<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
- -- Act of 1934
For the quarterly period ended March 31, 1996 or
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
- -- Act of 1934
For the transition period from _______ to ________
Commission file number 0-20046
RESOUND CORPORATION
(Exact name of Registrant as specified in its charter)
California 77-0019588
(State of Incorporation) (I.R.S. Employer
Identification No.)
220 Saginaw Drive, Seaport Centre, Redwood City, California 94063
(Address of principal executive offices)
(415) 780-7800
(Registrant's telephone number)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
The number of shares of Registrant's common stock issued and
outstanding as of May 6, 1996 was 15,783,258 shares.
This document consists of 12 pages of which this is page 1
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<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C>
Item 1. Condensed Consolidated Balance Sheets............................................ 3
Condensed Consolidated Statements of Income...................................... 4
Condensed Consolidated Statements of Cash Flows.................................. 5
Notes to Condensed Consolidated Financial Statements ............................ 6 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations............................................................ 7 - 9
Liquidity and Capital Resources.................................................. 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................ 10
Item 2. Changes in Securities............................................................ 10
Item 3. Defaults upon Senior Securities.................................................. 10
Item 4. Submission of Matters to a Vote of Security Holders ............................. 10
Item 5. Other Items...................................................................... 11
Item 6. Exhibits......................................................................... 11
SIGNATURES..................................................................................... 12
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
RESOUND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................. $ 6,647 $ 5,091
Accounts receivable, net .............................. 18,811 17,746
Inventories ........................................... 18,361 18,466
Prepaid expenses and other ............................ 2,762 2,441
-------- --------
Total current assets ............................... 46,581 43,744
Property and equipment, net .............................. 9,559 9,300
Other assets ............................................. 2,409 2,634
Goodwill ................................................. 26,488 27,692
-------- --------
$ 85,037 $ 83,370
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans and short-term notes payable ............... $ 6,959 $ 7,475
Accounts payable ...................................... 9,085 10,189
Accrued liabilities ................................... 13,693 13,135
Long-term debt, current portion ....................... 2,298 2,962
-------- --------
Total current liabilities .......................... 32,035 33,761
Long-term liabilities:
Long-term debt, non-current portion ................... 22,848 23,647
Accrued pension ....................................... 6,128 6,216
Minority interest ..................................... 1,433 1,525
-------- --------
Total long-term liabilities ........................ 30,409 31,388
Commitments and contingencies ............................ -- --
Shareholders' equity:
Preferred stock ....................................... 5,000 --
Common stock .......................................... 54,698 54,292
Accumulated deficit ................................... (37,892) (38,010)
Cumulative translation adjustment...................... 787 1,939
-------- --------
Total shareholders' equity ......................... 22,593 18,221
-------- --------
$ 85,037 $ 83,370
======== ========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to condensed consolidated financial statements.
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RESOUND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
------------------
March 31, April 2,
1996 1995
-------- --------
<S> <C> <C>
Net sales ..................................... $ 27,264 $ 26,930
Cost of sales ................................. 12,556 13,236
-------- --------
Gross profit ............................. 14,708 13,694
Operating expenses
Research and development ................. 3,068 2,406
Selling, general and administrative ...... 10,874 10,306
-------- --------
Total operating expenses ........ 13,942 12,712
-------- --------
Income from operations ........................ 766 982
Interest expense -- net .................. (595) (440)
Other income (expense) / minority interest (2) 41
--------
Income before income taxes .................... 169 583
Provision for income taxes (1) ........... 51 173
-------- --------
Net income .................................... $ 118 $ 410
======== ========
Net income per share ......................... $ 0.01 $ 0.03
======== ========
Shares used in per share calculation .......... 16,119 15,703
======== ========
</TABLE>
(1) Consists principally of state and foreign income taxes.
See Exhibit 11.1 "Statement of Computation of Net Income per Share"
See notes to condensed consolidated financial statements.
