1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- -- Act of 1934
For the quarterly period ended March 31, 1996 or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
- -- Act of 1934
For the transition period from _______ to ________
Commission file number 0-20046
RESOUND CORPORATION
(Exact name of Registrant as specified in its charter)
California 77-0019588
(State of Incorporation) (I.R.S. Employer
Identification No.)
220 Saginaw Drive, Seaport Centre, Redwood City, California 94063
(Address of principal executive offices)
(415) 780-7800
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of Registrant's common stock issued and
outstanding as of May 6, 1996 was 15,783,258 shares.
This document consists of 12 pages of which this is page 1
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Balance Sheets............................................ 3
Condensed Consolidated Statements of Income...................................... 4
Condensed Consolidated Statements of Cash Flows.................................. 5
Notes to Condensed Consolidated Financial Statements ............................ 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations............................................................ 7 - 9
Liquidity and Capital Resources.................................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 10
Item 2. Changes in Securities............................................................ 10
Item 3. Defaults upon Senior Securities.................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders ............................. 10
Item 5. Other Items...................................................................... 11
Item 6. Exhibits......................................................................... 11
SIGNATURES..................................................................................... 12
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
RESOUND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
March 31, December 31,
1996 1995
----------- ------------
(Unaudited) (Note)
Current assets:
Cash and cash equivalents ............................. $ 6,647 $ 5,091
Accounts receivable, net .............................. 18,811 17,746
Inventories ........................................... 18,361 18,466
Prepaid expenses and other ............................ 2,762 2,441
-------- --------
Total current assets ............................... 46,581 43,744
Property and equipment, net .............................. 9,559 9,300
Other assets ............................................. 2,409 2,634
Goodwill ................................................. 26,488 27,692
-------- --------
$ 85,037 $ 83,370
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans and short-term notes payable ............... $ 6,959 $ 7,475
Accounts payable ...................................... 9,085 10,189
Accrued liabilities ................................... 13,693 13,135
Long-term debt, current portion ....................... 2,298 2,962
-------- --------
Total current liabilities .......................... 32,035 33,761
Long-term liabilities:
Long-term debt, non-current portion ................... 22,848 23,647
Accrued pension ....................................... 6,128 6,216
Minority interest ..................................... 1,433 1,525
-------- --------
Total long-term liabilities ........................ 30,409 31,388
Commitments and contingencies ............................ -- --
Shareholders' equity:
Preferred stock ....................................... 5,000 --
Common stock .......................................... 54,698 54,292
Accumulated deficit ................................... (37,892) (38,010)
Cumulative translation adjustment...................... 787 1,939
-------- --------
Total shareholders' equity ......................... 22,593 18,221
-------- --------
$ 85,037 $ 83,370
======== ========
Note: The balance sheet at December 31, 1995 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
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RESOUND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(Unaudited)
Three months ended
------------------
March 31, April 2,
1996 1995
-------- --------
Net sales ..................................... $ 27,264 $ 26,930
Cost of sales ................................. 12,556 13,236
-------- --------
Gross profit ............................. 14,708 13,694
Operating expenses
Research and development ................. 3,068 2,406
Selling, general and administrative ...... 10,874 10,306
-------- --------
Total operating expenses ........ 13,942 12,712
-------- --------
Income from operations ........................ 766 982
Interest expense -- net .................. (595) (440)
Other income (expense) / minority interest (2) 41
--------
Income before income taxes .................... 169 583
Provision for income taxes (1) ........... 51 173
-------- --------
Net income .................................... $ 118 $ 410
======== ========
Net income per share ......................... $ 0.01 $ 0.03
======== ========
Shares used in per share calculation .......... 16,119 15,703
======== ========
(1) Consists principally of state and foreign income taxes.
See Exhibit 11.1 "Statement of Computation of Net Income per Share"
See notes to condensed consolidated financial statements.
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RESOUND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
(Unaudited)
Three months ended,
-------------------
March 31, April 2,
1996 1995
-------- --------
Cash flows provided by (used in) operating activities:
Net income .......................................................... $ 118 $ 410
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................... 1,580 2,494
Changes in assets and liabilities:
Accounts receivable ............................................. (1,065) (2,729)
Inventories ..................................................... 105 (468)
Deposits and other current assets ............................... (97) (469)
Accounts payable ................................................ (1,104) 1,560
Accrued liabilities ............................................. 378 298
-------- --------
Net cash provided by (used in) operating activities ......... (85) 1,096
Cash flows provided by (used in) investing activities:
Purchase of available-for-sale investments .......................... -- (669)
Change in translation adjustment .................................... (299) 205
Additions of property and equipment ................................. (1,487) (2,653)
-------- --------
Net cash used in investing activities ....................... (1,786) (3,117)
Cash flows provided by (used in) financing activities:
Payments on long-term debt ...................................... (1,110) --
Loans payable ................................................... (869) --
Bank borrowing .................................................. -- (12,501)
Issuance of long-term debt ...................................... -- 12,048
Issuance of preferred stock ..................................... 5,000 --
Issuance of common stock ........................................ 406 452
-------- --------
Net cash provided by (used in) financing activities ......... 3,427 (1)
-------- --------
Net increase (decrease) in cash and cash equivalents ................... 1,556 (2,022)
Cash and cash equivalents at the beginning of the period ............... 5,091 15,824
-------- --------
Cash and cash equivalents at the end of the period ..................... $ 6,647 $ 13,802
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................ $ 731 $ 173
======== ========
Income taxes .................................................... $ 309 $ --
======== ========
Supplemental schedule of non-cash investing and financing activities:
Issuance of convertible debt ........................................ $ -- $ 10,000
======== ========
See notes to condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
Unaudited March 31, 1996
NOTES A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. For further information, refer to the audited consolidated financial
statements for the year ended December 31, 1995 and footnotes thereto included
in the Company's 1995 Annual Report on Form 10-K.
