Sonic Innovations Inc. Business Information, Profile, and History

Company Perspectives:

Mission: to be the best hearing aid company in the world. Core Values: we are committed to delivering improved satisfaction to hearing impaired consumers; we are committed to delivering outstanding service & value to hearing aid dispensers; we are committed to continuous innovation; we are committed to practicing high standards of ethics, honesty, and professionalism; we are committed to providing value to our stakeholders.

History of Sonic Innovations Inc.

Sonic Innovations Inc. makes and sells advanced digital hearing aids. The company was launched with digital signal processing (DSP) technology developed by a handful of professors in Utah and California. Sonic has five product lines; four of these--the Natura, Altair, Tribute, and Quartet--are available in a variety of models: behind-the-ear (BTE), in-the-ear (ITE), in-the-canal (ITC), mini-canal (MC), and completely-in-the-canal (CIC). The Adesso, the smallest digital hearing aid on the market, is an instant-fit CIC model. Sonic moved into international markets quickly. Europe ($14.2 million) and the rest of the world ($13.2 million) outside of North America accounted for a significant portion of the company's 2002 revenues of $68 million.

Origins

Sonic Innovations Inc. had its origins in the digital signal processing (DSP) research of Brigham Young University professors Doug Chabries and Richard Christiansen. Chabries developed a new algorithm for processing audio signals. On the way to developing a viable hearing aid, he was assisted by Thomas Stockham, a digital recording pioneer from the University of Utah, and Carver Mead, professor of electrical engineering at the California Institute of Technology. Mead designed the extremely small and powerful computer chip for the hearing aids.

The group formed Sonix Technologies, Inc. in Utah in May 1991 as they sought venture capital backing. Utah's Centers of Excellence program, created in 1987 to help the state's university researchers create commercial businesses, was an important early supporter.

By 1996, Sonix had raised $6 million in start-up money from several private groups. Sonix changed its name to Sonic Innovations Inc. that year, and Andrew Raguskus was made president and CEO in September 1996. Raguskus had formerly been an executive with two California companies: ReSound Corp., a hearing aid maker in Redwood City, and Sonic Solutions, a Navato-based designer of digital audio workstations. By the time of Sonic's first product launch in September 1998, the company had 82 employees. It was based in Murray, Utah, a suburb of Salt Lake City.

First Product in 1998

The company's first product, the Natura hearing aid, was rolled out in September 1998. The units sold for about $5,000 a pair, several times more than lower-end, conventional hearing aids but more than $2,000 less than the Widex Senso, a top-end digital model. Sonic was not the first to market; Oticon, Siemens and Widex were also selling digital units, which had been available since 1996. However, Sonic's product had some distinctive advantages.

Analog hearing aids had changed little since the 1970s, and they had many drawbacks. They amplified all noise equally, sometimes uncomfortably so. The high-pitched shriek of feedback was another unwelcome occurrence. Sonic Innovations revolutionized the industry in two ways. Its hearing aids sounded better than those of the competition, and they were small enough to be barely noticeable.

The Natura's computer chip, said to be the most powerful used in a hearing aid, was capable of processing sound much faster than traditional hearing aids. The Natura had nine channels, versus the three usually found in analog units. This allowed audiologists to dial in reinforcement for the specific frequencies of hearing loss in half-octave increments. This was important, since high frequency pitches were usually the first to be lost. The Natura claimed to help users distinguish conversation from background noise and could be tuned for two different listening environments.

Sonic's new hearing aid also simplified the buying process. Using proprietary EXPRESSfit software, the Natura was programmed via Palm Pilot, helping cut down on fitting time, and some versions were small enough to fit deep inside the ear canal, making them virtually invisible. The Natura's small size was possible due to miniature electronic components from AVX Corp. of Myrtle Beach, S.C.

Sonic faced a ripe market. The Boston Globe reported a survey that estimated half of users were unhappy with their hearing aids. Twenty-seven million people in the United States had problems hearing, yet one survey estimated only 10 to 20 percent of these used a hearing aid. Nevertheless, the worldwide retail market was valued at $5 billion a year, and hearing aid sales were increasing about 5 percent a year. This rate was expected to rise with the aging of the Baby Boomer generation.

During its first twelve months of sales, Sonic took in $30 million, and its loss rose 7 percent to $14.9 million. More than 40 percent of revenues came from one customer, Starkey Laboratories Inc., a hearing aid manufacturer itself.

International in 1999

With more than 300 million people around the world suffering some hearing loss, Sonic moved quickly to penetrate the global market. Distributor M-E Hearing Systems Pty. Ltd. launched the Natura in Australia in November 1999. The next year, Hoya Healthcare Corporation began distributing the company's products in Japan. International sales accounted for 28 percent ($8 million) of Sonic's net revenues in 1999. Sonic's total sales for the year ended December 31, 1999 were $28.7 million, producing a net loss of $14.9 million.

