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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 September 26, 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, including zip code, of principal executive offices)
(650) 780-7800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
The number of shares of Registrant's Common Stock issued and outstanding as of
November 1, 1998 was 20,634,850 shares.
This document consists of 18 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.........................................................9
Liquidity and Capital Resources............................................. 12
Factors That May Affect Future Operating Results.............................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................16
Item 2. Changes in Securities and Use of Proceeds....................................16
Item 3. Defaults upon Senior Securities..............................................16
Item 4. Submission of Matters to a Vote of Security Holders..........................16
Item 5. Other Information............................................................16
Item 6. Exhibits and Reports on Form 8-K.............................................16
SIGNATURES.......................................................................................17
INDEX TO EXHIBITS................................................................................18
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
RESOUND CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
September 26, December 31,
1998 1997
-------- --------
(Unaudited) (Note)
Current assets:
Cash and cash equivalents $ 12,800 $ 19,853
Accounts receivable, net 22,225 17,966
Inventories 14,263 14,183
Other current assets 2,832 2,125
-------- --------
Total current assets 52,120 54,127
Property and equipment, net 11,226 10,838
Goodwill 13,595 20,217
Other assets 3,076 4,593
-------- --------
$ 80,017 $ 89,775
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans $ 3,680 $ 1,663
Accounts payable 8,193 8,735
Accrued liabilities 23,284 19,484
Long-term debt, current portion 2,524 4,362
-------- --------
Total current liabilities 37,681 34,244
Long-term liabilities:
Long-term debt, non-current portion 12,579 14,274
Employee benefits 3,987 3,738
Other accrued liabilities -- 500
-------- --------
Total long-term liabilities 16,566 18,512
Shareholders' equity:
Common stock 98,449 96,785
Accumulated deficit (73,414) (57,878)
Cumulative translation adjustment 735 (1,888)
-------- --------
Total shareholders' equity 25,770 37,019
-------- --------
$ 80,017 $ 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 Nine Months Ended
Sept. 26, Sept. 30, Sept. 26, Sept. 30,
1998 1997 1998 1997
-------- -------- -------- --------
Net sales $ 30,255 $ 31,934 $ 95,282 $ 96,376
Cost of sales 16,505(1) 16,224(2) 45,949(1) 46,066(2)
-------- -------- -------- --------
Gross profit 13,750 15,710 49,333 50,310
Operating expenses
Research and development 3,120 4,244 11,567 12,443
Selling, general and administrative 16,632(1) 13,028(2) 42,747(1) 40,026(2)
Restructuring and other charges 11,846(1) 11,184(2) 11,846(1) 11,184(2)
-------- -------- -------- --------
Total operating expenses 31,598 28,456 66,160 63,653
-------- -------- -------- --------
Loss from operations (17,848) (12,746) (16,827) (13,343)
Interest expense, net (225) (296) (732) (1,078)
Other income (expense), net 1,061 (36) 2,581 (371)
-------- -------- -------- --------
Loss before income taxes (17,012) (13,078) (14,978) (14,792)
Provision for income taxes (3) 180 217 558 896
-------- -------- -------- --------
Net loss (17,192) (13,295) (15,536) (15,688)
Preferred dividends -- (75) -- (225)
-------- -------- -------- --------
Net loss applicable to common shareholders $(17,192) $(13,370) $(15,536) $(15,913)
======== ======== ======== ========
Basic and diluted net loss per common share $ (0.84) $ (0.69) $ (0.76) $ (0.82)
======== ======== ======== ========
Shares used in basic and diluted net
loss per common share calculation 20,504 19,441 20,416 19,391
======== ======== ======== ========
(1) Includes special charges of $16.6 million as follows: cost of sales -- $1.8
million; selling, general and administrative -- $3.0 million; restructuring
and other charges -- $11.8 million (of which $8.1 million is the result of
write-down of goodwill).
(2) Includes special charges of $13.6 million as follows: cost of sales -- $1.8
million; selling, general and administrative -- $0.6 million; restructuring
and other charges -- $11.2 million (of which $10.3 million is the result of
write-down of goodwill).
