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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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 28, 1998 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 or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
220 Saginaw Drive, Seaport Centre, Redwood City, California 94063
(Address of principal executive offices)
(650) 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 1, 1998 was 20,359,503 shares.
This document consists of 14 pages of which this is page 1.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets........................................3
Consolidated Statements of Operations..............................4
Consolidated Statements of Cash Flows..............................5
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations.............................................10
Liquidity and Capital Resources.................................. 11
Factors That May Affect Future Operating Results..................12
Item 3. Quantitative and Qualitative Disclosures about Market Risks.......13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................13
Item 2. Changes in Securities and Use of Proceeds.........................13
Item 3. Defaults upon Senior Securities...................................13
Item 4. Submission of Matters to a Vote of Security Holders...............13
Item 5. Other Information.................................................13
Item 6. Exhibits and Reports on Form 8-K..................................13
SIGNATURES........................................................................14
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
RESOUND CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
March 28, December 31,
1998 1997
--------- ------------
(Note)
Current assets:
Cash and cash equivalents $ 17,990 $ 19,853
Accounts receivable, net 18,321 17,966
Inventories 12,833 14,183
Other current assets 2,799 2,125
-------- --------
Total current assets 51,943 54,127
Property and equipment, net 11,035 10,838
Goodwill 21,005 20,217
Other assets 3,577 4,593
-------- --------
$ 87,560 $ 89,775
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans $ 2,297 $ 1,663
Accounts payable 8,869 8,735
Accrued liabilities 18,944 19,484
Long-term debt, current portion 1,952 4,362
-------- --------
Total current liabilities 32,062 34,244
Long-term liabilities:
Long-term debt, non-current portion 13,698 14,274
Employee benefits 3,694 3,738
Other accrued liabilities --- 500
-------- --------
Total long-term liabilities 17,392 18,512
Commitments and contingencies -- --
Shareholders' equity:
Common stock 97,400 96,785
Accumulated deficit (56,904) (57,878)
Cumulative translation adjustment (2,390) (1,888)
-------- --------
Total shareholders' equity 38,106 37,019
-------- --------
$ 87,560 $ 89,775
======== ========
Note: The balance sheet at December 31, 1997 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 consolidated financial statements.
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RESOUND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(Unaudited)
Three months ended
-----------------------
March 28, March 31,
1998 1997
--------- ---------
Net sales $ 31,143 $ 32,211
Cost of sales 14,457 15,111
-------- --------
Gross profit 16,686 17,100
Operating expenses
Research and development 3,975 4,327
Selling, general and administrative 12,148 12,548
-------- --------
Total operating expenses 16,123 16,875
-------- --------
Income from operations 563 225
Interest expense, net (256) (397)
Other income (expense), net 848 (417)
-------- --------
Income (loss) before income taxes 1,155 (589)
Provision for income taxes (1) 181 305
-------- --------
Net income (loss) $ 974 $ (894)
======== ========
Net income (loss) applicable to common shareholders $ 974 $ (969)
======== ========
Basic and diluted net income (loss) per share $ 0.05 $ (0.05)
======== ========
Shares used in basic net income (loss) per share
calculation 20,259 19,389
======== ========
Shares used in diluted net income (loss) per share
calculation 20,744 19,389
======== ========
(1) Consists principally of foreign income taxes.
See notes to consolidated financial statements.
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RESOUND CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
(Unaudited)
Three months ended
-------------------------
March 28, March 31,
1998 1997
--------- ---------
Cash flows from operating activities:
Net income (loss) $ 974 $ (894)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,695 1,356
Changes in assets and liabilities:
Accounts receivable 168 (1,090)
Inventories 1,892 982
Other assets (1,592) 1,396
Accounts payable 134 (1,789)
Accrued liabilities (1,654) 887
-------- --------
Net cash provided by operating activities 1,617 848
Cash flows from investing activities:
Acquisition of ReSound Autac (401) ---
Patent license fees 900 ---
Change in translation adjustment (548) (616)
Additions of property and equipment (1,247) (695)
-------- --------
Net cash used in investing activities (1,296) (1,311)
Cash flows from financing activities:
Payments on long-term debt (2,799) (675)
Bank loans --- (40)
Issuance of common stock 615 249
-------- --------
Net cash used in financing activities (2,184) (466)
-------- --------
Net decrease in cash and cash equivalents (1,863) (929)
Cash and cash equivalents at the beginning of the period 19,853 7,980
-------- --------
Cash and cash equivalents at the end of the period $ 17,990 $ 7,051
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 287 $ 434
Income taxes $ 17 $ 227
Supplemental schedule of non-cash investing and
financing activities:
Accrual of preferred stock dividend --- $ 75
See notes to consolidated financial statements.