NOTE B - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market. The
components of inventory consist of the following (in thousands):
March 31, December 31,
1996 1995
--------- ------------
Raw materials ...................... $ 7,943 $ 8,879
Work in process .................... 4,914 4,431
Finished products .................. 5,504 5,156
------- -------
$18,361 $18,466
======= =======
NOTE C - BANK LOANS (CURRENT)
The Company's current U.S. bank loans, with balances outstanding of
approximately $2.9 million and $3.4 million at March 31, 1996 and December 31,
1995, respectively, are subject to certain financial covenants, including
minimum cash balances, quick assets ratio, tangible net worth and profitability
and are secured by substantially all of the Company's U.S. net assets. At
December 31, 1995, the Company was not in compliance with the financial
covenants. Non-compliance results in the bank having the right to declare the
loans due and payable immediately, but the bank has not exercised that right. At
March 31, 1996, the Company was in full compliance with the financial covenants.
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NOTE D - ACCOUNTING FOR INCOME TAXES
Income taxes have been provided for on a year-to-date basis and represent taxes
on profits earned at the Company's European subsidiaries in Ireland, Austria,
United Kingdom, and Holland, plus California taxes and U.S. alternative minimum
taxes.
NOTE E - SHAREHOLDERS' EQUITY
In March 1996, the Company issued 54,055 shares of Series B Preferred Stock for
$5.0 million in a private placement to an existing shareholder. These securities
have a cumulative stock dividend rate of 6% and are convertible into 540,550
shares of common stock at a price of $9.25 per share. Under certain conditions,
the Company may also be obligated to issue additional warrants in connection
with such issuance of Series B Preferred Stock.
NOTE F - USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
OVERVIEW
The following discussion should be read in conjunction with the unaudited
consolidated condensed financial statements and notes thereto included in Part I
- -- Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1995 contained in the Company's Annual Report on Form 10-K.
ReSound Corporation (the "Company" or "ReSound") is a hearing health care
company that designs, develops, manufactures and sells technologically advanced
hearing devices for the hearing impaired. ReSound distributes its products
through authorized dispensers in the United States, Europe and Asia. The Company
sells Personal Hearing Systems which are available in In-the-Ear ("ITE"),
Behind-the-Ear ("BTE") and In-the-Canal ("ITC") versions. In addition, the
Company sells a proprietary prescriptive programming system designed to enable a
hearing care professional to assess a patient's hearing impairment through
computerized measurement, to select an appropriate, individualized prescription
and to program the Personal Hearing System.
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RESULTS OF OPERATIONS
Three months ended March 31, 1996 and April 2, 1995
Net sales increased by 1% to $27.3 million in the first quarter ended March 31,
1996, from $26.9 million in the quarter ended April 2, 1995. International sales
accounted for 64 percent of ReSound's net sales during the first quarter of
1996, compared to 67 percent during the same quarter in 1995. International
sales for the first quarter were $17.6 million, a decrease of 3 percent from the
same period last year. The slight decrease in international sales was the result
of the economic slowdown in Germany, no repeat of a large one-time sale to an
Eastern European country which occurred in the first quarter of 1995 and to
weaker European currencies compared to the U.S. dollar. First quarter U.S. sales
of $9.7 million were up 11 percent from the same period last year due,
primarily, to continued strong sales of the Company's Encore(TM) hearing device
products.
Gross profit was 53.9 percent of net sales in the first quarter of 1996,
compared to 50.9 percent of net sales for the same quarter of 1995. The
quarter-to-quarter increase in gross profit was largely attributable to the
elimination of royalty expenses incurred in 1995 due to the A&L Technology
patent litigation, which was settled in October 1995. In addition, the Company
has benefited from improved efficiencies at its Ireland manufacturing facility
which supplies all ReSound BTE hearing devices and faceplate components
worldwide and for the use of Viennatone hearing device cases and components in
various products which began in the second half of 1995.
