Company or any Parent or Subsidiary,
the exercise price shall be no less than 110% of the Fair Market Value per Share
on the date of grant.
(B) granted to any other Service Provider, the per Share
exercise price shall be no less than 85% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted with
a per Share exercise price other than as required above pursuant to a merger or
other corporate transaction.
(b) The consideration to be paid for the Shares to be issued upon
exercise of an Option, including the method of payment, shall be determined by
the Administrator (and, in the case of an Incentive Stock Option, shall be
determined at the time of grant). Such consideration may consist of (1) cash,
(2) check, (3) promissory note, (4) other Shares which (x) in the case of Shares
acquired upon exercise of an Option, have been owned by the Optionee for more
than six months on the date of surrender, and (y) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares as to
which such Option shall be exercised, (5) consideration received by the Company
under a cashless exercise program implemented by the Company in connection with
the Plan, or (6) any combination of the foregoing methods of payment. In making
its determination as to the type of consideration to accept, the Administrator
shall consider if acceptance of such consideration may be reasonably expected to
benefit the Company.
-6-
<PAGE>
9. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms hereof at such
times and under such conditions as determined by the Administrator and set forth
in the Option Agreement. Except in the case of Options granted to Officers,
Directors and Consultants, Options shall become exercisable at a rate of no less
than 20% per year over five (5) years from the date the Options are granted.
Unless the Administrator provides otherwise, vesting of Options granted
hereunder shall be tolled during any unpaid leave of absence. An Option may not
be exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company receives: (i)
written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate entry on the books
of the Company or of a duly authorized transfer agent of the Company), no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Shares, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other right
for which the record date is prior to the date the Shares are issued, except as
provided in Section 12 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the
number of Shares thereafter available, both for purposes of the Plan and for
sale under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, such Optionee may exercise his or her Option
within such period of time as is specified in the Option Agreement (of at least
thirty (30) days) to the extent that the Option is vested on the date of
termination (but in no event later than the expiration of the term of the Option
as set forth in the Option Agreement). In the absence of a specified time in
the Option Agreement, the Option shall remain exercisable for three (3) months
following the Optionee's termination. If, on the date of termination, the
Optionee is not vested as to his or her entire Option, the Shares covered by the
unvested portion of the Option shall revert to the Plan. If, after termination,
the Optionee does not exercise his or her Option within the time specified by
the Administrator, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
(of at least six (6) months) to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a specified
time in the Option Agreement,
-7-
<PAGE>
the Option shall remain exercisable for twelve (12) months following the
Optionee's termination. If, on the date of termination, the Optionee is not
vested as to his or her entire Option, the Shares covered by the unvested
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified herein,
the Option shall terminate, and the Shares covered by such Option shall revert
to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement (of at least six (6) months) to the extent that the Option is
vested on the date of death (but in no event later than the expiration of the
term of such Option as set forth in the Option Agreement) by the Optionee's
estate or by a person who acquires the right to exercise the Option by bequest
or inheritance. In the absence of a specified time in the Option Agreement, the
Option shall remain exercisable for twelve (12) months following the Optionee's
termination. If, at the time of death, the Optionee is not vested as to the
entire Option, the Shares covered by the unvested portion of the Option shall
immediately revert to the Plan. If the Option is not so exercised within the
time specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares, an Option previously granted, based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
10. Non-Transferability of Options and Stock Purchase Rights. The Options
--------------------------------------------------------
and Stock Purchase Rights may not be sold, pledged, assigned, hypothecated,
transferred, or disposed of in any manner other than by will or by the laws of
descent or distribution and may be exercised, during the lifetime of the
Optionee, only by the Optionee.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. Stock Purchase Rights may be issued either
------------------
alone, in addition to, or in tandem with other awards granted under the Plan
and/or cash awards made outside of the Plan. After the Administrator determines
that it will offer Stock Purchase Rights under the Plan, it shall advise the
offeree in writing or electronically of the terms, conditions and restrictions
related to the offer, including the number of Shares that such person shall be
entitled to purchase, the price to be paid, and the time within which such
person must accept such offer. The terms of the offer shall comply in all
respects with Section 260.140.42 of Title 10 of the California Code of
Regulations. The offer shall be accepted by execution of a Restricted Stock
purchase agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock purchase agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock purchase agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse
-8-
<PAGE>
at such rate as the Administrator may determine. Except with respect to Shares
purchased by Officers, Directors and Consultants, the repurchase option shall in
no case lapse at a rate of less than 20% per year over five (5) years from the
date of purchase.
(c) Other Provisions. The Restricted Stock purchase agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Stockholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have rights equivalent to those of a stockholder
and shall be a stockholder when his or her purchase is entered upon the records
of the duly authorized transfer agent of the Company. No adjustment shall be
made for a dividend or other right for which the record date is prior to the
date the Stock Purchase Right is exercised, except as provided in Section 12 of
the Plan.
12. Adjustments Upon Changes in Capitalization, Merger or Asset Sale.
----------------------------------------------------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option or Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company. The conversion of any convertible securities
of the Company shall not be deemed to have been "effected without receipt of
consideration." Such adjustment shall be made by the Board, whose determination
in that respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any class, or
securities convertible into shares of stock of any class, shall affect, and no
adjustment by reason thereof shall be made with respect to, the number or price
of shares of Common Stock subject to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option or Stock Purchase Right until
fifteen (15) days prior to such transaction as to all of the Optioned Stock
covered thereby, including Shares as to which the Option or Stock Purchase Right
would not otherwise be exercisable. In addition, the Administrator may provide
that any Company repurchase option applicable to any Shares purchased upon
exercise of an Option or Stock Purchase Right shall lapse as to all such Shares,
provided the proposed dissolution or liquidation takes place at the time and in
the manner contemplated. To the
-9-
<PAGE>
extent it has not been previously exercised, an Option or Stock Purchase Right
will terminate immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or a Parent or Subsidiary of the successor corporation. In the event
that the successor corporation refuses to assume or substitute for the Option or
Stock Purchase Right, the Optionee shall fully vest in and have the right to
exercise the Option or Stock Purchase Right as to all of the Optioned Stock,
including Shares as to which it would not otherwise be vested or exercisable. If
an Option or Stock Purchase Right becomes fully vested and exercisable in lieu
of assumption or substitution in the event of a merger or sale of assets, the
Administrator shall notify the Optionee in writing or electronically that the
Option or Stock Purchase Right shall be fully exercisable for a period of
fifteen (15) days from the date of such notice, and the Option or Stock Purchase
Right shall terminate upon the expiration of such period. For the purposes of
this paragraph, the Option or Stock Purchase Right shall be considered assumed
if, following the merger or sale of assets, the option or right confers the
right to purchase or receive, for each Share of Optioned Stock subject to the
Option or Stock Purchase Right immediately prior to the merger or sale of
assets, the consideration (whether stock, cash, or other securities or property)
received in the merger or sale of assets by holders of Common Stock for each
Share held on the effective date of the transaction (and if holders were offered
a choice of consideration, the type of consideration chosen by the holders of a
majority of the outstanding Shares); provided, however, that if such
consideration received in the merger or sale of assets is not solely common
stock of the successor corporation or its Parent, the Administrator may, with
the consent of the successor corporation, provide for the consideration to be
received upon the exercise of the Option or Stock Purchase Right, for each Share
of Optioned Stock subject to the Option or Stock Purchase Right, to be solely
common stock of the successor corporation or its Parent equal in fair market
value to the per share consideration received by holders of Common Stock in the
merger or sale of assets.
13. Time of Granting Options and Stock Purchase Rights. The date of grant
--------------------------------------------------
of an Option or Stock Purchase Right shall, for all purposes, be the date on
which the Administrator makes the determination granting such Option or Stock
Purchase Right, or such other date as is determined by the Administrator.
Notice of the determination shall be given to each Service Provider to whom an
Option or Stock Purchase Right is so granted within a reasonable time after the
date of such grant.
14. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Stockholder Approval. The Board shall obtain stockholder approval
--------------------
of any Plan amendment to the extent necessary and desirable to comply with
Applicable Laws.
-10-
<PAGE>
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
15. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option unless the exercise of such Option and the issuance and
delivery of such Shares shall comply with Applicable Laws and shall be further
subject to the approval of counsel for the Company with respect to such
compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option, the Administrator may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are being
purchased only for investment and without any present intention to sell or
distribute such Shares if, in the opinion of counsel for the Company, such a
representation is required.
16. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this Plan,
---------------------
shall at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
18. Stockholder Approval. The Plan shall be subject to approval by the
--------------------
stockholders of the Company within twelve (12) months after the date the Plan is
adopted. Such stockholder approval shall be obtained in the degree and manner
required under Applicable Laws.
19. Information to Optionees and Purchasers. The Company shall provide to
---------------------------------------
each Optionee and to each individual who acquires Shares pursuant to the Plan,
not less frequently than annually during the period such Optionee or purchaser
has one or more Options or Stock Purchase Rights outstanding, and, in the case
of an individual who acquires Shares pursuant to the Plan, during the period
such individual owns such Shares, copies of annual financial statements. The
Company shall not be required to provide such statements to key employees whose
duties in connection with the Company assure their access to equivalent
information.
-11-
<PAGE>
SONIC INNOVATIONS, INC.
1993 STOCK PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall have
the same defined meanings in this Option Agreement.
1. NOTICE OF STOCK OPTION GRANT
_______________________
_______________________
_______________________
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number ___________
Date of Grant___________
Vesting Commencement Date___________
Exercise Price per Share___________$___________
Total Number of Shares Granted___________
Total Exercise Price_________$___________
Type of Option:__ Incentive Stock Option
___________ Nonstatutory Stock Option
Term/Expiration Date:____________
Vesting Schedule:
----------------
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
25% of the Shares subject to the Option shall vest twelve months after the
Vesting Commencement Date, and 1/48 of the Shares subject to the Option shall
vest each month thereafter.
<PAGE>
Termination Period:
------------------
This Option may be exercised for 90 days after termination of employment or
consulting relationship, or such longer period as may be applicable upon death
or disability of Optionee as provided in the Plan, but in no event later than
the Term/Expiration Date as provided above.
2. AGREEMENT
(a) Grant of Option. Sonic Innovations, Inc., a Delaware corporation (the
---------------
"Company"), hereby grants to the Optionee named in the Notice of Grant (the
"Optionee"), an option (the "Option") to purchase a total number of shares of
Common Stock (the "Shares") set forth in the Notice of Grant, at the exercise
price per share set forth in the Notice of Grant (the "Exercise Price") subject
to the terms, definitions and provisions of the 1993 Stock Option Plan (the
"Plan") adopted by the Company, which is incorporated herein by reference.
Unless otherwise defined herein, the terms defined in the Plan shall have the
same defined meanings in this Option Agreement.
If designated in the Notice of Grant as an Incentive Stock Option, this
Option is intended to qualify as an Incentive Stock Option as defined in Section
422 of the Code. However, if this Option is intended to be an Incentive Stock
Option, to the extent that it exceeds the $100,000 rule of Code Section 422(d)
it shall be treated as a Nonstatutory Stock Option.
(b) Exercise of Option. This Option shall be exercisable during its term
------------------
in accordance with the Exercise Schedule set out in the Notice of Grant and with
the provisions of Section 9 of the Plan as follows:
(c) Right to Exercise.
-----------------
(i) This Option may not be exercised for a fraction of a share.
(ii) In the event of Optionee's death, disability or other termination of
employment, the exercisability of the Option is governed by Sections 6, 7 and 8
below, subject to the limitation contained in subsection 2(i)(c).
(iii) In no event may this Option be exercised after the date of expiration
of the term of this Option as set forth in the Notice of Grant.
(d) Method of Exercise. This Option shall be exercisable by written
------------------
notice (in the form attached as Exhibit A) which shall state the election to
exercise the Option, the number of Shares in respect of which the Option is
being exercised, and such other representations and agreements as to the
holder's investment intent with respect to such shares of Common Stock as may be
required by the Company pursuant to the provisions of the Plan. Such written
notice shall be signed by the Optionee and shall be delivered in person or by
certified mail to the Secretary of the Company. The written notice shall be
accompanied by payment of the Exercise Price. This Option shall be deemed
-2-
<PAGE>
to be exercised upon receipt by the Company of such written notice accompanied
by the Exercise Price.
No Shares will be issued pursuant to the exercise of an Option unless such
issuance and such exercise shall comply with all relevant provisions of law and
the requirements of any stock exchange upon which the Shares may then be listed.
Assuming such compliance, for income tax purposes the Shares shall be considered
transferred to the Optionee on the date on which the Option is exercised with
respect to such Shares.
3. OPTIONEE'S REPRESENTATIONS. In the event the Shares purchasable
pursuant to the exercise of this Option have not been registered under the
Securities Act of 1933, as amended ("1933 Act"), at the time this Option is
exercised, Optionee shall, if required by the Company, concurrently with the
exercise of all or any portion of this Option, deliver to the Company his
Investment Representation Statement in the form attached hereto as Exhibit B.
4. METHOD OF PAYMENT. Payment of the Exercise Price shall be by any of the
following, or a combination thereof, at the election of the Optionee:
(a)cash; or
(b)check; or
(c)surrender of other shares of Common Stock of the Company which (A) in
the case of Shares acquired pursuant to the exercise of a Company option, have
been owned by the Optionee for more than six (6) months on the date of
surrender, and (B) have a fair market value on the date of surrender equal to
the Exercise Price of the Shares as to which the Option is being exercised; or
(d)delivery of a properly executed exercise notice together with such other
documentation as the Administrator and the broker, if applicable, shall require
to effect an exercise of the Option and delivery to the Company of the sale or
loan proceeds required to pay the exercise price.
5. RESTRICTIONS ON EXERCISE. This Option may not be exercised until such
time as the Plan has been approved by the shareholders of the Company, or if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulation, including any rule under
Part 207 of Title 12 of the Code of Federal Regulations ("Regulation G") as
promulgated by the Federal Reserve Board. As a condition to the exercise of
this Option, the Company may require Optionee to make any representation and
warranty to the Company as may be required by any applicable law or regulation.
6. TERMINATION OF RELATIONSHIP. In the event an Optionee's Continuous
Status as an Employee or Consultant terminates, Optionee may, to the extent
otherwise so entitled at the date of such termination (the "Termination Date"),
exercise this Option during the Termination Period set out in the Notice of
Grant. To the extent that Optionee was not entitled to exercise this
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<PAGE>
Option at the date of such termination, or if Optionee does not exercise this
Option within the time specified herein, the Option shall terminate.
7. DISABILITY OF OPTIONEE. Notwithstanding the provisions of Section 6
above, in the event of termination of an Optionee's consulting relationship or
Continuous Status as an Employee as a result of his or her disability, Optionee
may, but only within 180 days from the date of such termination (and in no event
later than the expiration date of the term of such Option as set forth in the
Option Agreement), exercise the Option to the extent otherwise entitled to
exercise it at the date of such termination; provided, however, that if such
disability is not a "disability" as such term is defined in Section 22(e)(3) of
the Code, in the case of an Incentive Stock Option such Incentive Stock Option
shall automatically convert to a Nonstatutory Stock Option on the day three
months and one day following such termination. To the extent that Optionee was
not entitled to exercise the Option at the date of termination, or if Optionee
does not exercise such Option to the extent so entitled within the time
specified herein, the Option shall terminate, and the Shares covered by such
Option shall revert to the Plan.
8. DEATH OF OPTIONEE. In the event of termination of Optionee's
Continuous Status as an Employee or Consultant as a result of the death of
Optionee, the Option may be exercised at any time within 180 days following the
date of death (but in no event later than the date of expiration of the term of
this Option as set forth in Section 10 below), by Optionee's estate or by a
person who acquired the right to exercise the Option by bequest or inheritance,
but only to the extent the Optionee could exercise the Option at the date of
death.
9. NON-TRANSFERABILITY OF OPTION. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by him. The terms of this
Option shall be binding upon the executors, administrators, heirs, successors
and assigns of the Optionee.
10. TERM OF OPTION. This Option may be exercised only within the term set
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option. The limitations set out
in Section 7 of the Plan regarding Options designated as Incentive Stock Options
and Options granted to more than ten percent (10%) shareholders shall apply to
this Option.
11. TAXATION UPON EXERCISE OF OPTION. Optionee understands that, upon
exercising a nonstatutory Option, he or she will recognize income for tax
purposes in an amount equal to the excess of the then fair market value of the
Shares over the exercise price. However, the timing of this income recognition
may be deferred for up to six months if Optionee is subject to Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). If the
Optionee is an employee, the Company will be required to withhold from
Optionee's compensation, or collect from Optionee and pay to the applicable
taxing authorities an amount equal to a percentage of this compensation income.
Additionally, the Optionee may at some point be required to satisfy tax
withholding obligations with respect to the disqualifying disposition of an
Incentive Stock Option.
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<PAGE>
The Optionee shall satisfy his or her tax withholding obligation arising upon
the exercise of this Option out of Optionee's compensation or by payment to the
Company.
12. "MARKET STAND-OFF" AGREEMENT. Optionee hereby agrees, if requested by
the Company and an underwriter of Common Stock (or other equity securities) of
the Company, not to sell or otherwise transfer or dispose of any Common Stock
(or other equity securities) of the Company held by the Optionee during the 180
day period following the date of the final prospectus of the Company, filed
under the 1993 Act; provided that such agreement will only apply to the first
registration statement of the Company, including any such registration statement
registering shares to be sold on Optionee's behalf to the public in an
underwritten offering. The Company may impose "stop transfer" instructions with
respect to any shares held by Optionee subject to the foregoing restriction
until the end of such 180 day period.
13. TAX CONSEQUENCES. Set forth below is a brief summary as of the date of
this Option of some of the federal and Delaware State tax consequences of
exercise of this Option and disposition of the Shares. THIS SUMMARY IS
NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE.
OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
(a) Exercise of ISO. If this Option qualifies as an ISO, there will be no
---------------
regular federal income tax liability or Delaware State income tax liability upon
the exercise of the Option, although the excess, if any, of the fair market
value of the Shares on the date of exercise over the Exercise Price will be
treated as an adjustment to the alternative minimum tax for federal tax purposes
and may subject the Optionee to the alternative minimum tax in the year of
exercise.
(b) Exercise of ISO following Disability. If the Optionee's Continuous
------------------------------------
Status as an Employee or Consultant terminates as a result of disability that is
not total and permanent disability as defined in Section 22(e)(3) of the Code,
to the extent permitted on the date of termination, the Optionee must exercise
an ISO within 90 days of such termination for the ISO to be qualified as an ISO.
(c) Exercise of Nonstatutory Stock Option. There may be a regular federal
-------------------------------------
income tax liability and Delaware State income tax liability upon the exercise
of a Nonstatutory Stock Option. The Optionee will be treated as having received
compensation income (taxable at ordinary income tax rates) equal to the excess,
if any, of the fair market value of the Shares on the date of exercise over the
Exercise Price. If Optionee is an employee, the Company will be required to
withhold from Optionee's compensation or collect from Optionee and pay to the
applicable taxing authorities an amount equal to a percentage of this
compensation income at the time of exercise.
(d) Disposition of Shares. In the case of an ISO, if Shares are held for
---------------------
at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal and Delaware State income tax
purposes. In the case of an ISO, if Shares transferred pursuant to the Option
are held for at least one year after exercise and are disposed of at least two
years after the Date of Grant, any gain realized on disposition of the Shares
will also be treated as long-term capital gain for federal and [state] income
tax purposes. If Shares purchased under an ISO are disposed of
-5-
<PAGE>
within such one-year period or within two years after the Date of Grant, any
gain realized on such disposition will be treated as compensation income
(taxable at ordinary income rates) to the extent of the difference between the
Exercise Price and the lesser of (1) the fair market value of the Shares on the
date of exercise, or (2) the sale price of the Shares.
(e) Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (1) the date two years after the Date of Grant, or (2) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
SONIC INNOVATIONS, INC.
a Delaware corporation
By: _____________________________
Its: ____________________________
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<PAGE>
OPTIONEE ACKNOWLEDGES AND AGREES THAT THE VESTING OF SHARES PURSUANT TO THE
OPTION HEREOF IS EARNED ONLY BY CONTINUING CONSULTANCY OR EMPLOYMENT AT THE WILL
OF THE COMPANY (NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR
ACQUIRING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT
NOTHING IN THIS AGREEMENT, NOR IN THE COMPANY'S STOCK OPTION PLAN WHICH IS
INCORPORATED HEREIN BY REFERENCE, SHALL CONFER UPON OPTIONEE ANY RIGHT WITH
RESPECT TO CONTINUATION OF EMPLOYMENT OR CONSULTANCY BY THE COMPANY, NOR SHALL
IT INTERFERE IN ANY WAY WITH HIS RIGHT OR THE COMPANY'S RIGHT TO TERMINATE HIS
EMPLOYMENT OR CONSULTANCY AT ANY TIME, WITH OR WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
is familiar with the terms and provisions thereof, and hereby accepts this
Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Dated: ____________________________________________________
Optionee
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EXHIBIT A
1993 STOCK PLAN
EXERCISE NOTICE
Sonic Innovations, Inc.
5330 South 900 East
Salt Lake City, Utah 84117
Attention: Chief Financial Officer
14. EXERCISE OF OPTION. Effective as of today, ___________, 19__, the
undersigned ("Optionee") hereby elects to exercise Optionee's option to purchase
_________ shares of the Common Stock (the "Shares") of Sonic Innovations, Inc.
(the "Company") under and pursuant to the Sonic Innovations, Inc. 1993 Stock
Plan, as amended (the "Plan") and the [ ] Incentive [ ] Nonstatutory Stock
Option Agreement dated ________ (the "Option Agreement").
15. REPRESENTATIONS OF OPTIONEE. Optionee acknowledges that Optionee has
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
16. RIGHTS AS SHAREHOLDER. Until the stock certificate evidencing such
Shares is issued (as evidenced by the appropriate entry on the books of the
Company or of a duly authorized transfer agent of the Company), no right to vote
or receive dividends or any other rights as a shareholder shall exist with
respect to the optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such stock certificate promptly
after the Option is exercised. No adjustment will be made for a dividend or
other right for which the record date is prior to the date the stock certificate
is issued, except as provided in Section 12 of the Plan.
Optionee shall enjoy rights as a shareholder until such time as Optionee
disposes of the Shares or the Company and/or its assignee(s) exercises the Right
of First Refusal hereunder. Upon such exercise, Optionee shall have no further
rights as a holder of the Shares so purchased except the right to receive
payment for the Shares so purchased in accordance with the provisions of this
Agreement, and Optionee shall forthwith cause the certificate(s) evidencing the
Shares so purchased to be surrendered to the Company for transfer or
cancellation.
17. COMPANY'S RIGHT OF FIRST REFUSAL. Before any Shares held by Optionee
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
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<PAGE>
(a) Notice of Proposed Transfer. The Holder of the Shares shall deliver to
---------------------------
the Company a written notice (the "Notice") stating: (i) the Holder's bona fide
intention to sell or otherwise transfer such Shares; (ii) the name of each
proposed purchaser or other transferee ("Proposed Transferee"); (iii) the number
of Shares to be transferred to each Proposed Transferee; and (iv) the bona fide
cash price or other consideration for which the Holder proposes to transfer the
Shares (the "Offered Price"), and the Holder shall offer the Shares at the
Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within thirty (30)
----------------------------------
days after receipt of the Notice, the Company and/or its assignee(s) may, by
giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the Shares
--------------
purchased by the Company or its assignee(s) under this Section shall be the
Offered Price. If the Offered Price includes consideration other than cash, the
cash equivalent value of the non-cash consideration shall be determined by the
Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the option of
-------
the Company or its assignee(s), in cash (by check), by cancellation of all or a
portion of any outstanding indebtedness of the Holder to the Company (or, in the
case of repurchase by an assignee, to the assignee), or by any combination
thereof within 30 days after receipt of the Notice or in the manner and at the
times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice and provided further
that any such sale or other transfer is effected in accordance with any
applicable securities laws and the Proposed Transferee agrees in writing that
the provisions of this Section shall continue to apply to the Shares in the
hands of such Proposed Transferee. If the Shares described in the Notice are
not transferred to the Proposed Transferee within such period, a new Notice
shall be given to the Company, and the Company and/or its assignees shall again
be offered the Right of First Refusal before any Shares held by the Holder may
be sold or otherwise transferred.
(f) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother, brother or sister. In such case, the transferee or
other recipient shall receive and hold the Shares so transferred subject to the
provisions of this Section, and there shall be no further transfer of such
Shares except in accordance with the terms of this Section.
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<PAGE>
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares immediately after the first sale of Common
Stock of the Company to the general public pursuant to a registration statement
filed with and declared effective by the Securities and Exchange Commission
under the 1933 Act.
(h) Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
(i) Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(ii) Legends. Optionee understands and agrees that the Company shall cause
-------
the legends set forth below or legends substantially equivalent thereto, to be
placed upon any certificate(s) evidencing ownership of the Shares together with
any other legends that may be required by state or federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933 (THE "1933 ACT") OR ANY STATE SECURITIES LAWS AND MAY NOT
BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND
UNTIL REGISTERED UNDER THE 1933 ACT OR SUCH APPLICABLE STATE SECURITIES LAWS,
OR, IN THE OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER
OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN
COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY THE ISSUER
OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE BETWEEN THE ISSUER AND
THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF WHICH MAY BE OBTAINED AT THE
PRINCIPAL OFFICE OF THE ISSUER. SUCH TRANSFER RESTRICTIONS AND RIGHT OF FIRST
REFUSAL ARE BINDING ON TRANSFEREES OF THESE SHARES.
(iii) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(iv) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Agreement or (ii) to treat as owner
of such Shares or to accord the right to vote or pay dividends to any purchaser
or other transferee to whom such Shares shall have been so transferred.
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<PAGE>
18. SUCCESSORS AND ASSIGNS. The Company may assign any of its rights under
this Agreement to single or multiple assignees, and this Agreement shall inure
to the benefit of the successors and assigns of the Company. Subject to the
restrictions on transfer herein set forth, this Agreement shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.