In 1998, Sonic set up a subsidiary to market in Europe. Sonic Innovations A/S was based in Denmark, home to three other leading high-tech hearing aid manufacturers. The company also had offices in Germany and Belgium. By the end of 1999, Sonic had moved its manufacturing operations from Salt Lake City to a new 12,000-square-foot facility in Eagan, Minnesota, a hearing aid industry center. In addition, Sonic moved its headquarters into 50,000 square feet of new office space in Salt Lake City. The company had 125 employees there and 50 in Eagan, totaling 211 employees worldwide.

Public in 2000

Sonic Innovations Inc. listed shares on the NASDAQ stock exchange in May 2000. The fall-off in tech stocks at the time made it an unwelcoming market. However, Sonic's shares rose 50 percent from the original price of $14 in the first day of trading. One of the company's backers attributed this to the fact that the company had "real revenue and real products," uncommon commodities during the dot-com boom and bust. Sonic raised $54 million in the initial public offering.

By this time, the company had 225 employees and had just introduced a second hearing aid line, the Conforma. The Conforma was unique in that its soft foam shell allowed users to be fitted with the hearing aid in a single visit to an audiologist. Others required multiple visits for impressions to be made and the fit of acrylic shells checked over a period of one to two weeks. Sonic likened the convenience to that of the soft contact lens, which had tripled the contact lens market over three decades.

Another innovation introduced during 2000 was noise reduction, first available in the Natura 2SE model. By the end of the year, Sonic had introduced another hearing aid line, the mid-priced Altair.

Sonic also sold components to rival manufacturer Starkey Laboratories Inc. of Minneapolis. Starkey accounted for $7.3 million of Sonic's 1999 revenues. Sales of Sonic's own brands became more important when Starkey announced it was scaling back its orders in late 2000.

Net sales rose 80 percent to $51.7 million in 2000, while gross profit increased 119 percent to $25.5 million. The company posted a net loss of $2.2 million. It had lost $14.4 million the year before.

Sonic continued to acquire international hearing aid companies with distribution networks in 2001 and 2002. Sonic's Australian distributor M-E Hearing Systems had been created by the optometry company Laubman & Pank. After acquiring Laubman & Pank, new owner OPSM Protector sold M-E Hearing Systems and Hearing Aid Specialists Pty. Ltd. to Sonic for $5 million in July 2001. The acquisitions took the Sonic Innovations name. This added about $10 million a year to Sonic's revenues. M-E Hearing had 110 employees at the time of the purchase and produced 15,000 hearing aids a year. Sonic was planning to expand its operations as a supplier for markets in Australia, Southeast Asia, South America, and South Africa.

Sonic acquired seven international businesses in all in 2002; five of these were existing Sonic distributors. Sonic acquired its Danish hearing aid distributor, Omni-ReSound, in February 2002. It instantly gained a significant share of the Canadian market with the October acquisition of Ontario's Sentech Systems and Orsonique of Quebec. Sonic also acquired companies in Switzerland, Austria, the United Kingdom, and the Netherlands in 2002.

First Profits in 2002

The "adesso" instant-fit hearing aid was introduced in March 2002. The adesso was a completely-in-the-canal device that was virtually invisible when worn. It was aimed at first-time hearing aid wearers with mild to moderate hearing loss.

Net sales rose 19 percent in 2002, to $68 million. North American sales accounted for $39.7 million of the total, with the remainder divided between Europe and the rest of the world. The company logged its first profitable year with a net income of $32,000. However, demand in the global hearing aid market had begun to decline significantly.

Sonic countered sales declines by announcing product improvements at an industry convention in April 2003. The company continued to bolster its global distribution network through acquisitions. In May, it agreed to acquire German hearing aid distributor Sanomed Handelsgesellschaft mbH for an initial price of $13 million, plus another $4 million to $5 million based on financial performance. Sanomed's 2002 revenues were about $20 million. Germany was the world's second largest hearing aid market.

Principal Subsidiaries: Audifon U.K. Ltd.; Hearing Aid Specialists Pty Limited (Australia); Hoorcomfort Nederland B.V. (Netherlands); Hoortoestelcentrum Sneek B.V. (Netherlands); Omni ApS (Denmark); Omni Otoplast ApS (Denmark); Sonic Innovations AG (Switzerland); Sonic Innovations A/S (Denmark); Sonic Innovations Canada Ltd.; Sonic Innovations GmbH (Austria); Sonic Innovations Pty Ltd. (Australia); Star Medical Europe B.V. (Netherlands).

Principal Competitors: Phonak S.A.; Siemens GmbH; Starkey Laboratories Inc.; Widex A/S; William Demant Holding A/S.

Chronology

• Key Dates:
• 1991: Sonix Technologies, Inc. is formed to market BYU hearing aid technology.
• 1996: Sonix becomes Sonic Innovations.
• 1998: The company's first product, the Natura hearing aid, is introduced.
• 1999: Sonic begins doing business internationally.
• 2000: Shares begin trading on the NASDAQ exchange; Conforma is introduced.
• 2002: The Adesso instant-fit hearing aid is introduced.