(3) Consists principally of state and 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)
Nine Months Ended
-----------------------
Sept. 26, Sept. 30,
1998 1997
-------- --------
Cash flows from operating activities:
Net loss $(15,536) $(15,688)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 6,439 3,977
Restructuring and other charges 11,846 10,688
Changes in assets and liabilities:
Accounts receivable (3,690) 383
Inventories 1,433 7,233
Other assets (2,963) (1,169)
Accounts payable (906) (2,836)
Accrued liabilities (1,064) (51)
-------- --------
Net cash provided by (used in) operating activities (4,441) 2,537
Cash flows from investing activities:
Acquisition of ReSound Autac (401) --
Acquisition of Apex Acoustics, Ltd. (750) --
Patent license fees 900 1,800
Change in cumulative translation adjustment 3,327 2,176
Additions of property and equipment (5,294) (1,028)
-------- --------
Net cash provided by (used in) investing activities (2,218) 2,948
Cash flows from financing activities:
Payments on long-term debt (3,442) (2,116)
Bank loans 1,384 395
Issuance of common stock 1,664 544
-------- --------
Net cash used in financing activities (394) (1,177)
-------- --------
Net increase (decrease) in cash and cash equivalents (7,053) 4,308
Cash and cash equivalents at the beginning of the period 19,853 7,980
-------- --------
Cash and cash equivalents at the end of the period $ 12,800 $ 12,288
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 887 $ 1,259
Income taxes $ 509 $ 1,086
Supplemental schedule of non-cash investing and financing activities:
Accrual of preferred stock dividend -- $ 225
See notes to consolidated financial statements.
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ReSound Corporation
Notes to Consolidated Financial Statements
(Unaudited)
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 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 and nine-month periods ended September 26, 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. Common equivalent shares
from stock options are excluded from the computation of diluted net loss per
common share for all periods presented as their effect is antidilutive.
Had the Company been in a net income position for the three months and nine
months ended September 26, 1998, diluted earnings per share for those periods
would have included 494,587 shares and 676,537 shares, respectively, related to
outstanding options not included above.
Had the Company been in a net income position for the three months and nine
months ended September 30, 1997, diluted earnings per share for those periods
would have included 397,000 shares and 182,000 shares, respectively, 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
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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.
During the third quarters of 1998 and 1997, total comprehensive loss amounted to
$14,615,000 and $12,670,000, respectively. During the first nine months of 1998
and 1997, total comprehensive loss amounted to $12,913,000 and $17,864,000,
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):
September 26, December 31,
1998 1997
------- -------
Raw materials $ 8,440 $ 9,191
Work in process 2,787 2,869
Finished products 3,036 2,123
------- -------
$14,263 $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,
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.
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The allocation of the purchase price was 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
=======
As part of the Company's strategic restructuring program announced in the third
quarter of 1998, the goodwill associated with the purchase of ReSound Autac GmbH
was written off during the third quarter of 1998.
NOTE E - APEX ACOUSTICS, LTD. ACQUISITION
In April 1998, ReSound-Viennatone Ltd. acquired all of the assets and
liabilities of Apex Acoustics, Ltd. from the Ultratone Group, the largest
hearing device retail chain in the United Kingdom, for $750,000. Concurrent with
the acquisition, the Company entered into a multi-year supply agreement with
Ultratone for custom hearing devices.
The allocation of the purchase price was as follows (in thousands):
Working capital acquired $494
Property and equipment, net 135
Goodwill 121
----
Total purchase price $750
====
NOTE F - SPECIAL CHARGES
In the third quarter of 1998, the Company announced a strategic restructuring
program designed to realign the Company's organizational structure, streamline
internal processes, and consolidate facilities worldwide in order to achieve
sustained profitability. This program is anticipated to result in a work force
reduction of up to 100 people worldwide and special charges in the second half
of 1998 of up to $18.0 million. Of this estimated amount, approximately $9.5
million reflects non-cash items for the write-down of goodwill and discontinued
product lines. The remaining charges of up to $8.5 million reflect cash and
non-cash items pertaining primarily to employee severance and consolidation
activities.
