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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 27, 1999 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 and zip code)
(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
April 30, 1999 was 20,927,169 shares.
This document consists of 20 pages of which this is page 1.
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets..............................3
Condensed Consolidated Statements of Operations....................4
Condensed Consolidated Statements of Cash Flows....................5
Notes to Condensed Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations.............................................12
Liquidity and Capital Resources.................................. 13
Factors That May Affect Future Operating Results..................14
Item 3. Quantitative and Qualitative Disclosures about Market Risks.......19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................19
Item 2. Changes in Securities and Use of Proceeds.........................19
Item 3. Defaults upon Senior Securities...................................19
Item 4. Submission of Matters to a Vote of Security Holders...............19
Item 5. Other Information.................................................19
Item 6. Exhibits and Reports on Form 8-K..................................19
SIGNATURES .............................................................................20
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RESOUND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
MARCH 27, DECEMBER 31,
1999 1998
------- -------
(UNAUDITED)
Current assets:
Cash and cash equivalents $ 6,323 $ 6,715
Accounts receivable, net 26,611 16,892
Inventories 15,813 16,199
Other receivables 876 2,313
Other current assets 878 1,452
------- -------
Total current assets 50,501 43,571
Property and equipment, net 9,955 10,734
Goodwill, net 11,200 12,263
Other assets 3,045 3,194
------- -------
$74,701 $69,762
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans $ 7,057 $ 4,646
Accounts payable 11,449 8,253
Accrued liabilities 18,536 18,548
Long-term debt, current portion 11,107 1,790
------- -------
Total current liabilities 48,149 33,237
Long-term liabilities:
Long-term debt, non-current portion 2,686 12,815
Employee benefits 2,708 2,891
Other accrued liabilities 125 125
------- -------
Total long-term liabilities 5,519 15,831
Shareholders' equity 21,033 20,694
------- -------
$74,701 $69,762
======= =======
The accompanying notes are an integral part of the 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 27, MARCH 28,
1999 1998
-------- --------
Net sales $ 34,230 $ 31,143
Cost of sales 16,271 14,457
-------- --------
Gross profit 17,959 16,686
Operating expenses
Research and development 3,388 3,975
Selling, general and administrative 12,158 12,148
-------- --------
Total operating expenses 15,546 16,123
-------- --------
Income from operations 2,413 563
Interest expense, net (234) (256)
Other income (expense), net (412) 848
-------- --------
Income before income taxes 1,767 1,155
Provision for income taxes 163 181
-------- --------
Net income $ 1,604 $ 974
======== ========
Basic and diluted net income per common share $ 0.08 $ 0.05
======== ========
Shares used in basic net income per common share
calculation 20,746 20,259
======== ========
Shares used in diluted net income per common share
calculation 20,918 20,744
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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RESOUND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED
------------------
MARCH 27, MARCH 28,
1999 1998
-------- --------
Cash flows from operating activities:
Net income $ 1,604 $ 974
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,667 1,695
Loss on disposal of property and equipment 5 --
Amortization of deferred compensation 51 --
Issuance of common stock for purchase of minority
shareholder's interest in Viennatone BVG 160 --
Changes in assets and liabilities:
Accounts receivable (10,771) 168
Inventories (233) 1,892
Other assets 1,965 (1,592)
Accounts payable 3,361 134
Accrued liabilities 368 (1,654)
-------- --------
Net cash provided by (used in) operating activities (1,823) 1,617
Cash flows from investing activities:
Acquisition of Autac GmbH -- (401)
Proceeds from patent license agreements -- 900
Additions of property and equipment (1,404) (1,247)
-------- --------
Net cash used in investing activities (1,404) (748)
Cash flows from financing activities:
Borrowings under bank loans 2,931 --
Payments on bank loans (199) --
Payments on long-term debt (488) (2,799)
Proceeds from issuance of common stock 218 615
-------- --------
Net cash provided by (used in) financing activities 2,462 (2,184)
-------- --------
Effect of exchange rate changes on cash 373 (548)
Net decrease in cash and cash equivalents (392) (1,863)
Cash and cash equivalents at the beginning of the period 6,715 19,853
-------- --------
Cash and cash equivalents at the end of the period $ 6,323 $ 17,990
======== ========
Supplemental schedule of non-cash investing activities:
Issuance of common stock for purchase of minority shareholder's
interest in Viennatone BVG $ 160 $ --
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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RESOUND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 27, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the audited
consolidated financial statements for the year ended December 31, 1998 and
footnotes thereto included in the Company's 1998 Annual Report on Form 10-K.