19. INTERPRETATION. Any dispute regarding the interpretation of this
Agreement shall be submitted by Optionee or by the Company forthwith to the
Company's Board of Directors or the committee thereof that administers the Plan,
which shall review such dispute at its next regular meeting. The resolution of
such a dispute by the Board or committee shall be final and binding on the
Company and on Optionee.
20. GOVERNING LAW; SEVERABILITY. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware excluding that
body of law pertaining to conflicts of law. Should any provision of this
Agreement be determined by a court of law to be illegal or unenforceable, the
other provisions shall nevertheless remain effective and shall remain
enforceable.
21. NOTICES. Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail by certified mail, with postage and fees
prepaid, addressed to the other party at its address as shown below beneath its
signature, or to such other address as such party may designate in writing from
time to time to the other party.
22. FURTHER INSTRUMENTS. The parties agree to execute such further
instruments and to take such further action as may be reasonably necessary to
carry out the purposes and intent of this Agreement.
23. DELIVERY OF PAYMENT. Optionee herewith delivers to the Company the
full Exercise Price for the Shares.
24. ENTIRE AGREEMENT. The Plan and Notice of Grant/Option Agreement are
incorporated herein by reference. This Agreement, the Plan, the Option
Agreement and the Investment Representation Statement constitute the entire
agreement of the parties and supersede in their entirety all prior undertakings
and agreements of the Company and Optionee with respect to the subject matter
hereof, and is governed by Delaware law except for that body of law pertaining
to conflict of laws.
Submitted by: Accepted by:
OPTIONEE: SONIC INNOVATIONS, INC.
_________________________________ By:_______________________________
(Signature)Its:______________________________
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Address: Address:
------- -------
__________________________________ _________________________________
__________________________________ _________________________________
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE:
COMPANY: SONIC INNOVATIONS, INC.
SECURITY: Common Stock
AMOUNT:
DATE:
In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the securities. Optionee is
acquiring these securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "1933 Act").
(b) Optionee acknowledges and understands that the securities constitute
"restricted securities" under the 1933 Act and have not been registered under
the 1933 Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of Optionee's investment
intent as expressed herein. In this connection, Optionee understands that, in
the view of the Securities and Exchange Commission, the statutory basis for such
exemption may be unavailable if Optionee's representation was predicated solely
upon a present intention to hold these Securities for the minimum capital gains
period specified under tax statutes, for a deferred sale, for or until an
increase or decrease in the market price of the Securities, or for a period of
one year or any other fixed period in the future. Optionee further understands
that the Securities must be held indefinitely unless they are subsequently
registered under the 1933 Act or an exemption from such registration is
available. Optionee further acknowledges and understands that the Company is
under no obligation to register the securities. Optionee understands that the
certificate evidencing the securities will be imprinted with a legend which
prohibits the transfer of the Securities unless they are
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<PAGE>
registered or such registration is not required under federal and applicable
state securities laws, in the opinion of counsel satisfactory to the Company.
(c) Optionee is familiar with the provisions of Rule 701 and Rule 144,
each promulgated under the 1933 Act, which, in substance, permit limited public
resale of "restricted securities" acquired, directly or indirectly from the
issuer thereof, in a non-public offering subject to the satisfaction of certain
conditions. Rule 701 provides that if the issuer qualifies under Rule 701 at the
time of the grant of the Option to the Optionee, the exercise will be exempt
from registration under the 1933 Act. In the event the Company becomes subject
to the reporting requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, ninety (90) days thereafter (or such longer period as any market
stand-off agreement may require) the securities exempt under Rule 701 may be
resold, subject to the satisfaction of certain of the conditions specified by
Rule 144, including: (1) the resale being made through a broker in an
unsolicited "broker's transaction" or in transactions directly with a market
maker (as said term is defined under the Securities Exchange Act of 1934); and,
in the case of an affiliate, (2) the availability of certain public information
about the Company, (3) the amount of securities being sold during any three
month period not exceeding the limitations specified in Rule 144(e), and (4) the
timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than two years after the party has purchased, and made full
payment for, within the meaning of Rule 144, the securities to be sold; and, in
the case of an affiliate, or of a non-affiliate who has held the securities less
than three years, the satisfaction of the conditions set forth in sections (1),
(2), (3) and (4) of the paragraph immediately above.
(d) Optionee further understands that in the event all of the applicable
requirements of Rule 701 or 144 are not satisfied, registration under the 1933
Act, compliance with Regulation A, or some other registration exemption will be
required; and that, notwithstanding the fact that Rules 144 and 701 are not
exclusive, the Staff of the Securities and Exchange Commission has expressed its
opinion that persons proposing to sell private placement securities other than
in a registered offering and otherwise than pursuant to Rules 144 or 701 will
have a substantial burden of proof in establishing that an exemption from
registration is available for such offers or sales, and that such persons and
their respective brokers who participate in such transactions do so at their own
risk. Optionee understands that no assurances can be given that any such other
registration exemption will be available in such event.
Signature of Optionee:
____________________________
Date:_________________, 19___
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<PAGE>
AMENDED AND RESTATED 1993 STOCK PLAN
STOCK OPTION AGREEMENT -- EARLY EXERCISE
Unless otherwise defined herein, the terms defined in the Amended and
Restated 1993 Stock Plan shall have the same defined meanings in this Stock
Option Agreement (the "Option Agreement").
I. NOTICE OF STOCK OPTION GRANT
----------------------------
[Optionee's Name and Address]
-----------------------------
You have been granted an option to purchase Common Stock of the Company,
subject to the terms and conditions of the Plan and this Option Agreement, as
follows:
Grant Number __________________________________
Date of Grant __________________________________
Vesting Commencement Date __________________________________
Exercise Price per Share __________________________________
Total Number of Shares Granted __________________________________
Total Exercise Price __________________________________
Type of Option: ____ Incentive Stock Option
____ Nonstatutory Stock Option
Term/Expiration Date: __________________________________
Exercise and Vesting Schedule:
-----------------------------
This Option shall be exercisable in whole or in part, and shall vest
according to the following vesting schedule:
1/24th of the Shares subject to the Option shall vest each month after the
Vesting Commencement Date, subject to Optionee's continuing to be a Service
Provider on such dates.
Termination Period:
------------------
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<PAGE>
This Option may be exercised, to the extent it is then vested, for three
months after Optionee ceases to be a Service Provider. Upon death or Disability
of the Optionee, this Option may be exercised, to the extent it is then vested,
for one year after Optionee ceases to be Service Provider. In no event shall
this Option be exercised later than the Term/Expiration Date as provided above.
II. AGREEMENT
---------
1. Grant of Option. The Administrator of the Company hereby grants to the
---------------
Optionee named in the Notice of Grant (the "Optionee"), an option (the "Option")
to purchase the number of Shares set forth in the Notice of Grant, at the
exercise price per Share set forth in the Notice of Grant (the "Exercise
Price"), and subject to the terms and conditions of the Plan, which is
incorporated herein by reference. Subject to Section 14(c) of the Plan, in the
event of a conflict between the terms and conditions of the Plan and this Option
Agreement, the terms and conditions of the Plan shall prevail.
If designated in the Notice of Grant as an Incentive Stock Option
("ISO"), this Option is intended to qualify as an Incentive Stock Option as
defined in Section 422 of the Code. Nevertheless, to the extent that it exceeds
the $100,000 rule of Code Section 422(d), this Option shall be treated as a
Nonstatutory Stock Option ("NSO").
2. Exercise of Option. This Option shall be exercisable during its term
------------------
in accordance with the provisions of Section 9 of the Plan as follows:
(a) Right to Exercise.
-----------------
(i) Subject to subsections 2(a)(ii) and 2(a)(iii) below, this
Option shall be exercisable cumulatively according to the vesting schedule set
forth in the Notice of Grant. Alternatively, at the election of the Optionee,
this Option may be exercised in whole or in part at any time as to Shares which
have not yet vested. Vested Shares shall not be subject to the Company's
repurchase right (as set forth in the Restricted Stock Purchase Agreement,
attached hereto as Exhibit C-1).
-----------
(ii) As a condition to exercising this Option for unvested
Shares, the Optionee shall execute the Restricted Stock Purchase Agreement.
(iii) This Option may not be exercised for a fraction of a Share.
(b) Method of Exercise. This Option shall be exercisable by delivery
------------------
of an exercise notice in the form attached as Exhibit A (the "Exercise Notice")
---------
which shall state the election to exercise the Option, the number of Shares with
respect to which the Option is being exercised, and such other representations
and agreements as may be required by the Company. The Exercise Notice shall be
accompanied by payment of the aggregate Exercise Price as to all Exercised
Shares. This
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<PAGE>
Option shall be deemed to be exercised upon receipt by the Company of such fully
executed Exercise Notice accompanied by the aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of an Option unless
such issuance and such exercise complies with Applicable Laws. Assuming such
compliance, for income tax purposes the Shares shall be considered transferred
to the Optionee on the date on which the Option is exercised with respect to
such Shares.
3. Optionee's Representations. In the event the Shares to be issued upon
--------------------------
exercise of an Option have not been registered under the Securities Act of 1933,
as amended, at the time this Option is exercised, the Optionee shall, if
required by the Company, concurrently with the exercise of all or any portion of
this Option, deliver to the Company his or her Investment Representation
Statement in the form attached hereto as Exhibit B.
---------
4. Lock-Up Period. Optionee hereby agrees that, if so requested by the
--------------
Company or any representative of the underwriters (the "Managing Underwriter")
in connection with any registration of the offering of any securities of the
Company under the Securities Act, Optionee shall not sell or otherwise transfer
any Shares or other securities of the Company during the 180-day period (or such
shorter period as may be requested in writing by the Managing Underwriter and
agreed to in writing by the Company) (the "Market Standoff Period") following
the date of the final Prospectus contained in a registration statement of the
Company filed under the Securities Act. Such restriction shall apply only to
the first registration statement of the Company to become effective under the
Securities Act that includes securities to be sold on behalf of the Company to
the public in an underwritten public offering under the Securities Act. The
Company may impose stop-transfer instructions with respect to securities subject
to the foregoing restrictions until the end of such Market Standoff Period.
5. Method of Payment. Payment of the aggregate Exercise Price shall be
-----------------
by any of the following, or a combination thereof, at the election of the
Optionee:
(a) cash;
(b) check;
(c) consideration received by the Company under a formal cashless
exercise program adopted by the Company in connection with the Plan; or
(d) surrender of other Shares which, (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for more
than six (6) months on the date of surrender, and (ii) have a Fair Market Value
on the date of surrender equal to the aggregate Exercise Price of the Exercised
Shares.
6. Restrictions on Exercise. This Option may not be exercised until such
------------------------
time as the Plan has been approved by the stockholders of the Company, or if the
issuance of such Shares upon such
-16-
<PAGE>
exercise or the method of payment of consideration for such shares would
constitute a violation of any Applicable Law.
7. Non-Transferability of Option. This Option may not be transferred in
-----------------------------
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by Optionee. The terms of
the Plan and this Option Agreement shall be binding upon the executors,
administrators, heirs, successors and assigns of the Optionee.
8. Term of Option. This Option may be exercised only within the term set
--------------
out in the Notice of Grant, and may be exercised during such term only in
accordance with the Plan and the terms of this Option.
9. Tax Consequences. Set forth below is a brief summary as of the date
----------------
of this Option of some of the federal tax consequences of exercise of this
Option and disposition of the Shares. THIS SUMMARY IS NECESSARILY INCOMPLETE,
AND THE TAX LAWS AND REGULATIONS ARE SUBJECT TO CHANGE. THE OPTIONEE SHOULD
CONSULT A TAX ADVISER BEFORE EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercise of NSO. There may be a regular federal income tax
---------------
liability upon the exercise of an NSO. The Optionee will be treated as having
received compensation income (taxable at ordinary income tax rates) equal to the
excess, if any, of the Fair Market Value of the Exercised Shares on the date of
exercise over the Exercise Price. If Optionee is an Employee or a former
Employee, the Company will be required to withhold from Optionee's compensation
or collect from Optionee and pay to the applicable taxing authorities an amount
in cash equal to a percentage of this compensation income at the time of
exercise, and may refuse to honor the exercise and refuse to deliver Shares if
such withholding amounts are not delivered at the time of exercise.
(b) Exercise of ISO. If this Option qualifies as an ISO, there will
---------------
be no regular federal income tax liability upon the exercise of the Option,
although the excess, if any, of the Fair Market Value of the Exercised Shares on
the date of exercise over the Exercise Price will be treated as an adjustment to
the alternative minimum tax for federal tax purposes and may subject the
Optionee to the alternative minimum tax in the year of exercise.
(c) Exercise of ISO Following Disability. If the Optionee ceases to
------------------------------------
be an Employee as a result of a disability that is not a total and permanent
disability as defined in Section 22(e)(3) of the Code, to the extent permitted
on the date of termination, the Optionee must exercise an ISO within three
months of such termination for the ISO to be qualified as an ISO.
(d) Disposition of Shares. In the case of an NSO, if Shares are held
---------------------
for at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes. In the case
of an ISO, if Shares transferred pursuant to the Option are held for at least
one year after exercise and at least two years after the Date of Grant, any gain
realized on
-17-
<PAGE>
disposition of the Shares will also be treated as long-term capital gain for
federal income tax purposes. If Shares purchased under an ISO are disposed of
within one year after exercise or two years after the Date of Grant, any gain
realized on such disposition will be treated as compensation income (taxable at
ordinary income rates) to the extent of the difference between the Exercise
Price of the Exercised Shares and the lesser of (i) the Fair Market Value of the
Exercised Shares on the date of exercise, or (ii) the sale price of the
Exercised Shares. Different rules may apply if the Shares are subject to a
substantial risk of forfeiture (within the meaning of Section 83 of the Code) at
the time of purchase. Any additional gain will be taxed as capital gain, short-
term depending on the period that the ISO Shares were held.
(e) Notice of Disqualifying Disposition of ISO Shares. If the Option
-------------------------------------------------
granted to Optionee herein is an ISO, and if Optionee sells or otherwise
disposes of any of the Shares acquired pursuant to the ISO on or before the
later of (i) the date two years after the Date of Grant, or (ii) the date one
year after the date of exercise, the Optionee shall immediately notify the
Company in writing of such disposition. Optionee agrees that Optionee may be
subject to income tax withholding by the Company on the compensation income
recognized by the Optionee.
(f) Section 83(b) Election for Unvested Shares Purchased Pursuant to
----------------------------------------------------------------
Options. With respect to the exercise of an Option for unvested Shares, an
- -------
election (the "Election") may be filed by the Optionee with the Internal Revenue
Service, within 30 days of the purchase of the Shares, electing pursuant to
--------------
Section 83(b) of the Code to be taxed currently on any difference between the
purchase price of the Shares and their Fair Market Value on the date of
purchase. In the case of an NSO, this will result in a recognition of taxable
income to the Optionee on the date of exercise, measured by the excess, if any,
of the Fair Market Value of the Exercised Shares, at the time the Option is
exercised over the purchase price for the Exercised Shares. Absent such an
election, taxable income will be measured and recognized by Optionee at the time
or times on which the Company's Repurchase Option lapses. In the case of an
ISO, such an election will result in a recognition of income to the Optionee for
alternative minimum tax purposes on the date of exercise, measured by the
excess, if any, of the Fair Market Value of the Exercised Shares, at the time
the Option is exercised, over the purchase price for the Exercised Shares.
Absent such an election, alternative minimum taxable income will be measured and
recognized by Optionee at the time or times on which the Company's Repurchase
Option lapses. Optionee is strongly encouraged to seek the advice of his or
her own tax consultants in connection with the purchase of the Shares and the
advisability of filing of the Election under Section 83(b) of the Code. A form
of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference.
-----------
OPTIONEE ACKNOWLEDGES THAT IT IS OPTIONEE'S SOLE RESPONSIBILITY AND NOT
THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b), EVEN IF OPTIONEE
REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON OPTIONEE'S
BEHALF.
-18-
<PAGE>
10. Entire Agreement; Governing Law. The Plan is incorporated herein by
-------------------------------
reference. The Plan and this Option Agreement constitute the entire agreement
of the parties with respect to the subject matter hereof and supersede in their
entirety all prior undertakings and agreements of the Company and Optionee with
respect to the subject matter hereof, and may not be modified adversely to the
Optionee's interest except by means of a writing signed by the Company and
Optionee. This Option Agreement is governed by the internal substantive laws
but not the choice of law rules of Utah.
11. No Guarantee of Continued Service. OPTIONEE ACKNOWLEDGES AND AGREES
---------------------------------
THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF IS EARNED
ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE COMPANY (NOT THROUGH
THE ACT OF BEING HIRED, BEING GRANTED THIS OPTION OR ACQUIRING SHARES
HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT, THE
TRANSACTIONS CONTEMPLATED HEREUNDER AND THE VESTING SCHEDULE SET FORTH HEREIN DO
NOT CONSTITUTE AN EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A
SERVICE PROVIDER FOR THE VESTING PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL
NOT INTERFERE IN ANY WAY WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO
TERMINATE OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR
WITHOUT CAUSE.
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee has
reviewed the Plan and this Option in their entirety, has had an opportunity to
obtain the advice of counsel prior to executing this Option and fully
understands all provisions of the Option. Optionee hereby agrees to accept as
binding, conclusive and final all decisions or interpretations of the
Administrator upon any questions arising under the Plan or this Option.
Optionee further agrees to notify the Company upon any change in the residence
address indicated below.
OPTIONEE: SONIC INNOVATIONS, INC.
___________________________ ____________________________
Signature By
_____________________________ ________________________________
Print Name Title
Residence Address
-19-
<PAGE>
EXHIBIT A
---------
1993 AMENDED AND RESTATED STOCK PLAN
EXERCISE NOTICE
Sonic Innovations, Inc.
5330 South 900 East Street
Salt Lake City, Utah 84117
Attention: Chief Financial Officer
1. Exercise of Option. Effective as of today, ___________, 19__, the
------------------
undersigned ("Optionee") hereby elects to exercise Optionee's option (the
"Option") to purchase _________ shares of the Common Stock (the "Shares") of
Sonic Innovations, Inc. (the "Company") under and pursuant to the Amended and
Restated 1993 Stock Plan (the "Plan") and the Stock Option Agreement dated
________, 19___ (the "Option Agreement").
2. Delivery of Payment. Purchaser herewith delivers to the Company the
-------------------
full purchase price of the Shares, as set forth in the Option Agreement.
3. Representations of Optionee. Optionee acknowledges that Optionee has
---------------------------
received, read and understood the Plan and the Option Agreement and agrees to
abide by and be bound by their terms and conditions.
4. Rights as Stockholder. Until the issuance of the Shares (as evidenced
---------------------
by the appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company), no right to vote or receive dividends or any
other rights as a stockholder shall exist with respect to the optioned stock,
notwithstanding the exercise of the Option. The Shares shall be issued to the
Optionee as soon as practicable after the Option is exercised. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date of issuance except as provided in Section 12 of the Plan.
5. Company's Right of First Refusal. Before any Shares held by Optionee
--------------------------------
or any transferee (either being sometimes referred to herein as the "Holder")
may be sold or otherwise transferred (including transfer by gift or operation of
law), the Company or its assignee(s) shall have a right of first refusal to
purchase the Shares on the terms and conditions set forth in this Section (the
"Right of First Refusal").
-20-
<PAGE>
(a) Notice of Proposed Transfer. The Holder of the Shares shall
---------------------------
deliver to the Company a written notice (the "Notice") stating: (i) the
Holder's bona fide intention to sell or otherwise transfer such Shares; (ii) the
name of each proposed purchaser or other transferee ("Proposed Transferee");
(iii) the number of Shares to be transferred to each Proposed Transferee; and
(iv) the bona fide cash price or other consideration for which the Holder
proposes to transfer the Shares (the "Offered Price"), and the Holder shall
offer the Shares at the Offered Price to the Company or its assignee(s).
(b) Exercise of Right of First Refusal. At any time within thirty
----------------------------------
(30) days after receipt of the Notice, the Company and/or its assignee(s) may,
by giving written notice to the Holder, elect to purchase all, but not less than
all, of the Shares proposed to be transferred to any one or more of the Proposed
Transferees, at the purchase price determined in accordance with subsection (c)
below.
(c) Purchase Price. The purchase price ("Purchase Price") for the
--------------
Shares purchased by the Company or its assignee(s) under this Section shall be
the Offered Price. If the Offered Price includes consideration other than cash,
the cash equivalent value of the non-cash consideration shall be determined by
the Board of Directors of the Company in good faith.
(d) Payment. Payment of the Purchase Price shall be made, at the
-------
option of the Company or its assignee(s), in cash (by check), by cancellation of
all or a portion of any outstanding indebtedness of the Holder to the Company
(or, in the case of repurchase by an assignee, to the assignee), or by any
combination thereof within 30 days after receipt of the Notice or in the manner
and at the times set forth in the Notice.
(e) Holder's Right to Transfer. If all of the Shares proposed in the
--------------------------
Notice to be transferred to a given Proposed Transferee are not purchased by the
Company and/or its assignee(s) as provided in this Section, then the Holder may
sell or otherwise transfer such Shares to that Proposed Transferee at the
Offered Price or at a higher price, provided that such sale or other transfer is
consummated within 120 days after the date of the Notice, that any such sale or
other transfer is effected in accordance with any applicable securities laws and
that the Proposed Transferee agrees in writing that the provisions of this
Section shall continue to apply to the Shares in the hands of such Proposed
Transferee. If the Shares described in the Notice are not transferred to the
Proposed Transferee within such period, a new Notice shall be given to the
Company, and the Company and/or its assignees shall again be offered the Right
of First Refusal before any Shares held by the Holder may be sold or otherwise
transferred.
(f) Exception for Certain Family Transfers. Anything to the contrary
--------------------------------------
contained in this Section notwithstanding, the transfer of any or all of the
Shares during the Optionee's lifetime or on the Optionee's death by will or
intestacy to the Optionee's immediate family or a trust for the benefit of the
Optionee's immediate family shall be exempt from the provisions of this Section.
"Immediate Family" as used herein shall mean spouse, lineal descendant or
antecedent, father, mother,
-21-
<PAGE>
brother or sister. In such case, the transferee or other recipient shall receive
and hold the Shares so transferred subject to the provisions of this Section,
and there shall be no further transfer of such Shares except in accordance with
the terms of this Section.
(g) Termination of Right of First Refusal. The Right of First Refusal
-------------------------------------
shall terminate as to any Shares upon the first sale of Common Stock of the
Company to the general public pursuant to a registration statement filed with
and declared effective by the Securities and Exchange Commission under the
Securities Act of 1933, as amended.
6. Tax Consultation. Optionee understands that Optionee may suffer
----------------
adverse tax consequences as a result of Optionee's purchase or disposition of
the Shares. Optionee represents that Optionee has consulted with any tax
consultants Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
7. Restrictive Legends and Stop-Transfer Orders.
--------------------------------------------
(a) Legends. Optionee understands and agrees that the Company shall
-------
cause the legends set forth below or legends substantially equivalent thereto,
to be placed upon any certificate(s) evidencing ownership of the Shares together
with any other legends that may be required by the Company or by state or
federal securities laws:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL
REGISTERED UNDER THE ACT OR, IN THE OPINION OF COMPANY COUNSEL
SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR
TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH.
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS ON TRANSFER AND RIGHT OF FIRST REFUSAL OPTIONS HELD BY
THE ISSUER OR ITS ASSIGNEE(S) AS SET FORTH IN THE EXERCISE NOTICE
BETWEEN THE ISSUER AND THE ORIGINAL HOLDER OF THESE SHARES, A COPY OF
WHICH MAY BE OBTAINED AT THE PRINCIPAL OFFICE OF THE ISSUER. SUCH
TRANSFER RESTRICTIONS AND RIGHT OF FIRST REFUSAL ARE BINDING ON
TRANSFEREES OF THESE SHARES.
-22-
<PAGE>
(b) Stop-Transfer Notices. Optionee agrees that, in order to ensure
---------------------
compliance with the restrictions referred to herein, the Company may issue
appropriate "stop transfer" instructions to its transfer agent, if any, and
that, if the Company transfers its own securities, it may make appropriate
notations to the same effect in its own records.
(c) Refusal to Transfer. The Company shall not be required (i) to
-------------------
transfer on its books any Shares that have been sold or otherwise transferred in
violation of any of the provisions of this Exercise Notice or (ii) to treat as
owner of such Shares or to accord the right to vote or pay dividends to any
purchaser or other transferee to whom such Shares shall have been so
transferred.
8. Successors and Assigns. The Company may assign any of its rights under
----------------------
this Exercise Notice to single or multiple assignees, and the terms and
conditions of this Exercise Notice shall inure to the benefit of the successors
and assigns of the Company. Subject to the restrictions on transfer herein set
forth, the terms and conditions of this Exercise Notice shall be binding upon
Optionee and his or her heirs, executors, administrators, successors and
assigns.
9. Interpretation. Any dispute regarding the interpretation of this
--------------
Exercise Notice shall be submitted by Optionee or by the Company forthwith to
the Administrator which shall review such dispute at its next regular meeting.
The resolution of such a dispute by the Administrator shall be final and binding
on all parties.
10. Governing Law; Severability. This Exercise Notice is governed by the
---------------------------
internal substantive laws, but not the choice of law rules, of Utah.
-23-
<PAGE>
11. Entire Agreement. The Plan and Option Agreement are incorporated
----------------
herein by reference. This Exercise Notice, the Plan, the Restricted Stock
Purchase Agreement, the Option Agreement and the Investment Representation
Statement constitute the entire agreement of the parties with respect to the
subject matter hereof and supersede in their entirety all prior undertakings and
agreements of the Company and Optionee with respect to the subject matter
hereof, and may not be modified adversely to the Optionee's interest except by
means of a writing signed by the Company and Optionee.
Submitted by: Accepted by:
OPTIONEE: SONIC INNOVATIONS, INC.
Signature By
Print Name Its
Address: Address:
------- -------
Sonic Innovations, Inc.
5330 South 900 East Street
Salt Lake City, Utah 94117
Date Received
-24-
<PAGE>
EXHIBIT B
---------
INVESTMENT REPRESENTATION STATEMENT
OPTIONEE :
COMPANY : SONIC INNOVATIONS, INC.