In the third quarter of 1998, the Company recorded special charges associated
with this restructuring program of $16.6 million as follows: Cost of sales --
$1.8 million (for write-down of inventories to net realizable value and losses
on supplier commitments); Selling, general and administrative -- $3.0 million
(for write-down of capital assets to fair value and other exit costs);
Restructuring and other --
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$11.8 million (for write-down of goodwill -- $8.1 million, and employee
termination benefits and lease termination costs -- $3.7 million). The Company
anticipates incurring up to an additional $1.4 million in special charges in the
fourth quarter of 1998 relating to this strategic restructuring program. The
remaining 1997 restructuring accrual of approximately $500,000 at the end of the
third quarter 1998 will be fully utilized by mid-year 1999.
NOTE G - 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 Report on 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 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 September 26, 1998 and September 30, 1997
Net sales decreased by 5 percent to $30.3 million in the quarter ended September
26, 1998, from $31.9 million in the quarter ended September 30, 1997.
International sales accounted for 47 percent of the Company's net sales during
the third quarter of 1998 compared to 45 percent during the third quarter of
1997. International sales for the third quarter of 1998 were $14.4 million, a
decrease of 1 percent from the same quarter last year. The quarter-to-quarter
decrease in international sales was the result of poor hearing device market
conditions in Germany and Austria and lower shipments to the Company's Japanese
distributor as a result of poor economic conditions in Japan. Furthermore, the
Company's Austrian export business with Eastern Europe was negatively impacted
by the current economic and political turmoil occurring in that part of the
world. These revenue losses, however, were partially offset by double-digit
percentage sales growth at the Company's sales subsidiaries in Holland, Sweden,
Switzerland, and the UK, as well as increased sales to new
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customers in Latin America and Asia. Sales in the U.S. and Canada decreased by 9
percent to $15.9 million in the quarter ended September 26, 1998, from $17.5
million in the quarter ended September 30, 1997, primarily due to increased
pricing pressures on analog devices, erosion of the Company's Sonar Hearing
Health business, and an understaffed U.S. sales force.
Gross profit was 45.4 percent of net sales in the third quarter of 1998 compared
to 49.2 percent of net sales in the third quarter of 1997. The
quarter-to-quarter decrease in gross profit was largely attributable to market
pricing pressures on analog devices, unabsorbed overhead costs resulting from
volume reductions of custom hearing devices, a decline in the product mix of
higher margin behind-the-ear devices, and a decrease in direct labor efficiency
due to new hires. Special charges of $1.8 million for write-down of inventories
and losses on supplier commitments were incurred in the third quarters of both
1998 and 1997. Excluding special charges, gross profit for the third quarter of
1998 was 51.4 percent of net sales compared to 54.8 percent of net sales for the
same period last year.
Research and development ("R&D") spending during the third quarter of 1998 was
$3.1 million (10.3 percent of net sales) compared to $4.2 million (13.3 percent
of net sales) during the same quarter of 1997. The quarter-to-quarter decrease
in R&D spending was primarily due to the near completion of the developmental
phase of the ReSound Digital 5000, the Company's Digital Signal Processing
technology platform.
Selling, general and administrative ("SG&A") expenses were $16.6 million (55.0
percent of net sales) during the third quarter of 1998 compared to $13.0 million
(40.8 percent of net sales) during the same quarter of 1997. The
quarter-to-quarter increase in SG&A expenses was primarily due to a $3.0 million
charge relating to facilities consolidation and other expenses under the
Company's restructuring program as well as additional expenses resulting from
this year's acquisitions of ReSound Autac and Apex Acoustics. Excluding special
charges, SG&A expenses were $13.6 million (45.1 percent of net sales) during the
third quarter of 1998 compared to $12.4 million (38.9 percent of net sales)
during the same period last year.
Net interest expense was $225,000 for the third quarter of 1998 compared to
$296,000 for the third quarter of 1997. This quarter-to-quarter decrease was
primarily attributable to a reduced level of debt.
Other income was $1.1 million for the third quarter of 1998 compared to other
expense of $36,000 for the third quarter of 1997. In the third quarter of 1998,
income primarily resulted from receipts of $750,000 under a patent license
agreement. This agreement requires similar payments to be made to the Company in
the fourth quarter of 1998. The other expense in the third quarter of 1997
primarily 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 the Company's European subsidiaries in Ireland, Germany,
and Holland.