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RESOUND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended,
-------------------
March 31, April 2,
1996 1995
-------- --------
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income .......................................................... $ 118 $ 410
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................... 1,580 2,494
Changes in assets and liabilities:
Accounts receivable ............................................. (1,065) (2,729)
Inventories ..................................................... 105 (468)
Deposits and other current assets ............................... (97) (469)
Accounts payable ................................................ (1,104) 1,560
Accrued liabilities ............................................. 378 298
-------- --------
Net cash provided by (used in) operating activities ......... (85) 1,096
Cash flows provided by (used in) investing activities:
Purchase of available-for-sale investments .......................... -- (669)
Change in translation adjustment .................................... (299) 205
Additions of property and equipment ................................. (1,487) (2,653)
-------- --------
Net cash used in investing activities ....................... (1,786) (3,117)
Cash flows provided by (used in) financing activities:
Payments on long-term debt ...................................... (1,110) --
Loans payable ................................................... (869) --
Bank borrowing .................................................. -- (12,501)
Issuance of long-term debt ...................................... -- 12,048
Issuance of preferred stock ..................................... 5,000 --
Issuance of common stock ........................................ 406 452
-------- --------
Net cash provided by (used in) financing activities ......... 3,427 (1)
-------- --------
Net increase (decrease) in cash and cash equivalents ................... 1,556 (2,022)
Cash and cash equivalents at the beginning of the period ............... 5,091 15,824
-------- --------
Cash and cash equivalents at the end of the period ..................... $ 6,647 $ 13,802
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................ $ 731 $ 173
======== ========
Income taxes .................................................... $ 309 $ --
======== ========
Supplemental schedule of non-cash investing and financing activities:
Issuance of convertible debt ........................................ $ -- $ 10,000
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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Notes to Condensed Consolidated Financial Statements
Unaudited March 31, 1996
NOTES A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles and with
the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 1996 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1996. For further information, refer to the audited consolidated financial
statements for the year ended December 31, 1995 and footnotes thereto included
in the Company's 1995 Annual Report on Form 10-K.
NOTE B - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market. The
components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
--------- ------------
<S> <C> <C>
Raw materials ...................... $ 7,943 $ 8,879
Work in process .................... 4,914 4,431
Finished products .................. 5,504 5,156
------- -------
$18,361 $18,466
======= =======
</TABLE>
NOTE C - BANK LOANS (CURRENT)
The Company's current U.S. bank loans, with balances outstanding of
approximately $2.9 million and $3.4 million at March 31, 1996 and December 31,
1995, respectively, are subject to certain financial covenants, including
minimum cash balances, quick assets ratio, tangible net worth and profitability
and are secured by substantially all of the Company's U.S. net assets. At
December 31, 1995, the Company was not in compliance with the financial
covenants. Non-compliance results in the bank having the right to declare the
loans due and payable immediately, but the bank has not exercised that right. At
March 31, 1996, the Company was in full compliance with the financial covenants.
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NOTE D - ACCOUNTING FOR INCOME TAXES
Income taxes have been provided for on a year-to-date basis and represent taxes
on profits earned at the Company's European subsidiaries in Ireland, Austria,
United Kingdom, and Holland, plus California taxes and U.S. alternative minimum
taxes.
NOTE E - SHAREHOLDERS' EQUITY
In March 1996, the Company issued 54,055 shares of Series B Preferred Stock for
$5.0 million in a private placement to an existing shareholder. These securities
have a cumulative stock dividend rate of 6% and are convertible into 540,550
shares of common stock at a price of $9.25 per share. Under certain conditions,
the Company may also be obligated to issue additional warrants in connection
with such issuance of Series B Preferred Stock.
NOTE F - USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS:
OVERVIEW
The following discussion should be read in conjunction with the unaudited
consolidated condensed financial statements and notes thereto included in Part I
- -- Item 1 of this Quarterly Report and the audited consolidated financial
statements and notes thereto and Management's Discussion and Analysis of
Financial Condition and Results of Operations for the year ended December 31,
1995 contained in the Company's Annual Report on Form 10-K.
ReSound Corporation (the "Company" or "ReSound") is a hearing health care
company that designs, develops, manufactures and sells technologically advanced
hearing devices for the hearing impaired. ReSound distributes its products
through authorized dispensers in the United States, Europe and Asia. The Company
sells Personal Hearing Systems which are available in In-the-Ear ("ITE"),
Behind-the-Ear ("BTE") and In-the-Canal ("ITC") versions. In addition, the
Company sells a proprietary prescriptive programming system designed to enable a
hearing care professional to assess a patient's hearing impairment through
computerized measurement, to select an appropriate, individualized prescription
and to program the Personal Hearing System.
