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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

  x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002  
       
  o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934  

Commission File No. 000-30335

SONIC INNOVATIONS, INC.
(Exact name of registrant as specified in its charter)

  DELAWARE 87-0494518  
  (State or other jurisdiction of (I.R.S. Employer  
  incorporation or organization) Identification No.)  

2795 East Cottonwood Parkway, Suite 660
Salt Lake City, UT 84121-7036
(Address of principal executive offices)

(801) 365-2800
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

x  Yes  o  No

As of August 6, 2002, there were 19,687,574 shares of the registrant’s common stock outstanding.


1

SONIC INNOVATIONS, INC.
TABLE OF CONTENTS
       
      Page
PART I - FINANCIAL INFORMATION    
       
ITEM 1. Unaudited Condensed Consolidated Financial Statements:    
       
  Condensed Consolidated Balance Sheets as of June 30, 2002 and December 31, 2001   3
       
  Condensed Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2002 and 2001   4
       
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2002 and 2001   5
       
  Notes to Condensed Consolidated Financial Statements   6
       
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations   9
       
ITEM 3. Quantitative and Qualitative Disclosures about Market Risks   13
       
  Factors That May Affect Future Performance   13
       
       
PART II - OTHER INFORMATION    
       
ITEM 1. Legal Proceedings   18
       
ITEM 4. Submission of Matters to a Vote of Security Holders   18
       
ITEM 6. Exhibits and Reports on Form 8-K   18
       
Signature     19
       
Section 906 Certifications   20

2

PART  I     FINANCIAL INFORMATION
 
ITEM  1.    UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
SONIC INNOVATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
  June 30,   December 31,
  2002   2001
ASSETS              
Current assets:              
Cash and cash equivalents $  6,970     $ 13,929  
Marketable securities   24,082       21,555  
Accounts receivable   8,447       7,044  
Inventories   6,724       6,075  
Prepaid expenses and other   1,398       938  
 
   
 
               
            Total current assets   47,621       49,541  
               
Marketable securities, net of current portion   5,694       10,322  
Property and equipment   5,286       4,920  
Intangible assets   13,396       5,445  
Other assets   2,012       628  
 
   
 
               
            Total assets $  74,009     $ 70,856  
 
   
 
               
               
LIABILITIES AND SHAREHOLDERS' EQUITY              
Current liabilities:              
Accounts payable and accrued expenses $ 15,313     $ 13,241  
Current portion of long-term obligation   284       349  
 
   
 
               
            Total current liabilities   15,597       13,590  
               
Long-term obligation, net of current portion   —       102  
               
Shareholders' equity:              
Common stock   20       20  
Additional paid-in capital   112,970       112,288  
Deferred stock-based compensation   (319 )     (507 )
Accumulated deficit   (51,878 )     (51,616 )
Other comprehensive income (loss) 1,022 (276)
Treasury stock, at cost   (3,403 )     (2,745 )
 
   
 
               
            Total shareholders' equity   58,412       57,164  
 
   
 
               
            Total liabilities and shareholders' equity $  74,009     $ 70,856  
 
   
 
               
The accompanying notes are an integral part of these condensed consolidated financial statements.

3

SONIC INNOVATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
                               
                               
  Three months ended   Six months ended
  June 30,   June 30,
                               
  2002   2001   2002   2001
                               
Net sales $ 17,351     $ 11,552     $ 32,455     $ 26,585  
Cost of sales   8,364       6,862       15,805       14,662  
 
   
   
   
 
                               
Gross profit   8,987       4,690      
16,650
       11,923  
Selling, general and administrative expense   7,048       5,583      
13,361
       11,180  
Research and development expense   2,140       2,310      
4,192
       4,599  
Stock-based compensation expense.   93       214      
199
       440  
 
   
   
   
 
                               
Operating loss    (294  )     (3,417 )    
(1,102
 )     (4,296 )
Other income   451       502       840       1,131  
 
   
   
   
 
                               
Net income (loss) $ 157     $ (2,915 )   $ (262 )   $ (3,165 )
 
   
   
   
 