The Company had a net loss of $17.2 million in the quarter ended September 26,
1998 compared to a net loss of $13.3 million in the quarter ended September 30,
1997. Excluding the impact of special charges, the Company had a net loss of
$0.6 million in the third quarter of 1998 compared to net income of $0.3 million
in the same prior year period. The quarter-to-quarter decrease in net income
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was primarily attributable to decreased gross profit and increased SG&A
expenses, partially offset by patent license income.
Nine months ended September 26, 1998 and September 30, 1997
Net sales decreased by 1 percent to $95.3 million in the nine months ended
September 26, 1998, from $96.4 million in the nine months ended September 30,
1997. International sales accounted for 48 percent of the Company's net sales
during the first nine months of 1998 compared to 49 percent during the first
nine months of 1997. International sales for the nine months ended September 26,
1998 were $45.7 million, down from $47.5 million in 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 contributed
to sales reductions in the Asia-Pacific region in the first nine months of 1998
when compared to the same period last year. Sales in the U.S. and Canada
increased 1 percent for the nine months ended September 26, 1998 to $49.6
million from $48.9 million for the comparable prior year period. Although total
units shipped increased, sales were flat primarily due to increased pricing
pressures on analog devices 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.
Gross profit was 51.8 percent of net sales in the first nine months of 1998
compared to 52.2 percent of net sales in the same period of 1997. The decrease
in gross profit was largely attributable to market pricing pressures on analog
devices, unabsorbed overhead costs resulting from volume reductions of custom
hearing devices, a decline in the product mix of higher margin behind-the-ear
devices, and a decrease in direct labor efficiency due to new hires. Special
charges of $1.8 million for write-down of inventories and losses on supplier
commitments were incurred in the first nine months of both 1998 and 1997.
Excluding special charges, gross profit for the first nine months of 1998 was
53.7 percent of net sales compared to 54.1 percent of net sales for the same
period last year.
R&D spending during the first nine months of 1998 was $11.6 million (12.1
percent of net sales) compared to $12.4 million (12.9 percent of net sales)
during the same period of 1997. R&D spending was primarily for the Company's
Digital Signal Processing technology platforms, the ReSound hearing enhancer
program, and products being developed in alliance with Motorola.
SG&A expenses were $42.7 million (44.9 percent of net sales) during the first
nine months of 1998 compared to $40.0 million (41.5 percent of net sales) during
the first nine months of 1997. The increase in SG&A expenses was due primarily
to a $3.0 million charge relating to the Company's restructuring program and
incremental expenses resulting from this year's acquisitions of ReSound Autac
and Apex Acoustics. Excluding special charges, SG&A expenses were $39.7 million
(41.7 percent of net sales) during the first nine months of 1998 compared to
$39.4 million (40.9 percent of net sales) during the same period last year.
Net interest expense was $732,000 for the first nine months of 1998 compared to
$1.1 million for the first nine months of 1997. This decrease was attributable
to reduction of debt and increased interest income due to higher average cash
balances.
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Other income was $2.6 million for the first nine months of 1998 compared to
other expense of $371,000 for the first nine months of 1997. In the first nine
months of 1998, income resulted primarily from receipts of $2.3 million under a
patent license agreement. This agreement requires additional payments of
$750,000 to be made to the Company in the fourth quarter of 1998. The other
expense in the first nine months of 1997 resulted primarily from losses on
foreign exchange.
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,
and Holland.
The Company had a net loss of $15.5 million in the nine months ended September
26, 1998 compared to a net loss of $15.7 million in the nine months ended
September 30, 1997. Excluding the impact of special charges, the Company had net
income of $1.1 million in the first nine months of 1998 compared to a net loss
of $2.1 million in the first nine months of 1997. The increase in net income was
primarily the result of patent license income.