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RESULTS OF OPERATIONS
Three months ended March 31, 1996 and April 2, 1995
Net sales increased by 1% to $27.3 million in the first quarter ended March 31,
1996, from $26.9 million in the quarter ended April 2, 1995. International sales
accounted for 64 percent of ReSound's net sales during the first quarter of
1996, compared to 67 percent during the same quarter in 1995. International
sales for the first quarter were $17.6 million, a decrease of 3 percent from the
same period last year. The slight decrease in international sales was the result
of the economic slowdown in Germany, no repeat of a large one-time sale to an
Eastern European country which occurred in the first quarter of 1995 and to
weaker European currencies compared to the U.S. dollar. First quarter U.S. sales
of $9.7 million were up 11 percent from the same period last year due,
primarily, to continued strong sales of the Company's Encore(TM) hearing device
products.
Gross profit was 53.9 percent of net sales in the first quarter of 1996,
compared to 50.9 percent of net sales for the same quarter of 1995. The
quarter-to-quarter increase in gross profit was largely attributable to the
elimination of royalty expenses incurred in 1995 due to the A&L Technology
patent litigation, which was settled in October 1995. In addition, the Company
has benefited from improved efficiencies at its Ireland manufacturing facility
which supplies all ReSound BTE hearing devices and faceplate components
worldwide and for the use of Viennatone hearing device cases and components in
various products which began in the second half of 1995.
Research and Development ("R&D") spending during the first quarter of 1996 was
$3.1 million (11.3 percent of net sales) compared to $2.4 million (8.9 percent
of net sales) in the same quarter of 1995. The Company increased spending for
development of new products scheduled to be introduced throughout 1996. In the
first quarter of 1996, the Company introduced its improved Behind-the-Ear Power
hearing device and upgraded a majority of its installed base of Portable
Prescriptive Programming fitting systems to allow improved performance in
programming of its newest generation of hearing devices. On April 17, 1996 the
Company announced its Advanced ReSound Processing chip incorporating ReSound's
Cochlea Dynamic technology into an ITC hearing device, along with a ReSound
software fitting system, ReSource, based on the industry standard NOAH platform.
Selling General and Administrative expenses ("SG&A") were $10.9 million, or 39.9
percent of net sales for the first quarter of 1996, compared to $10.3 million,
or 38.3 percent of net sales in the first quarter of 1995. The increase is
primarily due to expenditures relating to upgrading ReSound's worldwide customer
base of Portable Prescriptive Programming Systems and higher costs associated
with distribution in several new markets. These expense increases were partially
offset by weaker European currencies compared to the U.S. dollar.
Net interest expense was $595,000 for the first quarter of 1996 compared to
$440,000 for the first quarter of 1995. This increase in net interest expense is
primarily attributable to the depletion of the
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Company's short-term investments as a result of the payment of funds in
settlement of the A&L Technology patent litigation which occurred in October
1995.
Income taxes have been provided for on a year-to-date basis and represent taxes
on profits earned at ReSound's European subsidiaries in Ireland, Austria, UK,
and Holland, plus California taxes and U.S. alternative minimum taxes.
Net income was $118,000 in the quarter ended March 31, 1996, compared to net
income of $410,000 in the quarter ended April 2, 1995. The decrease was
primarily the result of increased R&D spending associated with the development
of new products scheduled to be introduced in 1996, increased SG&A costs related
to upgrading ReSound's customer base of Portable Prescriptive Programming
Systems and costs associated with distribution in several new markets.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1996 the Company used $85,000 in cash from
operations, compared to $1.1 million in cash generated in the three months ended
April 2, 1995. For the three months ended March 31, 1996, the negative cash flow
from operations was primarily due to an increase in accounts receivable of $1.1
million and a decrease in current liabilities of $700,000 offset by depreciation
and amortization charges of $1.6 million and net income of $118,000.
Net cash used in investing activities for the three months ended March 31, 1996
of $1.8 million resulted primarily from additions of property and equipment of
$1.5 million.