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.
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 the Netherlands.
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RESOUND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Computation of Basic and Diluted Net Income per Common Share
In accordance with the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share, a reconciliation of
the numerator and denominator of basic and diluted net income per common share
is provided as follows (in thousands, except per share data):
THREE MONTHS ENDED
-------------------------
MARCH 27, MARCH 28,
1999 1998
------- -------
Net income $ 1,604 $ 974
======= =======
Weighted average common shares - basic 20,746 20,259
Dilutive options 172 485
------- -------
Adjusted weighted average common shares - diluted 20,918 20,744
======= =======
Net income per common share - basic $ 0.08 $ 0.05
======= =======
Net income per common share - diluted $ 0.08 $ 0.05
======= =======
Reporting Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 130, Reporting Comprehensive Income, which establishes standards
for the reporting and display of income and its components (revenue, expenses,
gains and losses) in a full set of general-purpose financial statements. The
Company adopted SFAS No. 130 as of January 1, 1998.
During the three months ended March 27, 1999 and March 28, 1998, total
comprehensive income (loss) amounted to $(90,000) and $472,000, respectively.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value. Inventories at March 27, 1999 and December 31,
1998 consisted of the following (in thousands):
MARCH 27, DECEMBER 31,
1999 1998
------- -------
Raw materials $11,028 $10,260
Work in process 2,476 2,576
Finished products 2,309 3,363
------- -------
Total $15,813 $16,199
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RESOUND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other Receivables
At December 31, 1998, the Company carried a receivable in the amount of
$1,692,000 from Amplifon International NV, representing the final installment of
the sales price of the Viennatone retail business in Austria (Viennatone BVG) .
The final installment was received by the Company in March 1999.
Reclassifications
Certain amounts in the condensed consolidated financial statements have
been reclassified to conform with the current year's presentation. These
classifications and restatements did not impact previously reported total
assets, liabilities, shareholders' equity or net income.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the type of
hedge transaction. The Company does not expect that the adoption of SFAS No. 133
will have a material impact on its consolidated financial statements.
NOTE 2. LINE OF CREDIT
In February 1999, the Company entered into a loan and security agreement
with a U.S. bank which provides a line of credit of up to $3 million, secured by
the Company's U.S. assets. Amounts borrowed under the agreement currently bear
interest at a rate equal to one and three-quarters (1.75) percentage points
above the banks prime rate. The agreement contains certain financial covenants
and is available until September 30, 1999. Outstanding borrowings under this
line were $2.0 million at March 27, 1999.
NOTE 3. SPECIAL CHARGES
1998 Strategic Restructuring Program
In the second half of 1998, the Company recorded special charges of
$17.6 million associated with the Company's 1998 strategic restructuring
program. This program is designed to realign the Company's organizational
structure, streamline internal processes, and consolidate facilities, primarily
in Europe, in order to achieve sustained profitability. The program will result
in a workforce reduction of up to 100 people worldwide in all functional areas.
Of the $17.6 million in special charges, approximately $10.1 million reflects
non-cash items for the write-down of goodwill and discontinued product lines.
The remaining charges of approximately $7.5 million reflect cash and non-cash
items pertaining primarily to employee severance and facility and business
consolidation activities.