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended September 26, 1998, the Company used $4.4 million of
cash in operations compared to $2.5 million in cash generated from operations in
the nine months ended September 30, 1997. In addition to the $15.5 million net
loss for the nine-month period, cash used in operations for 1998 included an
increase in accounts receivable of $3.7 million primarily due to new customer
relationships in markets where customer repayment terms are longer than those
traditionally experienced by the Company. Other uses of cash in operations
include: (1) increases in other assets of $3.0 million due primarily to a
strengthening of certain European currencies vis-a-vis the U.S. dollar; and (2)
decreases in accrued liabilities and accounts payable of $2.0 million caused
primarily by spending and other charges in connection with the Company's
restructuring program. The above uses of cash in operations were partially
offset by non-cash charges of $11.8 million associated with the third quarter
restructuring charge, non-cash charges of $6.4 million relating to depreciation
and amortization, and improvements in inventory management of $1.4 million.
Net cash used in investing activities for the nine months ended September 26,
1998 of $2.2 million resulted from additions of property and equipment and cash
used in the acquisitions of ReSound Autac and Apex Acoustics, Ltd. These amounts
were partially offset by changes in the cumulative translation adjustment
account and by $900,000 in patent fees received for licensing certain technology
acquired by the Company in 1996 and 1997.
The primary financing activity in the nine months ended September 26, 1998 was
the payment of long-term debt of $3.4 million partially offset by proceeds of
$1.7 million from the issuance of common stock and additional funds from bank
loans of $1.4 million.
At September 26, 1998, the Company had available cash and cash equivalents of
$12.8 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, implementation of the Company's
restructuring program, and in connection with any future acquisitions.
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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 analog 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. While the Company has mechanisms in place to lessen
the negative impact of foreign currency fluctuations, any further weakness of
European currencies against the U.S. Dollar is 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.
On January 1, 1999, eleven of the fifteen member countries of the European Union
will establish fixed conversion rates between their existing sovereign
currencies and the Euro and adopt the Euro as their new common legal currency.
As of that date, the Euro will trade on currency exchanges and the legal
currencies will remain legal tender in the participating countries for a
transition period between January 1, 1999 and January 1, 2002. During the
transition period, non-cash transactions can be made in Euros, and parties can
elect to pay for goods and services and transact business using either the Euro
or legal currency. Between January 1, 2002 and July 1, 2002, the participating
countries will introduce Euro notes and coins and withdraw all legacy currencies
so that they will no longer be available. The Euro conversion may affect
cross-border competition by creating cross-border price transparency. The
Company is assessing its pricing/marketing strategy in order to insure that it
remains competitive in a broader European market. The Company is also assessing
its information technology systems to allow transactions to take place in both
the legacy currencies and
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the Euro, and to allow for the eventual elimination of the legacy currencies.
Additionally, the Company is reviewing whether certain existing contracts will
need to be modified. The Company's currency risk and risk management for
operations in participating countries may be reduced as the legacy currencies
are converted to the Euro. The Company will continue to evaluate issues
involving the introduction of the Euro. Based on the Company's assessment of
current information, it is not expected that the Euro conversion will have a
material adverse effect on its business or financial condition.
The Company is in the process of assessing the impact that the arrival of the
year 2000 may have on its business and operations. This issue arises because
many of the computer systems and software products currently in use are coded to
accept only two digit entries in the date code field. When the year 2000
arrives, these date code fields will have to accept four digit entries to
distinguish between dates in the twentieth century from those in the
twenty-first. There is widespread concern that, given the extent to which
computers, software and integrated circuits have come to permeate every facet of
today's society, including in the world of commerce, the failure to distinguish
between dates beginning with "19" and those beginning with "20" may cause
widespread disruption to the conduct of business, in the United States and
throughout the world.
In response to these concerns, the Company launched a program to assess the
impact of the year 2000 on its products, operations and business and on the
products, operations and businesses of those third-party vendors and suppliers
with which the Company has material relationships.
In assessing the impact on operations, the Company is undertaking an inventory
of the various hardware platforms and software products used throughout the
Company. These include centralized software applications used by the Company to
manage its core operations, such as supply chain management, engineering,
customer service and accounting, desktop applications used by Company employees,
and infrastructure hardware such as mid-range platforms, desktop PCs, and plant
floor equipment.
The Company's inventory of centralized and desktop software applications is
complete. The Company is working to complete its inventory of infrastructure
hardware by December 1998.