                               
Basic and diluted earnings (loss) per common share $ .01     $ (.15 )   $ (.01 )   $ (.16 )
 
   
   
   
 
                               
Weighted average number of common shares                              
              outstanding - basic.   19,567       19,932       19,457       19,890  
            
   
   
   
 
                                  - diluted   21,011       19,932       19,457       19,890  
 
   
   
   
 
                               
                               
                               
Stock-based compensation allocable to each caption:                              
         Cost of sales $ 4     $ 11     $ 9     $ 20  
         Selling, general and administrative expense   76       175       163       360  
         Research and development expense   13       28       27       60  
 
   
   
   
 
                               
  $ 93     $ 214     $ 199     $ 440  
 
   
   
   
 

The accompanying notes are an integral part of these condensed consolidated financial statements.


4

SONIC INNOVATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
               
               
  Six months ended
  June 30,
  2002   2001
Cash flows from operating activities:              
Net loss $ (262 )   $ (3,165 )
Adjustments to reconcile net loss to net cash provided by (used in)              
        operating activities:              
            Depreciation and amortization   1,055       778  
            Stock-based compensation   199       440  
            Foreign currency gain   (286 )     —  
            Changes in assets and liabilities, excluding the effect of acquisitions:              
                    Accounts receivable   107       3,388  
                    Inventories   421       328  
                    Prepaid expenses and other   (304 )     (114 )
                    Other assets   —       255  
                    Long-term obligation   —       (100 )
                    Accounts payable and accrued expenses   (1,767 )     (60 )
 
   
 
               
                            Net cash provided by (used in) operating activities   (837 )     1,750  
               
Cash flows from investing activities:              
Acquisitions, net of cash acquired   (6,125 )     —  
Purchases of property and equipment   (918 )     (652 )
Increase in other assets   (1,295 )     (500 )
Proceeds from marketable securities, net   2,101       808  
 
   
 
               
                            Net cash used in investing activities   (6,237 )     (344 )
               
Cash flows from financing activities:              
Principal payments on long-term obligations   (167 )     (220 )
Purchases of common stock for treasury   (658 )     (18 )
Proceeds from exercise of stock options and employee stock purchase plan issuances   671       449  
 
   
 
               
                            Net cash provided by (used in) financing activities   (154 )     211  
               
Effect of exchange rate changes on cash and cash equivalents   269       (51 )
 
   
 
               
Net increase (decrease) in cash and cash equivalents   (6,959 )     1,566  
Cash and cash equivalents, beginning of the period   13,929       7,312  
 
   
 
               
Cash and cash equivalents, end of the period $ 6,970     $  8,878  
 
   
 
               
Supplemental cash flow information:              
Cash paid for interest   22       94  
               
               

The accompanying notes are an integral part of these condensed consolidated financial statements.


5

SONIC INNOVATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data)
(unaudited)

1.       BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring adjustments) considered necessary for a fair presentation have been included. The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of results that may be expected for the full year ending December 31, 2002. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 as filed wit h the Securities and Exchange Commission.

The accompanying unaudited condensed consolidated financial statements include the accounts of Sonic Innovations, Inc. and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

2.       ACQUISITIONS

The Company acquired five hearing aid businesses outside the U.S. in the second quarter of 2002 and one hearing aid business outside the U.S. in the first quarter of 2002 for cash totaling $6,961. In addition, if certain financial milestones are accomplished, the Company would pay an additional $1,200. Four of these businesses were existing distributors of the Company’s products. The acquisitions were accounted for as purchases in accordance with Statement of Financial Accounting Standards No. 141 “Business Combinations.” The purchase prices of these businesses have been allocated to the net assets acquired based on management’s preliminary determinations of relative fair market values of the respective net assets. Management is in the process of obtaining independent valuations in order to finalize the allocations of the purchase price to the acquired assets, both tangible and intangible, and liabilities. The Company expects these valuations to be completed in the third quarter of 2002 and does not anticipate significant changes from the preliminary allocations.

The following table sets forth the preliminary allocations of the aggregate purchase prices of the six acquisitions: