UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

SCHEDULE 14A

 

Proxy Statement Pursuant to Section 14(a)

of the Securities Exchange Act of 1934

(Amendment No.     )

 

Filed by the Registrant  x

 

Filed by a Party other than the Registrant  ¨

 

Check the appropriate box:

 

 

SONIC INNOVATIONS, INC.

(Name of Registrant as Specified In Its Charter)

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

 

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Sonic Innovations, Inc.

2795 East Cottonwood Parkway, Suite 660

Salt Lake City, Utah 84121

Phone: (801) 365-2800

 

April 6, 2004

 

Dear Stockholder:

 

You are cordially invited to attend the Annual Meeting of Stockholders to be held at the Salt Lake Marriott City Center Hotel located at 220 South State Street, Salt Lake City, Utah on Thursday, May 6, 2004 at 9:00 a.m. MDT.

 

The accompanying Proxy Statement describes the business to be transacted at the Annual Meeting. It is important that your shares be represented whether or not you personally attend the Annual Meeting. Regardless of the number of shares you own, your vote is important to us. In order to ensure that you will be represented, we ask you to please vote by telephone or sign, date and return the enclosed proxy card or voting instruction card promptly. This will not limit your right to vote in person or to attend the Annual Meeting.

 

We also plan to review the status of our business at the Annual Meeting. We look forward to seeing you.

 

Sincerely,

 

Andrew G. Raguskus

President and Chief Executive Officer

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Sonic Innovations, Inc.

2795 East Cottonwood Parkway, Suite 660

Salt Lake City, Utah 84121

(801) 365-2800

 

NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

 

 

By Order of the Board of Directors,

Stephen L. Wilson

Senior Vice President and

Chief Financial Officer and Secretary

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This Notice of the Annual Meeting, Proxy Statement and accompanying proxy card were mailed on or about April 6, 2004.

 

SONIC INNOVATIONS, INC.

 

PROXY STATEMENT

 

ANNUAL MEETING OF STOCKHOLDERS

 

May 6, 2004

 

The Board of Directors of Sonic Innovations, Inc. (the “Board”) is soliciting the enclosed proxy from you. The proxy will be used at our 2004 Annual Meeting of Stockholders to be held on Thursday, May 6, 2004, beginning at 9:00 a.m. MDT at the Salt Lake City Marriott City Center Hotel, 220 South State Street, Salt Lake City, Utah 84111, and at any adjournments thereof. This Proxy Statement contains important information regarding the meeting. Specifically, it identifies the matters upon which you are being asked to vote, provides information that you may find useful in determining how to vote and describes the voting procedures. This Proxy Statement is being mailed to stockholders on or about April 6, 2004.

 

We use several abbreviations in this Proxy Statement. We may refer to our company as “Sonic Innovations” or the “Company.” The term “proxy materials” includes this Proxy Statement, as well as the enclosed proxy card and our Annual Report on Form 10-K for the year ended December 31, 2003. The term “Annual Meeting” means our 2004 Annual Meeting of Stockholders.

 

QUESTIONS AND ANSWERS CONCERNING THIS SOLICITATION AND VOTING

AT THE ANNUAL MEETING

 

When and where is the Annual Meeting?

 

The Annual Meeting will be held on Thursday, May 6, 2004, beginning at 9:00 a.m. MDT at the Salt Lake City Marriott City Center Hotel, 220 South State Street, Salt Lake City, Utah 84111.

 

Why I am receiving these proxy materials?

 

You are receiving these proxy materials from us because you were a stockholder of record at the close of business on March 8, 2004 (the “Record Date”). As a stockholder of record, you are invited to attend the Annual Meeting and are entitled to and requested to vote on the items of business described in this Proxy Statement.

 

What is the purpose of the Annual Meeting?

 

At our Annual Meeting, stockholders of record will act upon the items of business outlined in the Notice of the Annual Meeting (on the cover page of this Proxy Statement), each of which are described more fully in this Proxy Statement. In addition, management will report on the performance of the Company and respond to questions from stockholders.

 

Who is entitled to attend?

 

You are entitled to attend the Annual Meeting only if you were a Sonic Innovations stockholder (or joint holder) of record as of the close of business on the Record Date, or if you hold a valid proxy for the Annual Meeting. You should be prepared to present photo identification for admittance.

 

Please also note that if you are not a stockholder of record but hold shares in “street name” (that is, through a broker or nominee), you will need to provide proof of beneficial ownership as of the Record Date, such as your

 

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most recent brokerage account statement prior to the Record Date, a copy of the voting instruction card provided by your broker, trustee or nominee, or other similar evidence of ownership. The meeting will begin promptly at 9:00 a.m. MDT. Check-in will begin at 8:45 a.m. MDT.

 

Who is entitled to vote?

 

Only stockholders who owned Sonic Innovations common stock at the close of business on the Record Date are entitled to notice of and to vote at the Annual Meeting, and at any adjournments thereof.

 

How many shares are entitled to vote?

 

As of the Record Date, 20,510,778 shares of Sonic Innovations common stock were outstanding. Each outstanding share of Sonic Innovations common stock entitles the holder to one vote on each matter.

 

How many shares must be present or represented to conduct business (that is, what constitutes a quorum)?

 

The presence at the Annual Meeting, in person or by proxy, of the holders of a majority of the outstanding shares of Sonic Innovations common stock entitled to vote at the Annual Meeting will constitute a quorum. A quorum is required to conduct business at the Annual Meeting. The presence of the holders of Sonic Innovations common stock representing at least 10,255,390 votes will be required to establish a quorum at the meeting. Both abstentions and broker non-votes are counted for the purpose of determining the presence of a quorum.

 

What items of business will be voted on?

 

The items of business scheduled to be voted on at the Annual Meeting are as follows:

 

 

 

 

These proposals are described more fully below. As of the date of this Proxy Statement, the only business that our Board intends to present or knows of that others will present at the Annual Meeting is as set forth in this Proxy Statement. If any other matter or matters are properly brought before the meeting or any adjournment thereof, it is the intention of the persons who hold proxies to vote the shares they represent in accordance with their best judgment.

 

How does the Board of Directors recommend that I vote?

 

Our Board recommends that you vote your shares “FOR” each of the director nominees, “FOR” the ratification of KPMG LLP as our independent auditors for the 2004 fiscal year and “FOR” the approval of the Amended and Restated Sonic Innovations, Inc. 2000 Stock Plan.

 

What shares can I vote?

 

You may vote all shares owned by you as of the Record Date, including (1) shares held directly in your name as the stockholder of record, and (2) shares held for you as the beneficial owner through a broker, trustee or other nominee such as a bank.

 

What is the difference between holding shares as a stockholder of record and as a beneficial owner?

 

Most Sonic Innovations stockholders hold their shares through a broker or other nominee rather than directly in their own name.

 

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If your shares are registered directly in your name with our transfer agent, American Stock Transfer & Trust, you are considered, with respect to those shares, the stockholder of record, and these proxy materials are being sent directly to you by us. As the stockholder of record, you have the right to grant your voting proxy directly to Sonic Innovations or to vote in person at the Annual Meeting. We have enclosed a proxy card for you to use for this purpose.

 

If your shares are held in a brokerage account or by another nominee, you are considered the beneficial owner of shares held in “street name,” and these proxy materials are being forwarded to you together with a voting instruction card. As the beneficial owner, you have the right to direct your broker, trustee or nominee how to vote and are also invited to attend the Annual Meeting. Please note that since a beneficial owner is not the stockholder of record, you may not vote these shares in person at the meeting unless you obtain a “legal proxy” from the broker, trustee or other nominee that holds your shares, giving you the right to vote the shares at the Annual Meeting. Your broker, trustee or other nominee has enclosed or provided voting instructions for you to use in directing the broker, trustee or nominee how to vote your shares.

 

How can I vote my shares without attending the Annual Meeting?

 

Whether you hold shares directly or in street name, you may vote without attending the Annual Meeting. If you are a stockholder of record, you may vote by granting a proxy. If you are a stockholder of record, you may vote:

 

 

 

For shares held in street name, you should follow the voting directions provided by your nominee. You may complete and mail a voting instruction card to your nominee or, in many cases, submit voting instructions by telephone or the Internet. If you provide specific voting instructions by mail, telephone or the Internet, your shares will be voted by your nominee as you have directed.

 

Telephone voting facilities for stockholders of record will close at 12:00 noon EDT, on May 5, 2004.

 

How can I vote my shares in person?

 

If you are a stockholder of record and wish to vote your shares at the Annual Meeting, you should bring the enclosed proxy card or proof of identification. You may vote shares held in street name only if you obtain a signed proxy from the record holder (broker, trustee or other nominee) giving you the right to vote the shares. Even if you plan to attend the Annual Meeting, we encourage you to vote by proxy card or telephone so your vote will be counted even if you later decide not to attend.

 

Can I change my vote?

 

You may change your vote at any time prior to the vote at the Annual Meeting. If you are the stockholder of record, you may change your vote by:

 

 

 

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Attendance at the meeting will not cause your previously granted proxy to be revoked, unless you specifically so request.

 

What is a “broker non-vote”?

 

Under the rules that govern brokers who have record ownership of shares that are held in street name for their clients, who are the beneficial owners of the shares, brokers have the discretion to vote such shares on “routine matters” (such as election of directors), but not on “non-routine matters” (such as stockholder proposals). A “broker non-vote” occurs when a broker expressly instructs on a proxy card that it is not voting on a matter, whether routine or non-routine.

 

How are “broker non-votes” counted?

 

Broker non-votes will be counted for the purpose of determining the presence or absence of a quorum for the transaction of business, but they will not be counted in tabulating the voting result for any particular proposal.

 

Who will serve as inspector of election?

 

Michael M. Halloran, our Vice President and Corporate Controller, will tabulate the votes and act as inspector of election at the Annual Meeting.

 

What vote is required to approve each item and how are votes counted?

 

The vote required to approve each item of business and the method for counting votes is set forth below:

 

Election of Directors. The two director nominees receiving the highest number of affirmative “FOR” votes at the meeting (a plurality of votes cast) will be elected to serve as directors. You may vote either “FOR” or “WITHHOLD” your vote for the director nominees. A properly executed proxy marked “WITHHOLD” with respect to the election of one or more directors will not be voted with respect to the director or directors indicated, although it will be counted for purposes of determining whether there is a quorum.

 

All Other Items. For each of the other items of business, the affirmative “FOR” vote of a majority of the shares represented in person or by proxy and entitled to vote on the item will be required for approval. You may vote “FOR,” “AGAINST” or “ABSTAIN” for these items of business. If you “ABSTAIN,” your abstention has the same effect as a vote “AGAINST.”

 

If you provide specific instructions with regard to certain items, your shares will be voted as you instruct on such items. If you sign your proxy card or voting instruction card without giving specific instructions, your shares will be voted in accordance with the recommendations of the Board (“FOR” the two director nominees to the Board; “FOR” ratification of the independent auditors; and “FOR” approval of the Amended and Restated Sonic Innovations, Inc. 2000 Stock Plan), and in the discretion of the proxy holders on any other matters that properly come before the Annual Meeting and any adjournments thereof.

 

How are abstentions counted?

 

If you return a proxy card that indicates an abstention from voting in all matters, the shares represented will be counted for the purpose of determining both the presence of a quorum and the total number of votes cast with respect to a proposal (other than the election of directors), but they will not be voted on any matter at the Annual Meeting. In the absence of controlling precedent to the contrary, we intend to treat abstentions in this manner. Accordingly, abstentions will have the same effect as a vote “AGAINST” a proposal.

 

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What happens if additional matters are presented at the Annual Meeting?

 

Other than the three items of business described in this Proxy Statement, we are not aware of any other business to be acted upon at the Annual Meeting. If you grant a proxy, the persons named as proxy holders, Andrew G. Raguskus (our President and CEO) and Stephen L. Wilson (our Senior Vice President and CFO), will have the discretion to vote your shares on any additional matters properly presented for a vote. If for any unforeseen reason any of our nominees is not available as a candidate for director, the proxy holders will vote your proxy for such other candidate or candidates as may be nominated by our Board.

 

What should I do in the event that I receive more than one set of proxy/voting materials?

 

You may receive more than one set of these proxy materials, including multiple copies of this Proxy Statement and multiple proxy cards or voting instruction cards. For example, if you hold your shares in more than one brokerage account, you may receive a separate voting instruction card for each brokerage account in which you hold shares. If you are a stockholder of record and your shares are registered in more than one name, you will receive more than one proxy card. Please vote each proxy card and voting instruction card that you receive to ensure that all your shares are voted.

 

Where can I find the voting results?

 

We intend to announce preliminary voting results at the Annual Meeting and publish final results in our Quarterly Report on Form 10-Q for the second quarter of fiscal year 2004.

 

Who is soliciting my vote and who will bear the costs of this solicitation?

 

Sonic Innovations is making this solicitation and will pay the entire cost of preparing, assembling, printing, mailing and distributing these proxy materials and soliciting votes. In addition to this solicitation by mail, the solicitation of proxies or votes may be made in person, by telephone or by electronic communication by members of our Board, our officers and other employees, who will not receive any additional compensation for assisting in the solicitation. Upon request, we will also reimburse brokerage houses and other custodians, nominees and fiduciaries for forwarding proxy solicitation materials to the beneficial owners of Sonic Innovations common stock.

 

Who can help answer my questions?

 

If you have any questions about the Annual Meeting or how to vote or revoke your proxy, or if you need additional copies of this Proxy Statement or voting materials, please contact the Company’s Secretary at (801) 365-2800.

 

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SHARE OWNERSHIP BY CERTAIN BENEFICIAL OWNERS AND NAMED EXECUTIVE OFFICERS

 

The following table provides information relating to the beneficial ownership of Sonic Innovations common stock as of the Record Date, by:

 

 

 

 

 

The number of shares beneficially owned by each entity, person, director or executive officer is determined in accordance with the rules of the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares over which the person has the sole or shared voting power or investment power and any shares that the person has the right to acquire within 60 days of the Record Date through the exercise of any stock option or other right. Unless otherwise indicated, each person has sole voting and investment power (or shares such powers with his or her spouse) with respect to the shares set forth in the following table.

 

The number and percentage of shares beneficially owned is computed on the basis of 20,510,778 shares of Sonic Innovations common stock outstanding as of the Record Date. Shares of Sonic Innovations common stock that a person has the right to acquire within 60 days of the Record Date are deemed outstanding for purposes of computing the percentage ownership of the person holding such rights, but are not deemed outstanding for purposes of computing the percentage ownership of any other person, except with respect to the percentage ownership of all directors and executive officers as a group. The address for those persons for which an address is not otherwise provided is: c/o Sonic Innovations, Inc., 2795 East Cottonwood Parkway, Suite 660, Salt Lake City, Utah 84121.

 

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SHARE OWNERSHIP TABLE FOOTNOTES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

 

Based upon a review of reports and written representations furnished to us, we believe that during fiscal year 2003 all filings with the Securities and Exchange Commission by our executive officers and directors complied with requirements for reporting ownership and changes in ownership of our common stock pursuant to Section 16(a) of the Securities Exchange Act of 1934.

 

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GOVERNANCE OF THE COMPANY

 

Board Composition

 

The members of our Board on the date of this Proxy Statement, and the committees of our Board on which they serve, are identified below.

 

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During 2003, our Board met five times and each director attended each meeting. Our directors are encouraged to attend our annual meetings. All of our directors attended the 2003 annual meeting.

 

Board Independence

 

The Board has determined that each of the following directors (and each of the members of the Audit Committee, the Compensation Committee and the Governance and Nominating Committee) to be an “independent director” as such term is defined in Marketplace Rule 4200(a)(15) of the National Association of Securities Dealers, Inc. (the “NASD”):

 

Lewis S. Edelheit

Anthony B. Evnin

Lawrence C. Ward

Samuel L. Westover

 

Board Committee Composition

 

Audit Committee

 

Sonic Innovations has a separately-designated standing Audit Committee established in accordance with section 3(a)(58)(A) of the Securities Exchange Act, as amended. The Audit Committee currently consists of Dr. Edelheit, Dr. Evnin and Mr. Westover. The Board believes that each of these individuals is financially literate and that Mr. Westover is a “financial expert” as defined under applicable Securities and Exchange Commission rules. In addition, the Board believes that each member of the Audit Committee is independent as defined under Marketplace Rule 4350(d)(2) of the NASD. The Audit Committee assists the Board in fulfilling its responsibilities for general oversight of the integrity of Sonic Innovations’ financial statements; Sonic Innovations’ compliance with legal and regulatory requirements; and the independent auditors’ qualifications, independence and performance. Among other things, the Audit Committee prepares the report of the Audit Committee for inclusion in the Proxy Statement; annually reviews the Audit Committee charter; appoints, evaluates and determines the compensation of the independent auditors; reviews and approves the scope of the annual audit, the audit fee and the financial statements; reviews Sonic Innovations’ disclosure controls and procedures, internal controls and corporate policies with respect to financial information; oversees investigations

 

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into complaints concerning financial matters; and reviews other risks that may have a significant impact on Sonic Innovations’ financial statements. The Audit Committee works closely with management as well as the independent auditors. The Audit Committee has the authority to obtain advice and assistance from, and receive appropriate funding from Sonic Innovations for, outside legal, accounting or other advisors as the Audit Committee deems necessary to carry out its duties. The Audit Committee met seven times in 2003 and each member attended each meeting. The report of the Audit Committee is included herein. The charter for the Audit Committee was filed as an exhibit to last year’s proxy statement and is available on our website at http://www.sonici.com/corporategovernance.

 

Compensation Committee

 

The Compensation Committee currently consists of Dr. Evnin and Mr. Westover. The Compensation Committee consisted of Dr. Evnin and Dr. Allan M. Wolfe until Dr. Wolfe’s resignation from the Board in May 2003. The Compensation Committee approves our executive officers’ salaries, annual incentive awards and stock option grants. The Compensation Committee also administers our 1993 Stock Plan, 2000 Stock Plan and 2000 Employee Stock Purchase Plan. The Compensation Committee met twice in 2003 and each member attended each meeting. The charter for the Compensation Committee is available on our website at http://www.sonici.com/corporategovernance.

 

Governance and Nominating Committee

 

The Governance and Nominating Committee, which was formed in March 2004, currently consists of Dr. Edelheit, Mr. Ward and Mr. Westover. The Governance and Nominating Committee assists the Board in fulfilling its responsibility with respect to corporate governance of Sonic Innovations and is responsible for developing and recommending to the Board the governance principles applicable to Sonic Innovations; overseeing the evaluation of the Board and management of Sonic Innovations; recommending to the Board director nominees for each committee; and assisting the Board in identifying prospective director nominees and determining the director nominees for election. Among other things, the Governance and Nominating Committee determines the criteria for qualification and selection of directors for election to the Board; oversees the organization of the Board to discharge its duties and responsibilities properly and efficiently; and identifies best practices and recommends corporate governance principles, including giving proper attention and making effective responses to stockholder concerns regarding corporate governance. Other specific duties and responsibilities of the Governance and Nominating Committee include annually assessing the size and composition of the Board; developing membership qualifications for Board committees; defining specific criteria for director independence; monitoring compliance with Board and Board committee membership criteria; annually reviewing and recommending directors for continued service; coordinating and assisting management and the Board in recruiting new members to the Board; reviewing and recommending proposed changes to our Certificate of Incorporation or Bylaws and Board committee charters; recommending Board committee assignments; reviewing, approving and monitoring all service by executive officers on outside, for-profit boards of directors; reviewing and approving in advance any proposed related party transactions; and reviewing, approving and monitoring the Company’s Code of Ethics. The charter for the Governance and Nominating Committee is available on our website at http://www.sonici.com/corporategovernance.

 

Stock Option Committee

 

The Stock Option Committee, currently consisting solely of Mr. Raguskus, has the authority to grant stock options to non-officer employees only, up to a maximum of 10,000 shares per non-officer employee. Stock options granted in this manner are reported to the Board.

 

Director Compensation

 

Each of our directors is paid as follows: (i) $2,500 for attending a Board meeting in person and $500 for attending by telephone; and (ii) $500 for attending a Board committee meeting in person and $200 for attending

 

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by telephone. Each of our directors is also reimbursed for reasonable travel expenses incurred in attending Board or Board committee meetings.

 

Under our 2000 Stock Plan, each new non-employee director is granted a stock option for 15,000 shares of common stock, which vests at the rate of one-third on each annual anniversary from the date of grant. Following each annual meeting of stockholders, each continuing non-employee director is granted a stock option for 6,000 shares of common stock, which fully vests one year from the date of grant. These stock options have a ten year term and an exercise price per share equal to the fair market value per share on the date of grant.

 

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.

 

Consideration of Director Nominees

 

Stockholder Nominees

 

Our Bylaws permit stockholders to nominate directors. The policy of the Governance and Nominating Committee is to consider properly submitted stockholder nominations for candidates for membership on the Board as described under “Identifying and Evaluating Nominees for Directors” below. For a description of the process for nominating directors in accordance with our Bylaws, please refer to the section entitled “OTHER INFORMATION—Deadline for Receipt of Stockholder Proposals and Director Nominations.” In evaluating such nominations, the Governance and Nominating Committee seeks to achieve a balance of knowledge, experience and capability on the Board and to address the membership criteria set forth under “Director Qualifications” below. Any stockholder nominations proposed for consideration by the Governance and Nominating Committee should include the nominee’s name and qualifications for Board membership and should be addressed to:

 

Secretary

Sonic Innovations, Inc.

2795 East Cottonwood Parkway, Suite 660

Salt Lake City, Utah 84121

 

Director Qualifications

 

Each candidate must possess at least the following specific minimum qualifications:

 

 

 

 

 

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Identifying and Evaluating Nominees for Directors

 

The Governance and Nominating Committee assesses the appropriate size of the Board, and whether any vacancies on the Board are expected due to retirement or otherwise. The Governance and Nominating Committee utilizes a variety of methods for identifying and evaluating nominees for director. In evaluating such nominations, the Governance and Nominating Committee seeks to achieve a balance of knowledge, experience and capability on the Board and to address membership criteria set forth under “Director Qualifications” above. In the event that vacancies are anticipated, or otherwise arise, the Governance and Nominating Committee considers various potential candidates for director. Candidates may come to the attention of the Governance and Nominating Committee through current Board members, professional search firms, stockholders or other persons. In addition, from time-to-time, the Governance and Nominating Committee may solicit recommendations for director candidates from its professional service advisors. These candidates are evaluated at regular or special meetings of the Governance and Nominating Committee, and may be considered at any point during the year. The Governance and Nominating Committee considers properly submitted stockholder nominations for candidates for the Board following verification of the stockholder status of persons proposing candidates. If any materials are provided by a stockholder in connection with the nomination of a director candidate, such materials are forwarded to the Governance and Nominating Committee.

 

Communications with the Board

 

Stockholders and employees who desire to communicate with the Board or individual directors on a confidential basis may do so by writing directly and confidentially using an envelope marked confidential to Board of Directors, c/o Secretary, Sonic Innovations, Inc., 2795 East Cottonwood Parkway, Suite 660, Salt Lake City, Utah, 84121. Such communications will be forwarded directly to the named director or, if addressed to the Board, to the Chairman of the Audit Committee, who is an independent director.

 

Any non-confidential communications from stockholders and employees that are intended for the Board will be processed as follows: (i) if the sender specifically requests that the communication be sent to the Board, the communication will be promptly relayed to the Board; and (ii) if the sender does not specifically request that the communication be sent to the Board, the communication will be promptly relayed to the Board if management, using its best business judgment, determines that it should be relayed to the Board.

 

Code of Ethics

 

The Sonic Innovations Code of Ethics for Principal Executive and Senior Financial Officers, which applies to our chief executive officer, principal financial officer and principal accounting officer, is available on our website http://www.sonici.com/corporategovernance. We intend to post amendments to or waivers from our Code of Ethics for Principal Executive and Senior Financial Officers at that address.

 

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PROPOSALS TO BE VOTED ON

 

PROPOSAL ONE

ELECTION OF DIRECTORS

 

Directors and Nominees

 

Our Board of Directors currently consists of six members and is 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. Mr. Kevin J. Ryan and Mr. Samuel L. Westover are in the class of directors whose term expires at the 2004 Annual Meeting of Stockholders and they are the two nominees for election to the Board at this Annual Meeting. Directors whose terms are continuing after this Annual Meeting include Dr. Lewis S. Edelheit and Dr. Anthony B. Evnin, who are in the class of directors whose term expires at the 2005 annual meeting; and Mr. Andrew G. Raguskus and Mr. Lawrence C. Ward, who are in the class of directors whose term expires at the 2006 annual meeting. Executive officers are elected by the Board and serve until their successors have been duly elected and qualified. There are no family relationships among any of our directors or executive officers.

 

DIRECTORS

 

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Lewis S. Edelheit, Ph.D. retired from General Electric Company (“GE”) in 2002. Dr. Edelheit was GE’s Senior Research and Technology Advisor from 2000 to 2002 and was Senior Vice President of Corporate R&D from 1991 to 2000. From 1986 to 1991, he was President and CEO of Quantum Medical Systems, a venture capital-backed company that pioneered color flow ultrasound for vascular imaging. Dr. Edelheit is a director of Silicon Graphics, Inc., a high-end computer manufacturer, a member of the National Academy of Engineering and the Industrial Research Institute, and a Fellow of the American Physical Society. He earned a bachelor’s degree in engineering physics and a master’s degree and Ph.D. in physics from the University of Illinois.

 

Anthony B. Evnin, Ph.D. is Managing General Partner of Venrock Associates, a venture capital partnership, where he has been a Partner since 1975. Dr. Evnin serves on the board of Caliper Life Sciences, Inc., a manufacturer of microfluidic analysis systems, and Renovis, Inc., a developer of pharmaceuticals for the central nervous system. Dr. Evnin earned an AB from Princeton University and a Ph.D. in chemistry from Massachusetts Institute of Technology.

 

Andrew G. Raguskus joined Sonic Innovations, Inc. in 1996 as President, Chief Executive Officer and director. Mr. Raguskus was Chief Operating Officer of Sonic Solutions, Inc., a maker of digital audio workstations, during 1996. He was Senior Vice President Operations of 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. He serves on the board of the Hearing Industries Association. Mr. Raguskus earned a bachelor’s degree in electrical engineering from Rensselaer Polytechnic Institute.

 

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Kevin J. Ryan has been Chairman of the Board of Sonic Innovations, Inc. since January 2002. This position was an executive position from January 2002 to December 2003. Mr. Ryan was Chairman, President and Chief Executive Officer of Wesley Jessen Vision Care, Inc., a manufacturer of contact lenses, from 1995 until its acquisition by Novartis in 2001. Prior to that, Mr. Ryan was President of Biosource Technologies, Inc., a bio-pharmaceutical company, from 1991 to 1995. He serves on the board of Large Scale Biology Corporation, a bio-technology company. Mr. Ryan earned a bachelor’s degree in business and marketing from Notre Dame University.

 

Lawrence C. Ward was Corporate Vice President Worldwide Manufacturing Operations of Applied Materials Corporation from October 1998 to October 2001. Prior to that, Mr. Ward was President North American Region of Walbro Corporation from February 1998 to September 1998; Senior Vice President Operations and President Airbag and Seat Belt Division of Breed Technologies, Inc. from November 1997 to February 1998; Vice President Global Operations of Allied Signal Safety Restraint Systems from January 1997 to October 1997; and Vice President Manufacturing and Services of Exabyte Corporation from 1993 to 1996. He earned a bachelor’s degree in mechanical engineering from California Polytechnic State University and a master’s degree in mechanical engineering from Santa Clara University.

 

Samuel L. Westover is President and Chief Executive Officer of CIGNA Dental, a provider of dental insurance and dental managed care, which he joined in March 2002. He was Special Assistant to the Governor of Utah from March 2001 to March 2002. From 1996 to 2000, Mr. Westover was President and Chief Executive Officer of Orthalliance, Inc., a provider of practice management services to orthodontic practices, which he founded. Prior to that, Mr. Westover was President and Chief Executive Officer of SysteMed, Inc., a prescription benefits management company, and Senior Vice President and Chief Financial Officer of Wellpoint Health Networks, Inc. and Blue Cross of California. He earned a bachelor’s degree in accounting from Brigham Young University.

 

For information regarding certain related-party transactions, please refer to the section entitled “CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS.”

 

Vote Required and Recommendation of the Board

 

The two nominees receiving the highest number of affirmative “FOR” votes at the meeting (a plurality of votes cast) will be elected to serve as directors. Votes withheld from any director nominee will be counted for purposes of determining the presence or absence of a quorum, but have no other legal effect under Delaware law.

 

If you sign your proxy or voting instruction card but do not give instructions with respect to the voting of directors, your shares will be voted for the two nominees recommended by the Board. If you wish to give specific instructions with respect to the voting of directors, you may do so by indicating your instructions on your proxy or voting instruction card. The Board expects that each nominee will be available to serve as a director. In the event Messrs. Ryan or Westover become unavailable, however, the proxy holders will be authorized to vote for any nominee designated by the Board, unless the Board chooses to reduce the number of directors serving on the Board. In the event that additional persons are nominated for election as directors, the proxy holders intend to vote all proxies received by them in such a manner as to assure the election of Messrs. Ryan and Westover.

 

OUR BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE ELECTION OF MR. RYAN AND MR. WESTOVER.

 

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PROPOSAL TWO

RATIFICATION OF APPOINTMENT OF THE INDEPENDENT AUDITORS

 

The Audit Committee has appointed KPMG LLP, certified public accountants, as our independent auditors for the year ending December 31, 2004. KPMG has been our independent auditors since July 1, 2002, when, upon recommendation of the Audit Committee, the Board unanimously approved the dismissal of Arthur Andersen LLP (our independent auditors since 1995) and appointed KPMG as our new independent auditors. Although it is not required to do so, the Audit Committee wishes to submit the appointment of KPMG for stockholder ratification at the Annual Meeting. Notwithstanding the appointment or a ratification, the Audit Committee, in its discretion, may direct the appointment of new independent auditors at any time during the year without notice to, or the consent of, our stockholders, if the Audit Committee determines that such a change would be in our and our stockholders’ best interest. If the stockholders do not ratify the appointment, the Audit Committee will reconsider its selection.

 

Representatives of KPMG will be present at the Annual Meeting, will have the opportunity to make a statement if they desire and will be available to respond to appropriate questions.

 

During the year ended December 31, 2001, and the subsequent interim period of 2002 through the date of the dismissal of Arthur Andersen, there was no disagreement between us and Arthur Andersen on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreement, if not resolved to Arthur Andersen’s satisfaction, would have caused Arthur Andersen to make reference to the subject matter of such disagreement in its reports, and there occurred no reportable event as defined in Item 304(a)(1)(v) of Regulation S-K promulgated under the Securities Exchange Act of 1934.

 

The audit report of Arthur Andersen on our consolidated financial statements for the year ended December 31, 2001 did not contain an adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles.

 

During the fiscal year ended December 31, 2001, and the subsequent interim periods of 2002 through the appointment of KPMG, we did not consult with KPMG regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

 

In accordance with the requirements of Item 304 of Regulation S-K, we submitted this disclosure to Arthur Andersen and KPMG and presented them with the opportunity to include a statement in this proxy solicitation if they believe the above statements are incorrect or incomplete.

 

Audit Fees

 

For the years ended December 31, 2003 and 2002, we paid or have accrued fees to KPMG. Audit fees include the annual audit, quarterly reviews, accounting consultation, statutory audits, and review of registration statements and consents in connection with same. Audit-related fees include employee benefit plan audits, due diligence assistance and accounting consultation on proposed transactions. Tax fees include U.S., foreign and state income tax preparation and tax consultation. There were no fees for financial information systems design and implementation in 2003 or 2002. The Audit Committee believes KPMG’s independence has not been impaired by their non-audit services. A summary of fees paid or accrued to KPMG for 2003 and 2002 appears below:

 

 

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It is the policy of the Audit Committee to pre-approve audit, audit-related, tax and non-audit services not prohibited by law to be performed by the independent auditors of Sonic Innovations. The Audit Committee is authorized to delegate the pre-approval of such services to an individual member of the Audit Committee, provided that such individual shall report any decisions to pre-approve such services and fees to the full Audit Committee at its next regularly scheduled meeting.

 

Vote Required and Recommendation of the Board

 

Ratification of the appointment of KPMG LLP as our independent auditors for the 2004 fiscal year requires the affirmative vote of a majority of the shares of Sonic Innovations common stock present in person or represented by proxy and entitled to be voted at the Annual Meeting. Abstentions have the same effect as a vote against the proposal.

 

OUR BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” RATIFICATION OF KPMG LLP AS OUR INDEPENDENT AUDITORS FOR THE 2004 FISCAL YEAR.

 

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PROPOSAL THREE

APPROVAL OF THE AMENDED AND RESTATED 2000 STOCK PLAN

 

We are asking stockholders to approve our Amended and Restated 2000 Stock Plan (the “Plan”) so that we may use it to achieve the Company’s goals and also receive a federal income tax deduction for certain compensation paid under the Plan. We propose to allow us to grant a wider range of awards under the Plan, including stock appreciation rights, performance shares and performance units and to extend the term of the Plan until March 11, 2014. The Board of Directors approved these amendments to the Plan in March 2004, subject to approval from the stockholders at the Annual Meeting. The Board also approved amendments to the Plan in March 2004 to restrict the Company’s use of the Plan and limit its dilutive effect, including (i) requiring stockholder consent to reprice outstanding stock options or stock appreciation rights and/or institute an option or stock appreciation right exchange program, and (ii) limiting the total number of shares that may be covered by grants of awards with an exercise or purchase prices less than 100% of fair market value to no more than 30% of the shares available for issuance under the Plan. If approved, the Plan replaces the current 2000 Stock Plan (the “Current Plan”) in its entirety.