SECURITY : COMMON STOCK
AMOUNT :
DATE :
In connection with the purchase of the above-listed Securities, the
undersigned Optionee represents to the Company the following:
(a) Optionee is aware of the Company's business affairs and financial
condition and has acquired sufficient information about the Company to reach an
informed and knowledgeable decision to acquire the Securities. Optionee is
acquiring these Securities for investment for Optionee's own account only and
not with a view to, or for resale in connection with, any "distribution" thereof
within the meaning of the Securities Act of 1933, as amended (the "Securities
Act").
(b) Optionee acknowledges and understands that the Securities
constitute "restricted securities" under the Securities Act and have not been
registered under the Securities Act in reliance upon a specific exemption
therefrom, which exemption depends upon, among other things, the bona fide
nature of Optionee's investment intent as expressed herein. In this connection,
Optionee understands that, in the view of the Securities and Exchange
Commission, the statutory basis for such exemption may be unavailable if
Optionee's representation was predicated solely upon a present intention to hold
these Securities for the minimum capital gains period specified under tax
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future. Optionee further understands that the Securities must be
held indefinitely unless they are subsequently registered under the Securities
Act or an exemption from such registration is available. Optionee further
acknowledges and understands that the Company is under no obligation to register
the Securities. Optionee understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel satisfactory to the Company, and with any other legend
required under applicable state securities laws.
-25-
<PAGE>
(c) Optionee is familiar with the provisions of Rule 701 and Rule
144, each promulgated under the Securities Act, which, in substance, permit
limited public resale of "restricted securities" acquired, directly or
indirectly from the issuer thereof, in a non-public offering subject to the
satisfaction of certain conditions. Rule 701 provides that if the issuer
qualifies under Rule 701 at the time of the grant of the Option to the Optionee,
the exercise will be exempt from registration under the Securities Act. In the
event the Company becomes subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, ninety (90) days thereafter (or
such longer period as any market stand-off agreement may require) the Securities
exempt under Rule 701 may be resold, subject to the satisfaction of certain of
the conditions specified by Rule 144, including: (1) the resale being made
through a broker in an unsolicited "broker's transaction" or in transactions
directly with a market maker (as said term is defined under the Securities
Exchange Act of 1934); and, in the case of an affiliate, (2) the availability of
certain public information about the Company, (3) the amount of Securities being
sold during any three month period not exceeding the limitations specified in
Rule 144(e), and (4) the timely filing of a Form 144, if applicable.
In the event that the Company does not qualify under Rule 701 at the time
of grant of the Option, then the Securities may be resold in certain limited
circumstances subject to the provisions of Rule 144, which requires the resale
to occur not less than one year after the later of the date the Securities were
sold by the Company or the date the Securities were sold by an affiliate of the
Company, within the meaning of Rule 144; and, in the case of acquisition of the
Securities by an affiliate, or by a non-affiliate who subsequently holds the
Securities less than two years, the satisfaction of the conditions set forth in
sections (1), (2), (3) and (4) of the paragraph immediately above.
(d) Optionee further understands that in the event all of the
applicable requirements of Rule 701 or 144 are not satisfied, registration under
the Securities Act, compliance with Regulation A, or some other registration
exemption will be required; and that, notwithstanding the fact that Rules 144
and 701 are not exclusive, the Staff of the Securities and Exchange Commission
has expressed its opinion that persons proposing to sell private placement
securities other than in a registered offering and otherwise than pursuant to
Rules 144 or 701 will have a substantial burden of proof in establishing that an
exemption from registration is available for such offers or sales, and that such
persons and their respective brokers who participate in such transactions do so
at their own risk. Optionee understands that no assurances can be given that
any such other registration exemption will be available in such event.
Signature of Optionee:
___________________________________
Date:____________________ , 19_____
-2-
<PAGE>
EXHIBIT C-1
-----------
SONIC INNOVATIONS, INC.
AMENDED AND RESTATED 1993 STOCK PLAN
RESTRICTED STOCK PURCHASE AGREEMENT
THIS AGREEMENT is made between ____________________________________ (the
"Purchaser") and Sonic Innovations, Inc. (the "Company") as of_________________,
199__.
Unless otherwise defined herein, the terms defined in the Amended and
Restated 1993 Stock Plan shall have the same defined meanings in this Agreement.
RECITALS
--------
A. Pursuant to the exercise of the option (grant number ____) granted to
Purchaser under the Plan and pursuant to the Option Agreement dated ___________
by and between the Company and Purchaser with respect to such grant (the
"Option"), which Plan and Option Agreement are hereby incorporated by reference,
Purchaser has elected to purchase _________ of those shares of Common Stock
which have not become vested under the vesting schedule set forth in the Option
Agreement ("Unvested Shares"). The Unvested Shares and the shares subject to
the Option Agreement which have become vested are sometimes collectively
referred to herein as the "Shares".
B. As required by the Option Agreement, as a condition to Purchaser's
election to exercise the option, Purchaser must execute this Agreement, which
sets forth the rights and obligations of the parties with respect to Shares
acquired upon exercise of the Option.
1. Repurchase Option.
-----------------
(a) If Purchaser's status as a Service Provider is terminated for any
reason, including for cause, death, and Disability, the Company shall have the
right and option to purchase from Purchaser, or Purchaser's personal
representative, as the case may be, all of the Purchaser's Unvested Shares as of
the date of such termination at the price paid by the Purchaser for such Shares
(the "Repurchase Option").
(b) Upon the occurrence of such termination, the Company may exercise
its Repurchase Option by delivering personally or by registered mail, to
Purchaser (or his transferee or legal representative, as the case may be),
within ninety (90) days of the termination, a notice in writing indicating the
Company's intention to exercise the Repurchase Option and setting forth a date
for closing not later than thirty (30) days from the mailing of such notice. The
closing shall take place at the Company's office. At the closing, the holder of
the certificates for the Unvested Shares being transferred shall deliver the
stock certificate
-3-
<PAGE>
or certificates evidencing the Unvested Shares, and the Company shall deliver
the purchase price therefor.
(c) At its option, the Company may elect to make payment for the
Unvested Shares to a bank selected by the Company. The Company shall avail
itself of this option by a notice in writing to Purchaser stating the name and
address of the bank, date of closing, and waiving the closing at the Company's
office.
(d) If the Company does not elect to exercise the Repurchase Option
conferred above by giving the requisite notice within ninety (90) days following
the termination, the Repurchase Option shall terminate.
(e) The Repurchase Option shall terminate in accordance with the
vesting schedule contained in Optionee's Option Agreement.
2. Transferability of the Shares; Escrow.
-------------------------------------
(a) Purchaser hereby authorizes and directs the Secretary of the
Company, or such other person designated by the Company, to transfer the
Unvested Shares as to which the Repurchase Option has been exercised from
Purchaser to the Company.
(b) To insure the availability for delivery of Purchaser's Unvested
Shares upon repurchase by the Company pursuant to the Repurchase Option under
Section 1, Purchaser hereby appoints the Secretary, or any other person
designated by the Company as escrow agent, as its attorney-in-fact to sell,
assign and transfer unto the Company, such Unvested Shares, if any, repurchased
by the Company pursuant to the Repurchase Option and shall, upon execution of
this Agreement, deliver and deposit with the Secretary of the Company, or such
other person designated by the Company, the share certificates representing the
Unvested Shares, together with the stock assignment duly endorsed in blank,
attached hereto as Exhibit C-2. The Unvested Shares and stock assignment shall
-----------
be held by the secretary in escrow, pursuant to the Joint Escrow Instructions of
the Company and Purchaser attached as Exhibit C-3 hereto, until the Company
-----------
exercises its Repurchase Option, until such Unvested Shares are vested, or until
such time as this Agreement no longer is in effect. As a further condition to
the Company's obligations under this Agreement, the spouse of the Purchaser, if
any, shall execute and deliver to the Company the Consent of Spouse attached
hereto as Exhibit C-4. Upon vesting of the Unvested Shares, the escrow agent
-----------
shall promptly deliver to the Purchaser the certificate or certificates
representing such Shares in the escrow agent's possession belonging to the
Purchaser, and the escrow agent shall be discharged of all further obligations
hereunder; provided, however, that the escrow agent shall nevertheless retain
such certificate or certificates as escrow agent if so required pursuant to
other restrictions imposed pursuant to this Agreement.
-4-
<PAGE>
(c) The Company, or its designee, shall not be liable for any act it
may do or omit to do with respect to holding the Shares in escrow and while
acting in good faith and in the exercise of its judgment.
(d) Transfer or sale of the Shares is subject to restrictions on
transfer imposed by any applicable state and federal securities laws. Any
transferee shall hold such Shares subject to all the provisions hereof and the
Exercise Notice executed by the Purchaser with respect to any Unvested Shares
purchased by Purchaser and shall acknowledge the same by signing a copy of this
Agreement.
3. Ownership, Voting Rights, Duties. This Agreement shall not affect in
--------------------------------
any way the ownership, voting rights or other rights or duties of Purchaser,
except as specifically provided herein.
4. Legends. The share certificate evidencing the Shares issued hereunder
-------
shall be endorsed with the following legend (in addition to any legend required
under applicable federal and state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO CERTAIN
RESTRICTIONS UPON TRANSFER AND RIGHTS OF REPURCHASE AS SET FORTH IN AN AGREEMENT
BETWEEN THE COMPANY AND THE STOCKHOLDER, A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY.
5. Adjustment for Stock Split. All references to the number of Shares and
--------------------------
the purchase price of the Shares in this Agreement shall be appropriately
adjusted to reflect any stock split, stock dividend or other change in the
Shares which may be made by the Company pursuant to Section 12 of the Plan after
the date of this Agreement.
6. Notices. Notices required hereunder shall be given in person or by
-------
registered mail to the address of Purchaser shown on the records of the Company,
and to the Company at their respective principal executive offices.
7. Survival of Terms. This Agreement shall apply to and bind Purchaser
-----------------
and the Company and their respective permitted assignees and transferees, heirs,
legatees, executors, administrators and legal successors.
8. Section 83(b) Election. Purchaser hereby acknowledges that he or she
has been informed that, with respect to the exercise of an Option for Unvested
Shares, an election (the "Election") may be filed by the Purchaser with the
Internal Revenue Service, within 30 days of the purchase of the exercised
--------------
Shares, electing pursuant to Section 83(b) of the Code to be taxed
-5-
<PAGE>
currently on any difference between the purchase price of the exercised Shares
and their Fair Market Value on the date of purchase. In the case of a
Nonstatutory Stock Option, this will result in a recognition of taxable income
to the Purchaser on the date of exercise, measured by the excess, if any, of the
Fair Market Value of the exercised Shares, at the time the Option is exercised
over the purchase price for the exercised Shares. Absent such an Election,
taxable income will be measured and recognized by Purchaser at the time or times
on which the Company's Repurchase Option lapses. In the case of an Incentive
Stock Option, such an Election will result in a recognition of income to the
Purchaser for alternative minimum tax purposes on the date of exercise, measured
by the excess, if any, of the Fair Market Value of the exercised Shares, at the
time the option is exercised, over the purchase price for the exercised Shares.
Absent such an Election, alternative minimum taxable income will be measured and
recognized by Purchaser at the time or times on which the Company's Repurchase
Option lapses. Purchaser is strongly encouraged to seek the advice of his or her
own tax consultants in connection with the purchase of the Shares and the
advisability of filing of the Election under Section 83(b) of the Code. A form
of Election under Section 83(b) is attached hereto as Exhibit C-5 for reference.
-----------
PURCHASER ACKNOWLEDGES THAT IT IS PURCHASER'S SOLE RESPONSIBILITY AND NOT
THE COMPANY'S TO FILE TIMELY THE ELECTION UNDER SECTION 83(b) OF THE CODE, EVEN
IF PURCHASER REQUESTS THE COMPANY OR ITS REPRESENTATIVE TO MAKE THIS FILING ON
PURCHASER'S BEHALF.
9. Representations. Purchaser has reviewed with his own tax advisors the
---------------
federal, state, local and foreign tax consequences of this investment and the
transactions contemplated by this Agreement. Purchaser is relying solely on
such advisors and not on any statements or representations of the Company or any
of its agents. Purchaser understands that he (and not the Company) shall be
responsible for his own tax liability that may arise as a result of this
investment or the transactions contemplated by this Agreement.
10 Governing Law. This Agreement shall be governed by the internal
-------------
substantive laws, but not the choice of law rules, of Utah.
Purchaser represents that he has read this Agreement and is familiar with
its terms and provisions. Purchaser hereby agrees to accept as binding,
conclusive and final all decisions or interpretations of the Board upon any
questions arising under this Agreement.
-6-
<PAGE>
IN WITNESS WHEREOF, this Agreement is deemed made as of the date first set
forth above.
OPTIONEE: SONIC INNOVATIONS, INC.
______________________ ___________________________
Signature By
______________________ ___________________________
Print Name Title
Residence Address
Dated: _______________, 19
-7-
<PAGE>
EXHIBIT C-2
-----------
ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED I, __________________________, hereby sell, assign and
transfer unto Sonic Innovations, Inc. (__________) shares of the Common Stock of
Sonic Innovations, Inc. standing in my name of the books of said corporation
represented by Certificate No. _____ herewith and do hereby irrevocably
constitute and appoint
___________________________________________________________ to transfer the
said stock on the books of the within named corporation with full power of
substitution in the premises.
This Stock Assignment may be used only in accordance with the Restricted
Stock Purchase Agreement between Sonic Innovations, Inc. and the undersigned
dated ______________, 19__.
Dated: _______________, 19__ Signature:___________________
<PAGE>
INSTRUCTIONS: Please do not fill in any blanks other than the signature
line. The purpose of this assignment is to enable the Company to exercise its
"repurchase option," as set forth in the Agreement, without requiring additional
signatures on the part of the Purchaser.
EXHIBIT C-3
-----------
JOINT ESCROW INSTRUCTIONS
-------------------------
_____________, 19
Corporate Secretary
Sonic Innovations, Inc.
5330 South 900 East Street
Salt Lake City, Utah 84117
Attention: Secretary
Dear _________________:
As Escrow Agent for both Sonic Innovations, Inc. (the "Company"), and
the undersigned purchaser of stock of the Company (the "Purchaser"), you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the terms of that certain Restricted Stock Purchase Agreement ("Agreement")
between the Company and the undersigned, in accordance with the following
instructions:
1 In the event the Company and/or any assignee of the Company
(referred to collectively for convenience herein as the "Company") exercises the
Company's repurchase option set forth in the Agreement, the Company shall give
to Purchaser and you a written notice specifying the number of shares of stock
to be purchased, the purchase price, and the time for a closing hereunder at the
principal office of the Company. Purchaser and the Company hereby irrevocably
authorize and direct you to close the transaction contemplated by such notice in
accordance with the terms of said notice.
2 At the closing, you are directed (a) to date the stock
assignments necessary for the transfer in question, (b) to fill in the number of
shares being transferred, and (c) to deliver the stock assignments, together
with the certificate evidencing the shares of stock to be transferred, to the
Company or its assignee, against the simultaneous delivery to you of the
purchase price (by cash, a check, or some combination thereof) for the number of
shares of stock being purchased pursuant to the exercise of the Company's
repurchase option.
<PAGE>
3 Purchaser irrevocably authorizes the Company to deposit with you
any certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as defined in the Agreement.
Purchaser does hereby irrevocably constitute and appoint you as Purchaser's
attorney-in-fact and agent for the term of this escrow to execute with respect
to such securities all documents necessary or appropriate to make such
securities negotiable and to complete any transaction herein contemplated,
including but not limited to the filing with any applicable state blue sky
authority of any required applications for consent to, or notice of transfer of,
the securities. Subject to the provisions of this paragraph 3, Purchaser shall
exercise all rights and privileges of a stockholder of the Company while the
stock is held by you.
4 Upon written request of the Purchaser, but no more than once per
calendar year, unless the Company's repurchase option has been exercised, you
will deliver to Purchaser a certificate or certificates representing so many
shares of stock as are not then subject to the Company's repurchase option.
Within 120 days after cessation of Purchaser's continuous employment by or
services to the Company, or any parent or subsidiary of the Company, you will
deliver to Purchaser a certificate or certificates representing the aggregate
number of shares held or issued pursuant to the Agreement and not purchased by
the Company or its assignees pursuant to exercise of the Company's repurchase
option.
5 If at the time of termination of this escrow you should have in
your possession any documents, securities, or other property belonging to
Purchaser, you shall deliver all of the same to Purchaser and shall be
discharged of all further obligations hereunder.
6 Your duties hereunder may be altered, amended, modified or
revoked only by a writing signed by all of the parties hereto.
7 You shall be obligated only for the performance of such duties as
are specifically set forth herein and may rely and shall be protected in relying
or refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be personally liable for any act you may do or omit to do hereunder as
Escrow Agent or as attorney-in-fact for Purchaser while acting in good faith,
and any act done or omitted by you pursuant to the advice of your own attorneys
shall be conclusive evidence of such good faith.
8 You are hereby expressly authorized to disregard any and all
warnings given by any of the parties hereto or by any other person or
corporation, excepting only orders or process of courts of law and are hereby
expressly authorized to comply with and obey orders, judgments or decrees of any
court. In case you obey or comply with any such order, judgment or decree, you
shall not be liable to any of the parties hereto or to any other person, firm or
corporation by reason of such compliance, notwithstanding any such order,
judgment or decree being subsequently reversed, modified, annulled, set aside,
vacated or found to have been entered without jurisdiction.
-2-
<PAGE>
9 You shall not be liable in any respect on account of the
identity, authorities or rights of the parties executing or delivering or
purporting to execute or deliver the Agreement or any documents or papers
deposited or called for hereunder.
10 You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Joint Escrow Instructions or any
documents deposited with you.
11 You shall be entitled to employ such legal counsel and other
experts as you may deem necessary properly to advise you in connection with your
obligations hereunder, may rely upon the advice of such counsel, and may pay
such counsel reasonable compensation therefor.
12 Your responsibilities as Escrow Agent hereunder shall terminate
if you shall cease to be an officer or agent of the Company or if you shall
resign by written notice to each party. In the event of any such termination,
the Company shall appoint a successor Escrow Agent.
13 If you reasonably require other or further instruments in
connection with these Joint Escrow Instructions or obligations in respect
hereto, the necessary parties hereto shall join in furnishing such instruments.
14 It is understood and agreed that should any dispute arise with
respect to the delivery and/or ownership or right of possession of the
securities held by you hereunder, you are authorized and directed to retain in
your possession without liability to anyone all or any part of said securities
until such disputes shall have been settled either by mutual written agreement
of the parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings.
15 Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail with
postage and fees prepaid, addressed to each of the other parties thereunto
entitled at the following addresses or at such other addresses as a party may
designate by ten days' advance written notice to each of the other parties
hereto.
16 By signing these Joint Escrow Instructions, you become a party
hereto only for the purpose of said Joint Escrow Instructions; you do not become
a party to the Agreement.
17 This instrument shall be binding upon and inure to the benefit of
the parties hereto, and their respective successors and permitted assigns.
-3-
<PAGE>
18 These Joint Escrow Instructions shall be governed by the internal
substantive laws, but not the choice of law rules, of Utah.
PURCHASER: SONIC INNOVATIONS, INC.
________________________
Signature By
________________________
Print Name Title
Residence Address
ESCROW AGENT
Corporate Secretary
Dated: _______________, 19
-4-
<PAGE>
EXHIBIT C-4
-----------
CONSENT OF SPOUSE
-----------------
I, ____________________, spouse of ___________________, have read and
approve the foregoing Restricted Stock Purchase Agreement (the "Agreement"). In
consideration of granting of the right to my spouse to purchase shares of
____________________________, as set forth in the Agreement, I hereby appoint my
spouse as my attorney-in-fact in respect to the exercise of any rights under the
Agreement and agree to be bound by the provisions of the Agreement insofar as I
may have any rights in said Agreement or any shares issued pursuant thereto
under the community property laws or similar laws relating to marital property
in effect in the state of our residence as of the date of the signing of the
foregoing Agreement.
Dated: _______________, 19__ Signature:
<PAGE>
EXHIBIT C-5
-----------
ELECTION UNDER SECTION 83(b)
----------------------------
OF THE INTERNAL REVENUE CODE OF 1986
------------------------------------
The undersigned taxpayer hereby elects, pursuant to Sections 55 and 83(b)
of the Internal Revenue Code of 1986, as amended, to include in taxpayer's gross
income or alternative minimum taxable income, as the case may be, for the
current taxable year the amount of any compensation taxable to taxpayer in
connection with taxpayer's receipt of the property described below:
1. The name, address, taxpayer identification number and taxable year of the
undersigned are as follows:
NAME: TAXPAYER: SPOUSE:
ADDRESS:
IDENTIFICATION NO.: TAXPAYER: SPOUSE:
TAXABLE YEAR:
2. The property with respect to which the election is made is described as
follows: ______________________________ shares (the "Shares") of the Common
Stock of Sonic Innovations, Inc. (the "Company").
3. The date on which the property was transferred is: , 19 ____.
4. The property is subject to the following restrictions:
The Shares may not be transferred and are subject to forfeiture under the
terms of an agreement between the taxpayer and the Company. These
restrictions lapse upon the satisfaction of certain conditions contained in
such agreement.
5. The fair market value at the time of transfer, determined without regard to
any restriction other than a restriction which by its terms will never
lapse, of such property is:
$______________________.
6. The amount (if any) paid for such property is:
$______________________.
The undersigned has submitted a copy of this statement to the person for
whom the services were performed in connection with the undersigned's receipt of
the above-described property. The transferee of such property is the person
performing the services in connection with the transfer of said property.
<PAGE>
The undersigned understands that the foregoing election may not be revoked
--------------------------------------------------------------------------
except with the consent of the Commissioner.
- -------------------------------------------
Dated: ___________________, 19__ ___________________________________________
Taxpayer
The undersigned spouse of taxpayer joins in this election.
Dated: ___________________, 19__ ___________________________________________
<PAGE>
Exhibit 10.3
SONIC INNOVATIONS, INC.
2000 STOCK PLAN
1. Purposes of the Plan. The purposes of this 2000 Stock Plan are:
--------------------
. to attract and retain the best available personnel for positions
of substantial responsibility,
. to provide additional incentive to Service Providers, and
. to promote the success of the Company's business.
Options granted under the Plan may be Incentive Stock Options or
Nonstatutory Stock Options, as determined by the Administrator at the time of
grant. Stock Purchase Rights may also be granted under the Plan.
2. Definitions. As used herein, the following definitions shall apply:
-----------
(a) "Administrator" means the Board or any of its Committees as shall
-------------
be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
---------------
administration of stock option plans under U. S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or quotation
system on which the Common Stock is listed or quoted and the applicable laws of
any foreign country or jurisdiction where Options or Stock Purchase Rights are
granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
-----
(d) "Code" means the Internal Revenue Code of 1986, as amended.
----
(e) "Committee" means a committee of Directors appointed by the Board
---------
in accordance with Section 4 of the Plan.
(f) "Common Stock" means the common stock of the Company.
------------
(g) "Company" means Sonic Innovations, Inc., a Delaware corporation.
-------
(h) "Director" means a member of the Board.
--------
(i) "Disability" means total and permanent disability as defined in
----------
Section 22(e)(3) of the Code.
<PAGE>
(j) "Employee" means any person employed by the Company or any Parent
--------
or Subsidiary of the Company. A Service Provider shall not cease to be an
Employee in the case of (i) any leave of absence approved by the Company or (ii)
transfers between locations of the Company or between the Company, its Parent,
any Subsidiary, or any successor. For purposes of Incentive Stock Options, if
reemployment upon expiration of a leave of absence approved by the Company is
not guaranteed, on the 91st day of such leave any Incentive Stock Option shall
cease to be treated as an Incentive Stock Option and shall be treated as a
Nonstatutory Stock Option.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(l) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, its Fair Market Value shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or system for the last market trading day prior to the
time of determination;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the last market trading day prior to the day of
determination; or
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(m) "Incentive Stock Option" means an Option intended to qualify as
----------------------
an incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(n) "Nonstatutory Stock Option" means an Option not intended to
-------------------------
qualify as an Incentive Stock Option.
(o) "Officer" means a person who is an officer of the Company within
-------
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(p) "Option" means a stock option granted pursuant to the Plan.
------
(q) "Option Agreement" means an agreement between the Company and an
----------------
Optionee evidencing the terms and conditions of an individual Option grant. The
Option Agreement is subject to the terms and conditions of the Plan.
(r) "Optionee" means the holder of an outstanding Option or Stock
--------
Purchase Right granted under the Plan.
(s) "Parent" means a "parent corporation," whether now or hereafter
------
existing, as defined in Section 424(e) of the Code.
-2-
<PAGE>
(t) "Plan" means this 2000 Stock Plan.
----
(u) "Restricted Stock Purchase Agreement" means a written agreement
-----------------------------------
between the Company and the Optionee evidencing the terms and restrictions
applying to stock purchased under a Stock Purchase Right.
(v) "Rule 16b-3" means Rule 16b-3 of the Exchange Act or any
----------
successor to Rule 16b-3, as in effect when discretion is being exercised with
respect to the Plan.
(w) "Section 16(b) " means Section 16(b) of the Exchange Act.
-------------
(x) "Service Provider" means an Employee, Director or any provider of
----------------
service to the Company.
(y) "Share" means a share of the Common Stock, as adjusted in
-----
accordance with Section 13 of the Plan.
(z) "Stock Purchase Right" means the right to purchase Common Stock
--------------------
pursuant to Section 11 of the Plan.
(aa) "Subsidiary" means a "subsidiary corporation", whether now or
----------
hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section 13 of
-------------------------
the Plan, the maximum aggregate number of Shares that may be optioned and sold
under the Plan is 1,578,947 Shares, plus an annual increase to be added on each
January 1/st/ equal to the lesser of (i) 789,474 shares, (ii) 5% of the
outstanding shares on that date, or (iii) a lesser amount of Shares as
determined by the Board. The Shares may be authorized, but unissued, or
reacquired Common Stock.
If an Option or Stock Purchase Right expires or becomes unexercisable
without having been exercised in full, or is surrendered pursuant to an option
exchange program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated); provided, however, that Shares that have actually been issued under
the Plan, whether upon exercise of an Option or Stock Purchase Right, shall not
be returned to the Plan and shall not become available for future distribution
under the Plan, except that if Shares of Restricted Stock are repurchased by the
Company at their original purchase price, such Shares shall become available for
future grant under the Plan.