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RESOUND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The special charges provided for costs associated with the write-down of
inventories to net realizable value, losses on supplier commitments, the
write-down of capital assets to fair value, the write-down of goodwill, employee
termination benefits and lease termination costs, and other exit costs, as
follows (in thousands):
Spending/
Total 1998 Balance Charges Balance
Special Spending/ Dec. 31, 3 Months Ended March 27,
Charges Charges 1998 March 27, 1999 1999
------- ------- ------- -------------- ---------
Employee termination benefits and
lease termination costs (recorded
as Restructuring and Other Charges) $ 4,038 $ 1,192 $ 2,846 $ 280 $ 2,566
Write-down of goodwill in ReSound
Autac and Viennatone (recorded as
Restructuring and Other Charges) 8,082 8,082 -- -- --
Write-down of inventories to net
realizable value and losses on
supplier commitments (recorded as
Cost of Sales) 1,832 1,456 376 275 101
Write-down of capital assets to fair
value (recorded as Selling, General
and Administrative) 1,344 567 777 364 413
Other exit costs (recorded as
Selling, General and Administrative
- $1,808, and Research and
Development -$520) 2,328 1,550 778 120 658
------- ------- ------- ------- -------
$17,624 $12,847 $ 4,777 $ 1,039 $ 3,738
======= ======= ======= ======= =======
The activities contemplated in the 1998 strategic restructuring program
are expected to be substantially completed by December 31, 1999. Management
anticipates no material change in the estimated cost of such activities. During
the three months ended March 27, 1999, the Company made approximately $0.4
million of cash payments relating to the special charges.
1997 Strategic Restructuring Program
In the second half of 1997, the Company recorded special charges of
$18.0 million associated with the Company's 1997 strategic restructuring
program. This program was designed to streamline operations and control costs
through management restructuring, operations consolidations, and increased focus
on core activities and product lines.
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RESOUND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of March 27, 1999 and December 31, 1998, $0.5 million and $0.8
million, respectively, remained of the 1997 restructuring accrual. During the
three months ended March 27, 1999, the Company made approximately $0.1 million
of cash payments relating to the special charges. The remaining 1997
restructuring accrual of $0.5 million will be substantially utilized by December
31, 1999.
NOTE 4. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, as of January 1, 1998. The Company has the
following reportable segments: North America, Europe, and Asia Pacific/Latin
America. The North America and Europe segments design, develop, manufacture, and
market hearing devices through audiologists, acousticians and other qualified
hearing device dispensers and distributors. The Asia Pacific/Latin America
segment primarily markets hearing devices through audiologists, acousticians and
other qualified hearing device dispensers and distributors.
The accounting policies of the segments are the same as those described
in Note 1, "Summary of Significant Accounting Policies". The Company evaluates
the performance of its sales and marketing segments (North America, Europe and
Asia Pacific/Latin America) and allocates resources to them based on earnings
from operations, which does not include nonrecurring gains and losses and
foreign exchange gains and losses. Additionally, the Company separately records
and analyzes R&D and Corporate operating expenses.
The Company attributes the operating results of intersegment sales and
transfers based upon the region in which the sale to a third party customer
occurs.
The Company's reportable segments are geographic locations. The
reportable segments are each managed separately due to their different economic
characteristics.
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RESOUND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The table below presents information about reported segments for the
three months ended March 27, 1999 and March 28, 1998 (in thousands):
THREE MONTHS ENDED North Asia Pacific/ R&D/
MARCH 27, 1999 America Europe Latin America Corporate Totals
- -------------- ------- ------ ------------- --------- ------
Net sales to external customers $16,048 $16,788 $1,394 $ --- $34,230
Operating income (loss) 6,018 3,034 368 (7,007) 2,413
Segment assets 23,070 49,776 1,855 --- 74,701
THREE MONTHS ENDED North Asia Pacific/ R&D/
MARCH 28, 1998 America Europe Latin America Corporate Totals
- -------------- ------- ------ ------------- --------- ------
Net sales to external customers $16,261 $13,723 $1,159 $ --- $31,143
Operating income (loss) 4,879 863 206 (5,385) 563
Segment assets 29,054 57,908 598 --- 87,560
NOTE 5. SUBSEQUENT EVENT
On May 7, 1999 the Company confirmed that it is in discussions with
another party concerning a possible business combination involving the two
companies at a price of $8.00 per share. The Company stated that it could
provide no assurance that a transaction will be consummated and that it does
not intend to comment further on any potential transaction until either a
definitive agreement is approved by both companies' Board of Directors or
discussions are terminated.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly 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, 1998.