The primary financing activity in the three months ended March 31, 1996 involved
the issuance of Series B Preferred Stock for $5.0 million. (See Note E -
Shareholders' Equity, in Notes to Condensed Consolidated Financial Statements,
above.) In addition, the Company made payments of principal and interest on bank
loans of approximately $2.0 million in the three months ended March 31, 1996.
At March 31, 1996, the Company had available cash and cash equivalents of $6.6
million. While the Company believes that available cash will be sufficient to
meet the Company's short-term operating and capital requirements, the Company
will be required to raise additional capital for its currently envisaged
long-term needs, to refinance short-term debt and in connection with any future
acquisitions. (See also Part II, Item 5. Other Items, below.)
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is the defendant in a lawsuit filed in September 1993 in the United
States District Court, District of Minnesota, by Minnesota Mining and
Manufacturing Company ("3M") alleging that the Company's hearing devices and
programming systems infringe the claims of three patents owned by the plaintiff.
(See also Item 5. Other Items, below.)
ITEM 2. CHANGES IN THE RIGHTS OF COMPANY SECURITY HOLDERS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
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ITEM 5. OTHER ITEMS
On April 8, 1996 the Company announced that a letter of intent had been signed
for the Company to purchase the assets of 3M's Hearing Health business. A
purchase price of approximately $25 million, subject to adjustment based upon
due diligence, has been agreed to by the parties. The purchase will include 3M's
Hearing Health business, patents and patent applications and also will involve
dismissal of the 3M patent infringement lawsuit filed against the Company. A
final asset purchase agreement, subject to completion of financing by the
Company, obtaining of necessary governmental approvals and other conditions, is
expected to be signed and the purchase completed by approximately June 14, 1996.
In April 1996, the Company formed a strategic alliance with GN Danavox a/s and
Audiologic with the intention of developing a standard hardware platform for
digital hearing technology. The companies will collaborate to create a computer
chip powerful enough to perform multiple complex signal processing functions at
once.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.24 Letter of Intent for Purchase of Certain Assets
of 3M Hearing Health Business between the Company and
Minnesota Mining and Manufacturing Company dated March 11,
1996.
(b) Exhibit 10.25 Letter agreement with respect to Purchase of
Series B Preferred Stock dated March 8, 1996 between the
Company and S-E-Banken Lakemedelsfond.
(c) Exhibit 11.1: Statement of computation of net income per share
(d) Exhibit 27: Financial data schedule
(e) Report on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOUND CORPORATION
/s/ Paul A. Busse
--------------------------------------------
Paul A. Busse
Sr. Vice President Finance & Administration,
Chief Financial Officer
(Principal Financial Officer)
Date: May 10, 1996
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EXHIBIT 10.24
March 11, 1996
Mr. George Meredith
Executive Vice President
Life Sciences & Corporate Services
3M
220-13W-39
Maplewood, MN 55144-1000 Via Telefax 612-736-8715
Re: LETTER OF INTENT for Purchase of Certain Assets of 3M Hearing Health
Business
Dear Mr. Meredith:
The purpose of this letter is to outline the manner in which we (the "Buyer")
propose to acquire from Minnesota Mining and Manufacturing Company (the
"Corporation") all the assets, tangible and intangible, owned or used directly
and primarily by the Corporation in connection with its Hearing Health business
(the "Business") including but not limited to those set forth on Exhibit A
attached hereto (the "Assets") and to assume certain specified liabilities of
the Corporation. The parties recognize that the transaction will require further
documentation and approvals, including the preparation and approval of a formal
agreement setting forth the terms and conditions of the proposed purchase
("Asset Purchase Agreement"); nevertheless, they execute this letter to evidence
their intention to proceed in mutual good faith to complete work required to
negotiate terms of an Asset Purchase Agreement that are consistent with this
letter.
<PAGE> 2
The proposed terms and conditions include, but are not limited to, the
following:
PURCHASE OF
ASSETS: The Buyer will purchase the Assets from the Corporation.
ASSUMPTION
OF LIABILITIES: The Buyer will assume certain liabilities of the
Corporation to be agreed upon by the parties. The Buyer
will not assume nor be liable for any other liabilities or
obligations of the Corporation (including but not limited
to accounts payable and any other amounts owed to third
parties) except as agreed to by the parties.