 

We strongly believe that the approval of the Plan is essential to our continued success. Our employees are our most valuable asset. Stock options and other awards such as those provided under the Plan are vital to our ability to attract, retain and motivate outstanding and highly skilled individuals to further the Company’s goals. We also believe the Plan will help us to increase stockholder value by enabling us to more directly link some of the vesting of awards to our performance. We will also be able to receive a federal income tax deduction for certain compensation paid under the Plan.

 

Summary of the Plan

 

The following paragraphs provide a summary of the principal features of the Plan and its operation. The following summary is qualified in its entirety by reference to the Plan as set forth in Appendix A.

 

Background and Purpose of the Plan

 

The Plan permits the grant of the following types of incentive awards: (1) stock options; (2) stock purchase rights; (3) stock appreciation rights; (4) performance shares; and (5) performance units (individually, each an “Award”). The Plan is intended to help the Company attract and retain the best available personnel for positions of substantial responsibility, provide additional incentives to employees, directors and consultants, and promote the success of the Company.

 

Administration of the Plan

 

The Compensation Committee of the Board (the “Administrator”) will administer the Plan. Members of the Compensation Committee generally must qualify as “outside directors” under Section 162(m) of the Internal Revenue Code (so that the Company is entitled to receive a federal tax deduction for certain compensation paid under the Plan) and must meet such other requirements as are established by the Securities and Exchange Commission for plans intended to qualify for exemption under Rule 16b-3. (For the Plan to qualify for exemption under Rule 16b-3, members of the Compensation Committee must be “non-employee directors”). Notwithstanding the foregoing, the Board also may appoint one or more separate committees (whose members do not have to meet the previously discussed qualifications) to administer the Plan with respect to employees who are not officers or directors of the Company.

 

Subject to the terms of the Plan, the Administrator has the sole discretion to select the employees, directors and consultants who will receive Awards, determine the terms and conditions of Awards (for example, the exercise price and vesting schedule), and interpret the provisions of the Plan and outstanding Awards.

 

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A total of 5,000,000 shares of our common stock (“Shares”) are reserved for issuance under the Current Plan. As of March 8, 2004, 666,056 Shares were available for future issuance. No more than 30% of the Shares reserved for issuance under the Plan may be issued pursuant to Awards with an exercise price or purchase price less than 100% of fair market value on the date of grant. Shares that are returned to the Current Plan as a result of termination, expiration or forfeiture will be available for issuance under the Plan.

 

If an Award expires or is cancelled without having been fully exercised or vested, the unvested or cancelled Shares generally will be returned to the available pool of Shares reserved for issuance under the Plan. Also, if the exercise or purchase price of an Award is paid through the tender of Shares, or if Shares are withheld to satisfy a withholding obligation, the number of Shares available for issuance shall be reduced by the net number of Shares issued. If we experience a stock dividend, reorganization or other change in our capital structure, the Administrator has discretion to adjust the number of Shares available for issuance under the Plan, the outstanding Awards, and the per-person limits on Awards, as appropriate to reflect the stock dividend or other change.

 

Eligibility to Receive Awards

 

The Administrator selects the employees, directors and consultants who will be granted Awards under the Plan. The actual number of individuals who will receive an Award under the Plan cannot be determined in advance because the Administrator has the discretion to select the participants.

 

Stock Options

 

A stock option is the right to acquire Shares at a fixed exercise price for a fixed period of time. Under the Plan, the Administrator may grant nonstatutory stock options and/or incentive stock options (which entitle employees, but not the Company, to more favorable tax treatment). The Administrator will determine the number of Shares covered by each option, but during any fiscal year of the Company, no participant may be granted options covering more than 500,000 Shares. Notwithstanding the 500,000 Share limit, a participant may be granted options covering an additional 500,000 Shares in connection with his or her initial service.

 

The exercise price of the Shares subject to each option is set by the Administrator but cannot be less than 100% of the fair market value (on the date of grant) of the Shares covered by incentive stock options or nonstatutory options intended to qualify as “performance based” under Section 162(m) of the Internal Revenue Code. In addition, the exercise price of an incentive stock option must be at least 110% of fair market value if (on the grant date) the participant owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its subsidiaries. The aggregate fair market value of the Shares (determined on the grant date) covered by incentive stock options that first become exercisable by any participant during any calendar year also may not exceed $100,000.

 

An option granted under the Plan generally cannot be exercised until it vests. Options become exercisable at the times and on the terms established by the Administrator. The Administrator also determines when options expire, subject to the limitation that the term of an option may be no more than 10 years from the grant date (and, in the case of an incentive stock option granted to a participant who owns stock possessing more than 10% of the total combined voting power of all classes of stock of the Company or any of its subsidiaries, no more than 5 years).

 

The exercise price of each option granted under the Plan must be paid in full at the time of exercise. The exercise price may be paid in any form as determined by the Administrator, including, but not limited to, cash, check, promissory note, surrender of shares that meet conditions established by the Administrator to avoid adverse accounting consequences and consideration received through a cashless exercise program.

 

The Administrator may offer to buy out previously granted options at any time. However, options cannot be repriced nor can an option exchange program be implemented without first obtaining stockholder approval.

 

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Stock Purchase Rights

 

Stock purchase rights (also referred to as restricted stock) are Shares that vest in accordance with the terms and conditions established by the Administrator. The Administrator will determine the purchase price to be paid for the Shares, the number of Shares subject to stock purchase rights and any other terms and conditions of the stock purchase rights (including the vesting schedule); provided, however, that no participant may be granted stock purchase rights covering more than 500,000 Shares in any one fiscal year of the Company.

 

Stock Appreciation Rights

 

Stock appreciation rights grant the participant the right to receive an amount equal to (1) the number of shares exercised, times (2) the amount by which the Company’s stock price exceeds the exercise price. An individual will be able to profit from a stock appreciation right only if the fair market value of the stock increases above the exercise price. No participant may be granted stock appreciation rights covering more than 500,000 Shares in any fiscal year of the Company, except that a participant may receive stock appreciation rights covering an additional 500,000 Shares in connection with his or her initial employment.

 

The Administrator determines the terms and conditions of stock appreciation rights, including the exercise price and when the stock appreciation right expires, subject to the limitation that no stock appreciation right may have a term of more than 10 years.

 

The Administrator may offer to buy out previously granted stock appreciation rights at any time. However, the exercise price of outstanding stock appreciation rights may not be reduced without stockholder consent.

 

Performance Units and Performance Shares

 

Performance units and performance shares result in a payment to a participant if performance objectives are achieved or the Awards otherwise vest. The Administrator determines the terms and conditions of performance units and performance shares, including the applicable performance objectives (which may be solely service-based); provided, however, that any period for measuring performance will be at least 12 months. Each performance unit and performance share generally has an initial value equal to the fair market value of one Share on the date of grant. The Administrator will determine the number of performance units and performance shares granted to any participant; provided, however, that during any fiscal year of the Company, no participant may be granted performance units with an initial value greater $3 million or be granted more than 500,000 performance Shares.

 

Performance Goals

 

Under Section 162(m) of the Internal Revenue Code, the annual compensation paid to our Chief Executive Officer and to each of our other four most highly compensated executive officers may not be deductible to the extent it exceeds $1 million. However, we are able to preserve the deductibility of compensation in excess of $1 million if the conditions of Section 162(m) are met. These conditions include stockholder approval of the Plan, setting limits on the number of Awards that any individual may receive, and for Awards other than options, establishing performance criteria that must be met before the Award will vest or be paid.

 

We have designed the Plan so that it permits us to pay compensation that qualifies as performance-based under Section 162(m). Thus, the Administrator (in its discretion) may make performance goals applicable to a participant with respect to an Award. At the Administrator’s discretion, one or more of the following performance goals may apply: cash flow, customer satisfaction, earnings, gross margin, market price of stock, market share, net income, operating income, operating margin, return on capital, return on equity, return on net assets and sales. Any criteria used may be measured, as applicable, in relative terms (including passage of time and/or against another company or companies), on a per-share basis, against the performance of the Company as a whole or any segment of the Company, and on a pre-tax or after-tax basis.

 

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Deferred Stock Units

 

Shares acquired upon exercise (or vesting, as applicable) of a stock purchase right, performance shares and performance units may be paid-out in installments or on a deferred basis, as determined by the Administrator. In the event the Administrator decides to permit deferral, the Administrator shall establish rules and procedures governing how a participant may elect to defer payout.