The following discussion should be read in conjunction with the
unaudited condensed 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, 1998.
RESULTS OF OPERATIONS
Three months ended March 27, 1999 and March 28, 1998
Net sales increased by 10% to $34.2 million in the quarter ended March
27, 1999, from $31.1 million in the quarter ended March 28, 1998. International
sales accounted for 53% of ReSound's net sales during the first quarter of 1999,
compared to 48% during the same quarter in 1998. International sales for the
first quarter were $18.2 million, an increase of 22% from the same period last
year. European sales in the first quarter of 1999 increased 22% to $16.8
million, compared to $13.7 million during the same quarter in 1998. The increase
in European sales resulted primarily from the shipment of a significant analog
product tender order and the ramp-up of production and sales of the new Digital
5000 Series product line in several key European markets. Sales in the
Asia-Pacific region were $1.4 million in the first quarter of 1999, an increase
of 20% compared to $1.2 million in the first quarter of 1998. This
quarter-to-quarter increase resulted primarily from higher sales in Australia,
New Zealand and South Korea. First quarter North America sales of $16.0 million
were down slightly from the same quarter one year ago. The shortfall in revenue
in North America in the first quarter of 1999 compared to the same period in
1998 was primarily attributable to a continued significant movement in the
market from analog to digital devices, including the Company's Digital 5000
Series product line, a continued decrease in Sonar Hearing Health orders as the
Company completes the conversion of Sonar customers to the ReSound product line
and continued pricing pressures on analog products. This shortfall was largely
offset by the successful roll-out of the Company's Digital 5000 Series product
line.
Gross profit was 52% of net sales in the first quarter of 1999, compared
to 54% of net sales for the same quarter of 1998. This quarter-to-quarter
decrease in gross profit resulted primarily from the shipment of the relatively
low margin analog product tender order, which depressed the margin by
approximately three percentage points, and the continued pricing pressures
experienced on analog products.
Research and development ("R&D") spending during the first quarter of
1999 was $3.4 million (10% of net sales) compared to $4.0 million (13% of net
sales) in the same quarter of 1998.
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Spending in the first quarter of 1999 was primarily attributable to the
continuing development of new Digital Signal Processing ("DSP") technology
platforms, the ReSound Avance - the Company's hearing enhancer product, and
communications products being developed in alliance with Motorola, Inc. The
higher level of R&D spending in the comparable period of 1998 was primarily due
to costs associated with the early stages of development of the Company's DSP
technology product platform and the ReSound hearing enhancer program.
Selling, general and administrative expenses ("SG&A") were $12.2 million
(36% of net sales) in the first quarter of 1999, compared to $12.1 million (39%
of net sales) in the first quarter of 1998. This quarter-to-quarter increase in
SG&A expenses in absolute dollars was primarily attributable to additional SG&A
expenses for Apex Acoustics, Ltd. (a U.K. company), which was acquired in April
1998, partly offset by savings achieved as a result of the Company's 1998
strategic restructuring program.
Net interest expense was $234,000 for the first quarter of 1999 compared
to $256,000 for the first quarter of 1998. This quarter-to-quarter decrease was
primarily due to the Company's continued repayment of debt, partially offset by
lower interest income earned on its average cash balances.
Net other income (expense) was $412,000 (expense) for the first quarter
of 1999, compared to $848,000 (income) in the corresponding quarter of 1998. The
other expense in the first quarter of 1999 resulted primarily from unfavorable
foreign currency exchange rates and from the issuance of common stock in
settlement of the purchase of a minority shareholder's interest in Viennatone
BVG. In the first quarter of 1998, income resulted primarily from receipt of
$750,000 under a patent license agreement.