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ReSound Corporation
Notes to Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited 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 only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 28, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the audited consolidated financial
statements for the year ended December 31, 1997 and footnotes thereto included
in the Company's 1997 Annual Report on Form 10-K.
In 1998, the Company adopted the policy of closing its fiscal quarters on the
last Saturday falling within the calendar quarter, except that the fiscal year
will end at the calendar year end.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("SFAS No. 128"). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Earnings per share amounts for all periods have been
restated to conform to the SFAS No. 128 requirement.
The following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share data):
Three months ended
-----------------------
March 28, March 31,
1998 1997
--------- ----------
Net income (loss) $ 974 $ (894)
Preferred dividends
--- (75)
-------- --------
Net income (loss) applicable to common shareholders $ 974 $ (969)
======== ========
Weighted average common shares - basic 20,259 19,389
Dilutive options 485 --
-------- --------
Adjusted weighted average common shares - diluted 20,744 19,389
======== ========
Earnings per share - basic:
Net income (loss) per common share $ 0.05 $ (0.05)
======== ========
Earnings per share - diluted:
Net income (loss) per common share $ 0.05 $ (0.05)
======== ========
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Had the Company been in a net income position for the three months ended March
31, 1997, diluted earnings per share for that period would have included 619,000
shares related to outstanding options not included above.
New Accounting Pronouncements
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
During the first quarters of 1998 and 1997, total comprehensive income (loss)
amounted to $472,000 and $(4,093,000), respectively.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures About Segments of An Enterprise and Related Information ("SFAS No.
131"). SFAS No. 131 will require the Company to use the "management approach" in
disclosing segment information in its December 31, 1998 financial statements.
The adoption of SFAS No. 131 will not have an impact on the Company's results of
operations, cash flows, or financial position.
Reclassifications
Certain reclassifications have been made to prior year's amounts in order to
conform to the current year's presentation.
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 28, December 31,
1998 1997
--------- ------------
Raw materials $ 8,416 $ 9,191
Work in process 2,318 2,869
Finished products 2,099 2,123
------- -------
$12,833 $14,183
======= =======
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NOTE C - 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, Germany,
Switzerland and Holland.
NOTE D - RESOUND AUTAC ACQUISITION
In January 1998, ReSound Autac GmbH, a newly formed subsidiary of the Company
located in Zurich, Switzerland, acquired all of the assets and liabilities of a
former Swiss distributor for $401,000. At the time of the transaction, that
distributor owed the Company $979,000 for previous financial assistance. The
agreement contains a clause which obligates the seller for a period of five
years not to compete in the area of manufacture or distribution of hearing
devices. Additionally, an employment agreement was negotiated with the seller
through December 31, 2002.
The effects of this acquisition on the March 28, 1998 Consolidated Statement of
Cash Flows were as follows (in thousands):
Working capital acquired $ 507
Property and equipment, net 163
Goodwill 1,342
Bank loans (632)
Loan from ReSound (979)
-------
Total purchase price $ 401
=======
NOTE E - SPECIAL CHARGES
In the second half of 1997, the Company recorded special charges of $18.0
million, associated with the Company's strategic restructuring program. This
program is designed to streamline operations and control costs through
management restructuring, operations consolidations, and increased focus on core
activities and product lines.
The special charges provided for costs associated with employee termination
benefits for approximately 100 employees from all functional areas in various
subsidiary locations; lease termination costs; the write-down of goodwill
associated with the acquired hearing health business activity of 3M (which was
renamed Sonar Hearing Health, "SHH"; the incremental impairments in
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the carrying value of certain product inventories; and losses on supplier
commitments arising directly from the decision to exit product lines, as follows
(in thousands):
Spending/
Total 1997 Balance Charges Balance
Special Spending/ Dec. 31, 3-mos ended March 28,
Charges Charges 1997 March 28, 1998 1998
--------- --------- -------- -------------- ---------
Employee termination benefits and
lease termination costs
(recorded as Restructuring) $ 2,254 $ 765 $ 1,489 $ 444 $ 1,045
Write-down of SHH goodwill
(recorded as Restructuring) 10,307 10,307 -- -- --
Write-down of inventories to net
realizable value and losses on
supplier commitments (recorded
as Cost of Sales) 3,093 723 2,370 1,637 733
Write-down of capital assets to
fair value (recorded as Selling,
General and Administrative -
$633, and Research and
Development - $123) 756 -- 756 694 62
Other exit costs (recorded as
Selling, General and
Administrative) 1,566 -- 1,566 1,141 425
------- ------- ------- ------- -------
$17,976 $11,795 $ 6,181 $ 3,916 $ 2,265
======= ======= ======= ======= =======
The activities contemplated in the restructuring program are expected to be
substantially completed by June 30, 1998. Management anticipates no material
change in the estimated cost of such activities. During the quarter ended March
28, 1998, the Company made approximately $1.0 million of cash payments relating
to the special charges.