4. Administration of the Plan.
--------------------------
(a) Procedure.
---------
(i) Multiple Administrative Bodies. Different Committees with
------------------------------
respect to different groups of Service Providers may administer the Plan.
(ii) Section 162(m). To the extent that the Administrator
--------------
determines it to be desirable to qualify Options granted hereunder as
"performance-based compensation" within the
-3-
<PAGE>
meaning of Section 162(m) of the Code, the Plan shall be administered by a
Committee of two or more "outside directors" within the meaning of Section
162(m) of the Code.
(iii) Rule 16b-3. To the extent desirable to qualify
----------
transactions hereunder as exempt under Rule 16b-3, the transactions contemplated
hereunder shall be structured to satisfy the requirements for exemption under
Rule 16b-3.
(iv) Other Administration. Other than as provided above, the
--------------------
Plan shall be administered by (A) the Board or (B) a Committee, which committee
shall be constituted to satisfy Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of the
---------------------------
Plan, and in the case of a Committee, subject to the specific duties delegated
by the Board to such Committee, the Administrator shall have the authority, in
its discretion:
(i) to determine the Fair Market Value;
(ii) to select the Service Providers to whom Options and Stock
Purchase Rights may be granted hereunder;
(iii) to determine the number of shares of Common Stock to be
covered by each Option and Stock Purchase Right granted hereunder;
(iv) to approve forms of agreement for use under the Plan;
(v) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any Option or Stock Purchase Right granted
hereunder. Such terms and conditions include, but are not limited to, the
exercise price, the time or times when Options or Stock Purchase Rights may be
exercised (which may be based on performance criteria), any vesting acceleration
or waiver of forfeiture restrictions, and any restriction or limitation
regarding any Option or Stock Purchase Right or the shares of Common Stock
relating thereto, based in each case on such factors as the Administrator, in
its sole discretion, shall determine;
(vi) to reduce the exercise price of any Option or Stock
Purchase Right to the then current Fair Market Value if the Fair Market Value of
the Common Stock covered by such Option or Stock Purchase Right shall have
declined since the date the Option or Stock Purchase Right was granted;
(vii) to institute an option exchange program whereby
outstanding Options are surrendered in exchange for Options with a lower
exercise price;
(viii) to construe and interpret the terms of the Plan and
Options and Stock Purchase Rights granted pursuant to the Plan;
(ix) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
-4-
<PAGE>
(x) to modify or amend each Option or Stock Purchase Right
(subject to Section 15(c) of the Plan), including the discretionary authority to
extend the post-termination exercisability period of Options longer than is
otherwise provided for in the Plan;
(xi) to allow Optionees to satisfy withholding tax obligations
by electing to have the Company withhold from the Shares to be issued upon
exercise of an Option or Stock Purchase Right that number of Shares having a
Fair Market Value equal to the amount required to be withheld;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option or Stock
Purchase Right previously granted by the Administrator;
(xiii) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
----------------------------------
decisions, determinations and interpretations shall be final and binding on all
holders of Options or Stock Purchase Rights.
5. Eligibility. Nonstatutory Stock Options and Stock Purchase Rights may
-----------
be granted to Service Providers. Incentive Stock Options may be granted only to
Employees.
6. Limitations.
-----------
(a) Each Option shall be designated in the Option Agreement as
either an Incentive Stock Option or a Nonstatutory Stock Option. However,
notwithstanding such designation, to the extent that the aggregate Fair Market
Value of the Shares with respect to which Incentive Stock Options are
exercisable for the first time by the Optionee during any calendar year (under
all plans of the Company and any Parent or Subsidiary) exceeds $100,000, such
Options shall be treated as Nonstatutory Stock Options. For purposes of this
Section 6(a), Incentive Stock Options shall be taken into account in the order
in which they were granted.
(b) Neither the Plan nor any Option or Stock Purchase Right shall
confer upon an Optionee any right with respect to continuing the Optionee's
relationship as a Service Provider with the Company, nor shall they interfere in
any way with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
(c) The following limitations shall apply to grants of Options:
(i) No Service Provider shall be granted, in any fiscal year
of the Company, Options to purchase more than 500,000 Shares.
(ii) In connection with his or her initial service, an Employee
may be granted Options to purchase up to an additional 500,000 Shares, which
shall not count against the limit set forth in subsection (i) above.
-5-
<PAGE>
(iii) The foregoing limitations shall be adjusted
proportionately in connection with any change in the Company's capitalization as
described in Section 13.
(iv) If an Option is cancelled in the same fiscal year of the
Company in which it was granted (other than in connection with a transaction
described in Section 13), the cancelled Option will be counted against the
limits set forth in subsections (i) and (ii) above. For this purpose, if the
exercise price of an Option is reduced, the transaction will be treated as a
cancellation of the Option and the grant of a new Option.
7. Term of Plan. Subject to Section 19 of the Plan, the Plan shall
------------
become effective upon its adoption by the Board. It shall continue in effect
for a term of ten (10) years unless terminated earlier under Section 15 of the
Plan.
8. Term of Option. The term of each Option shall be stated in the Option
--------------
Agreement. In the case of an Incentive Stock Option, the term shall be ten (10)
years from the date of grant or such shorter term as may be provided in the
Option Agreement. Moreover, in the case of an Incentive Stock Option granted to
an Optionee who, at the time the Incentive Stock Option is granted, owns stock
representing more than ten percent (10%) of the total combined voting power of
all classes of stock of the Company or any Parent or Subsidiary, the term of the
Incentive Stock Option shall be five (5) years from the date of grant or such
shorter term as may be provided in the Option Agreement.
9. Option Exercise Price and Consideration.
---------------------------------------
(a) Exercise Price. The per share exercise price for the Shares to be
--------------
issued pursuant to exercise of an Option shall be determined by the
Administrator, subject to the following:
(i) In the case of an Incentive Stock Option
(A) granted to an Employee who, at the time the Incentive
Stock Option is granted, owns stock representing more than ten percent (10%) of
the voting power of all classes of stock of the Company or any Parent or
Subsidiary, the per Share exercise price shall be no less than 110% of the Fair
Market Value per Share on the date of grant.
(B) granted to any Employee other than an Employee
described in paragraph (A) immediately above, the per Share exercise price shall
be no less than 100% of the Fair Market Value per Share on the date of grant.
(ii) In the case of a Nonstatutory Stock Option, the per Share
exercise price shall be determined by the Administrator. In the case of a
Nonstatutory Stock Option intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Code, the per Share
exercise price shall be no less than 100% of the Fair Market Value per Share on
the date of grant.
(iii) Notwithstanding the foregoing, Options may be granted
with a per Share exercise price of less than 100% of the Fair Market Value per
Share on the date of grant pursuant to a merger or other corporate transaction.
-6-
<PAGE>
(b) Waiting Period and Exercise Dates. At the time an Option is
---------------------------------
granted, the Administrator shall fix the period within which the Option may be
exercised and shall determine any conditions that must be satisfied before the
Option may be exercised.
(c) Form of Consideration. The Administrator shall determine the
---------------------
acceptable form of consideration for exercising an Option, including the method
of payment. In the case of an Incentive Stock Option, the Administrator shall
determine the acceptable form of consideration at the time of grant. Such
consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired upon
exercise of an option, have been owned by the Optionee for more than six months
on the date of surrender, and (B) have a Fair Market Value on the date of
surrender equal to the aggregate exercise price of the Shares as to which said
Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to the
Optionee, including any liability attributable to the Optionee's participation
in any Company-sponsored deferred compensation program or arrangement;
(vii) any combination of the foregoing methods of payment; or
(viii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws.
10. Exercise of Option.
------------------
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
-----------------------------------------------
granted hereunder shall be exercisable according to the terms of the Plan and at
such times and under such conditions as determined by the Administrator and set
forth in the Option Agreement. Unless the Administrator provides otherwise,
vesting of Options will be suspended during any unpaid leave of absence.
An Option shall be deemed exercised when the Company receives:
(i) written or electronic notice of exercise (in accordance with the Option
Agreement) from the person entitled to exercise the Option, and (ii) full
payment for the Shares with respect to which the Option is exercised. Full
payment may consist of any consideration and method of payment authorized by the
Administrator and permitted by the Option Agreement and the Plan. Shares issued
upon exercise of an Option shall be issued in the name of the Optionee or, if
requested by the Optionee, in the name of the Optionee and his or her spouse.
Until the Shares are issued (as evidenced by the appropriate
-7-
<PAGE>
entry on the books of the Company or of a duly authorized transfer agent of the
Company), no right to vote or receive dividends or any other rights as a
shareholder shall exist with respect to the Optioned Stock, notwithstanding the
exercise of the Option. The Company shall issue (or cause to be issued) such
Shares promptly after the Option is exercised. No adjustment will be made for a
dividend or other right for which the record date is prior to the date the
Shares are issued, except as provided in Section 13 of the Plan.
Exercising an Option in any manner shall decrease the number of
Shares thereafter available, both for purposes of the Plan and for sale under
the Option, by the number of Shares as to which the Option is exercised. No
option may be exercised after the expiration of the term as set forth in the
Option Agreement. Unvested Shares at the date of termination, Disability, or
death shall revert to the Plan. If, after termination, Disability, or death,
the Optionee's Options are not exercised within the timeframe specified herein,
the unexercised Shares shall revert to the Plan.
(b) Termination of Relationship as a Service Provider. If an Optionee
-------------------------------------------------
ceases to be a Service Provider, other than upon the Optionee's death or
Disability, the Optionee may exercise his or her Option within such period of
time as is specified in the Option Agreement to the extent that the Option is
vested on the date of termination. In the absence of a specified time in the
Option Agreement, the Option shall remain exercisable for three (3) months
following the Optionee's termination.
(c) Disability of Optionee. If an Optionee ceases to be a Service
----------------------
Provider as a result of the Optionee's Disability, the Optionee may exercise his
or her Option within such period of time as is specified in the Option Agreement
to the extent the Option is vested on the date of termination. In the absence
of a specified time in the Option Agreement, the Option shall remain exercisable
for twelve (12) months following the Optionee's Disability.
(d) Death of Optionee. If an Optionee dies while a Service Provider,
-----------------
the Option may be exercised within such period of time as is specified in the
Option Agreement by the Optionee's estate or by a person who acquires the right
to exercise the Option by bequest or inheritance, but only to the extent that
the Option is vested on the date of death. In the absence of a specified time
in the Option Agreement, the Option shall remain exercisable for twelve (12)
months following the Optionee's death. The Option may be exercised by the
executor or administrator of the Optionee's estate or, if none, by the person(s)
entitled to exercise the Option under the Optionee's will or the laws of descent
or distribution.
(e) Buyout Provisions. The Administrator may at any time offer to buy
-----------------
out for a payment in cash or Shares an Option previously granted based on such
terms and conditions as the Administrator shall establish and communicate to the
Optionee at the time that such offer is made.
11. Stock Purchase Rights.
---------------------
(a) Rights to Purchase. After the Administrator determines that it
------------------
will offer Stock Purchase Rights under the Plan, it shall advise the offeree in
writing or electronically, of the terms, conditions and restrictions related to
the offer, including the number of Shares that the offeree shall be entitled to
purchase, the price to be paid, and the time within which the offeree must
accept such
-8-
<PAGE>
offer. The offer shall be accepted by execution of a Restricted Stock Purchase
Agreement in the form determined by the Administrator.
(b) Repurchase Option. Unless the Administrator determines otherwise,
-----------------
the Restricted Stock Purchase Agreement shall grant the Company a repurchase
option exercisable upon the voluntary or involuntary termination of the
purchaser's service with the Company for any reason (including death or
Disability). The purchase price for Shares repurchased pursuant to the
Restricted Stock Purchase Agreement shall be the original price paid by the
purchaser and may be paid by cancellation of any indebtedness of the purchaser
to the Company. The repurchase option shall lapse at a rate determined by the
Administrator.
(c) Other Provisions. The Restricted Stock Purchase Agreement shall
----------------
contain such other terms, provisions and conditions not inconsistent with the
Plan as may be determined by the Administrator in its sole discretion.
(d) Rights as a Shareholder. Once the Stock Purchase Right is
-----------------------
exercised, the purchaser shall have the rights equivalent to those of a
shareholder, and shall be a shareholder when his or her purchase is entered upon
the records of the duly authorized transfer agent of the Company. No adjustment
will be made for a dividend or other right for which the record date is prior to
the date the Stock Purchase Right is exercised, except as provided in Section 13
of the Plan.
12. Non-Transferability of Options and Stock Purchase Rights. Unless
--------------------------------------------------------
determined otherwise by the Administrator, an Option or Stock Purchase Right may
not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any
manner other than by will or by the laws of descent or distribution and may be
exercised, during the lifetime of the Optionee, only by the Optionee. If the
Administrator makes an Option or Stock Purchase Right transferable, such Option
or Stock Purchase Right shall contain such additional terms and conditions as
the Administrator deems appropriate.
13. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
------------------------------------------------------------------
Asset Sale.
- ----------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and Stock Purchase Right, and the number of shares of
Common Stock which have been authorized for issuance under the Plan but as to
which no Options or Stock Purchase Rights have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option or Stock
Purchase Right, as well as the price per share of Common Stock covered by each
such outstanding Option or Stock Purchase Right, shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of issued shares of Common Stock effected without receipt
of consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall
-9-
<PAGE>
be made with respect to, the number or price of shares of Common Stock subject
to an Option or Stock Purchase Right.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Administrator shall notify each
Optionee as soon as practicable prior to the effective date of such proposed
transaction. The Administrator in its discretion may provide for an Optionee to
have the right to exercise his or her Option until ten (10) days prior to such
transaction as to all of the Shares covered thereby, including Shares as to
which the Option would not otherwise be exercisable. In addition, the
Administrator may provide that any Company repurchase option applicable to any
Shares purchased upon exercise of an Option or Stock Purchase Right shall lapse
as to all such Shares, provided the proposed dissolution or liquidation takes
place at the time and in the manner contemplated. To the extent it has not been
previously exercised, an Option or Stock Purchase Right will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
--------------------
with or into another corporation, or the sale of substantially all of the assets
of the Company, each outstanding Option and Stock Purchase Right shall be
assumed or an equivalent option or right substituted by the successor
corporation or its Parent. In the event that the successor corporation refuses
to assume or substitute for the Option or Stock Purchase Right, the Optionee
shall fully vest in and have the right to exercise the Option or Stock Purchase
Right as to all of the Shares, including Shares which would not otherwise be
vested or exercisable. If an Option or Stock Purchase Right becomes fully vested
and exercisable in lieu of assumption or substitution in the event of a merger
or sale of assets, the Administrator shall notify the Optionee in writing or
electronically that the Option or Stock Purchase Right shall be fully vested and
exercisable for a period of fifteen (15) days from the date of such notice, and
the Option or Stock Purchase Right shall terminate upon the expiration of such
period. For the purposes of this paragraph, the Option or Stock Purchase Right
shall be considered assumed if, following the merger or sale of assets, the
option or right confers the right to purchase or receive the consideration
(whether stock, cash, or other securities or property) received in the merger or
sale of assets by holders of Common Stock on the effective date of the
transaction provided, however, that if such consideration received in the merger
or sale of assets is not solely common stock of the successor corporation or its
Parent, the Administrator may, with the consent of the successor corporation,
provide for the consideration to be received upon the exercise of the Option or
Stock Purchase Right, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
14. Date of Grant. The date of grant of an Option or Stock Purchase Right
-------------
shall be, for all purposes, the date on which the Administrator makes the
determination granting such Option or Stock Purchase Right, or such other later
date as is determined by the Administrator. Notice of the determination shall
be provided to each Optionee within a reasonable time after the date of such
grant.
-10-
<PAGE>
15. Amendment and Termination of the Plan.
-------------------------------------
(a) Amendment and Termination. The Board may at any time amend,
-------------------------
alter, suspend or terminate the Plan.
(b) Shareholder Approval. The Company shall obtain shareholder
--------------------
approval of any Plan amendment to the extent necessary and desirable to comply
with Applicable Laws.
(c) Effect of Amendment or Termination. No amendment, alteration,
----------------------------------
suspension or termination of the Plan shall impair the rights of any Optionee,
unless mutually agreed otherwise between the Optionee and the Administrator,
which agreement must be in writing and signed by the Optionee and the Company.
Termination of the Plan shall not affect the Administrator's ability to exercise
the powers granted to it hereunder with respect to Options granted under the
Plan prior to the date of such termination.
16. Conditions Upon Issuance of Shares.
----------------------------------
(a) Legal Compliance. Shares shall not be issued pursuant to the
----------------
exercise of an Option or Stock Purchase Right unless the exercise of such Option
or Stock Purchase Right and the issuance and delivery of such Shares shall
comply with Applicable Laws and shall be further subject to the approval of
counsel for the Company with respect to such compliance.
(b) Investment Representations. As a condition to the exercise of an
--------------------------
Option or Stock Purchase Right, the Company may require the person exercising
such Option or Stock Purchase Right to represent and warrant at the time of any
such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares if, in the
opinion of counsel for the Company, such a representation is required.
17. Inability to Obtain Authority. The inability of the Company to obtain
-----------------------------
authority from any regulatory body having jurisdiction, which authority is
deemed by the Company's counsel to be necessary to the lawful issuance and sale
of any Shares hereunder, shall relieve the Company of any liability in respect
of the failure to issue or sell such Shares as to which such requisite authority
shall not have been obtained.
18. Reservation of Shares. The Company, during the term of this Plan,
---------------------
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
19. Shareholder Approval. The Plan shall be subject to approval by the
--------------------
shareholders of the Company within twelve (12) months after the date the Plan is
adopted. Such shareholder approval shall be obtained in the manner and to the
degree required under Applicable Laws.
-11-
<PAGE>
Exhibit 10.4
SONIC INNOVATIONS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
The following constitute the provisions of the 2000 Employee Stock
Purchase Plan of Sonic Innovations, Inc. (the "Plan").
1. Purpose. The purpose of the Plan is to provide employees of the
-------
Company and its Designated Subsidiaries with an opportunity to purchase Common
Stock of the Company through accumulated payroll deductions. It is the
intention of the Company to have the Plan qualify as an "employee stock purchase
plan" under Section 423 of the Internal Revenue Code of 1986, as amended. The
provisions of the Plan, shall be construed so as to extend and limit
participation in a manner consistent with the requirements of that section of
the Code.
2. Definitions.
-----------
(a) "Board" means the Board of Directors of the Company or any
-----
committee thereof designated by the Board of Directors of the Company in
accordance with Section 14 of the Plan.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
----
(c) "Common Stock" means the common stock of the Company.
------------
(d) "Company" means Sonic Innovations, Inc. and any Designated
-------
Subsidiary of the Company.
(e) "Compensation" means all gross earnings including commissions,
------------
overtime, shift premium, incentive compensation, bonuses and other compensation.
(f) "Designated Subsidiary" means any subsidiary of the Company that
---------------------
has been designated by the Board as eligible to participate in the Plan.
(g) "Employee" means any individual who is an employee of the Company
--------
for tax purposes. For purposes of the Plan, the employment relationship shall
be treated as continuing intact while the individual is on sick leave or other
leave of absence approved by the Company. Where the period of leave exceeds 90
days and the individual's right to reemployment is not guaranteed either by
statute or by contract, the employment relationship shall be deemed to have
terminated on the 91/st/ day of such leave.
(h) "Enrollment Date" means the first Trading Day of each Offering
---------------
Period.
(i) "Exercise Date" means the last Trading Day of each Purchase
-------------
Period.
(j) "Fair Market Value" means, as of any date, the value of Common
-----------------
Stock determined as follows:
<PAGE>
(i) If the Common Stock is listed on any established stock
exchange or a national market system, its Fair Market Value shall be the closing
sales price for such stock (or the closing bid, if no sales were reported) as
quoted on such exchange or system for the last market trading day prior to the
date of determination.
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, its Fair Market Value
shall be the mean of the closing bid and asked prices for the Common Stock prior
to the date of determination.
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board; or
(iv) For purposes of the Enrollment Date of the first Offering
Period under the Plan, the Fair Market Value shall be the initial price to the
public as set forth in the final prospectus included within the registration
statement on Form S-1 filed with the Securities and Exchange Commission (the
"SEC") for the initial public offering of the Company's Common Stock (the
"Registration Statement").
(k) "Offering Periods" means the periods of approximately 24
----------------
months during which an option granted pursuant to the Plan may be exercised,
commencing on the first Trading Day on or after May 1/st/ and November 1/st/ of
each year and terminating on the last Trading Day in the periods ending twenty-
four months later; provided, however, that the first Offering Period under the
Plan shall commence with the first Trading Day on or after the date on which the
SEC declares the Company's Registration Statement effective and ending on the
last Trading Day on or before April 30, 2002 The duration and timing of Offering
Periods may be changed pursuant to Section 4 of this Plan.
(l) "Plan" means this 2000 Employee Stock Purchase Plan.
----
(m) "Purchase Period" means the approximately six month period
---------------
commencing after one Exercise Date and ending with the next Exercise Date.
(n) "Purchase Price" means 85% of the Fair Market Value of a share of
--------------
Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower;
provided however, that the Purchase Price may be adjusted by the Board pursuant
to Section 20.
(o) "Trading Day" means a day on which national stock exchanges are
-----------
open for trading.
3. Eligibility.
-----------
(a) Any Employee who shall be employed by the Company on a given
Enrollment Date shall be eligible to participate in the Plan.
(b) Any provisions of the Plan to the contrary notwithstanding, no
Employee shall be granted an option under the Plan (i) to the extent that,
immediately after the grant, such Employee (or any other person whose stock
would be attributed to such Employee pursuant to Section 424(d) of the Code)
would own capital stock of the Company and/or hold outstanding options to
purchase
-2-
<PAGE>
such stock possessing five percent (5%) or more of the total combined voting
power or value of all classes of capital stock of the Company or any subsidiary;
or (ii) to the extent that his or her rights to purchase stock under all
employee stock purchase plans of the Company and its subsidiaries accrues at a
rate which exceeds Twenty Thousand Dollars ($20,000) worth of stock (determined
at the fair market value of the shares at the time such option is granted) for
each calendar year in which such option is outstanding at any time.
4. Offering Periods. The Plan shall be implemented by consecutive,
----------------
overlapping Offering Periods with a new Offering Period commencing on the first
Trading Day on or after May 1/st/ and November 1/st/ each year, or on such other
date as the Board shall determine; provided, however, that the first Offering
Period shall commence with the first Trading Day on or after the date on which
the SEC declares the Company's Registration Statement effective and ending on
the last Trading Day on or before April 30, 2002. The Board shall have the
power to change the commencement dates and duration of Offering Periods with
respect to future offerings without shareholder approval if such change is
announced at least five (5) days prior to the scheduled beginning of the first
Offering Period to be affected thereafter.
5. Participation.
-------------
(a) An eligible Employee may become a participant in the Plan by
completing an agreement authorizing payroll deductions in the form of Exhibit A
and filing it with the Company's human resources department prior to the
applicable Enrollment Date.
(b) Payroll deductions for a participant shall commence on the first
payroll following the Enrollment Date and shall end on the last payroll in the
Offering Period to which such authorization is applicable, unless sooner
terminated by the participant as provided in Section 10 hereof.
6. Payroll Deductions.
------------------
(a) At the time a participant files his or her subscription
agreement, he or she shall elect to have payroll deductions made on each pay day
during the Offering Period in an amount not exceeding ten percent (10%) of the
Compensation which he or she receives on each pay day during the Offering
Period.
(b) All payroll deductions made for a participant shall be credited
to his or her account under the Plan and shall be withheld in whole percentages
only. A participant may not make any additional payments into such account.
(c) A participant may discontinue his or her participation in the
Plan as provided in Section 10 hereof, or may increase or decrease the rate of
his or her payroll deductions during the Offering Period by filing with the
Company a new agreement authorizing a change in payroll deduction rate. A
participant's agreement shall remain in effect for successive Offering Periods
unless terminated as provided in Section 10 hereof.
(d) Notwithstanding the foregoing, to the extent necessary to comply
with Section 423(b)(8) of the Code and Section 3(b) hereof, a participant's
payroll deductions may be decreased by the Company at any time during a Purchase
Period. Payroll deductions shall recommence at the
-3-
<PAGE>
rate provided in such participant's agreement at the beginning of the first
Purchase Period which is scheduled to end in the following calendar year.
(e) At the time the Company's Common Stock issued under the Plan is
disposed of, the participant must make adequate provision for the Company's
federal, state, or other tax withholding obligations, if any, which arise upon
the disposition of the Common Stock. The Company may, but shall not be
obligated to, withhold from the participant's compensation the amount necessary
for the Company to meet applicable withholding obligations.
7. Grant of Option. On the Enrollment Date of each Offering Period,
---------------
each participating Employee shall be granted an option to purchase on each
Exercise Date up to a number of shares of the Company's Common Stock determined
by dividing such Employee's payroll deductions accumulated prior to such
Exercise Date and retained in the Participant's account as of the Exercise Date
by the applicable Purchase Price; provided that in no event shall an Employee be
permitted to purchase during each Purchase Period more than 5,263 shares of the
Company's Common Stock (subject to any adjustment pursuant to Section 19), and
provided further that such purchase shall be subject to the limitations set
forth in Sections 3(b) and 13 hereof. The Board may, for future Offering
Periods, increase or decrease, in its absolute discretion, the maximum number of
shares of the Company's Common Stock an Employee may purchase during each
Purchase Period of such Offering Period. Exercise of the option shall occur as
provided in Section 8 hereof, unless the participant has withdrawn pursuant to
Section 10 hereof. The option shall expire on the last day of the Offering
Period.
8. Exercise of Option.
------------------
(a) Unless a participant withdraws from the Plan as provided in
Section 10 hereof, his or her option for the purchase of shares shall be
exercised automatically on the Exercise Date, and the maximum number of full
shares subject to option shall be purchased for such participant at the
applicable Purchase Price with the accumulated payroll deductions in his or her
account. No fractional shares shall be purchased; any payroll deductions
accumulated in a participant's account which are not sufficient to purchase a
full share shall be retained in the participant's account for the subsequent
Purchase Period.