 

Change of Control

 

In the event of a “change in control” of the Company, the successor corporation will either assume or provide a substitute award for each outstanding Award. In the event the successor corporation refuses to assume or provide a substitute award, the Award immediately will vest and become exercisable (if applicable) as to all of the Shares (or cash) subject to the Award. In addition, if an option or stock appreciation right becomes fully vested and exercisable in lieu of assumption or substitution, the Administrator will provide at least a 15 day notice and the Award will terminate upon the expiration of such notice period.

 

Certain officers of the Company may be granted limited stock appreciation rights in connection with their options. Upon a “hostile take-over,” each outstanding option with a limited stock appreciation right that has been in effect for at least six months automatically shall be cancelled and the stock appreciation right automatically shall be exercised. The Shares subject to the cancelled options shall not be available for future issuance in the event the Plan is assumed and continued in connection with the hostile take-over.

 

Awards to be Granted to Certain Individuals and Groups

 

The number of Awards that an employee or consultant may receive under the Plan is in the discretion of the Administrator and therefore cannot be determined in advance. Our directors and executive officers have an interest in this proposal because they are eligible to receive discretionary Awards under the Plan. To date, only stock options have been granted under the Current Plan. The following table sets forth the aggregate number of Shares subject to options granted during 2003 and the average per share exercise price of such options.

 

 

Limited Transferability of Awards

 

Awards granted under the Plan generally may not be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the applicable laws of descent and distribution.

 

Federal Tax Aspects

 

The following paragraphs are a summary of the general federal income tax consequences to U.S. taxpayers and the Company of Awards granted under the Plan. Tax consequences for any particular individual may be different.

 

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Nonstatutory Stock Options.

 

A participant does not recognize taxable income upon grant of a nonstatutory stock option. Upon exercise, the participant recognizes ordinary income in an amount equal to the excess of the fair market value (on the exercise date) of the Shares purchased over the exercise price of the option. Any additional gain or loss recognized upon any later disposition of the Shares is capital gain or loss.

 

Incentive Stock Options.

 

A participant does not recognize taxable income upon the grant or exercise of an incentive stock option (except for purposes of the alternative minimum tax, in which case taxation upon exercise is the same as for nonstatutory stock options). If the participant exercises the option and then later sells or otherwise disposes of the Shares more than two years after the grant date and more than one year after the exercise date, the difference between the sale price and the exercise price is taxed as capital gain or loss. If the participant exercises the option and then later sells or otherwise disposes of the Shares before the end of the two-year or one-year holding periods described above, he or she generally recognizes ordinary income at the time of the sale equal to the fair market value of the Shares on the exercise date (or the sale price, if less) minus the exercise price of the option. Any further gain or loss is capital gain or loss.

 

Stock Appreciation Rights.

 

A participant does not recognize taxable income upon grant of a stock appreciation right. Upon exercise, the participant recognizes ordinary income in an amount equal to the amount of cash received and the fair market value of any Shares received. Any additional gain or loss recognized upon any later disposition of the Shares would be capital gain or loss.

 

Stock Purchase Rights, Performance Units and Performance Shares.

 

A participant does not recognize taxable income upon grant of a stock purchase right, performance units or performance shares. Instead, he or she recognizes ordinary income at the time of vesting equal to the fair market value (on the vesting date) of the Shares or cash received minus any amount paid for the Shares. (If payout of an Award is deferred, a participant will not have taxable income until the Award is paid-out.) For restricted stock (that was acquired pursuant to a stock purchase right) only, a participant instead may elect to be taxed at the time of grant.

 

Tax Effect for the Company.

 

The Company generally will be entitled to a tax deduction in connection with an Award in an amount equal to the ordinary income realized by a participant and at the time the participant recognizes such income (for example, the exercise of a nonstatutory stock option). As discussed above, Section 162(m) of the Internal Revenue Code limits the deductibility of compensation paid to our Chief Executive Officer and to each of our four most highly compensated executive officers. However, the Plan has been designed to permit the Administrator to grant Awards that qualify as performance-based compensation for purposes of satisfying the conditions of Section 162(m), thereby permitting the Company to receive a federal income tax deduction in connection with such Awards.

 

Amendment and Termination of the Plan

 

The Board generally may amend or terminate the Plan at any time and for any reason. Amendments will be contingent on stockholder approval if required by applicable law, stock exchange listing requirements, or if so promised by the Board. By its terms, the Plan automatically terminates in 2014.

 

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Summary

 

We believe strongly that the approval of the Plan is essential to our continued success. Our employees are our most important asset. Awards such as those provided under the Plan constitute an important incentive for key employees of the Company and help us to attract, retain and motivate people whose skills and performance are critical to our success.

 

Vote Required and Recommendation of the Board

 

The approval of the Plan requires the affirmative vote of the holders of a majority of the shares of the Company’s common stock that are present in person or by proxy and entitled to vote at the Annual Meeting.

 

OUR BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” THE APPROVAL OF THE AMENDED AND RESTATED 2000 STOCK PLAN.

 

REPORT OF THE COMPENSATION COMMITTEE ON

EXECUTIVE COMPENSATION

 

Overview

 

The Compensation Committee of the Board of Directors (the “Committee”) is responsible for establishing compensation policy and administering the compensation programs for the Company’s executive officers including the Named Executive Officers.

 

The Compensation Committee charter describes in greater detail the full responsibilities of the Compensation Committee and is available on our website at http://www.sonici.com/corporategovernance. The Committee is comprised solely of independent directors as defined by the listing standards of the National Association of Securities Dealers. Further, Committee members have no “interlocking” relationships as defined by Securities and Exchange Commission regulations. All decisions by the Committee relating to the compensation of the Company’s executive officers are reviewed by the Board.

 

The Committee evaluates the Company’s executive compensation programs, mainly in relation to the programs offered by other medical equipment and supplies companies. This analysis is intended to ensure that the Committee has sufficient comparative data with respect to overall compensation levels. The Company reviews the reasonableness of total compensation levels using public information from medical equipment and supplies companies and several publicly available surveys. Certain of these companies are included in the S&P Healthcare (Equipment and Supplies) Index, which is used for the purpose of comparing stockholder returns in the stockholder return performance graph. The Committee’s objective is to attract and retain talented individuals by targeting total executive compensation in line with medical equipment and supplies peer group companies.

 

In recognition of Section 162(m) of the Internal Revenue Code, which limits the deductibility of certain executive compensation to $1,000,000 per year, the Committee will, to the extent programs can be excluded from the $1,000,000 limit and to the extent no pre-existing, contractual obligations exist, take the necessary actions to secure full tax deductibility under the Internal Revenue Code.

 

Compensation Philosophy

 

The hearing aid market is highly competitive. There are six hearing aid manufacturers that are substantially larger than the Company. Achieving increased revenues and profitability in this competitive market presents significant challenges for the Company’s management. The Committee believes that, if the Company is to continue its growth, bring new products to market, gain market share, achieve greater revenues and improve profitability, its executive compensation program must have the flexibility to attract and retain high quality, motivated employees. Furthermore, the executive compensation program must provide incentives that will reward key managers for aggressively pursuing the actions necessary to improve the Company’s performance and enhance long-term stockholder value.

 

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The Company’s executive compensation program is based upon a pay-for-performance philosophy. There are currently three components to the Company’s executive compensation program: base salary; an annual cash bonus opportunity; and long-term stock-based incentives in the form of stock options. The Company is committed to a strong link between its operating and strategic goals and its compensation program. The financial goals for certain elements of the compensation program are reviewed by the Committee in conjunction with its review of the Company’s annual operating plan.

 

Base Salary

 

An executive’s base salary is determined by an assessment of his current performance, sustained performance, advancement potential, experience, responsibility, scope and complexity of the position, current salary in relation to the range designated for the job and salary levels for comparable positions at peer group companies. Additionally, the Committee sets base salaries for executive officers based on the executive’s contribution to the Company’s success through operational improvements and strategic initiatives. Factors considered in determining base salary are not assigned pre-determined relative weights.

 

Annual Incentive Awards

 

Payments under the Company’s bonus program are based on the Company’s achievement of Company performance goals as approved by the Committee and each executive’s achievement of individual objectives as approved by the Chief Executive Officer. The Chief Executive Officer’s individual objectives are approved by the Chairman of the Board. The bonus program provides for a normal bonus of up to a maximum of 55% of base pay, with an over-achievement bonus opportunity based on Company performance in excess of targets. For 2003, the Company performance goals related to targeted levels of net sales and earnings per share, each of which accounted for one-third of the participant’s bonus. The remaining one-third of the participant’s bonus related to the participant’s individual objectives. Bonuses for 2003 reflect the fact that net sales targets were achieved principally as a result of acquisition activity, earnings per share targets were achieved at a low level principally as a result of acquisition activity and individual objectives were generally achieved. In addition, discretionary bonuses were recommended by the Committee and approved by the Board for the executive officers as a result of the Company’s improving operational and financial performance through the year, culminating in record fourth quarter net sales and net income.