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
This Form 10-Q contains forward-looking statements, which can be identified by
words such as "may," "will," "believe," "expect," "anticipate," "estimate,"
"plan," "intend" and the like. These
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statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those contemplated in the statements.
These risks and uncertainties are discussed in the section below entitled
"Factors That May Affect Future Operating Results" and in the Company's reports
filed with the Securities and Exchange Commission, including its Report on Form
10-K for the year ended December 31, 1997.
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part I - Item 1
of this Quarterly Report and the audited consolidated financial statements and
notes thereto, the Introductory Statement and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
RESULTS OF OPERATIONS
Three months ended March 28, 1998 and March 31, 1997
Net sales decreased by 3% to $31.1 million in the quarter ended March 28, 1998,
from $32.2 million in the quarter ended March 31, 1997. International sales
accounted for 49 percent of ReSound's net sales during the first quarter of
1998, compared to 51 percent during the same quarter in 1997. International
sales for the first quarter were $15.4 million, a decrease of 7 percent from the
same period last year. The decrease in international sales was the result of
weaker European currencies compared to the U.S. dollar, and poor hearing device
market conditions in Germany and Austria together with management and employee
turnover at Viennatone, the Company's Austrian subsidiary. Additionally,
economic uncertainty in Japan coupled with lower shipments to the Company's
Japanese distributor (to improve the balance of inventory levels to in-market
sales) contributed to sales reductions in the Asia-Pacific region in the first
quarter of 1998 when compared to the prior year first quarter. First quarter
U.S. sales of $15.7 million were consistent with the same period last year, due
primarily to unit volume growth being offset by declines in average unit sales
prices as a result of increasing competition and product mix sales shifts from
the Company's higher priced Premium Series product line to the Company's more
moderately priced Encore Series product line. The Premium Series product line
was enhanced by the addition of the Company's completely-in-the-canal device,
the CC4, which first shipped in volume during the first quarter of 1998. Due to
strong customer demand and a supplier constraint, a substantial volume of orders
for this product were in backlog status at March 28, 1998.
Gross profit was 53.6 percent of net sales in the first quarter of 1998,
compared to 53.1 percent of net sales for the same quarter of 1997. The
quarter-to-quarter increase in gross profit resulted primarily from lower
component costs and improved manufacturing efficiencies in the custom business,
partially offset by margin erosion at Viennatone due to unfavorable sales mix
and pricing pressures.
Research and Development ("R&D") spending during the first quarter of 1998 was
$4.0 million (12.8 percent of net sales) compared to $4.3 million (13.4 percent
of net sales) in the same quarter of 1997. The reduction in first quarter 1998
R&D expenses was primarily due to compliance with planned spending on the
program for ReSound's Digital Signal Processing technology platforms, partially
offset by an increase in the development activities for the ReSound hearing
enhancer program.
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Selling, General and Administrative expenses ("SG&A") were $12.1 million or 39.0
percent of net sales for the first quarter of 1998, compared to $12.5 million,
or 39.0 percent of net sales in the first quarter of 1997. The reduction in SG&A
expenses in absolute dollars resulted primarily from the effects of
consolidation of certain sales and marketing activities in the U.S., and
improved cost controls, partially offset by higher business system
implementation costs and one-time severance costs in Viennatone and incremental
SG&A expenses resulting from the acquisition of ReSound Autac in January 1998.
Net interest expense was $256,000 for the first quarter of 1998 compared to
$397,000 for the first quarter of 1997. This quarter-to-quarter decrease is
attributable to reduction of debt and the effect of the stronger U.S. dollar
compared to European currencies.
Other income was $848,000 for the first quarter of 1998 compared to other
expense of $417,000 in the corresponding quarter of 1997. In the first quarter
of 1998, income resulted primarily from receipts of $750,000 under a patent
license agreement. The agreement requires similar payments to be made to the
Company in each of the remaining quarters of 1998. The other expense in the
first quarter of 1997 resulted from losses on foreign exchange.
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, Germany,
Switzerland and Holland.