(b) If the Board determines that, on a given Exercise Date, the
number of shares with respect to which options are to be exercised may exceed
the number of shares of Common Stock that were authorized under the Plan, the
Board may in its sole discretion provide that the Company shall make a pro rata
allocation of the shares of Common Stock available for purchase on such Exercise
Date, and (i) continue all Offering Periods then in effect, or (ii) terminate
any or all Offering Periods then in effect pursuant to Section 20 hereof.
9. Delivery. As promptly as practicable after each Exercise Date on
--------
which a purchase of shares occurs, the Company shall arrange the delivery to
each participant, as appropriate, of a certificate representing the shares
purchased upon exercise of his or her option.
10. Withdrawal. A participant may withdraw all but not less than all
----------
the payroll deductions credited to his or her account and not yet used to
exercise his or her option under the Plan at any time by giving written notice
to the Company in the form of Exhibit B. All of the participant's
-4-
<PAGE>
payroll deductions credited to his or her account shall be paid to such
participant promptly after receipt of notice of withdrawal and such
participant's option for all Offering Periods then in progress shall be
automatically terminated, and no further payroll deductions for the purchase of
shares shall be made for such Offering Periods. Payroll deductions shall not
resume at the beginning of the succeeding Offering Period unless the participant
delivers to the Company a new agreement.
11. Termination of Employment.
-------------------------
Upon a participant's ceasing to be an Employee for any reason, he or
she shall be deemed to have elected to withdraw from the Plan and the payroll
deductions credited to such participant's account during the Purchase Period but
not yet used to exercise the option shall be returned to such participant or, in
the case of his or her death, to the person or persons entitled thereto under
Section 15 hereof, and such participant's option shall be automatically
terminated.
12. Interest. No interest shall accrue on the payroll deductions of
--------
a participant in the Plan.
13. Stock.
-----
(a) Subject to adjustment upon changes in capitalization of the
Company as provided in Section 19 hereof, the maximum number of shares of the
Company's Common Stock which shall be made available for sale under the Plan
shall be 263,158 shares plus an annual increase to be added on each January
1/st/ equal to the lesser of (i) 105,263 shares, (ii) 1% of the outstanding
shares on such date, or (iii) a lesser amount determined by the Board.
(b) The participant shall have no interest or voting right in shares
covered by his option until such option has been exercised.
(c) Shares to be delivered to a participant under the Plan shall be
registered in the name of the participant or in the name of the participant and
his or her spouse.
14. Administration. The Plan shall be administered by the Board or a
--------------
committee of members of the Board appointed by the Board. The Board or its
committee shall have full and exclusive discretionary authority to construe,
interpret and apply the terms of the Plan, to determine eligibility and to
adjudicate all disputed claims filed under the Plan. Every finding, decision
and determination made by the Board or its committee shall, to the full extent
permitted by law, be final and binding upon all parties.
15. Designation of Beneficiary. A participant may file a written
--------------------------
designation of a beneficiary who is to receive any shares and cash from the
participant's account under the Plan in the event of such participant's death.
If a participant is married and the designated beneficiary is not the spouse,
spousal consent shall be required for such designation to be effective. Such
designation of beneficiary may be changed by the participant at any time by
written notice. In the event of the death of a participant and in the absence
of a valid beneficiary, the Company shall deliver such shares and cash to the
executor or administrator of the estate of the participant.
16. Transferability. Neither payroll deductions credited to a
---------------
participant's account nor any rights with regard to the exercise of an option to
receive shares under the Plan may be assigned,
-5-
<PAGE>
transferred, pledged or otherwise disposed of in any way (other than by will,
the laws of descent and distribution, or as provided in Section 15 hereof) by
the participant. Any such attempt at assignment, transfer, pledge or other
disposition shall be without effect.
17. Use of Funds. All payroll deductions received or held by the Company
------------
under the Plan may be used by the Company for any corporate purpose, and the
Company shall not be obligated to segregate such payroll deductions.
18. Reports. Individual accounts shall be maintained for each participant
-------
in the Plan. Statements of account shall be given to participating Employees at
least annually, which statements shall set forth the amounts of payroll
deductions, the Purchase Price, the number of shares purchased and the remaining
cash balance, if any.
19. Adjustments Upon Changes in Capitalization, Dissolution, Liquidation,
--------------------------------------------------------------------
Merger or Asset Sale.
- --------------------
(a) Changes in Capitalization. Subject to any required action by the
-------------------------
shareholders of the Company, the shares authorized and remaining under the Plan,
the maximum number of shares each participant may purchase each Purchase Period,
the price per share and the number of shares of Common Stock covered by each
option under the Plan which has not yet been exercised shall be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a stock split, reverse stock split, stock dividend,
combination or reclassification of the Common Stock, or any other increase or
decrease in the number of shares of Common Stock effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Such adjustment shall be made by the Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an option.
(b) Dissolution or Liquidation. In the event of the proposed
--------------------------
dissolution or liquidation of the Company, the Offering Period then in progress
shall be shortened by setting a new Exercise Date (the "New Exercise Date").
The Board shall notify each participant in writing, at least ten (10) business
days prior to the New Exercise Date, that the Exercise Date for the
participant's option has been changed to the New Exercise Date.
(c) Merger or Asset Sale. In the event of a proposed sale of all or
--------------------
substantially all of the assets of the Company, or the merger of the Company
with or into another corporation, each outstanding option shall be assumed or an
equivalent option substituted by the successor corporation. In the event that
the successor corporation refuses to assume or substitute for the option, any
Purchase Periods then in progress shall be shortened by setting a new Exercise
Date (the "New Exercise Date") and any Offering Periods then in progress shall
end on the New Exercise Date. The Board shall notify each participant in
writing, at least ten (10) business days prior to the New Exercise Date, that
the Exercise Date for the participant's option has been changed to the New
Exercise Date.
-6-
<PAGE>
20. Amendment or Termination.
------------------------
(a) The Board of Directors of the Company may at any time and for any
reason terminate or amend the Plan. Except as provided in Section 20 hereof, no
such termination can affect options previously granted, provided that an
Offering Period may be terminated by the Board of Directors on any Exercise Date
if the Board determines that the termination of the Offering Period or the Plan
is in the best interests of the Company and its shareholders. Except as provided
in Section 19 and this Section 20 hereof, no amendment may make any change in
any option theretofore granted which adversely affects the rights of any
participant. To the extent necessary to comply with Section 423 of the Code (or
any successor rule or provision or any other applicable law, regulation or stock
exchange rule), the Company shall obtain shareholder approval in such a manner
and to such a degree as required.
(b) Without shareholder consent and without regard to whether any
participant rights may be considered to have been "adversely affected," the
Board (or its committee) shall be entitled to change the Offering Periods, limit
the frequency and/or number of changes in the amount withheld during an Offering
Period, establish the exchange ratio applicable to amounts withheld in a
currency other than U.S. dollars, permit payroll withholding in excess of the
amount designated by a participant in order to adjust for delays or mistakes in
the Company's processing of properly completed withholding elections, establish
reasonable waiting and adjustment periods and/or accounting and crediting
procedures to ensure that amounts applied toward the purchase of Common Stock
for each participant properly correspond with amounts withheld from the
participant's Compensation, and establish such other limitations or procedures
as the Board (or its committee) determines in its sole discretion advisable
which are consistent with the Plan.
(c) In the event the Board determines that the ongoing operation of
the Plan may result in unfavorable financial consequences, the Board may, in its
discretion and, to the extent necessary or desirable, modify or amend the Plan
to reduce or eliminate such financial consequences including, but not limited
to: (i) altering the Purchase Price for any Offering Period including an
Offering Period underway; (ii) shortening any Offering Period so that Offering
Period ends on a new Exercise Date, including an Offering Period underway; and
(iii) allocating shares. Such modifications or amendments shall not require
shareholder approval or the consent of any Plan participants.
21. Notices. All notices or other communications by a participant to the
-------
Company in connection with the Plan shall be deemed to have been duly given when
received in the form specified by the Company at the location, or by the person,
designated by the Company for the receipt thereof.
22. Conditions Upon Issuance of Shares. Shares shall not be issued with
----------------------------------
respect to an option unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all applicable
provisions of law, domestic or foreign, including, without limitation, the
Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as
amended, and the requirements of any stock exchange upon which the shares may
then be listed.
As a condition to the exercise of an option, the Company may require
the person exercising such option to represent and warrant at the time of any
such exercise that the shares are
-7-
<PAGE>
being purchased only for investment and without any present intent to sell or
distribute such shares if, in the opinion of counsel for the Company, such a
representation is required by any of the aforementioned applicable provisions of
law.
23. Term of Plan. The Plan shall become effective upon of its adoption by
------------
the Board of Directors and approval by the shareholders of the Company. It
shall continue in effect for a term of 10 years unless sooner terminated under
Section 20 hereof.
24. Automatic Transfer to Low Price Offering Period. To the extent
-----------------------------------------------
permitted by any applicable laws, regulations, or stock exchange rules, if the
Fair Market Value of the Common Stock on any Exercise Date in an Offering Period
is lower than the Fair Market Value of the Common Stock on the Enrollment Date
of such Offering Period, then all participants in such Offering Period shall be
automatically withdrawn from such Offering Period immediately after the exercise
of their option on such Exercise Date and automatically re-enrolled in the
immediately following Offering Period as of the first day thereof.
-8-
<PAGE>
SONIC INNOVATIONS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
AGREEMENT
_____ Original Application Enrollment Date:___________
_____ Change in Payroll Deduction Rate
_____ Change of Beneficiary
1. I hereby elect to participate in the 2000 Employee Stock Purchase Plan (the
"ESPP") and to purchase shares of the Company's Common Stock in accordance
with this Agreement and the ESPP.
2. I hereby authorize payroll deductions from each paycheck in the amount of
____% of my Compensation on each payday (from 0 to 10% in whole
percentages) during the Offering Period.
3. I understand that if I do not withdraw from an Offering Period, my
accumulated payroll deductions will be used to automatically exercise my
option to purchase shares of Common Stock at the applicable Purchase Price.
4. I have received a copy of the complete ESPP. I understand that my
participation in the ESPP is in all respects subject to the terms of the
ESPP and I hereby agree to be bound by the terms of the ESPP.
5. My shares purchased under the ESPP should be issued in the name(s) of:
___________________________________________________________________________
(Employee or Employee and Spouse only).
6. I understand that if I dispose of any shares received by me pursuant to the
ESPP within one year after the Exercise Date, I will be treated for federal
income tax purposes as having received ordinary income at the time of such
disposition in an amount equal to the excess of the fair market value of
the shares at the time such shares were purchased by me over the price
which I paid for the shares. I hereby agree to notify the Company in
writing within 30 days after the date of any disposition of my shares and I
will make adequate provision for Federal, state or other tax withholding
obligations, if any, which arise upon the disposition of the shares. The
Company may, but will not be obligated to, withhold from my compensation
the amount necessary to meet any applicable withholding obligation.
7. In the event of my death, I hereby designate the following as my
beneficiary(ies) to receive all payments and shares due me under the ESPP:
________________________________________________________________________
(Name) (Social Security Number) (Relationship)
I UNDERSTAND THAT THIS AGREEMENT SHALL REMAIN IN EFFECT THROUGHOUT SUCCESSIVE
OFFERING PERIODS UNLESS TERMINATED BY ME.
Dated:________________ ____________________________________________________
Signature of Employee Social Security
Number
____________________________________________________
Spouse's Signature (If beneficiary other than spouse)
<PAGE>
EXHIBIT B
SONIC INNOVATIONS, INC.
2000 EMPLOYEE STOCK PURCHASE PLAN
NOTICE OF WITHDRAWAL
I hereby withdraw from the 2000 Employee Stock Purchase Plan (the "ESPP").
I hereby direct the Company to pay to me as promptly as practicable all the
payroll deductions credited to my account with respect to the ESPP. I
understand and agree that my options for such Offering Period(s) in progress
will be automatically terminated. I also understand that no further payroll
deductions will be made for the purchase of shares in the Offering Period(s) in
progress and that I shall be eligible to participate in succeeding Offering
Periods only by delivering to the Company a new Agreement.
___________________________________________
Name
___________________________________________
Social Security Number
___________________________________________
Signature
___________________________________________
Date
<PAGE>
SONIC INNOVATIONS, INC. (the "Company")
2000 STOCK PLAN (the "Plan")
STOCK OPTION AGREEMENT (the "Agreement")
Optionee:
- --------
Name: ________________________________________
Social Security Number: ________________________________________
Terms:
- -----
You have been granted an option (the "Option") to purchase Common Stock of
the Company, subject to the terms and conditions of the Plan (which is
incorporated herein by reference) and this Stock Option Agreement, as follows:
<TABLE>
<S> <C> <C> <C>
Grant Number ____________________ Exercise Price per Share $____________________
Date of Grant ____________________ Total Exercise Price $____________________
Vesting Commencement Date ____________________ Type of Option __ Incentive Stock Option
Option Shares Granted ____________________ __ Nonstatutory Stock Option
Expiration Date ____________________
</TABLE>
Vesting Schedule:
- ----------------
This Option may be exercised, in whole or in part, in accordance with the
following schedule:
[25% of the Option Shares shall vest each anniversary on the Vesting
Commencement Date, subject to the Optionee continuing to be a Service Provider
on such dates].
Termination Period:
- ------------------
This Option may be exercised for three months after Optionee ceases to be a
Service Provider as defined in the Plan. Upon the death or Disability of the
Optionee, this Option may be exercised for twelve months after Optionee ceases
to be a Service Provider. In no event shall this Option be exercised later than
the Expiration Date.
Exercise:
- --------
This Option is exercisable by delivery of an "Exercise Notice" to the
Company's CFO. The Exercise Notice shall be accompanied by payment. Payment of
the aggregate Exercise Price shall be by any of the following, or a combination
thereof, at the election of the Optionee: cash; check; consideration received by
the Company under a cashless option exercise program; surrender of Company
common stock which in the case of
<PAGE>
shares acquired upon exercise of an option, have been owned by the Optionee for
more than six (6) months on the date of surrender; or with the Plan
Administrator's consent, delivery of Optionee's promissory note in a form
agreeable to the Plan Administrator.
OPTIONEE SHOULD CONSULT A TAX ADVISOR BEFORE EXERCISING THIS OPTION OR DISPOSING
OF THE SHARES.
General:
- -------
This Option may not be transferred in any manner otherwise than by will or
by the laws of descent or distribution and may be exercised during the lifetime
of Optionee only by the Optionee. The terms of the Plan and this Agreement shall
be binding upon the executors, administrators, heirs, successors and assigns of
the Optionee.
The Plan and this Agreement constitute the entire agreement of the parties
with respect to the subject matter hereof and supersede in their entirety all
prior undertakings and agreements of the Company and Optionee with respect to
the subject matter hereof.
In the event of a conflict between the terms and conditions of the Plan and
the terms and conditions of this Agreement, the terms and conditions of the Plan
shall prevail.
If designated as an Incentive Stock Option ("ISO"), this Option is intended
to qualify as an Incentive Stock Option under Section 422 of the Code. However,
if this Option is intended to be an Incentive Stock Option, to the extent that
it exceeds the $100,000 rule of Code Section 422(d) it shall be treated as a
Nonstatutory Stock Option ("NSO").
OPTIONEE ACKNOWLEDGES AND AGREES THAT THIS AGREEMENT DOES NOT CONSTITUTE AN
EXPRESS OR IMPLIED PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER AND
SHALL NOT INTERFERE WITH OPTIONEE'S RIGHT OR THE COMPANY'S RIGHT TO TERMINATE
OPTIONEE'S RELATIONSHIP AS A SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT
CAUSE.
OPTIONEE: SONIC INNOVATIONS, INC.
_____________________________ ______________________________
Signature By
_____________________________ ______________________________
Print Name Name and Title
-2-
<PAGE>
SONIC INNOVATIONS, INC.
2000 STOCK PLAN
EXERCISE NOTICE
Optionee Name: ______________________________
Social Security Number: ______________________________
1. I hereby elect to purchase ______________ shares (the "Shares") of the
Common Stock of Sonic Innovations, Inc. under and pursuant to the 2000 Stock
Plan (the "Plan") and the Stock Option Agreement dated _____________ (the
"Agreement"). The purchase price of $_______ per share as required by the
Agreement, is herewith delivered.
2. I have received, read and understand the Plan and the Agreement and
agree to abide by and be bound by their terms and conditions.
3. I understand that until the issuance (as evidenced by the appropriate
entry on the books of Sonic Innovations, Inc. or of a duly authorized transfer
agent of the Company) of the Shares, I have no rights as a shareholder with
respect to the Shares.
4. I understand that I may suffer adverse tax consequences as a result of
my purchase or disposition of the Shares. I have consulted with any tax
consultants I have deemed advisable in connection with the purchase or
disposition of the Shares and I am not relying on the Company for any tax
advice.
_____________________________ ________________________
Signature Date
<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 [ * ] 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
[ATMEL LOGO]
LICENSE AND MANUFACTURING AGREEMENT
This License and Manufacturing Agreement (the "Agreement") is entered into
on February 20, 1997 by and between ATMEL CORPORATION, a California corporation
("Atmel") 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. Atmel is in the business of designing, developing, manufacturing and
selling various types of integrated circuits; and
C. Sonix and Atmel desire to enter into this Agreement for the purposes
of setting forth the terms and conditions under which Atmel will be granted
the right to make or have made certain integrated circuits, for sale to Sonix
and other customers of Atmel, and Atmel 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 Atmel,
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 Atmel 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. Atmel'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 Atmel 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 Atmel by Sonix pursuant to Section 2.1
hereof, may be transferred by Atmel 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 Atmel, 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 Atmel of its obligations hereunder.
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WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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2.2 License to Sonix. Atmel 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 Atmel to the
Licensed Technology for use by Sonix solely in Hearing Applications. If Atmel
makes a major or substantial improvement or enhancement to the Licensed
Technology, Atmel and Sonix shall meet to discuss a license to such major
improvements to Sonix for Hearing Applications.
2.3 Intellectual Property Rights. Atmel agrees that Sonix will retain
sole ownership and complete intellectual property rights to the Licensed
Technology, Sonix Patents and Sonix Know- How licensed to Atmel hereunder and to
any enhancements, modifications, improvements, changes or derivative products
thereto made by or for Sonix. Sonix agrees that Atmel 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 Atmel to manufacture the Products and to any enhancements,
modifications, improvements, changes or derivative products made by Atmel 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) Atmel shall make available to Sonix its design, electrical and layout
rule set for Atmel's AT19760 Process.
(b) Atmel shall make available to Sonix, in a format compatible with
Sonix's design platform, the AT19760 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 Atmel. Atmel 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) ATMEL 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 Atmel before masks are made.
(g) Atmel 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) Atmel shall generate a test program (probe) from customer
supplied,test specification and test vectors.
(i) Atmel shall perform qualification (per Sonix's specification) and
characterization for release of the Product to production.
(j) Atmel shall make available to Sonix any applicable future fabrication
process that Atmel installs into its fabrication facility in Colorado
Springs, Colorado.
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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 Atmel hereunder, Atmel agrees to pay Sonix a royalty in
the amount of five percent (5%) of the Net Selling Price of each Product sold by
Atmel or its transferee under Section 2.1 (a) to p arties other than Sonix.
4.2 Statement and Payment. Within forty-five (45) days after the end of
each calendar quarter, Atmel shall finish to Sonix a statement showing for
each Product the number of each such Product which were sold by Atmel 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. Atmel shall keep records of
royalty bearing events for two years. Sonix may have an independent third party
audit such records of Atmel upon reasonable notice and no more than once a
year. If the audit reveals an underpayment of royalties of 10% or more, then
Atmel shall pay all costs of the audit in addition to the amount of the
underpayment plus reasonable interest.
SECTION 5
MANUFACTURING
5.1 Manufacturing. Atmel 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 Atmel 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 Atmel 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 Atmel's invoice. In the event Sonix
fails to make any payment here-under when due, Atmel 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 Atmel'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
Atmel'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 Atmel'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 Atmel with an appropriate
tax exemption certificate.
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THE OMITTED PORTIONS.
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5.4 Forecasts and Orders.
(a) Forecast. Commencing upon Atmel's commercial production of the
Products Sonix shall provide to Atmel a eighteen (18) month rolling forecast
setting forth its estimated requirements for shipment by month for Products, and
Sonix and Atmel 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 Atmel for shipment
with respect to such products even if Sonix fails to submit such an order to
Atmel 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 Atmel'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 Atmel 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 Atmel 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 Atmel of an order shall be indicated by written acknowledgment
thereof by Atmel. All orders placed by Sonix and accepted by Atmel shall be
non-cancelable except as set forth in Section 5.4 (a). If in conformance with
this Agreement Atmel shall accept the purchase order or if not in conformance
with this Agreement, Atmel 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 Atmel'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, Atmel shall make such designation in conformance with its standard
shipping practices. Shipment will be F.O.B. Atmel's factory, at which time
risk of loss (other than loss or damage due to Atmel'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.
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WITH THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
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5.6 Warranty.
(a) Atmel 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, Atmel 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) Atmel 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 Atmel, FCA
Atmel's facility accompanied by Atmel's Returned Material Authorization; and
(iii) Atmel's reasonable examination of such goods discloses to Atmel'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 Atmel, improper testing, or use contrary to
any instructions issued by Atmel within a reasonable time, Atmel 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 Atmel the opportunity to inspect such goods at Sonix's location, and
any such goods so inspected shall not be returned to Atmel without its prior
written consent.
Atmel 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 ATMEL'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. ATMEL 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
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THE OMITTED PORTIONS.
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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 Atmel following a material breach by Sonix, the license granted
to Atmel in Section 2 hereof shall survive and remain in ftill force and
effect, and such license shall thereafter be perpetual, but Atmel shall
continue to pay royalties as set forth in Section 4 provided, however, that
Atmel may offset any amounts owed to Sonix by Atmel 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 Atmel, the license granted
to Atmel in Section 2 shall terminate upon the sale of the Products Atmel
has on its backlog as of the date of termination of the Agreement, and Atmel
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.
Atmel 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 Atmel 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 Atmel against any
actions brought against Atmel 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 Atmel 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 Atmel'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 Atmel. Except as set forth in Section 7.1 hereof,
Atmel 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 Atmel, 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 Atmel is provided reasonably prompt
notice of any such action and reasonable assistance in connection with the
defense thereof (at Atmel's expense) and allows Atmel full control of the
defense and settlement
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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 Atmel.
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 Atmel pursuant to this Agreement. Atmel'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.
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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 Atmel shall be permitted to retain any Confidential Information
relating to Sonix Know-How in the event this Agreement is terminated by Atmel
as a result of a breach by Sonix, but must keep all Confidential Information as
set forth in this Section 8.
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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.
ATMEL CORPORATION SONIX TECHNOLOGIES, INC.
By: /s/ George Perlegos By: /s/ A. Raguskus
----------------------- ----------------------------
George Perlegos Name: A. Raguskus
--------------------------
President and CEO Title: President and CEO
-------------------------
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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 AT19760 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 AT19760 process;
b) Wafer Sort Test time is 5 seconds; and
c) Deliver tested die (bumping and price adder TBD*).
[ * ]
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THE OMITTED PORTIONS.
<PAGE>
Exhibit 10.8
AMENDED AND RESTATED LICENSE AGREEMENT BETWEEN
BRIGHAM YOUNG UNIVERSITY AND SONIC INNOVATIONS, INC.
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<S> <C>
1 Definitions................................................. 1
2 BYU Grant................................................... 3
3 Sharing of all Improvements................................. 4
4 Alternate Technology........................................ 4
5 Performance Requirements.................................... 4
6 License Fees and Royalties.................................. 5
7 Reports, Records, Penalties and Interest.................... 6
8 Confidentiality............................................. 7
9 Separate Service Agreement.................................. 8
10 Export Controls............................................. 8
11 Patent Marking and Copyright Notice......................... 8
12 Patent Prosecution and Maintenance.......................... 8
13 Infringement................................................ 9
14 Warranty and Limitation of Remedy........................... 10
15 Product Liability and General Indemnification............... 10
16 Term and Termination........................................ 11
17 Negotiations, Mediation and Arbitration..................... 12
18 Licensee Assignment......................................... 13
19 Non Use of BYU Name......................................... 13
20 Publication................................................. 13
21 Payment, Notices and Other Communications................... 14
22 Miscellaneous Provisions.................................... 14
</TABLE>
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AMENDED AND RESTATED LICENSE AGREEMENT
BRIGHAM YOUNG UNIVERSITY
This Amended and Restated License Agreement (the "Agreement"), effective
March 21, 2000 is entered into between Brigham Young University, a Utah non-
profit corporation and educational institution, with its principal campus and
place of business located at Provo, Utah 84602 (referred to in this Agreement as
"BYU") and Sonic Innovations, Inc., a Utah corporation with its principal place
of business located at 2795 E. Cottonwood Parkway, Suite 660, Salt Lake City,
Utah 84121 (referred to in this Agreement as "LICENSEE").
RECITALS
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1. BYU is the sole owner of certain intellectual property rights known as
"Noise Suppression" and has the right to grant licenses with respect to these
rights.
A. BYU is an institution of higher education and is not in the
business of commercially developing ideas, inventions, or other types of
intellectual property, but it does desire to have Noise Suppression available to
the public and is willing to grant a license for this purpose.
B. LICENSEE has represented to BYU that LICENSEE has the technical
and commercial ability, and the technical, financial and other resources
necessary to develop and sell products or services based upon Noise Suppression.
C. LICENSEE desires to obtain a license to Noise Suppression upon
the terms and conditions of this Agreement.
D. LICENSEE (or its predecessor entity) and BYU have previously
entered into that certain License Agreement in 1997 (the "Old 1997 Agreement")
and now desire to terminate the Old 1997 Agreement and amend and restate it in
its entirety in this Agreement.
In consideration of the promises and mutual covenants contained in this
Agreement the parties agree as follows:
TERMS OF AGREEMENT
1 Definitions
For the purposes of this Agreement, the following terms, words and phrases
shall have the meaning ascribed to them in this Section.