 

It is anticipated for 2004 that the Company’s performance goals will also relate to net sales and earnings per share targets, and a component of the bonus will be tied solely to achievement of individual objectives.

 

Stock Options

 

The Company’s philosophy regarding equity-based compensation is that equity-based incentives should be directly related to the creation of stockholder value, thus providing a strong link between management and stockholders. The Company believes that equity-based incentives are very consistent with the entrepreneurial spirit the Company seeks in its executive team. In support of this philosophy, the Company has awarded stock options to its executive officers.

 

Stock options are generally granted annually consistent with the Company’s objective to provide (i) a long-term equity interest in the Company, and (ii) an opportunity for a greater financial reward if long-term performance is sustained. To encourage a long-term perspective, stock options cannot be exercised immediately. Generally, stock options become exercisable over a four-year period. The number of shares subject to stock options granted to each executive officer is approved by the Committee. Individual grant size is dependent on the executive officer’s experience, position and level of responsibility within the Company, an evaluation of the executive officer’s performance and an assessment of the executive officer’s ability to positively impact the Company’s future business plans. No pre-assigned relative weight is ascribed to any of these factors.

 

 

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Chief Executive Officer Compensation

 

Andrew G. Raguskus has been President and Chief Executive Officer of the Company since 1996. Mr. Raguskus’ annual salary at the end of 2003 was $288,000. He has an annual normal bonus opportunity of up to a maximum of 55% of his base pay, with an over-achievement bonus opportunity based on Company performance in excess of targets. For 2003, Mr. Raguskus received a bonus of $143,000, which included a discretionary amount of $90,200 recommended by the Committee and approved by the Board as a result of the Company’s improving operational and financial performance through the year, culminating in record fourth quarter net sales and net income. Mr. Raguskus’ salary and bonus opportunity were considered to be reasonable in comparison to similar salaries and bonus structures for medical equipment and supplies company chief executive officers. In 2003, Mr. Raguskus was granted stock options to purchase 80,000 shares of common stock with an exercise price of $2.86 per share and 90,000 shares of common stock with an exercise price of $6.29 per share. The Committee will consider future salary and bonus adjustments and stock option grants for the Chief Executive Officer based on the Company’s operating performance, as well as the compensation packages of similarly positioned medical equipment and supplies company chief executive officers. The Committee believes that the Chief Executive Officer should have an equity interest in the Company. As of March 8, 2004, Mr. Raguskus beneficially owned 551,731 shares of the Company’s common stock.

 

Conclusion

 

Consistent with its compensation philosophy, the Committee believes the executive officer compensation program provides appropriate incentives to attain solid financial performance and is closely aligned with stockholder interests. The Committee believes that the Company’s compensation program directs the efforts of the executive officers toward the continued achievement of Sonic Innovations’ growth and profitability for the benefit of the Company’s stockholders.

 

Compensation Committee:

 

Anthony B. Evnin, Chairman

Samuel L. Westover

 

REPORT OF THE AUDIT COMMITTEE

 

The Audit Committee assists the Board in fulfilling its responsibilities for general oversight of the integrity of the Company’s financial statements, the Company’s compliance with legal and regulatory requirements, and the independent auditors’ qualifications, independence and performance. The Audit Committee manages the Company’s relationship with its independent auditors (who report directly to the Audit Committee). The Audit Committee has the authority to (i) obtain advice and assistance from outside legal, accounting or other advisors as the Audit Committee deems necessary to carry out its duties, and (ii) receive appropriate funding, as determined by the Audit Committee, from the Company for such advice and assistance. The Audit Committee charter describes in greater detail the full responsibilities of the Audit Committee and was filed as an exhibit to last year’s proxy statement and is available on our website at http://www.sonici.com/corporategovernance.

 

Management is responsible for the Company’s financial reporting process, including its system of disclosure controls and internal controls, and for the preparation of consolidated financial statements in accordance with accounting principles generally accepted in the United States. The Company’s independent auditors are responsible for auditing those financial statements. The Audit Committee monitors and reviews these processes.

 

The Committee has reviewed and discussed with management and KPMG LLP the Company’s audited financial statements as of and for the year ended December 31, 2003. The Audit Committee has discussed with KPMG LLP the matters required to be discussed by the American Institute of Certified Public Accountants’

 

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Statement on Auditing Standards No. 61, “Communication with Audit Committees,” as well as those communications specifically required by Securities and Exchange Commission rules and regulations. The Audit Committee has also received the written disclosures and the letter from KPMG LLP required by the Independence Standards Board’s Independence Standard No. 1, “Independence Discussions with Audit Committees,” and has discussed with KPMG LLP its independence from the Company and management.

 

Based on the reviews and discussions referred to above, the Audit Committee has recommended to the Board that the Company’s 2003 audited financial statements be included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003 for filing with the Securities and Exchange Commission.

 

Audit Committee:

 

Samuel L. Westover, Chairman

Lewis S. Edelheit

Anthony B. Evnin

 

STOCKHOLDER RETURN PERFORMANCE GRAPH

 

The graph and table below compare the cumulative total stockholder return on Sonic Innovations’ common stock from May 2, 2000, the date of our initial public offering, with the cumulative total return on the S&P 500 Composite Index and the S&P Healthcare (Equipment and Supplies) Index over the same period. The graph and table assume the investment of $100 in each of Sonic Innovations’ common stock, the S&P 500 Composite Index and the S&P Healthcare (Equipment and Supplies) Index on May 2, 2000 and that all dividends were reinvested.

 

Comparison of Cumulative Total Return Among Sonic Innovations, S&P 500 Composite Index,

and S&P Healthcare (Equipment and Supplies) Index

 

 

 

 

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EXECUTIVE COMPENSATION AND OTHER INFORMATION

 

Summary of Cash and Certain Other Compensation

 

The following table shows the cash compensation and certain other compensation paid or accrued by us to our Chief Executive Officer and each of our other four most highly compensated executive officers (collectively, the “Named Executive Officers”) during fiscal years 2003, 2002 and 2001.

 

SUMMARY COMPENSATION TABLE

 

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Option/SAR Grants in Last Fiscal Year

 

The following table sets forth information with respect to stock options granted during the fiscal year ended December 31, 2003 to each of the Named Executive Officers. All options were granted under our 2000 Stock Plan at exercise prices equal to the fair market value of our common stock on the dates of grant. We have never granted any stock appreciation rights.

 

The percentage of options granted is based on an aggregate of 1,461,250 options granted by us during the fiscal year ended December 31, 2003 to our employees, including the Named Executive Officers. The potential realizable value amounts in the last two columns of the table represent hypothetical gains that could be achieved for the respective options if exercised at the end of the ten-year 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 Securities and Exchange Commission 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 our common stock and the option holder’s continued employment through the vesting period.

 

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OPTION GRANTS IN LAST FISCAL YEAR

 

 

Options granted in 2003 vest at the rate of 1/4th one year from the date of grant and 1/48th per month thereafter with full vesting achieved in four years, except for Mr. Wilson’s option pertaining to 125,000 shares, all or a part of which shall vest on July 31, 2004, provided that certain performance objectives relating to sales and profits of the Company’s German operation, which was acquired in May 2003, are achieved. In the event such performance objectives are not achieved, the options vest at the end of four years.

 

Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values

 

The following table sets forth for each of the Named Executive Officers the number and value of (i) options exercised in 2003 and (ii) exercisable and unexercisable stock options held at December 31, 2003.

 

OPTION EXERCISES IN LAST FISCAL YEAR AND

FISCAL YEAR-END OPTION VALUES

 

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The value realized on shares acquired on exercise was determined by multiplying the number of shares acquired by the difference between the exercise price per share and the market value per share on the exercise date. The value of unexercised “in-the-money” options was determined by multiplying the number of shares subject to such options by the difference between the exercise price per share and $6.45, the closing price per share of our common stock on the Nasdaq National Market on December 31, 2003.