The Company had net income of $974,000 in the quarter ended March 28, 1998,
compared to a net loss of $894,000 in the quarter ended March 31, 1997. The
increase in net income in the current quarter was primarily the result of lower
SG&A expenses, patent license income and the absence of foreign exchange losses,
partially offset by lower gross profit.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended March 28, 1998 the Company generated $1,617,000 in
cash from operations, compared to $848,000 in the three months ended March 31,
1997. Cash generated from operations in the first quarter of 1998 included
non-cash charges of $1.7 million relating to depreciation and amortization. In
addition, positive cash flows from operations primarily resulted from
improvements in inventory management of $1.9 million, and net income for the
period of $1.0 million. This positive cash flow from operations was partially
offset by increases in other assets of $1.6 million and reductions in accrued
liabilities of $1.7 million caused primarily by spending and other charges in
connection with the Company's restructuring program.
Net cash used in investing activities for the three months ended March 28, 1998
of $1.3 million resulted from additions of property and equipment, cash used in
the acquisition of ReSound Autac and changes in the cumulative translation
adjustment account. These amounts were offset by $900,000 of fees received for
licensing certain technology acquired by the Company in 1996 and 1997.
The primary financing activity in the three months ended March 28, 1998 was the
payment of long-term debt of $2.8 million.
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At March 28, 1998, the Company had available cash and cash equivalents of $18.0
million. While the Company believes that available cash will be sufficient to
meet the Company's short-term operating and capital requirements for at least
the next twelve months, the Company may be required to raise additional capital
for its currently envisaged long-term needs and in connection with any future
acquisitions.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Competition, especially from new digital hearing device products, is expected to
continue to increase. The Company's ability to grow and maintain profitability
will depend upon its ability to develop, individually and jointly with current
or future strategic partners, or otherwise acquire and effectively market,
competitive DSP and other products. There can be no assurance that the Company
can develop and introduce these products in a timely manner, or that these
products will be able to compete effectively against current or new competing
products. The development or acquisition of new products is always subject to
technological risks and uncertainties which could cause termination of the
development of the product or termination of or delay in the introduction of the
product, or which could significantly decrease the originally anticipated level
of customer acceptance of the product. Also, there can be no assurance that a
new product can be manufactured on a cost-effective basis, that regulatory
approvals, where necessary, can be obtained, or that the expected level of
customer acceptance will be met. Also, there can be no assurance that the
Company will be able to continue its successful relationships with its current
strategic partners or establish successful relationships with new strategic
partners. In addition, announcements of new products may cause hearing care
professionals or hearing impaired persons to defer purchases of existing
products or return previously purchased products. The Company's failure to
introduce competitive products in a timely manner would have a material, adverse
impact on the Company's financial condition and results of operations.
The Company anticipates that it will continue to experience, at least for the
near-term, lower average unit sales prices of its products due to aggressive
competitive pricing and product mix shift to the Company's more moderately
priced products. In order to offset this, the Company will need to increase unit
sales volume, about which there can be no assurance. The Company also expects
that the negative impact caused by weak economic conditions and/or reductions in
government reimbursement levels available to consumers purchasing hearing
devices in Austria, France and Germany, reduced shipments to its Japanese
distributor, and unsettled economic conditions in Japan will continue, at least
for the near term. Also, while the Company believes that the backlog it
experienced during the first quarter of 1998 for its completely-in-the-canal
(CIC) device, the CC4, will be significantly reduced by the end of the second
quarter of this year, there can be no assurance that the component delivery
problems that caused the backlog will be resolved in time to achieve this
reduction. While the Company has mechanisms in place to lessen the negative
impact of foreign currency fluctuations, continued or increased weakness of
European currencies against the US Dollar also are likely to adversely impact
the Company's sales in Europe. Finally, there can be no assurance that the
Company will be able to complete its restructuring program in a timely manner,
consolidate targeted operations successfully, and otherwise achieve the cost
reductions and other restructuring benefits anticipated to result from the
restructuring.
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The Company has determined that it will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. All required software
modifications and replacements are expected to be completed not later than
March, 1999, which is prior to the estimated occurrence of any year 2000 issues.
While the Company believes its planning efforts are adequate to address its year
2000 concerns, there can be no guarantee that the systems of other companies on
which the Company's systems and operations rely will be converted on a timely
basis and will not have a material effect on the Company. The cost of the year
2000 initiatives is not expected to be material to the Company's results of
operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.34: Agreement in Contemplation of Separation
(b) Exhibit 27: Financial data schedule
(c) Reports 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/ Arthur T. Taylor
--------------------------------------------
Arthur T. Taylor
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 6, 1998
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INDEX TO EXHIBITS
Exhibit
Number Description
- -------- -----------
10.34 Agreement in Contemplation of Separation
27 Financial Data Schedule