The next step in the assessment process is to determine whether or not the
infrastructure hardware and various software applications used by the Company
are year 2000 compliant; that is, whether the arrival of the year 2000 will
cause the subject hardware or software to malfunction or cause a disruption to
the Company's operations.
The Company has determined that year 2000 issues exist with certain of the
desktop software applications in use throughout the Company. The Company intends
to implement solutions to these issues as they become available from the vendors
of such desktop applications. To the extent that solutions are not made
available by the vendors of such products, the Company will replace such
products with equivalent year 2000 compliant desktop applications. The Company
expects that by March 1999, it will have implemented vendor-provided solutions
to these issues or have begun a program to implement replacement applications.
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The Company has determined that its supply chain management, customer service,
and accounting software applications may have year 2000 issues. However, the
Company had previously intended to and is in the process of upgrading such
software applications, which upgrades are designed to resolve any year 2000
issues. The timing of and expense associated with such upgrades have not been
affected by the need to address year 2000 concerns.
The Company's assessment of the year 2000 readiness of its infrastructure
hardware and engineering software awaits completion of the inventory.
In addition to assessing the impact of the year 2000 on its internal operations,
the Company has also undertaken to assess the impact of the year 2000 on its
products. The Company is currently assessing the impact of the year 2000 on its
hearing devices and fitting systems software products and has initiated
communications with vendors of critical components to assess the year 2000
compliance of such components and such vendors' state of readiness for the year
2000. The Company is working to complete an assessment of the impact of the year
2000 on its hearing devices and fitting systems software products by the end of
January 1999. Additionally, by the end of January 1999, the Company anticipates
having completed an assessment of the impact of the year 2000 on the vendors of
critical components and their products.
To date the Company has incurred minimal incremental expenditures in assessing
the impact of the year 2000. Such amounts have been expensed as incurred. Until
completion of the inventory and assessments described above, estimates of the
total costs to the Company of addressing the year 2000 problem cannot be made.
However, the Company does not currently anticipate that such costs will be
material to the Company's business, results of operations or financial
condition.
As previously reported, the Company plans that, by March 1999, it will have
completed its year 2000 assessment and put in place any required hardware or
software modifications and replacements.
The Company believes that a significant risk it faces from the year 2000 is risk
that is outside of its control. Notwithstanding written assurances from the
Company's vendors regarding year 2000 compliance, there is no guarantee that the
year 2000 will not cause a disruption in supply of critical components. Given
the Company's reliance on suppliers of critical, sole-sourced components for its
hearing devices, the Company is relying on these suppliers to address the year
2000 issues in their own products and operations, and the failure of such
suppliers to adequately address these issues could have a material adverse
effect on the Company's business, financial condition and results of operations.
The discussion of the Company's efforts and expectations relating to year 2000
compliance are forward-looking statements. The Company's ability to achieve year
2000 compliance both with respect to its internal operations and its products,
and the level of incremental costs associated therewith, could be adversely
impacted by, among other things, failure to identify all susceptible systems or
products, the availability and costs of upgrades to hardware platforms and
software products necessary to achieve year 2000 compliance, the availability
and costs of alternative hardware platforms and software products that may be
necessary to replace non year-2000 compliant products, the actions of vendors
with respect to components critical to the Company's products, particularly
sole-sourced components, and unanticipated problems identified in the Company's
ongoing assessment. Any of such factors could have a material adverse effect on
the Company's business, financial condition, and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
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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
During the third quarter, the Board of Directors approved the entering
into by the Company of new change of control agreements with executive
officers. These agreements would replace any change of control
agreements currently in place between the Company and executive
officers. The form of new change of control agreement is attached as
Exhibit 10.35.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.35: Amended and Restated Change of Control Agreement
Exhibit 27.01: Financial Data Schedule
(b) 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/Laureen DeBuono
Laureen DeBuono
Executive Vice President, Chief Operating
Officer & Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 9, 1998
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INDEX TO EXHIBITS
Exhibit
Number Description
- ------- -----------
10.35 Amended and Restated Change of Control Agreement
27.01 Financial Data Schedule
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