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 the Netherlands.
Net income increased by 65% to $1.6 million in the quarter ended March
27, 1999, compared to $974,000 in the quarter ended March 28, 1998. The increase
in net income in the current quarter was primarily attributable to the ramp-up
of production and sales of the new Digital 5000 Series product line, the
shipment of the analog product tender order, savings achieved as a result of the
Company's 1998 strategic restructuring program and lower R&D expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations in the three months ended March 27, 1999 was
$1.8 million compared to $1.6 million in cash generated from operations in the
three months ended March 28, 1998. The additional $3.4 million used in the first
quarter of 1999 compared to the same period in 1998 resulted primarily from the
following: (1) an increase in accounts receivable of $10.8 million primarily due
to a higher than normal level of shipments made in the last month of the
quarter, compared to a decrease in accounts receivable of $168,000 in the three
months ended March 28, 1998 and (2) an increase in inventory of $233,000
primarily due to the ramp-up of production of the Digital 5000 Series product
line in the first quarter of 1999, compared to a decrease in inventory of $1.9
million in the same period in 1998. The above uses of cash in operations in the
first quarter of 1999 were partially offset by: (1) non-cash charges of $1.7
million relating to depreciation and amortization; (2) a decrease in other
assets of $2.0 million due primarily to the receipt of $1.7 million representing
the final installment of the sales price of the Viennatone retail business in
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Austria (Viennatone BVG) and the release in March 1999 of $500,000 of restricted
cash which was deposited with the Company's primary bank as security for a
letter of credit in connection with the purchase of certain technology and (3)
increases in accounts payable and accrued liabilities of $3.7 million primarily
as a result of improved cash management.
Net cash used in investing activities in the three months ended March
27, 1999 was $1.4 million compared to $748,000 in the three months ended March
28, 1998. The use of cash in the first quarter of 1999 resulted from additions
of property and equipment. Usage of cash in the first quarter of 1998 resulted
from additions of property and equipment of $1.2 million and the acquisition of
Autac GmbH for $401,000, partially offset by $900,000 in patent fees received
for licensing certain technology.
Net cash provided by financing activities in the three months ended
March 27, 1999 was $2.5 million due primarily to borrowings of $2.9 million
under new bank loans and proceeds from issuance of common stock of $218,000
partially offset by payments on bank loans and long-term debt of $687,000. Net
cash used in financing activities in the three months ended March 28, 1998 was
$2.2 million due primarily to payments on long-term debt of $2.8 million
partially offset by proceeds from issuance of common stock of $615,000.
At March 27, 1999, the Company had available cash and cash equivalents
of $6.3 million. In addition, included in other assets at March 27, 1999 is
$525,000 in restricted cash which was deposited with the Company's primary bank.
These deposits related to the Company's Purchase Card program, which is secured
by an ongoing deposit of $125,000 and an additional $400,000 secures debt,
through February 2002, of an executive officer of the Company, related to the
purchase of a private residence in connection with the executive officer's
relocation. 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
strategic activities. In February 1999, the Company obtained a line of credit of
up to $3 million, secured by its U.S. assets, from a U.S. bank. Outstanding
borrowings under this line were $2.0 million at March 27, 1999.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Competition and pricing pressures, especially from mid-priced new
digital products, are expected to increase. The Company's ability to grow and
achieve profitability will depend upon its ability to continue to develop or
otherwise acquire and effectively market competitive hearing health care
products based on digital signal processing technology. 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. In addition, announcements of
new products may cause hearing health 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 could have a material, adverse impact on the Company's
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business, financial condition and results of operations. See Part 1 Item 1
"Business - Competition" of the Company's 1998 Annual Report on Form 10-K for a
discussion of the competitive environment.
During 1998, the Company initiated a strategic restructuring program.
There can be no assurance that the Company will be able to implement this
program in a timely manner, consolidate targeted operations successfully, or
otherwise achieve the cost reductions and other restructuring benefits
anticipated.