Research and Development ("R&D") spending during the first quarter of 1996 was
$3.1 million (11.3 percent of net sales) compared to $2.4 million (8.9 percent
of net sales) in the same quarter of 1995. The Company increased spending for
development of new products scheduled to be introduced throughout 1996. In the
first quarter of 1996, the Company introduced its improved Behind-the-Ear Power
hearing device and upgraded a majority of its installed base of Portable
Prescriptive Programming fitting systems to allow improved performance in
programming of its newest generation of hearing devices. On April 17, 1996 the
Company announced its Advanced ReSound Processing chip incorporating ReSound's
Cochlea Dynamic technology into an ITC hearing device, along with a ReSound
software fitting system, ReSource, based on the industry standard NOAH platform.
Selling General and Administrative expenses ("SG&A") were $10.9 million, or 39.9
percent of net sales for the first quarter of 1996, compared to $10.3 million,
or 38.3 percent of net sales in the first quarter of 1995. The increase is
primarily due to expenditures relating to upgrading ReSound's worldwide customer
base of Portable Prescriptive Programming Systems and higher costs associated
with distribution in several new markets. These expense increases were partially
offset by weaker European currencies compared to the U.S. dollar.
Net interest expense was $595,000 for the first quarter of 1996 compared to
$440,000 for the first quarter of 1995. This increase in net interest expense is
primarily attributable to the depletion of the
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Company's short-term investments as a result of the payment of funds in
settlement of the A&L Technology patent litigation which occurred in October
1995.
Income taxes have been provided for on a year-to-date basis and represent taxes
on profits earned at ReSound's European subsidiaries in Ireland, Austria, UK,
and Holland, plus California taxes and U.S. alternative minimum taxes.
Net income was $118,000 in the quarter ended March 31, 1996, compared to net
income of $410,000 in the quarter ended April 2, 1995. The decrease was
primarily the result of increased R&D spending associated with the development
of new products scheduled to be introduced in 1996, increased SG&A costs related
to upgrading ReSound's customer base of Portable Prescriptive Programming
Systems and costs associated with distribution in several new markets.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1996 the Company used $85,000 in cash from
operations, compared to $1.1 million in cash generated in the three months ended
April 2, 1995. For the three months ended March 31, 1996, the negative cash flow
from operations was primarily due to an increase in accounts receivable of $1.1
million and a decrease in current liabilities of $700,000 offset by depreciation
and amortization charges of $1.6 million and net income of $118,000.
Net cash used in investing activities for the three months ended March 31, 1996
of $1.8 million resulted primarily from additions of property and equipment of
$1.5 million.
The primary financing activity in the three months ended March 31, 1996 involved
the issuance of Series B Preferred Stock for $5.0 million. (See Note E -
Shareholders' Equity, in Notes to Condensed Consolidated Financial Statements,
above.) In addition, the Company made payments of principal and interest on bank
loans of approximately $2.0 million in the three months ended March 31, 1996.
At March 31, 1996, the Company had available cash and cash equivalents of $6.6
million. While the Company believes that available cash will be sufficient to
meet the Company's short-term operating and capital requirements, the Company
will be required to raise additional capital for its currently envisaged
long-term needs, to refinance short-term debt and in connection with any future
acquisitions. (See also Part II, Item 5. Other Items, below.)
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is the defendant in a lawsuit filed in September 1993 in the United
States District Court, District of Minnesota, by Minnesota Mining and
Manufacturing Company ("3M") alleging that the Company's hearing devices and
programming systems infringe the claims of three patents owned by the plaintiff.
(See also Item 5. Other Items, below.)
ITEM 2. CHANGES IN THE RIGHTS OF COMPANY SECURITY HOLDERS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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ITEM 5. OTHER ITEMS
On April 8, 1996 the Company announced that a letter of intent had been signed
for the Company to purchase the assets of 3M's Hearing Health business. A
purchase price of approximately $25 million, subject to adjustment based upon
due diligence, has been agreed to by the parties. The purchase will include 3M's
Hearing Health business, patents and patent applications and also will involve
dismissal of the 3M patent infringement lawsuit filed against the Company. A
final asset purchase agreement, subject to completion of financing by the
Company, obtaining of necessary governmental approvals and other conditions, is
expected to be signed and the purchase completed by approximately June 14, 1996.
In April 1996, the Company formed a strategic alliance with GN Danavox a/s and
Audiologic with the intention of developing a standard hardware platform for
digital hearing technology. The companies will collaborate to create a computer
chip powerful enough to perform multiple complex signal processing functions at
once.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.24 Letter of Intent for Purchase of Certain Assets
of 3M Hearing Health Business between the Company and
Minnesota Mining and Manufacturing Company dated March 11,
1996.
(b) Exhibit 10.25 Letter agreement with respect to Purchase of
Series B Preferred Stock dated March 8, 1996 between the
Company and S-E-Banken Lakemedelsfond.
(c) Exhibit 11.1: Statement of computation of net income per share
(d) Exhibit 27: Financial data schedule
(e) Report on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOUND CORPORATION
/s/ Paul A. Busse
--------------------------------------------
Paul A. Busse
Sr. Vice President Finance & Administration,
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 1996
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