1.1 "ADJUSTED GROSS SALES" shall mean LICENSEE's gross sales price or the
--------------------
fair market monetary equivalent value of consideration received for LICENSED
PRODUCTS or PROCESSES, including product or process IMPROVEMENTS, sold, leased,
licensed or otherwise transferred by LICENSEE or a SUBLICENSEE to a third party,
including fees separately billed and specifically identified as consideration
for support, maintenance, service or subscriptions which include providing
upgrades or improvements, less qualifying costs directly attributable to such
sale, lease, license or transfer actually allowed and borne by LICENSEE or a
SUBLICENSEE. Such qualifying costs shall be limited to the costs of the
following:
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A. Trade or quantity discounts actually allowed and taken in such
amounts as are customary in the trade;
B. Sales, import and export duties and/or use and excise taxes
imposed with reference to particular sales;
C. Outbound transportation expenses prepaid or allowed;
D. Amounts allowed or credited by reason of timely rejections or
returns; and
E. Fees separately billed and specifically identified as
"installation fees," which are consistent with those normally
charged in the trade.
No deductions shall be made for commissions paid to individuals, whether
they be regularly employed by LICENSEE or by independent sales agents, or for
the cost of collections. For purposes of calculating "ADJUSTED GROSS SALES" a
LICENSED PRODUCT or PROCESS shall be considered sold, leased, licensed or
transferred when billed, invoiced, shipped, paid for or transferred, whichever
event occurs first.
1.2 "AFFILIATE" shall mean any person or entity owned or controlled
---------
directly or indirectly by LICENSEE or any person or other entity controlled by,
controlling, or under common control with LICENSEE. The term "control" means
possession, direct or indirect, of the powers to direct or cause the direction
of the management and policies of a person or entity; whether through ownership,
voting securities, beneficial interests; by contract; by agreement; or
otherwise.
1.3 "END USER" means any person or entity to which LICENSED PRODUCTS or
--------
LICENSED PROCESSES are sold or licensed for personal or business use and not for
the purpose of licensing or selling to other persons or entities.
1.4 "IMPROVEMENT(S)" means any invention, idea, trade secret, know-how or
--------------
derivative work which is directly related to or which includes any portion of or
utilizes any portion of the LICENSED TECHNOLOGY, LICENSED PRODUCTS or LICENSED
PROCESSES, whether or not patentable, copyrightable, or otherwise protectable as
intellectual property which is subsequently acquired or developed by LICENSEE
during the term of this Agreement.
1.5 "LICENSED PROCESS(ES)" means and includes any process, procedure,
--------------------
technique, method or service the use or practice of which incorporates or makes
use of any part of the LICENSED TECHNOLOGY or IMPROVEMENTS.
1.6 "LICENSED PRODUCT(S)" means and includes any product, apparatus, or
-------------------
IMPROVEMENTS which are developed, or enhanced in whole or in part by LICENSEE,
the production, manufacture, sale, lease, license, transfer or use of which
incorporates or makes use of any part of the LICENSED TECHNOLOGY or
IMPROVEMENTS. In the event such a product or apparatus forms an integral part
or component of a larger product, such larger product shall be considered a
"LICENSED PRODUCT," for purposes of this Agreement.
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1.7 "LICENSED TECHNOLOGY" means and includes all of BYU's technology and
-------------------
intellectual property referred to in this Agreement as Noise Suppression and
related enhancements generated at BYU as specifically identified and limited on
Exhibit "A", which is attached to this Agreement and by reference is
incorporated and made part of this Agreement.
1.8 "LICENSEE" is Licensee, and its AFFILIATES.
--------
1.9 "SUBLICENSEE" is any person or entity including value added retailers
-----------
or other individuals or entities, which are licensed pursuant to this Agreement
by LICENSEE with rights to the LICENSED TECHNOLOGY to market to END USERS
LICENSED PRODUCTS or LICENSED PROCESSES which are developed, enhanced, improved
or manufactured by said person or entity.
2 BYU Grant
2.1 BYU hereby grants LICENSEE an exclusive, worldwide, right and license
to utilize the LICENSED TECHNOLOGY, to develop LICENSED PRODUCTS and LICENSED
PROCESSES to manufacture, sell, lease and otherwise transfer LICENSED PRODUCTS
and to practice LICENSED PROCESSES within the field of auditory assistance to
the hearing impaired and hearing protection as authorized in this Agreement
until such time as this Agreement is terminated. This grant will extend to the
manufacture, sale, lease, transfer or other disposition of LICENSED PRODUCTS or
LICENSED PROCESSES through an AFFILIATE or through LICENSEE's use of any retail
outlet or distributor and shall authorize any END USERS' use of the LICENSED
PRODUCTS and LICENSED PROCESSES sold or transferred by LICENSEE or its
AFFILIATES, retail outlets or distributors.
2.2 BYU hereby grants LICENSEE a non-exclusive, worldwide right and
license to utilize the LICENSED TECHNOLOGY, to develop LICENSED PRODUCTS and
LICENSED PROCESSES to manufacture, sell, lease and otherwise transfer LICENSED
PRODUCTS and to practice LICENSED PROCESSES for all applications of the LICENSED
TECHNOLOGY outside the field of auditory assistance to the hearing impaired and
hearing protection as authorized in this Agreement until such time as this
Agreement is terminated. This grant will extend to the manufacture, sale, lease,
transfer or other disposition of LICENSED PRODUCTS or LICENSED PROCESSES through
an AFFILIATE or through LICENSEE's use of any retail outlet or distributor and
shall authorize any END USERS' use of the LICENSED PRODUCTS and LICENSED
PROCESSES sold or transferred by LICENSEE or its AFFILIATES, retail outlets or
distributors.
2.3 The grants provided under this Agreement shall specifically include
the right for LICENSEE to grant sublicenses to the LICENSED TECHNOLOGY to
SUBLICENSEES. All sublicenses granted by LICENSEE shall be subject to the terms
and conditions of this Agreement and the sublicense agreement shall have an
express provision to this effect. No sublicense shall relieve LICENSEE of any of
its obligations under this Agreement. LICENSEE agrees to forward to BYU a fully
executed copy of each sublicense agreement within thirty (30) days upon written
request from BYU, and to act as a fiduciary to protect BYU's interests in the
sublicense and to collect and transmit to BYU all royalties due.
2.4 Nothing in this Agreement shall be considered as granting any rights,
express or implied, in BYU's patents, patent applications, inventions, methods,
technical, confidential or
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proprietary information, expertise, know-how, trade secrets or knowledge not
specifically licensed in this Agreement, and all rights not expressly granted by
this Agreement to LICENSEE are expressly reserved by BYU. The license granted
by this Agreement shall not be construed to confer any rights upon LICENSEE by
implication, estoppel or otherwise as to any existing, new or derivative
technology not specifically licensed by this Agreement. The reservation of
rights described in this Section is intended to be broadly construed and not to
be limited by the definitions set forth in this Agreement.
2.5 Notwithstanding the exclusive license granted pursuant to this
Agreement, BYU, The Church of Jesus Christ of Latter-day Saints and the Church
Education System shall have the right to make, have made or use the LICENSED
TECHNOLOGY, LICENSED PRODUCTS, LICENSED PROCESSES and IMPROVEMENTS for
continuing research and non-commercial, academic and ecclesiastical uses without
cost. LICENSEE agrees that any time during the term of this Agreement, it will
sell to current or retired full-time faculty, administrative and staff personnel
of BYU and the full-time permanent employees of The Church of Jesus Christ of
Latter-day Saints covered by their respective health and welfare benefits
programs as then in effect for such personnel (similar to the current DMBA
coverage, but in no case applicable due to temporary or part-time employment,
including employment of students), LICENSED PRODUCTS or PROCESSES at the pricing
offered under LICENSEE'S Friends and Family program (or any successor or similar
program). LICENSEE may take reasonable steps to verify qualification by such
retired personnel and may employ a third-party to administer this program.
3 Sharing of all Improvements
For the purpose of facilitating BYU's exercise of its rights regarding
IMPROVEMENTS pursuant to the first sentence of Section 2.5 hereof, LICENSEE
agrees to share information regarding IMPROVEMENTS with BYU on a prompt and
reasonable basis and BYU agrees to maintain the confidentiality of such
information on the basis set forth in Section 8 of the Agreement.
4 Alternate Technology
In the event that LICENSEE chooses to use alternate technology to replace
the LICENSED TECHNOLOGY, representatives of BYU and LICENSEE shall meet and
confer regarding such alternate technology. If BYU agrees that the alternate
technology is superior to the LICENSED TECHNOLOGY and is not derived from the
LICENSED TECHNOLOGY, then LICENSEE shall have no royalty obligations under this
Agreement with respect to its products containing such alternate technology. If
BYU, acting in good faith, does not believe that such alternate technology is
superior to the LICENSED TECHNOLOGY, then LICENSEE shall continue to pay
royalties as provided for in this Agreement with respect to sales of products
containing such alternate technology. Promptly following the meeting(s) of BYU
and LICENSEE to consider the alternate technology, BYU shall give written notice
to LICENSEE of its opinion pursuant to this paragraph.
5 Performance Requirements
5.1 LICENSEE shall, during the term of this Agreement, use its best
efforts to bring one or more LICENSED PRODUCTS or LICENSED PROCESSES to market
in order to
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maximize the ADJUSTED GROSS SALES through a thorough, vigorous and diligent
commercial program.
5.2 LICENSEE's failure to perform in accordance with this Section of the
Agreement to the reasonable satisfaction of BYU may be considered by BYU to be a
material breach of this Agreement. (See Section 17 for termination procedure.)
6 License Fees and Royalties
In consideration of the license granted under this Agreement, LICENSEE
shall pay to BYU, in the manner designated below until the Agreement shall be
terminated, as follows:
6.1 License Issue Fees: A license issue fee in the amount of Fifty
Thousand Dollars ($50,000.00) shall be paid upon the execution of this
Agreement. This license issue fee shall be non-refundable and may not be
credited toward the payment of any royalties or other consideration required by
this Agreement.
6.2 Earned Royalties: An earned royalty shall be paid in the amount equal
to one-half of one percent (0.50%) of the ADJUSTED GROSS SALES of the LICENSED
PRODUCTS, LICENSED PROCESSES or IMPROVEMENTS subject of this Agreement used,
leased, licensed, sold or otherwise transferred to an END USER by or for
LICENSEE or its AFFILIATES.
6.3 Minimum Royalties: An annual minimum royalty of fifty thousand dollars
($50,000.00) for each calendar year shall be paid in two installments of twenty-
five thousand dollars ($25,000) at the conclusion of each six month period
commencing with the 1998 calendar year. In the event that LICENSEE's earned
royalty payment to BYU during any particular six-month period shall fall below
twenty-five thousand dollars, then LICENSEE shall pay a minimum royalty to BYU
with its report of the second or fourth quarter respectively of twenty-five
thousand dollars less any earned royalties paid for that six-month period. All
earned royalties for any given calendar year can be credited against all minimum
royalties for that calendar year, but earned royalties for any given calendar
year shall only be credited against minimum royalties for that same calendar
year.
6.4 Pass Through Royalties: A "pass through royalty" to be levied on all
license fees and any and all other consideration of any kind or description
received by LICENSEE or any AFFILIATE from any third party which is not an
AFFILIATE, distributor, retail outlet or END USER, but which is granted a
sublicense, is assigned rights or receives rights from LICENSEE with respect to
the LICENSED TECHNOLOGY to make, use, sell, lease or otherwise transfer LICENSED
PRODUCTS or PROCESSES made or developed by the SUBLICENSEE, assignee or
transferee and which is not otherwise subject to the earned and minimum royalty
provisions of this Agreement. The pass through royalty shall be paid on all
such license fees or consideration, which shall specifically include, but not be
limited to, license issue fees, minimum royalties, equity interests or other
consideration in excess of earned royalties to which BYU is entitled pursuant to
Sections 2.2 and 6.2 of this Agreement.
A. The "pass through royalty" shall be fifty percent (50%) of all
applicable consideration subject to the pass through royalty.
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B. Pass through royalty payments shall be payable to BYU quarterly
in addition to and contemporaneously with earned royalty
payments. Such pass through royalty payments shall be based on
all consideration paid during the applicable three months.
Reporting of such consideration shall be made following the same
criteria set forth for earned royalty payments in this Agreement.
In no event shall BYU be entitled to receive both an "earned
royalty" and a "pass through royalty" on the same transaction,
and if multiple licensed technologies are involved in the same
transaction, the total "pass through royalty" shall not exceed
50%.
6.5 Any royalty amount due to BYU arising out of this Agreement shall
accrue at the time of use, sale, lease, license or transfer of the LICENSED
PRODUCT or LICENSED PROCESS and shall be deemed to be held in trust for the
benefit of BYU until actual payment of such amounts is made pursuant to this
Agreement.
7 Reports, Records, Penalties and Interest
7.1 LICENSEE shall keep and shall require all SUBLICENSEES, AFFILIATES,
and any other party responsible by the terms of this Agreement to make payments
to BYU to keep, at their own expense, accurate books of account, using generally
accepted accounting principles and practices, detailing all data necessary to
calculate and easily audit any payments due to BYU under this Agreement. These
books of account shall be kept at LICENSEE's, AFFILIATE's or SUBLICENSEE's
principal place of business. These books and supporting data shall be open at
all reasonable times, upon ten (10) calendar days written notice, for a period
of five (5) years following the end of the calendar year to which they pertain,
to the inspection by BYU or its agents for the purpose of verifying LICENSEE's
royalty statements or other compliance with this Agreement.
7.2 LICENSEE, within forty-five (45) days after the last day of each full
calendar quarter subsequent to the effective date of this Agreement, shall
deliver to BYU an accurate written report summarizing in sufficient detail to
allow BYU to verify all payment amounts, the data used during the preceding
three-month period under this Agreement to calculate the payments due to BYU
during the applicable accounting period. These records and reports shall
include at least the following information for the accounting period:
A. Calculation of ADJUSTED GROSS SALES itemized as to the number and
the identity of the LICENSED PRODUCTS or PROCESSES sold.
B. All qualifying deductible costs claimed as offsets as applicable.
C. Total royalties due broken down by applicable category.
D. Minimum royalty amounts in excess of earned royalty amounts.
(Fourth quarter report only.)
E. Pass through royalty amounts.
F. Names and address of all AFFILIATES and SUBLICENSEES and full
reports from them complying with the reporting requirements of
Section 8.2 A-E.
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7.3 With each such report submitted, LICENSEE shall pay to BYU all fees,
royalties and all other amounts due, payable and arising pursuant to this
Agreement. If no amounts shall be due, LICENSEE shall so report.
7.4 A penalty will be assessed in an amount equal to three percent (3%) of
any payment due to BYU arising out of this Agreement if the payment is made more
than thirty (30) days late. Interest will accrue from the thirtieth day after
the payment was due at a rate of eighteen percent (18%) per annum and the
interest payment shall be due and payable every thirty (30) days thereafter. It
is the intention of the parties to this Agreement that any unpaid interest or
penalty shall be subject to monthly compounded interest at the rate of eighteen
percent (18%) per annum. Accordingly, the parties expressly agree that any
unpaid interest or penalty shall be added on a monthly basis to the unpaid
principle and such total amount shall accrue interest at the rate of eighteen
percent (18%) per annum.
7.5 LICENSEE shall cause an independent auditor to deliver to BYU a
certified report which shall verify the accuracy of the quarterly reports
required in Section 8 on or before ninety (90) days after end of each fiscal
year.
8 Confidentiality
8.1 LICENSEE agrees, that as LICENSEE receives material provided by BYU
which is marked as confidential, or is verbally so designated and confirmed in
writing by BYU within thirty (30) days of the receipt of the materials by
LICENSEE, or which LICENSEE would at the time of disclosure reasonably
understand under the circumstances to be considered by BYU to be confidential,
LICENSEE shall take reasonable precautions to protect such material and to
preserve its confidential, proprietary or trade secret status during the term of
this Agreement and for a period of five (5) years after termination of this
Agreement.
8.2 In determining whether or not information is confidential, the burden
of proof shall be upon LICENSEE to establish by competent proof and by
preponderance of the evidence that such information to be nonconfidential was:
A. Already known to LICENSEE at the time of disclosure by BYU, or
B. Was generally available to the public or otherwise part of the
public domain at the time of its disclosure to LICENSEE, or
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 LICENSEE in breach of this Agreement, or
D. Was subsequently, lawfully disclosed to LICENSEE by a third
party.
8.3 LICENSEE may disclose BYU's confidential information only to the
extent it is authorized in writing to do so by BYU and such disclosure is
reasonably necessary to further the objectives of this Agreement.
8.4 All of LICENSEE's and SUBLICENSEE's employees and independent
contractors with access to BYU's confidential information shall be bound in
writing, copies of
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which shall be retained by LICENSEE and submitted to BYU upon request of BYU, to
make no unauthorized use or disclosure of the confidential information.
8.5 LICENSEE agrees that a breach of its obligation to protect BYU's
confidential information shall cause immediate and irreparable harm to BYU which
cannot be adequately compensated by monetary damages. Accordingly, any breach or
threatened breach of confidentiality shall entitle BYU to preliminary and
permanent injunctive relief in addition to such remedies as may be otherwise
available to BYU.
9 Separate Service Agreement
If BYU shall agree to supply technical and engineering services required to
effectively transfer to LICENSEE the LICENSED TECHNOLOGY licensed herein,
LICENSEE shall reimburse BYU for its expenses incurred in furnishing such
technical and engineering services pursuant to the terms and conditions of a
separate written agreement.
10 Export Controls
It is understood that the LICENSED TECHNOLOGY may be subject to United
States laws and regulations controlling the export of technical data, computer
software, laboratory prototypes and other commodities (including the Arms Export
Control Act, as amended, and the Export Administration Act of 1979), and
LICENSEE's obligations under this Agreement may be contingent upon compliance
with applicable United States export laws and regulations. The transfer of
certain technical data and commodities may require a license from the cognizant
agent of the United States Government and/or written assurances by LICENSEE that
LICENSEE shall not export data or commodities to certain foreign countries
without prior approval of such agency. BYU neither represents that a license
shall not be required nor that, if required, it shall be issued. LICENSEE shall
observe and obey all export laws in countries in which it shall do business.
11 Patent Marking and Copyright Notice
LICENSEE agrees to mark the LICENSED PRODUCTS sold in the United States
with all applicable United States patent numbers and copyright notices. All
LICENSED PRODUCTS shipped to or sold in other countries shall be marked in such
a manner as to conform with the patent and/or copyright laws and practice of the
country of manufacture or sale.
12 Patent Prosecution and Maintenance
12.1 LICENSEE shall apply for, seek prompt issuance of, and maintain during
the term of this Agreement any patent and/or copyrights to properly patentable
or copyrightable intellectual property set forth in Exhibit A or to any
residuals, derivatives, enhancements and modifications. LICENSEE shall
diligently prosecute, file, perfect and maintain all such patent or copyright
rights, patents or applications utilizing legal counsel of its choice. All
resulting patents, copyrights and accompanying rights shall be assigned by
LICENSEE to BYU. BYU shall cooperate with LICENSEE in such prosecution, filing
and maintenance.
12.2 LICENSEE shall be solely responsible for the payment of all fees and
costs relating to the filing, prosecution, perfection and maintenance of the
patent and copyright rights,
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both domestic and foreign, whether such fees and costs were incurred before or
after the date of this Agreement.
12.3 LICENSEE expressly represents and warrants that it will timely and
faithfully perform its obligations pursuant to Section 3 of this Agreement.
LICENSEE's failure to so perform shall constitute a material breach of this
Agreement entitling BYU to terminate this Agreement and recover from LICENSEE
BYU's actual, incidental and consequential damages resulting from such breach.
13 Infringement
13.1 LICENSEE shall inform BYU promptly in writing of any alleged
infringement or misuse of the intellectual property rights subject of this
Agreement by a third party and of any available evidence of such infringement or
misuse.
13.2 During the term of this Agreement, BYU shall have the right, but shall
not be obligated, to prosecute at its own expense any infringements or misuse
and, in furtherance of such right, LICENSEE agrees that BYU may require LICENSEE
to participate as a party plaintiff in any such suit, without expense to
LICENSEE. The total cost of any such infringement action commenced solely by BYU
shall be paid by BYU and BYU shall be entitled to retain any recovery or damages
arising from the infringement or misuse.
13.3 If within sixty (60) days after having been notified of any alleged
misuse or infringement, BYU does not intend on prosecuting an infringement
action, BYU shall notify LICENSEE of its intention not to bring suit. In such
event only, LICENSEE shall have the right, at its own expense, to prosecute a
suit to remedy the infringement or misuse of the intellectual property rights
subject of this Agreement. LICENSEE may, for such purposes, use the name of BYU
as party plaintiff. However, the right to bring an infringement action shall
remain only for so long as this Agreement remains in effect. No settlement,
consent judgment or other voluntary final disposition of the suit may be entered
into without the express written consent of BYU, which consent shall not be
unreasonably withheld. LICENSEE shall indemnify BYU against any order or
settlement for costs or attorneys' fees that may be made against BYU in such
proceedings prosecuted by LICENSEE.
13.4 In the event that LICENSEE shall undertake the enforcement of
intellectual property rights by litigation, LICENSEE may withhold up to 50% of
any royalty payment otherwise due BYU and apply the same toward reimbursement of
a cumulative maximum of fifty percent (50%) of its reasonable and paid outside
attorneys fees, court costs and fees of expert witnesses. Any recovery of
damages by LICENSEE for such suit shall be applied first to satisfaction of any
unreimbursed litigation expenses and legal fees of LICENSEE relating to the suit
and next toward reimbursement of BYU for any royalties withheld. The balance
remaining from any such recovery shall be divided equally between LICENSEE and
BYU.
13.5 In the event that a declaratory judgment or other action alleging
unlawful infringement of any intellectual property rights of a third party is
brought against LICENSEE, BYU, at its sole option, shall have the right within
thirty (30) days after the commencement of such action to intervene and assume
the sole defense of the action at its own expense. Should BYU elect not to
defend, LICENSEE shall have the right to defend the suit at its sole expense.
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13.6 If a third party is successful in prevailing against LICENSEE in an
adjudicated lawsuit demonstrating that the LICENSED TECHNOLOGY as delivered to
LICENSEE by BYU unlawfully infringed upon such third party's intellectual
property rights, LICENSEE shall be entitled to offset against future earned
royalties the full amount of LICENSEE's court costs, attorney fees and damages
awarded.
13.7 In any infringement suit, the other party shall, at the request and
expense of the party initiating the suit, cooperate in all respects and, to the
extent possible, make its employees reasonably available to testify when
requested and make available relevant records, papers, information, samples,
specimens, and the like.
14 Warranty and Limitation of Remedy
14.1 BYU represents and warrants that to the best of its knowledge it is
the owner of the entire right, title, and interest in and to and has the sole
right to grant licenses under this Agreement to the LICENSED TECHNOLOGY as
described on Exhibit "A. ". BYU makes no warranty or representation with
respect to the application of the LICENSED TECHNOLOGY to any particular purpose.
14.2 BYU makes no representation that the manufacture, use, lease, or sale
of the LICENSED TECHNOLOGY will not infringe a copyright or patent granted to
others, other than to state that it knows of no such copyright, patent or other
proprietary interests which would be so infringed.
14.3 Each party represents and warrants to the other that it has all of the
requisite power and authority to enter into this Agreement and to perform each
and every term, provision and obligation of this Agreement and that neither the
execution nor delivery of this Agreement will conflict with or result in a
breach of the terms, provisions or obligations of, or constitute a default
pursuant to any other Agreement or instrument under which each party is
obligated.
14.4 ALL WARRANTIES MADE IN THIS AGREEMENT ARE EXCLUSIVE AND IN LIEU OF ALL
OTHER WARRANTIES EXPRESS AND IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, OR ANY OTHER
WARRANTY WHETHER EXPRESS OR IMPLIED.
14.5 BYU will not be liable for any loss of profits or for any claim or
demand against LICENSEE by any other party. BYU's liability, if any, for any
damages to LICENSEE shall not exceed in any event the total earned royalties
which have been paid by LICENSEE to BYU during the term of this Agreement. IN NO
EVENT WILL BYU BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES EVEN IF BYU HAS
BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. No action, regardless of form,
arising out of the transaction subject of this Agreement may be brought against
BYU more than one year after the cause of action is discovered.
15 Product Liability and General Indemnification
15.1 BYU does not warrant the effectiveness or operation of any of the
LICENSED PRODUCTS or LICENSED PROCESSES and the parties to this Agreement agree
and understand that BYU shall have no liability to an END USER. LICENSEE,
therefore, agrees to
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hold BYU harmless and indemnify BYU, its trustees, officers, employees and
agents from and against any and all litigation, claims, damages or actions
(including reasonable attorneys' fees) that may be instituted against BYU
arising out of LICENSEE's marketing, distribution, sale, production,
manufacture, lease, consumption or advertisement of the LICENSED TECHNOLOGY,
LICENSED PRODUCTS or LICENSED PROCESSES or arising from any obligation of
LICENSEE under this Agreement, including, but not limited to, claims resulting
from any alleged type of defect in the LICENSED PRODUCTS or LICENSED PROCESSES
or damages allegedly caused by any breach of contract by LICENSEE, its
AFFILIATES or SUBLICENSEES or the use or misuse of the LICENSED PRODUCTS and
LICENSED PROCESSES, notwithstanding any third-party allegation that their
claims, injuries or damages were proximately caused in part or wholly by BYU's
negligence. In the event BYU is sued as a party defendant or otherwise pursuant
to claims identified in this Section as being subject to indemnification,
LICENSEE agrees to defend BYU at LICENSEE's sole expense in such action. Should
any award or decree be made against BYU, it shall be the obligation of LICENSEE
to (a) appeal the decision and pay if the appeal is lost or (b) pay such award
or make any settlement as may be warranted before or after the decision on
appeal. BYU may, at its own option, conduct its own defense in such actions and
all expenses and attorneys' fees for such defense shall be paid by LICENSEE.
15.2 LICENSEE shall immediately notify BYU of any litigation in which it,
its officers or its directors, agents or employees may be involved if there is a
reasonable possibility that this Agreement or BYU will be affected and afford
BYU reasonable cooperation should BYU elect to make its own defense.