Due to changing economic conditions in certain countries in Europe (in
particular, Germany, Austria and France) and elsewhere, some governments have
reduced and/or are under increasing pressure to reduce government reimbursement
levels available to consumers on the purchases of hearing devices. Recent
reductions in reimbursement levels have had a negative impact on the Company's
revenues in the affected markets. Any future reimbursement reductions can also
be expected to have a negative impact on the Company's revenues. The Company
cannot predict whether or the extent to which further reimbursement reductions
will be implemented.
Similarly, it can be expected that the Company's sales results in Europe
would be adversely impacted if there were a future recurrence of the
appreciation of the U.S. dollar versus European currencies that was experienced
in 1997.
A much publicized dispute in Germany between ear, nose and throat
professionals who prescribe hearing devices and acousticians who dispense them
began in late 1997 and has negatively impacted the overall hearing health care
market since that time. Reduced consumer demand for hearing devices was felt
throughout 1998 and has continued in the first quarter of 1999. The Company
cannot predict how long and the extent to which its sales in Germany will
continue to be negatively impacted by this dispute.
The Company is subject to regulation by the FDA and numerous other
federal, state, local and international laws and regulations involving, among
other matters, the development, production and marketing of its products, safe
working conditions, manufacturing practices, and environmental protection.
Failure to comply with applicable regulatory laws and regulations can result in
fines, suspensions, delays in marketing or loss of permission to market
products, seizures or recalls of products, operating restrictions, injunctions,
civil fines and criminal prosecution. Also, new regulatory requirements may
significantly increase the costs of compliance with these laws and regulations.
See Part 1 Item 1 "Business - Government Regulation" of the Company's 1998
Annual Report on Form 10-K for a description of these laws and regulations.
The Company has been issued or has applied for a substantial number of
patents. No assurance can be given that pending patent applications will be
approved, that current or future patents will provide or continue to provide
competitive advantages for the Company's products, will not be challenged or
circumvented, or will afford the same degree of protection for future products
as they do for current products. Also, the Company may be contacted by parties
claiming that the Company's products infringe such parties' patent or other
proprietary rights. The Company may also find it necessary to institute
litigation to enforce patents issued to it, to protect trade secrets or
know-how owned by it or to determine the scope and validity of the patents or
other proprietary rights of others. Resolution of these claims generally
involves complex legal and factual questions and is highly uncertain. The cost
of prosecuting or defending these suits is high, and adverse determinations
could subject the Company to significant liabilities to third parties and
require the
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Company to seek licenses from other parties, prevent the Company from
manufacturing and selling its products, and/or require the Company to redesign
its products, all of which could have a materially adverse effect on the
Company's financial condition. Also, there can be no assurance that
confidentiality agreements between the Company and its employees or consultants
will not be breached, or that the Company will have adequate remedies for any
breach, or that it will otherwise be able to protect its trade secrets.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary technology or disclose such
technology, or that the Company can meaningfully protect its rights in such
unpatented proprietary technology. See Part 1 Item 1 "Business - Patents, Trade
Secrets and Licenses" of the Company's 1998 Annual Report on Form 10-K for a
discussion of the Company's patents and other intellectual property.
During 1998, the Company experienced various changes in its management
and technical staff. Competition for employees with technical, management and
other skills is intense. The Company's failure to retain the services of key
personnel or to attract additional qualified employees could materially and
adversely affect the Company's business.
Certain key components used in the Company's products are currently
available only from single or limited sources. The Company's inability to obtain
sufficient sole source or limited source components or subassemblies as
required, or to develop alternative sources if and as required, would have a
material adverse effect on the Company's financial condition.
Other factors which could impact the Company's revenues and results of
operations include a significant reduction in product sales to certain
customers, economic downturns in certain markets, and the costs incurred to
expand distribution in Europe and Asia. In connection with the Company's
international sales, a number of risks are inherent in international
transactions. Fluctuations in the exchange rates between the U.S. dollar and
other currencies could increase the sales price of the Company's products in
international markets where the prices of the Company's products are denominated
in U.S. dollars or lead to currency exchange losses where the prices of the
Company's products are denominated in local currencies. International sales and
operations may also be limited or disrupted by the imposition of governmental
controls, regulation of medical devices, export license requirements, political
instability, trade restrictions, changes in tariffs, and difficulties in
staffing and managing international operations.