 

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CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

Employment Agreements and Change of Control Arrangements

 

We have agreements with each of our executive officers, including each of the Named Executive Officers (except Mr. Wilson), which are intended to provide for continuity of management in the event of a change of control of the Company. The agreements provide that covered executive officers are entitled to certain severance benefits following a change in control of the Company (as defined in the agreements). If, at any time beginning 20 days before and ending 12 months after a change in control, the covered executive officer is involuntarily terminated by the Company (as defined in the agreements), then the executive will receive a severance payment equal to 12 months of the executive’s base monthly salary (24 months in the case of Mr. Raguskus). For a period of up to one year, the covered executive officer will receive health and dental insurance coverage substantially similar to the coverage provided prior to termination. In addition, (i) all outstanding and unvested stock options granted to the covered executive officer prior to the change in control will become fully vested and exercisable, and (ii) the right of repurchase, if any, by the Company (or its successor) with respect to any Company stock that was purchased by the executive prior to the change in control will lapse in its entirety as of the date of termination. Under the terms of Mr. Wilson’s employment agreement, he will receive a severance package of one year’s salary, bonus and benefits in the event that we terminate his employment. In the event that Mr. Wilson is terminated following a change of control of the Company, he will receive two year’s salary and bonus and all of his then outstanding stock options will become fully vested and exercisable.

 

Indemnification Agreements

 

We indemnify our directors and officers against certain costs that could be incurred if they were made, or threatened to be made, a party to a legal proceeding because of their official status as a director or officer. The indemnification agreements, together with our charter documents provide for indemnification to the fullest extent permitted by Delaware law.

 

Stock Option Grants

 

In 2003, we granted stock options to purchase an aggregate of 934,000 shares of our common stock to our executive officers and directors. Such options were granted at exercise prices ranging from $2.86 to $7.11 per share, in each case equal to the fair market value of our common stock on the date of grant.

 

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OTHER INFORMATION

 

Expenses of Solicitation

 

Sonic Innovations will bear the costs of soliciting proxies, including the reimbursement to record holders of their expenses for postage in forwarding proxy materials to beneficial owners. Directors, officers and employees of Sonic Innovations, without extra compensation, may solicit proxies personally or by mail, telephone or fax.

 

Householding

 

We have adopted a procedure approved by the Securities and Exchange Commission called “householding.” Under this procedure, stockholders of record who have the same address and last name receive only one copy of our proxy material unless such stockholders notify us that they would like to continue to receive individual copies. This reduces our printing costs and postage fees. If because of multiple accounts you are still receiving multiple copies of our proxy material at a single address and wish to receive a single copy, or if you currently participate in householding but prefer to receive separate copies of future materials; and your shares are registered directly through the Company’s stock transfer agent, please contact American Stock Transfer at (718) 921-8380 or inform them in writing at 6201 15^th Avenue, Brooklyn, NY 11219. If your shares are held through a brokerage account, please contact your broker directly.

 

Deadline for Receipt of Stockholder Proposals and Director Nominations

 

Stockholders are entitled to present proposals for action at a forthcoming annual meeting if they comply with the requirements of our Bylaws and the rules established by the Securities and Exchange Commission (the “SEC”) under the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). In order for a stockholder proposal to be considered for inclusion in Sonic Innovations’ proxy statement for next year’s annual meeting, the written proposal must be received by the Secretary at our offices no later than one hundred twenty (120) days prior to the date on which we mailed this Proxy Statement to stockholders in connection with this year’s Annual Meeting. Assuming a mailing date of April 5, 2004, the deadline for stockholder proposals for next year’s annual meeting will be December 6, 2004. In the event that the date of next year’s annual meeting is changed by more than thirty (30) days from the date of this year’s Annual Meeting, notice by the stockholder to be timely must be received no later than the close of business on the later of one hundred twenty (120) calendar days in advance of such annual meeting or ten (10) calendar days following the date on which public announcement of the date of next year’s annual meeting is first made. A stockholder’s notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting: (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting; (ii) the name and address, as they appear on our books, of the stockholder proposing such business; (iii) the class and number of shares of our stock which are beneficially owned by the stockholder; (iv) any material interest of the stockholder in such business; and (v) any other information that is required to be provided by the stockholder pursuant to Regulation 14A under the Exchange Act.

 

For any proposal that is not submitted for inclusion in next year’s proxy statement but instead is sought to be presented directly at next year’s annual meeting, SEC rules permit management to vote proxies in its discretion if Sonic Innovations: (a) receives notice before the close of business on December 6, 2004 and advises stockholders in next year’s proxy statement about the nature of the matter and how management intends to vote on the matter, or (b) does not receive notice of the proposal prior to the close of business on December 6, 2004.

 

All submissions to, or requests of, the Secretary should be made to our principal offices: 2795 East Cottonwood Parkway, Suite 660, Salt Lake City, Utah 84121.

 

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Other

 

Sonic Innovations’ 2003 Annual Report on Form 10-K, containing the audited financial statements as of and for the year ended December 31, 2003, is being sent to stockholders together with this Proxy Statement.

 

SONIC INNOVATIONS WILL FURNISH TO STOCKHOLDERS WITHOUT CHARGE A COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2003, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, UPON RECEIPT OF WRITTEN REQUEST ADDRESSED TO: SECRETARY, SONIC INNOVATIONS, INC., 2795 EAST COTTONWOOD PARKWAY, SUITE 660, SALT LAKE CITY, UTAH 84121.

 

The Board of Directors knows of no other matters to be presented at the Annual Meeting. If any other business properly comes before the Annual Meeting or any adjournment thereof, the proxies will vote on that business in accordance with their best judgment.

 

By Order of the Board of Directors

 

Stephen L. Wilson

Senior Vice President and

Chief Financial Officer and Secretary

 

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Appendix A

 

SONIC INNOVATIONS, INC.

 

2000 STOCK PLAN

 

(Amended and restated as of March 11, 2004)

 

 

 

 

 

Awards granted under the Plan may be Incentive Stock Options, Nonstatutory Stock Options, Restricted Stock, Stock Appreciation Rights, Performance Shares, Performance Units or Deferred Stock Units, as determined by the Administrator at the time of grant.

 

 

 

 

 

 

 

 

 

 

 

 

 

A-1

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A-2

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A-3

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If an Award expires or becomes unexercisable without having been exercised in full, or, with respect to Restricted Stock, Performance Shares, Performance Units or Deferred Stock Units, is forfeited back to or repurchased by the Company, the unpurchased Shares (or for Awards other than Options and SARs, the forfeited or repurchased Shares) which were subject thereto shall become available for future grant or sale under the Plan (unless the Plan has terminated). With respect to SARs, only Shares actually issued pursuant to an SAR shall cease to be available under the Plan; all remaining Shares under SARs, shall remain available for future grant or sale under the Plan (unless the Plan has terminated). However, Shares that have actually been issued under the Plan under any Award 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, Performance Shares, Performance Units or Deferred Stock Units are repurchased by the Company at their original purchase price or are forfeited to the Company, such Shares shall become available for future grant under the Plan. To the extent an Award under the Plan is paid out in cash rather than stock, such cash payment shall not result in reducing the number of Shares available for issuance under the Plan.

 

 

 

 

 

 

 

 

 

 

 

 

 

A-4

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A-5

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The foregoing limitations shall be adjusted proportionately in connection with any change in the Company’s capitalization as described in Section 17(a).

 

If an Option or SAR 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 17(c)), the cancelled Option or SAR will be counted against the limits set forth in subsections (i) and (ii) above.

 

 

 

 

 

 

 

 

 

A-6

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A-7

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A-8

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A-9

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A-10

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A-11

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A-12

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A-13

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A-14

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A-15

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ANNUAL MEETING OF STOCKHOLDERS OF

 

SONIC INNOVATIONS, INC.

 

May 6, 2004

 

Please date, sign and mail

your proxy card in the

envelope provided as soon

as possible.

 

êPlease detach along perforated line and mail in the envelope provided.ê

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SONIC INNOVATIONS, INC.

 

THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS

FOR THE ANNUAL MEETING OF STOCKHOLDERS

TO BE HELD MAY 6, 2004

 

The undersigned hereby appoints Andrew G. Raguskus and Stephen L. Wilson, or either of them, as Proxies, with full power of substitution, to vote all shares of common stock which the undersigned would be entitled to vote if personally present at the Annual Meeting of Stockholders to be held on May 6, 2004 at 9:00 a.m. MDT at the Salt Lake Marriott City Center, 220 South State Street, Salt Lake City, Utah, or any adjournments thereof, and upon any and all matters which may properly be brought before the Annual Meeting or any adjournments thereof, hereby revoking all former proxies.

 

(Continued and to be signed on reverse side.)

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ANNUAL MEETING OF STOCKHOLDERS OF

 

SONIC INNOVATIONS, INC.

 

May 6, 2004

 

PROXY VOTING INSTRUCTIONS

 

 

ê  Please detach along perforated line and mail in the envelope provided IF you are not voting via telephone or the Internet.  ê

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THE BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” THE ELECTION OF DIRECTORS AND “FOR” PROPOSALS 2 AND 3. PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. PLEASE MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE: x