16 Term and Termination
This Agreement shall remain in force until properly terminated as provided
in this Section.
16.1 The Agreement may be terminated automatically without prior notice by
BYU at its election in the event of the occurrence of any one of the following
circumstances:
A. In the event LICENSEE is placed in the hands of a receiver or
makes a general assignment for the benefit of creditors; or
B. In the event that substantial assets of LICENSEE or its
successor-in-interest are seized or attached in conjunction with
any action brought against it by a third party creditor.
16.2 This Agreement may be terminated effective upon fifteen (15) days
written notice from BYU and the failure of LICENSEE to cure any breach or
default prior to the expiration of the fifteen-day notice period in any of the
following circumstances:
A. In the event LICENSEE becomes insolvent or shall cease to carry
on its business in the normal course; or
B. In the event there is a transfer or sale of LICENSEE's business
purporting to transfer or assign this Agreement or LICENSED
TECHNOLOGY without the prior express written consent of BYU,
except in connection
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<PAGE>
with a merger, sale or transfer of substantially the LICENSEE'S
entire business, in which case no consent shall be required; or
C. Disclosure of confidential information in violation of the
confidentiality provisions of this agreement; or
D. In the event that BYU reasonably determines that LICENSEE does
not have the financial ability to perform the terms of this
Agreement.
16.3 In the case of breach or default arising from LICENSEE's failure to
pay BYU royalties or other costs or expenses pursuant to the Agreement when due
and payable, failure to complete the performance requirements of Section 5 of
this Agreement or from any other material breach or default of this Agreement
other than those described in Section 16.3 and Section 16.2, BYU shall have
the right to terminate this Agreement upon thirty (30) days notice to LICENSEE.
Termination shall become effective upon the failure of LICENSEE to cure such
breach or default.
16.4 Upon termination of this Agreement, for any reason, the parties shall
not be released from any obligation that has matured prior to the effective date
of the termination. LICENSEE may, however, after the effective date of such
termination, sell all LICENSED PRODUCTS and complete LICENSED PROCESSES in its
inventory or in process as of the time of such termination, provided that
LICENSEE shall pay to BYU the royalties and other consideration on these
products as required by this Agreement and shall submit the reports as required.
16.5 Upon the termination of this Agreement, any SUBLICENSEE that has not
breached in any material way its sublicense agreement shall continue to maintain
its license on substantially unchanged terms, except that such license shall be
deemed to be a license from BYU.
16.6 Upon the termination of this Agreement for breach by LICENSEE,
LICENSEE shall return to BYU all equipment, enhancements and all other
materials, documents and information as may have been provided by BYU pursuant
to this Agreement, which contain information which is confidential or
proprietary to BYU and shall grant back to BYU all of LICENSEE's right, title
and interest to all IMPROVEMENTS, with applicable documentation, made by
LICENSEE in relation to the LICENSED TECHNOLOGY.
16.7 Nothing herein shall be construed to limit BYU's legal or equitable
remedies in the event of a default by LICENSEE and subsequent termination of
this Agreement by BYU.
17 Negotiations, Mediation and Arbitration
17.1 With respect to any and all claims, disputes or controversies arising
out of the performance of or in connection with this Agreement, except with
respect to enforcement of the LICENSEE's obligations specified in Sections 6, 8
and 13, hereof for which BYU may seek any legal or equitable remedy available
through a court of competent jurisdiction, the parties agree to attempt in good
faith to resolve those claims, disputes or controversies by negotiations between
the parties. In the event either party believes the negotiation discussions are
likely not to result in settlement, the parties must, in good faith, participate
in mediation sessions with a professional mediator to be mutually selected by
the parties and the expense of which is to be paid fifty
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percent (50%) by each party. In the event, after one or more mediation sessions,
either party believes the mediation process is not likely to resolve the dispute
by mutual agreement, the dispute shall be resolved by final and binding
arbitration in Provo, Utah. Each party shall choose one arbitrator and these two
arbitrators shall in turn select a third arbitrator, which three arbitrators
shall constitute the arbitration panel. The arbitrators shall have no power to
add to, subtract from or modify any of the terms or conditions of this
Agreement. Any award rendered in such arbitration may be enforced by either
party in either the courts of the State of Utah or in the United States District
Court for the District of Utah in which jurisdiction for such purposes BYU and
LICENSEE hereby irrevocably consent and submit. The arbitration proceedings
shall be conducted in all matters not specifically identified in this Agreement
pursuant to the rules of the American Arbitration Association, unless otherwise
expressly agreed in writing by the parties. Each party shall bear its own costs.
17.2 Claims, disputes or controversies concerning the validity,
construction or effect of any patent subject of this License Agreement shall be
resolved in any court having competent jurisdiction.
17.3 In the event in any arbitration proceeding any issue shall arise
concerning the validity, construction or effect of any patent licensed, the
arbitrator shall assume the validity of all claims as set forth in the patent.
Except with reference to a prior determination by a court of competent
jurisdiction, neither party shall raise any issue concerning the validity,
construction or effect of any patent licensed under this Agreement in any
arbitration proceeding, in any proceeding to enforce the arbitration award or in
any proceeding arising out of such arbitration award.
17.4 Nothing in this Section shall be construed to waive any rights of
timely performance of any obligation existing under the Agreement.
18 Licensee Assignment
Neither this Agreement nor the LICENSED TECHNOLOGY is assignable by
LICENSEE without the express written consent of BYU, which shall not be
unreasonably withheld, and any attempt to do so without such written consent
shall be void.
19 Non Use of BYU Name
LICENSEE shall not use the name of Brigham Young University nor of any of
its employees, nor any adaptation thereof, in any advertisement, promotion or
sales literature without the express prior written consent from BYU in each
case, except that LICENSEE may state that it is licensed by BYU.
20 Publication
BYU shall have the right to publish any academic paper, article or learned
treatise and make public disclosure at professional meetings or seminars
regarding any portion of the LICENSED TECHNOLOGY which has been or may be
invented, conceived or developed by BYU.
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21 Payment, Notices and Other Communications
Any payment, notice or other communication pursuant to this Agreement shall
be sufficiently made or given on the date of mailing if sent by certified first-
class mail, postage prepaid, addressed to the receiving party at its address
designated below or such address as shall be designated by written notice given
to the other party.
BYU: Technology Transfer Office
A-268 ASB
Brigham Young University
P.O. Box 21231
Provo, Utah 84602-1231
(801) 378-6266
LICENSEE: Sonic Innovations, Inc.
2795 E. Cottonwood Parkway
Suite 660
Salt Lake City, Utah 84121
(801) 365-2800
22 Miscellaneous Provisions
22.1 Independence of Parties. BYU and LICENSEE are independent parties
engaged in independent business and neither party nor any respective agent or
employee of either party shall be regarded as an agent or an employee of the
other. Nothing in this Agreement shall be construed as reserving to either party
the right to control the other in the conduct of its business, nor shall either
party have the authority to make any promise, guarantee, warranty or reservation
which will create any obligation or liability whether express or implied on
behalf of the other.
22.2 Attorneys' Fees. In the event a suit or an arbitration proceeding is
commenced to construe or enforce any provision of this Agreement, the prevailing
party, in addition to all other amounts to which such party may be entitled,
shall be paid by the other party a reasonable sum for attorneys' fees and
reasonable costs related to the dispute resolution.
22.3 Waiver. No waiver by either party, whether express or implied, of any
provisions of this Agreement or of any breach or default of either party, shall
constitute a continuing waiver of such provision or a wavier of any other
provisions of this Agreement.
22.4 Governing Law. This Agreement shall be interpreted and construed in
accordance with the laws of the State of Utah. Venue for any legal disputes
shall be in Utah County, Utah.
22.5 Partial Invalidity. Should any Section or any part of a Section of
this Agreement be held unenforceable or in conflict with the law of any
jurisdiction, the validity of the remaining Sections and Subsections shall not
be affected by the invalidity of any other part of the Agreement.
22.6 Force Majeure. Neither party to this Agreement shall be in default
because of a delay or failure to perform which is not the result of the
defaulting party's intentional or
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negligent acts or omissions, but results from causes beyond the reasonable
control of such party such as acts of God, civil disobedience and war.
22.7 Entire Agreement. This Agreement constitutes the entire Agreement and
understanding between the parties and supersedes all prior agreements and
understandings with respect to the LICENSED TECHNOLOGY, whether written or oral.
No modification or claimed waiver of any of the provisions of this Agreement
shall be valid unless in writing and signed by authorized representatives of the
party against whom such modification or wavier was sought to be enforced.
22.8 Binding Effect. This License Agreement shall be binding upon and
shall inure to the benefit of the successors, assigns and legal representatives
of the parties.
22.9 Headings. The paragraph and subparagraph headings contained in this
Agreement are for convenience and reference only. They are not intended to
define and limit the scope of the provisions of this Agreement.
22.10 Old 1997 Agreement. The Old 1997 Agreement is hereby terminated and
made of no force or effect.
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IN WITNESS WHEREOF, the parties have entered into this Agreement and it is
effective this 21/st/ day of March, 2000.
BRIGHAM YOUNG UNIVERSITY
/s/ Gary R. Hooper 3/21/00
- ------------------------------------- ----------
By: Gary R. Hooper Date
Associate Academic Vice President
LICENSEE
/s/ Steve Wilson 3/21/00
- ------------------------------------- ----------
By: Steve Wilson Date
Chief Financial Officer
16
<PAGE>
EXHIBIT A
LICENSED TECHNOLOGY
The LICENSED TECHNOLOGY includes the U.S. patent application(s) (in
preparation on the effective date of this agreement) based upon the Technical
Description below, and any U.S. patent issuing therefrom, any foreign
counterparts thereof, as well as all continuations, continuations-in-part,
divisions and renewals thereof, all patents which may be granted thereon, and
all reissues, reexaminations, extensions, patents of addition, improvement
patents and patents of importation thereof; trade secrets; and know-how which
trade secrets and know-how are associated with the Technical Description and are
in existence upon the effective date of the Agreement.
TECHNICAL DESCRIPTION
(See attached description.)
<PAGE>
EXHIBIT 10.9
AMENDED AND RESTATED EXCLUSIVE LICENSE AGREEMENT BETWEEN
--------------------------------------------------------
BRIGHAM YOUNG UNIVERSITY AND
----------------------------
SONIC INNOVATIONS, INC.
-----------------------
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
1 Definitions.......................................................... 2
2 Grant................................................................ 2
3 Performance Criteria................................................. 4
4 Consideration........................................................ 4
5 BYU's Equity Ownership of SONIC...................................... 5
6 Reports and Records.................................................. 6
7 Confidentiality...................................................... 6
8 Export Controls...................................................... 7
9 Patent Marking and Copyright Notice.................................. 7
10 Patent Prosecution and Maintenance................................... 7
11 Infringement......................................................... 8
12 Warranty and Limitation of Remedy.................................... 8
13 Indemnification...................................................... 9
14 Termination.......................................................... 10
15 Negotiations, Meditation and Arbitration............................. 11
16 Assignment........................................................... 12
17 Non Use of BYU Name.................................................. 12
18 Publication.......................................................... 13
19 Payment Notices and Other Communications............................. 13
20 Miscellaneous Provisions............................................. 13
</TABLE>
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AMENDED AND RESTATED EXCLUSIVE LICENSE AGREEMENT
------------------------------------------------
BETWEEN
-------
BRIGHAM YOUNG UNIVERSITY
------------------------
AND
---
SONIC INNOVATIONS, INC.
-----------------------
This Amended and Restated Exclusive License Agreement (the "Agreement") by
and between BRIGHAM YOUNG UNIVERSITY, a Utah non-profit corporation and
educational institution with its principle campus and place of business located
at Provo, Utah 84602 (referred to in this Agreement as "BYU") and SONIC
INNOVATIONS, INC., (hereinafter referred to as "SONIC") duly organized and
existing under the laws of the State of Utah and having its principle place of
business located at 2795 E. Cottonwood Parkway, Suite 660, Salt Lake City, Utah
84121.
RECITALS
--------
A. BYU is an owner (along with Dr. Thomas G. Stockham, Jr., the only
other owner) of certain intellectual property rights (Exhibit A) and is also the
sole owner of other intellectual property rights (Exhibit B) and has the right
to grant licenses to these rights. These intellectual property rights consist
primarily of proprietary intellectual properties and patents with applications
principally related to assisting the hearing impaired, audio signal processing
and providing industrial, sports and, except as previously licensed, government
applications;
B. BYU desires to have the intellectual property utilized in the public
interest and is willing to grant an exclusive worldwide license to these
intellectual property rights for this purpose;
C. SONIC has represented to BYU, to induce BYU to enter into this
Agreement, that SONIC has experience in the development, production,
manufacture, marketing and sale of high technology based products and that it
shall commit itself to a thorough, vigorous and diligent program of exploiting
the intellectual property rights within the intent of this Agreement so that
public utilization will result;
D. SONIC has already obtained exclusive worldwide rights to Dr.
Stockham's ownership interest in the intellectual property (Exhibit A) subject
of this Agreement; and
E. SONIC wishes to obtain the exclusive worldwide rights to BYU's
ownership interest in the intellectual property rights (Exhibits A and B)
subject of this Agreement by entering into the terms and conditions of this
Exclusive License Agreement with BYU.
F. SONIC (or its predecessor entity) and BYU have previously entered into
that certain Exclusive License Agreement in 1995 (the "Old 1995 Agreement") and
now desire to terminate the Old 1995 Agreement and amend and restate it in its
entirety in this Agreement.
NOW, THEREFORE, in consideration of the promises and mutual covenants
contained in this Agreement the parties agree as follows:
<PAGE>
TERMS OF AGREEMENT
1 Definitions
1.1 "SONIC" shall mean SONIC INNOVATIONS, INC., and any AFFILIATE of SONIC
INNOVATIONS, INC.
1.2 "AFFILIATE" shall mean any person or entity owned or controlled
directly or indirectly by SONIC or any person or other entity controlled by,
controlling, or under common control with SONIC. The term "control" means
possession, direct or indirect, of the powers to direct or cause the direction
of the management and policies of a person or entity; whether through ownership
or voting securities, by contract, agreement or otherwise.
1.3 "LICENSED TECHNOLOGY" means and includes all of BYU's technology,
trade secrets and intellectual property rights relating to signal processing
technology for hearing aid, audio signal processing and hearing protection
applications which has been developed by or under the direction of Dr.
Douglas M. Chabries and/or Dr. Richard Christiansen and not previously granted
through any earlier license agreements with other parties, and which are listed
in Exhibits A and B which are attached to this Agreement and by reference are
incorporated and made part of this Agreement. Exhibit A is limited to that
technology which is jointly owned by BYU and Dr. Thomas G. Stockham, Jr.
Exhibit B is limited to that technology which is owned solely by BYU.
1.4 "LICENSED PRODUCT(S)" means and includes any product or apparatus,
including but not limited to such product or apparatus which is developed or
enhanced in whole or in part by SONIC, the production, manufacture, sale, lease,
transfer or use of which incorporates or makes use of any part of the LICENSED
TECHNOLOGY. In the event such a product or apparatus forms an integral part or
component of a larger and distinct product or software package, excluding other
software products to which a LICENSED PRODUCT may be interfaced, such larger
product or software package shall be considered a "LICENSED PRODUCT" for
purposes of this Agreement.
1.5 "LICENSED PROCESS(ES)" means and includes any process, procedure,
technique, method or service which incorporates or makes use of any part of the
LICENSED TECHNOLOGY. Processes, procedures, techniques, methods or services
which can be performed independent of the use of any part of the LICENSED
TECHNOLOGY shall specifically be excluded from the definition of LICENSED
PROCESS(ES).
1.6 "IMPROVEMENT(S)" means any invention, idea, trade secret, know-how or
derivative work which is derived from or which includes any portion of or
utilizes any portion of the LICENSED TECHNOLOGY, LICENSED PRODUCTS or LICENSED
PROCESSES, whether or not patentable, copyrightable, or otherwise protectable as
intellectual property which is subsequently acquired or developed by SONIC
during the term of this Agreement.
2 Grant
2.1 BYU hereby grants, to the full extent that BYU has the power to grant
such rights, SONIC the exclusive worldwide right and license to utilize the
LICENSED TECHNOLOGY, to
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develop LICENSED PRODUCTS and LICENSED PROCESSES until such time as this
Agreement is terminated. This grant will extend to the manufacture, sale,
lease, transfer or other disposition of LICENSED PRODUCTS or LICENSED PROCESSES
through an AFFILIATE or through SONIC's use of any retail outlet or distributor
and shall authorize any end users' use of the LICENSED PRODUCTS and LICENSED
PROCESSES sold or transferred by SONIC or its AFFILIATES, retail outlets or
distributors.
2.2 The grants provided under Subsection 2.1 include the right to grant
sublicenses to make, or have made, sell, lease, or otherwise transfer LICENSED
PRODUCTS and LICENSED PROCESSES. All sublicenses granted by SONIC shall be
subject to the terms and conditions of this Agreement and the sublicense
agreement shall have an express provision to this effect. No sublicense shall
relieve SONIC of any of its obligations under this Agreement. SONIC agrees to
forward to BYU a fully executed copy of each sublicense agreement within ninety
(90) days after the execution thereof, and to act as a fiduciary to protect
BYU's interests in the sublicense.
2.3 SONIC agrees that it will make reasonable attempts to enter into
sublicense agreements with third parties for the utilization of the LICENSED
TECHNOLOGY in fields of use other than providing auditory assistance to the
hearing impaired and hearing protection. If, in the sole discretion of BYU, it
determines that SONIC has not made reasonable efforts to enter into appropriate
sublicense agreements, BYU shall have the right to grant such sublicenses upon
providing SONIC with written notice and a ninety (90) day opportunity to cure.
2.4 Nothing in this Agreement shall be considered as granting any rights,
express or implied, in BYU's patents, patent applications, inventions, methods,
technical, confidential or proprietary information, expertise, know-how, trade
secrets or knowledge not specifically defined as LICENSED TECHNOLOGY, and all
such rights not expressly granted by this Agreement to SONIC are expressly
reserved by BYU, and the license granted by this Agreement shall not be
construed to confer any rights upon SONIC by implication, estoppel, or otherwise
to any existing, new or derivative technology not specifically included in the
LICENSED TECHNOLOGY.
2.5 Notwithstanding the exclusive license granted herein, BYU, the Church
Education System and The Church of Jesus Christ of Latter-day Saints
specifically reserve the right to make, have made, or use the LICENSED
TECHNOLOGY for their own non-commercial purposes including research,
development, in-house testing, and academic or ecclesiastical uses. Furthermore,
upon request by BYU, SONIC agrees to grant to BYU a non-exclusive, royalty-free
right and license to use IMPROVEMENTS only for its own non-commercial purposes
including research, development, in-house testing and academic or ecclesiastical
uses. SONIC agrees that any time during the term of this Agreement, it will sell
to current or retired full-time faculty, administrative and staff personnel of
BYU and the full-time permanent employees of The Church of Jesus Christ of
Latter-day Saints covered by their respective health and welfare benefits
programs as then in effect for such personnel (similar to the current DMBA
coverage, but in no case applicable due to temporary or part-time employment,
including employment of students), LICENSED PRODUCTS or PROCESSES at the pricing
offered under SONIC's Friends and Family program (or any successor or similar
program). SONIC may take reasonable steps to verify qualification by such
retired personnel and may employ a third-party to administer this program.
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3 Performance Criteria
3.1 SONIC shall, during the term of this Agreement, use its best efforts
to bring one or more LICENSED PRODUCTS or LICENSED PROCESSES to market through a
thorough, vigorous and diligent program designed to commercially develop the
LICENSED TECHNOLOGY to its full market potential.
3.2 SONIC shall develop a body-worn self-contained operating unit on which
clinical hearing tests can be conducted using the LICENSED TECHNOLOGY by July
31, 1995.
3.3 SONIC's failure to perform in accordance with any portion of Sections
3.1 or 3.2 of this Agreement shall be grounds for BYU to terminate this
Agreement. (See Section 14 for termination procedure.)
4 Consideration
4.1 For the rights, privileges and license granted under this Agreement,
SONIC shall pay to BYU, in the manner designated below until the Agreement shall
be terminated, consideration as follows:
A. A non-refundable license fee in an amount of eighty thousand dollars
($80,000), to be paid on the following schedule:
LICENSE FEE
-----------
Date Amount Due $'s
---- --------------
Upon execution of this Agreement $30,000
Whichever occurs first,
a Series B financing, or July 31, 1995 $25,000
Whichever occurs first,
a Series B financing, or Dec. 31, 1995 $25,000
B. A Five-hundred thousand dollars ($500,000) license fee paid in
installments on the following schedule:
On or before: Dollars
December 31, 1996 $ 30,000
December 31, 1997 $ 50,000
December 31, 1998 $ 70,000
December 31, 1999 $ 100,000
December 31, 2000 $ 100,000
December 31, 2001 $ 150,000
C. SONIC will receive credit against the five-hundred thousand dollar
($500,000) license fee (Section 4.B) on a dollar for dollar basis, for research
sponsored by SONIC through the BYU Office of Sponsored Research to be conducted
in the Signal Processing Center or under the direction of the Director of the
Signal Processing Center. BYU agrees that resulting
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<PAGE>
IMPROVEMENTS developed pursuant to this sponsored research shall be included in
this Agreement. BYU also agrees that any new concepts or inventions discovered
or created pursuant to this research will be provided to SONIC pursuant to an
exclusive worldwide license to be negotiated in good faith between BYU and SONIC
D. In addition, SONIC will reimburse BYU for all future obligations
incurred as maintenance costs on U.S. Patents #4,872,012 and #4,977,604, and for
all past and future legal and related expenses, incurred by non-BYU personnel,
which are reasonably necessary to obtaining patent protection for the LICENSED
TECHNOLOGY and any other BYU technologies where rights to such technologies are
subsequently licensed to SONIC.
E. A penalty in the amount equal to three percent (3%) of any payment if
the payment is made more than thirty (30) days late. Interest will accrue on
the payment plus the penalty from the thirtieth day after the payment was due at
a rate of twelve and one-half percent (12.5%) per annum and the interest payment
will be due and payable every thirty (30) days thereafter.
4.2 Pass Through Royalties: A "pass through royalty" to be levied on all
royalties, license fees and any and all other consideration of any kind or
description received by SONIC or any AFFILIATE from any third party which is not
an AFFILIATE, distributor, retail outlet or end user, but which is granted a
sublicense, is assigned rights or receives rights from SONIC with respect to the
LICENSED TECHNOLOGY to make, use, sell, lease or otherwise transfer LICENSED
PRODUCTS or PROCESSES made or developed by the sublicensee, assignee or
transferee. The pass through royalty shall be paid on all such license fees or
consideration, which shall specifically include, but not be limited to,
royalties, license issue fees, minimum royalties, equity interests or other
consideration to which BYU is entitled pursuant to Paragraph 2.2 of this
Agreement.
A. The "pass through royalty" shall be fifty percent (50%) of all
applicable consideration subject to the pass through royalty.
B. Pass through royalty payments shall be payable to BYU quarterly. Such
pass through royalty payments shall be based on all consideration paid
during the applicable three months.
5 BYU's Equity Ownership of SONIC
5.1 Within thirty (30) days following the execution of this Agreement,
SONIC shall issue to BYU certificates of common stock securities for 184,000
shares (in addition to the 16,000 common shares already held by BYU) to bring
BYU's total holding in SONIC to 200,000 common shares.
5.2 SONIC will issue to BYU, prior to April 15, 2000 (or closing of
SONIC's initial public offering, whichever is earlier), [16,575] shares of SONIC
Common Stock (calculated on a pre-split basis). BYU hereby expressly waives any
claim for antidilution, preemptive or similar rights pursuant to the Old 1995
Agreement. All voting rights associated with BYU's equity ownership shall be
exercisable by BYU or its proxy. SONIC recognizes that BYU is in a position of
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<PAGE>
minority stockholder, will not be involved in the management or operation of and
will not be liable for any liabilities incurred by SONIC.
5.3 Investment Representation: BYU hereby represents to SONIC that BYU is
acquiring the common shares identified in 5.1 for investment purposes and not
with the intention of immediately selling or transferring the same. BYU agrees
to execute, concurrently herewith, a 180-day lock-up agreement in substantially
the form attached hereto as Exhibit C.
5.4 In the event SONIC undertakes an offering of its securities to the
public or consummates a transaction with a publicly owned company, which results
in the receipt of securities by SONIC or its shareholders, including BYU, then
both parties shall abide by any requirements of state or federal law governing
the sale of such securities, including sale of securities restrictions.
6 Reports and Records
6.1 SONIC and AFFILIATES shall keep, at their own expense, full, true and
accurate books of account showing all particulars that may be necessary for the
purpose of showing the amount payable to BYU. These books of account shall be
kept at SONIC's or AFFILIATE's principal place of business. These books and
supporting data shall be open at all reasonable times, upon ten (10) calendar
days written notice by BYU to SONIC for a period of five (5) years following the
end of the calendar year to which they pertain, to the inspection by BYU or its
agents for the sole purpose of verifying SONIC's payment of license fees, pass
through royalties and other consideration due BYU and otherwise for compliance
with this Agreement.
6.2 SONIC, within forty-five (45) days after the first calendar quarter in
which SONIC receives any sublicense revenue, shall deliver to BYU true and
correct reports, giving such particulars as are necessary to allow calculation
and verification of the pass through royalty amounts and other payments or
consideration due to BYU during the applicable accounting period. SONIC shall
continue to deliver such reports throughout the term of this Agreement. Such
reports shall cover the quarters ending March 31, June 30, September 30, and
December 31.
6.3 With each such report submitted, SONIC shall pay to BYU the pass
through royalties due and payable under this Agreement.
7 Confidentiality
7.1 SONIC and BYU agree, that as each receives material provided by the
other which may be marked as confidential or is so designated in writing within
thirty (30) days of the receipt of the materials, that SONIC and BYU shall keep
such material confidential to the same extent and in the same manner that each
protects its own confidential information during the term of this Agreement and
in any event for a minimum period of five (5) years after receipt of the
confidential material.
7.2 In determining whether or not information is reasonably considered to
be confidential, the burden of proof shall be upon the recipient to establish by
competent proof and by preponderance of the evidence that such information is
nonconfidential by documenting that the information was:
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A. Already known to the recipient at the time of disclosure by SONIC or
BYU, or
B. Generally available to the public or otherwise part of the public
domain at the time of its disclosure to SONIC or BYU, or
C. Generally available to the public or otherwise part of the public
domain after its disclosure, other than through any act or omission of
SONIC or BYU in breach of this Agreement, or
D. Subsequently, lawfully disclosed to SONIC or BYU by a third,
unaffiliated party.
8 Export Controls
It is understood that the LICENSED TECHNOLOGY may be subject to the United
States laws and regulations controlling the export of technical data, computer
software, laboratory prototypes and other commodities (including the Arms Export
Control ACT, as amended, and the Export Administration Act of 1979), and SONIC's
obligations under this Agreement may be contingent on compliance with applicable
United States export laws and regulations. The transfer of certain technical
data and commodities may require a license from the cognizant agent of the
United States Government and/or written assurances by SONIC that SONIC shall not
export data or commodities to certain foreign countries without prior approval
of such agency. BYU neither represents that a license shall not be required nor
that, if required, it shall be issued. SONIC shall observe and obey all export
laws in countries in which it shall do business.
9 Patent Marking and Copyright Notice
SONIC agrees to mark the LICENSED PRODUCTS sold in the United States with
all applicable United States patent numbers and copyright notices. All LICENSED
PRODUCTS shipped to or sold in other countries shall be marked in such a manner
as to conform with the patent and/or copyright laws and practice of the country
of manufacture or sale.
10 Patent Prosecution and Maintenance
10.1 SONIC shall apply for, seek prompt issuance of, and maintain during
the term of this Agreement the patent rights to any properly patentable
intellectual property subject to this Agreement or to residuals, derivatives,
enhancements and modifications thereto. SONIC shall diligently prosecute, file
and maintain all such patent rights, patents and applications utilizing legal
and technical counsel of its choice after due consultation with BYU. BYU shall
cooperate with SONIC in such prosecution, filing and maintenance.
10.2 Payment of all fees and costs relating to the filing, prosecution and
maintenance of the patent rights shall be the responsibility of SONIC.
10.3 SONIC shall be solely responsible to pay maintenance fees for the
patents as required by Title 35 of the United States Code. SONIC shall, within
30 days before such maintenance fees are due and payable, file with BYU written
documentation that the fees have been paid. If such documentation is not
received at least thirty days before the fee is due and payable, BYU shall have
the right to pay the maintenance fees subject to reimbursement by SONIC.
SONIC shall also be
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solely responsible for payment of reissue fees and other fees required to
preserve the rights granted in the patent and any extensions thereto.
10.4 THE ULTIMATE RESPONSIBILITY FOR MEETING ALL PAYMENT AND FILING
DEADLINES CONCERNING ANY FORM OF INTELLECTUAL PROPERTY PROTECTION LICENSED BY
THIS AGREEMENT RESTS WITH SONIC, AND SONIC SHALL HAVE NO CLAIM OF DAMAGES
AGAINST BYU, ITS PERSONNEL, TRUSTEES OR STUDENTS, AND SHALL NOT CONSIDER BYU'S
FAILURE TO MEET SUCH DEADLINES OR PAY SUCH FEES A BREACH OF THIS AGREEMENT.
11 Infringement
11.1 Either party to this Agreement shall promptly in writing notify the
other of any alleged infringement of the patent rights or intellectual property
rights by a third party and of any available evidence of infringement.
11.2 During the term of this Agreement, either party shall have the right,
but shall not be obligated, to prosecute any infringements at its own expense
and be entitled to any recovery, and, in furtherance of such right, each party
hereby agrees that it may be joined as a party plaintiff in any such suit,
without expense to the party initiating the suit.
11.3 If within two (2) months after having been notified of any alleged
infringement, a party does not intend on prosecuting the infringement action, it
shall notify the other party of its intention not to bring suit against any
alleged infringer, then, the other party shall have the right, at its own
expense to prosecute a suit to remedy the infringement of the patent rights, and
shall be entitled to any recovery of damages. However, if both parties intend to
prosecute the infringement, all expenses shall be paid and all recoveries shared
on a 50/50 basis. Either party may, for such purposes, use the name of the other
as a party plaintiff; provided, however, that such right to bring an
infringement action shall remain in effect only for so long as the license
granted remains in effect. No settlement, consent judgment or other voluntary
final disposition of the suit may be entered into without the consent of both
parties, which consent shall not be unreasonably withheld. Each party shall
indemnify the other in such proceedings prosecuted solely by one party.
11.4 In the event that a declaratory judgment action alleging invalidity or
nonenforcement of any of the patent rights shall be brought either party may
elect, upon notice to the other, to not defend against the declaratory action.
11.5 In any infringement suit brought by one party, the other party shall,
at the request and expense of the party initiating the suit, cooperate in all
respects and, to the extent possible, make its employees reasonably available to
testify when requested and make available relevant records, papers, information,
samples, specimens, and the like.
12 Warranty and Limitation of Remedy
12.1 BYU represents and warrants that, to the best of its knowledge, it is
an owner and has an interest in and to the LICENSED TECHNOLOGY as described on
Exhibit A;
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<PAGE>
owner of said technology is Dr. Thomas G. Stockham, Jr., and his right thereto
has been assigned to SONIC in a separate agreement. BYU represents and warrants
that to the best of its knowledge it is the owner of the entire right, title,
and interest in and to and has the sole right to grant licenses under this
Agreement to the LICENSED TECHNOLOGY as described on Exhibit B except for those
rights granted to UNISYS Corporation in a license agreement dated September 27,
1990. BYU also represents that it has the lawful right to grant licenses under
this Agreement in and to such LICENSED TECHNOLOGIES.
12.2 BYU makes no representation that the manufacture, use, lease, or sale
of the LICENSED TECHNOLOGY will not infringe a copyright or patent granted to
others, other than to state that it knows of no such copyright, patent or other
proprietary interests which would be so infringed.
12.3 Each party represents and warrants to the other party that it has all
of the requisite power and authority to enter into this Agreement and to perform
each and every term, provision and obligation of this Agreement and that neither
the execution nor delivery of this Agreement will conflict with or result in a
breach of the terms, provisions or obligations of, or constitute a default
under, any other Agreement or instrument under which each party is obligated.
12.4 ALL WARRANTIES MADE IN THIS AGREEMENT ARE EXCLUSIVE AND IN LIEU OF ALL
OTHER WARRANTIES EXPRESS AND IMPLIED, INCLUDING BUT NOT LIMITED TO, THE IMPLIED
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, AND VALIDITY
OF PATENT RIGHTS, CLAIMS ISSUED OR PENDING, OR ANY OTHER WARRANTY WHETHER
EXPRESS OR IMPLIED.
12.5 BYU will not be liable for any loss of profits or for any claim or
demand against SONIC by any other party. BYU's liability, if any, for any
damages to SONIC shall not exceed in any event the total license fees and pass
through royalties which have been paid by SONIC to BYU during the term of this
Agreement. IN NO EVENT WILL BYU BE LIABLE FOR INCIDENTAL OR CONSEQUENTIAL
--------------------------------------------------------------
DAMAGES EVEN IF BYU HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
- -----------------------------------------------------------------------
13 Indemnification
13.1 BYU shall have no liability to ultimate users of the LICENSED
TECHNOLOGY or any of the LICENSED PRODUCTS and/or LICENSED PROCESSES. SONIC
agrees to hold harmless and indemnify BYU and its trustees, officers, employees,
agents and students against all costs, losses, and liabilities concerning any
and all litigation, claims or action of any kind or description, including
reasonable attorneys' fees, that may be incurred as a result of any type of
defect in the LICENSED PRODUCTS or LICENSED PROCESSES, damages allegedly caused
by any breach of contract by SONIC, the use or misuse of the LICENSED PRODUCTS
and/or LICENSED PROCESSES resulting from the production, manufacture, sale, use,
lease, consumption or advertisement of the LICENSED PRODUCTS and/or LICENSED
PROCESSES. In the event that BYU is sued as a party defendant under conditions
described in this Section, SONIC agrees to defend BYU in any such action. Should
any award or decree be made against BYU it shall be the obligation of SONIC to
(a) appeal the award or decree and pay the award if the award thereof is
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sustained on appeal, or to (b) pay such award or reach such settlement as may be
warranted before or after the decision on appeal. BYU may, at its option,
conduct its own defense in any such action.
13.2 Notwithstanding the provisions of Section 13.1, if there is a
reasonable possibility that this Agreement or BYU will be affected, SONIC shall
immediately notify BYU of any litigation in which BYU, its officers, or its
directors may be involved, and afford BYU reasonable cooperation should BYU
enter the litigation.
14 Termination
14.1 This Agreement shall continue in full force and effect from the date
this Agreement is executed by the parties until terminated in accordance with
the terms of the Agreement, or shall terminate upon the expiration of the latest
licensed patent claims or in the event SONIC fails to sublicense some major
application of the LICENSED TECHNOLOGY or use any major application of the
LICENSED TECHNOLOGY in its products or processes within a period of three (3)
years from the effective date of this Agreement.
14.2 This Agreement may be terminated automatically by BYU in the event of
the occurrence of any one of the following circumstances:
A. In the event SONIC or its successor-in-interest, is ordered or
adjudged bankrupt, is placed in the hands of a receiver or makes an
unauthorized assignment for the benefit of creditors; or
B. In the event that the assets of SONIC or its successor-in-interest are
seized or attached in conjunction with any action brought against it
by a third party creditor.
14.3 This Agreement may be terminated upon notice by BYU to SONIC in any of
the following circumstances:
A. In the event SONIC shall cease to carry on its business; or
B. In the event there is a transfer or sale of SONIC's business
purporting to transfer or assign this Agreement or LICENSED TECHNOLOGY
contrary to the provision of Section 17 hereunder; or
C. Disclosure of confidential information in material breach of the
confidentiality provisions of this Agreement; or
D. In the event that SONIC does not have the financial ability to perform
the terms of this Agreement as determined by failing to receive a
"going concern" statement by independent auditors satisfactory to BYU.
E. In the case of a breach under Paragraph 14.3A, 14.3B, 14.3C and/or
14.3D, BYU shall have the right to terminate this Agreement upon
thirty (30) days notice to SONIC. Such termination shall become
effective upon the failure of SONIC to cure any such breach or default
prior to the expiration of the thirty-day period.
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14.4 in the case of breach or default arising from SONIC's failure to pay
BYU license fees, pass through royalties or other consideration when due and
payable, BYU shall have the right to terminate this Agreement upon forty-five
(45) days notice to SONIC. Such termination shall become effective upon the
failure of SONIC to cure such breach or default by paying all delinquent
amounts, with applicable late charges and interest.
14.5 In the case of any other material breach or default of this Agreement
by SONIC other than those occurrences set forth in Paragraphs 14.2, 14.3 or
14.4, which shall always take precedence over any material breach or default
referred to in this Section, BYU shall have the right to terminate this
Agreement upon sixty (60) days notice to SONIC. Such termination shall become
effective upon the failure of SONIC to cure any such breach or default prior to
the expiration of the sixty-day period.
14.6 Upon termination of this Agreement, for any reason, the parties shall
not be released from any obligation that has matured prior to the effective date
of the termination. SONIC and its AFFILIATES may, however, after the effective
date of such termination, sell all LICENSED PRODUCTS and complete LICENSED
PRODUCTS in process of manufacture at the time of such termination and sell the
same.
14.7 Upon the termination of this Agreement, SONIC shall return to BYU all
computer software routines, source codes, updates, modifications and
enhancements and all other materials, documents and information as may have been
provided by BYU pursuant to this Agreement, which contains information which is
confidential or proprietary to BYU. Notwithstanding the termination of this
Agreement, SONIC shall continue to maintain the confidentiality as provided for
in this Agreement with respect to the confidential information furnished to it
by BYU.
14.8 Nothing herein shall be construed to limit BYU's legal or equitable
remedies in the event of a default by SONIC and subsequent termination of this
Agreement by BYU.
15 Negotiations, Meditation and Arbitration
15.1 With respect to any and all claims, disputes or controversies arising
under, out of, or in connection with this Agreement, except with respect to
enforcement of SONIC's payment obligations specified in Sections 4, 10 and 11
hereof, for which BYU may seek any legal or equitable remedy available through a
court of competent jurisdiction, the parties agree to attempt in good faith to
resolve those claims, disputes or controversies by negotiations between the
parties. In the event either party believes the negotiation discussions are not
likely to result in settlement, the parties must, in good faith, participate in
mediation sessions with a professional mediator to be mutually selected by the
parties and the expense of which is to be paid fifty percent (50%) by each
party. In the event, after one or more mediation sessions, either party believes
the mediation process is not likely to resolve the dispute by mutual agreement,
the dispute shall be resolved by final and binding arbitration in Provo, Utah.
Each party shall choose one arbitrator and these two arbitrators shall in turn
select a third arbitrator, which three arbitrators shall constitute the
arbitration panel. The arbitrators shall have no power to add to, subtract from
or modify any of the terms or conditions of this Agreement. In the event either
party believes that the arbitration process is becoming onerous or protracted,
it may petition a state or federal court in the State of Utah to annex the
arbitration for the
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purpose of establishing procedural guidelines, scheduling and to resolve other
obstacles preventing the expeditious resolution of the dispute subject of the
arbitration. Any award rendered in such arbitration may be enforced by either
party in either the courts of the State of Utah or in the United States District
Court for the District of Utah in which jurisdiction for such purposes BYU and
SONIC hereby irrevocably consent and submit. The arbitration proceedings shall
be conducted in all matters not specifically identified in this Agreement
pursuant to the rules of the American Arbitration Association, unless otherwise
expressly agreed in writing by the parties.
15.2 Claims, disputes or controversies concerning the validity,
construction or effect of any patent subject of this Agreement shall be resolved
in any court having jurisdiction.
15.3 In the event in any arbitration proceeding any issue shall arise
concerning the validity, construction or effect of any patent licensed, the
arbitrators shall assume the validity of all claims as set forth in the patent.
In any event, the arbitrators shall not delay the arbitration proceedings for
the purpose of obtaining or permitting any party to obtain judicial resolution
of such issue, unless an order staying such arbitration shall be entered by a
court of competent jurisdiction. Except with reference to a prior determination
by a court of competent jurisdiction, neither party shall raise any issue
concerning the validity, construction or effect of any patent licensed under
this Agreement in any arbitration proceeding, in any proceeding to enforce the
arbitration award or in any proceeding arising out of such arbitration award.
15.4 Nothing in this section shall be construed to waive any rights of
timely performance of any obligation existing under the Agreement.
16 Assignment
This Agreement is not assignable without the express written consent of
BYU, which consent shall not be unreasonably withheld; provided, however, that
SONIC, without consent, may assign or sell the same in connection with the
transfer or sale of all or substantially all of its business relating to
LICENSED TECHNOLOGY or LICENSED PRODUCTS or LICENSED PROCESSES in the event of a
merger or consolidation with another company.
17 Non Use of BYU Name
17.1 SONIC shall not use the name of Brigham Young University nor of any of
its employees, nor any adaptation thereof, in any advertisement, promotion or
sales literature without the prior written consent obtained from BYU in each
case, except that SONIC may state that it is licensed by BYU.
17.2 SONIC shall not use BYU's name, trade name, trademark or copyrights in
association with any advertising or marketing of the LICENSED TECHNOLOGY or
LICENSED PRODUCTS or LICENSED PROCESSES.
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<PAGE>
18 Publication
Upon sixty (60) days notice to SONIC, BYU shall have the right to publish
any academic paper, article or learned treatise and make public disclosure at
professional meetings or seminars regarding any portion of the LICENSED
TECHNOLOGY which has been or may be invented, conceived or developed by BYU
unless the information is revealed to BYU by SONIC and is covered under Section
7 of this Agreement.
19 Payment Notices and Other Communications
Any payment, notice or other communication pursuant to this Agreement shall
be sufficiently made or given on the date of mailing if sent by certified first-
class mail, postage prepaid, addressed to the receiving party at its address
designated below or such address as shall be designated by written notice given
to the other party.
BYU: Technology Transfer Office
A-268 ASB
Brigham Young University
Provo, Utah 84602
(801) 378-6266
SONIC: President
SONIC INNOVATIONS, INC.
2795 E. Cottonwood Parkway
Salt Lake City, Utah 84121
(801) 365-2800
20 Miscellaneous Provisions
20.1 Independence of Parties. BYU and SONIC are independent parties engaged
in independent business and neither party nor any respective agent or employee
of either party shall be regarded as an agent or an employee of the other.
Nothing in this Agreement shall be construed as reserving to either party the
right to control the other in the conduct of its business, nor shall either
party have the authority to make any promise, guarantee, warranty or reservation
which will create any obligation or liability whether express or implied on
behalf of the other.
20.2 Attorneys' Fees. In the event a suit or an arbitration proceeding is
commenced to construe or enforce any provision of this Agreement, the prevailing
party, in addition to all other amounts to which such party may be entitled,
shall be paid by the other party a reasonable sum for attorneys' fees and costs.
20.3 Waiver. No waiver by either party, whether express or implied, of any
provisions of this Agreement or of any breach or default of either party, shall
constitute a continuing waiver of such provision or a waiver of any other
provisions of this Agreement.
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20.4 Governing Law. This agreement shall be interpreted and construed in
accordance with the laws of the State of Utah. Venue for any legal disputes
shall be in Utah County, Utah.
20.5 Partial Invalidity. Should any Section or any part of any Section of
this Agreement be held unenforceable or in conflict with the laws of any
jurisdiction, the validity of the remaining Sections and Subsections shall not
be effected by the invalidity of any other part of the Agreement.
20.6 Entire Agreement. This Agreement constitutes the entire Agreement and
understanding between the parties and supersedes all prior agreements and
understandings whether written or oral, including but not limited to the
Exclusive License Agreement dated June 19, 1992, with respect to the LICENSED
TECHNOLOGY. No modification or claimed waiver of any of the provisions of this
Agreement shall be valid unless in writing and signed by authorized
representatives of the party against whom such modification or waiver was sought
to be enforced.
20.7 Binding Effect. This License Agreement shall be binding upon and shall
inure to the benefit of the successors, assigns and legal representatives of the
parties.
20.8 Headings. The paragraph and subparagraph headings contained in this
Agreement are for convenience and reference only. They are not intended to
define and limit the scope of the provisions of this Agreement.
20.9 Old 1995 Agreement. The Old 1995 Agreement is hereby terminated and
made of no force or effect.
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<PAGE>
IN WITNESS WHEREOF, the parties have entered into this Agreement and it is
effective this 21/st/ day of March, 2000.
BRIGHAM YOUNG UNIVERSITY:
/s/ Gary R. Hooper 3/21/00
________________________________________ ______________________
By: Gary R. Hooper Date
Associate Academic Vice President
SONIC INNOVATIONS, INC.:
/s/ Steve Wilson 3/21/00
________________________________________ ______________________
By: Steve Wilson Date
Chief Financial Officer
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<PAGE>
EXHIBIT A
LICENSED TECHNOLOGY
The signal processing technology for hearing aid, audio signal processing
and hearing protection comprising the LICENSED TECHNOLOGY specifically includes
the following:
1. U.S. patent application, "Hearing Aid Device Incorporating Signal
Processing Techniques"; S/N 08/272,927; filed July 8, 1994; inventors,
Douglas M. Chabries and Thomas G. Stockham, Jr., and any foreign
counterparts thereof, as well as all continuations, continuations-in-part,
divisions and renewals thereof, all patents which may be granted thereon,
and all reissues, reexaminations, extensions, patents of addition,
improvement patents and patents of importation thereof.
Rights to said intellectual property are owned jointly by BYU and Thomas G.
Stockham, Jr. Only those rights owned by BYU are conveyed in this license
agreement.
<PAGE>
EXHIBIT B
LICENSED TECHNOLOGY
The signal processing technology for hearing aid, audio signal processing
and hearing protection owned solely by BYU comprising the LICENSED TECHNOLOGY
specifically includes the following:
1. Patent No. 4,872,012, "Data Compression Method and Apparatus for Radar
Image Formation and Like Data Processing Operations"; issued, October 3,
1998; inventor, Douglas M. Chabries.
2. Patent No. 4,977,604, "Method and Apparatus for Processing Sampled Data
Signals by Utilizing Preconvolved Quantized Vectors"; issued, December 11,
1990; except for those rights granted to UNISYS Corporation in a license
agreement dated September 27, 1990 wherein UNISYS was granted, ".a royalty-
free exclusive world-wide license to make, have made, use, sell, lease, or
otherwise dispose of the LICENSED SUBJECT MATTER in the field of Federal
Government contracting, with DOD, MOD's of U.S. Allies, and Federal
agencies which shall include, but not be limited to, P.O., FAA, and NASA.
UNISYS may sublicense their above rights, and any consideration from such
sublicense shall belong solely to UNISYS."
3. The technology and intellectual property rights described in the patent
application in preparation, tentatively entitled, "Digital Hearing Aid";
inventors, Douglas M. Chabries, Mark W. Christiansen and Richard W.
Christiansen, and any U.S. patent issuing therefrom, any foreign
counterparts thereof, as well as all continuations, continuations-in-part,
divisions and renewals thereof, all patents which may be granted thereon,
and all reissues, reexaminations, extensions, patents of addition,
improvement patents and patents of importation thereof.
<PAGE>
EXHIBIT C
FORM OF LOCK-UP AGREEMENT
<PAGE>
Sonic Innovations, Inc.
Lock-Up Agreement
April __, 2000
Goldman, Sachs & Co.
Deutsche Bank Securities Inc.
Chase Securities Inc.
c/o Goldman, Sachs & Co.
85 Broad Street
New York, NY 10004
Re: Sonic Innovations, Inc. - Lock-Up Agreement
-------------------------------------------
Ladies and Gentlemen:
The undersigned understands that you, as representatives (the
"Representatives"), propose to enter into an Underwriting Agreement on behalf of
the several Underwriters named in Schedule I to such agreement (collectively,
the "Underwriters"), with Sonic Innovations, Inc., a Delaware corporation (the
"Company"), providing for a public offering of the Common Stock of the Company
(the "Shares") pursuant to a Registration Statement on Form S-1 to be filed with
the Securities and Exchange Commission (the "SEC").
In consideration of the agreement by the Underwriters to offer and
sell the Shares, and of other good and valuable consideration the receipt and
sufficiency of which is hereby acknowledged, the undersigned agrees that during
the period beginning from the date of the final Prospectus covering the public
offering of the Shares and continuing to and including the date 180 days after
the date of such final Prospectus, the undersigned will not offer, sell,
contract to sell, pledge, grant any option to purchase, make any short sale or
otherwise transfer or dispose of the economic interest in any shares of Common
Stock of the Company, or any options or warrants to purchase any shares of
Common Stock of the Company, or any securities that are convertible into or
exercisable or exchangeable for, or that represent the right to receive, shares
of Common Stock of the Company, whether now owned or hereinafter acquired, owned
directly by the undersigned (including holding as a custodian) or with respect
to which the undersigned has beneficial ownership within the rules and
regulations of the SEC (collectively the "Undersigned's Shares"); provided,
however that such restrictions shall not apply to shares of Common Stock sold or
purchased in the initial public offering; and provided, further, that such
restrictions shall not apply to shares of Common Stock purchased by the
undersigned in the open market following the initial public offering.
The foregoing restriction is expressly agreed to preclude the
undersigned from engaging in any hedging or other transaction which is designed
to or which reasonably could be expected to lead to or result in a sale or
disposition of the Undersigned's Shares even if such Shares would be disposed of
by someone other than the undersigned. Such prohibited hedging or other
transactions would include without limitation any short sale or any purchase,
sale or grant of any right (including without limitation any put or call option)
with respect to any of the Undersigned's Shares or with respect to any security
that includes, relates to, or derives any significant part of its value from
such Shares.
<PAGE>
Notwithstanding the foregoing, the undersigned may transfer the
Undersigned's Shares (i) as a bona fide gift or gifts, provided that the donee
or donees thereof agree to be bound in writing by the restrictions set forth
herein, (ii) to any trust for the direct or indirect benefit of the undersigned
or the immediate family of the undersigned, provided that the trustee of the
trust agrees to be bound in writing by the restrictions set forth herein, and
provided further that any such transfer shall not involve a disposition for
value, or (iii) with the prior written consent of Goldman, Sachs & Co. on behalf
of the Underwriters. For purposes of this Lock-Up Agreement, "immediate family"
shall mean any relationship by blood, marriage or adoption, not more remote than
first cousin. In addition, notwithstanding the foregoing, if the undersigned is
a corporation, the corporation may transfer the capital stock of the Company to
any wholly-owned subsidiary of such corporation; provided, however, that in any
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such case, it shall be a condition to the transfer that the transferee execute
an agreement stating that the transferee is receiving and holding such capital
stock subject to the provisions of this Agreement and there shall be no further
transfer of such capital stock except in accordance with this Agreement, and
provided further that any such transfer shall not involve a disposition for
value. The undersigned now has, and, except as contemplated by clause (i),
(ii), or (iii) above, for the duration of this Lock-Up Agreement will have, good
and marketable title to the Undersigned's Shares, free and clear of all liens,
encumbrances, and claims whatsoever. The undersigned also agrees and consents
to the entry of stop transfer instructions with the Company's transfer agent and
registrar against the transfer of the Undersigned's Shares except in compliance
with the foregoing restrictions.
The undersigned understands that the Company and the Underwriters are
relying upon this Lock-Up Agreement in proceeding toward consummation of the
offering. The undersigned further understands that this Lock-Up Agreement is
irrevocable and shall be binding upon the undersigned's heirs, legal
representatives, successors, and assigns.
Very truly yours,
________________________________
Exact Name of Shareholder
________________________________
Authorized Signature
________________________________
Title
<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.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Salt Lake City, Utah
March 22, 2000
<PAGE>
EXHIBIT 24.2
POWER OF ATTORNEY
The undersigned director of Sonic Innovations, Inc., a Delaware
corporation, hereby 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 the Registration Statement on Form S-1
(Registration No. 333-30566) (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.
/s/ Luke B. Evnin 3/21/00
---------------------------- -------------
Luke B. Evnin, Director Date