On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
sovereign currencies and the Euro, and adopted the Euro as their new common
legal currency. As of that date, the Euro is traded on currency exchanges and
the sovereign currencies 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 sovereign 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 has assessed its pricing/marketing strategy in order to insure that
it remains competitive in a broader European market. The Company has also
assessed its information technology systems to allow transactions to take place
in both the legacy currencies and the Euro, and to allow for the eventual
elimination of the legacy currencies. 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
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Company's assessment of current information, it is not expected that the Euro
conversion will have a material adverse effect on its business, financial
condition, or results of operations.
The market price of the Company's common stock may be subject to
significant fluctuations. These fluctuations may be due to factors specific to
the Company, such as quarterly fluctuations in the Company's financial results,
changes in analysts' estimates of future results, litigation and regulatory
developments, changes in investors' perceptions of the Company or the
announcement of new or enhanced products by the Company or its competitors. In
addition, such fluctuations may be due to or exacerbated by general conditions
in the medical device industry or conditions in the financial markets generally.
The Company has assessed 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 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 has completed 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 next step in the assessment process was 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 these 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
has commenced implementation and expects that by the end of the third quarter of
1999, it will have fully implemented vendor-provided solutions to these issues
or have completed its program to implement replacement applications.
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
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are designed to resolve any year 2000 issues. The Company expects all U.S.
locations, and its manufacturing locations outside the U.S., to be upgraded by
the end of the second quarter of 1999, and all other locations to be upgraded by
the end of the third quarter of 1999. The timing of and expense associated with
such upgrades have not been affected by the need to address year 2000 concerns.
The Company has implemented, where necessary, year 2000 compliant
solutions for its infrastructure hardware and engineering software.
In addition to assessing the impact of the year 2000 on its internal
operations, the Company has also assessed the impact of the year 2000 on its
products. The Company has assessed the impact of the year 2000 on its hearing
devices and fitting systems software products and has communicated 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 has determined
that its hearing devices are year 2000 compliant. The Company's fitting systems
software products have also been determined to be year 2000 compliant.
Additionally, the Company has completed an assessment of the impact of the year
2000 on the vendors of critical components and their products. Based on
responses from these vendors, it is not anticipated that such vendors will be
impacted by the year 2000 to an extent that would cause any significant
disruption to the Company's operations.
To date, the Company has incurred approximately $240,000 in addressing
the impact of the year 2000. Such amounts have been expensed as incurred. The
Company estimates that total costs of addressing the year 2000 problem will not
exceed $400,000.
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. To
address this issue, the Company has implemented a contingency plan of
establishing a reasonable safety stock of any critical, sole-sourced components
in amounts that will permit the Company to weather an interruption of supply.
Given the Company's reliance on suppliers of critical, sole-sourced components
for its 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.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The information required by this Item is included under the
section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That may Affect Future
Operating Results" on pages 15 and 16.
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
On May 7, 1999 the Company confirmed that it is in discussions
with another party concerning a possible business combination
involving the two companies at a price of $8.00 per share. The
Company stated that it could provide no assurance that a transaction
will be consummated and that it does not intend to comment further
on any potential transaction until either a definitive agreement is
approved by both companies' Board of Directors or discussions are
terminated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.46: Master Term Lease Agreement Between the
Registrant and IBM Ireland Limited dated March 26, 1999.
(b) Exhibit 27.01: 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/ Robert D. Luttrell
---------------------------------------
Robert D. Luttrell
Vice President, Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: May 10, 1999
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INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION
- -------- -----------
Exhibit 10.46: Master Term Lease Agreement Between the Registrant and
IBM Ireland Limited dated March 26, 1999.
Exhibit 27.01: Financial data schedule
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