INDEMNIFICATION: The Corporation shall indemnify and hold harmless the
Buyer against each and every liability and obligation of
the Corporation other than those specifically assumed by
the Buyer and all liabilities, obligations, and costs
relating to the conduct of the Business prior to the
Closing. The Buyer shall indemnify and hold harmless the
Corporation against each and every liability and
obligation of the Business relating to the conduct of the
Business after the closing.
PURCHASE PRICE: The Buyer will pay Corporation $25 million ("Purchase
Price"), payable as follows: $1 million in cash upon the
signing of this letter by both parties and $24 million in
cash at the Closing.
CLOSING: The parties shall execute the Asset Purchase Agreement and
close the transactions contemplated herein (the "Closing")
on or before May 31, 1996.
2
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ASSET PURCHASE
AGREEMENT: The transaction will be subject to the negotiation and
execution of a definitive Asset Purchase Agreement with
terms satisfactory to Corporation and Buyer. The Asset
Purchase Agreement will contain representations,
warranties, covenants, conditions, and indemnification
provisions customary in transactions of this size and type
and will provide for allocation of the Purchase Price
among the Covenant Not To Compete and the Assets based on
their agreed value and, in addition, shall provide for the
following:
a. Buyer will be licensed to use the trademark "3M" until
the earlier of a) the date Buyer no longer has inventory
bearing the "3M" logo and b) one year following the
Closing (the "License Termination Date"). Buyer shall use
reasonable commercial efforts to transition to the
manufacture of Products without the trademark "3M" and to
sell inventory bearing such trademark before selling
Product without such trademark. Notwithstanding the
foregoing Buyer shall be free to sell Products bearing the
trademark "3M" following the License Termination Date if
such product was in inventory as of the Closing or
returned to inventory as a result of a return for
reimbursement or credit in accordance with customary
practice. Buyer is hereby licensed for a period of five
years following the Closing to reference 3M, subject to
3M's prior written approval of said reference, which
approval shall not unreasonable be withheld, as one of the
sources of the technology used in any ReSound product so
long as such product embodies the technology included in
one of the patents included among the Assets.
3
<PAGE> 4
b. Standard Sellers representations regarding selected
financial data, liabilities, inventory, employees, and
stating that Corporation's disclosures are materially
complete, accurate, and not misleading.
c. Buyer will be allowed for two years following the
Closing on a rent-free basis to retain the use of the
facilities currently used by the Business, such additional
space as is required for the transfer of certain employees
of the Business from their current office at the
Corporation to the facility currently occupied by the
Business and to accommodate additional personnel as are
required to grow the business at a mutually agreed upon
growth rate and square footage allowance. Notwithstanding
the foregoing, Buyer will be responsible for non-rent
costs related to Buyer's use of facilities including but
not limited to facility operating expenses, real estate
taxes, telephone and improvement/remodeling expenses.
d. Buyer may offer employment and Buyer's benefit package
to employees of its choice of the Business; Buyer will not
be responsible for relocating or severing those employees
who decline Buyer's offer or to whom no offer was given or
who return from disability leave; Corporation, at the
Closing, will pay all employees in cash for vacation
accrued as of the Closing. Buyer agrees to recognize all
years of employment with Corporation as years of service
with Buyer for the purpose of computing years of service
for benefits plan purposes for all of Corporation's
employees who become employees of Buyer at and as a result
of the Closing.
4
<PAGE> 5
e. Corporation shall provide the Business, at no charge,
information systems access, information services,
accounting, billing, and cost reports services for thirty
days following Closing. Corporation shall charge Buyer its
cost therefor for 60 days thereafter and for sixty
additional days at cost plus 20%. Upon the signing of this
letter by both parties information service personnel from
both Corporation and Buyer shall promptly meet to develop
a program for the provision of such services.
f. Buyer shall assume all Warranty expenses relating to
Products sold prior to the Closing, including the cost of
returns, remakes and repairs. The term "Warranty expenses"
shall not include the cost of damages, liabilities or
expense relating to personal injury or property damage
cause by or related to such Products.
g. Corporation shall make available to Buyer Corporation's
employees, namely Gabi Sabongi and Terry Rogers, formerly
associated with the Business for consulting purposes
during the three months following the Closing for up to
104 hours per each such employee. Other corporation
employees formerly associated with the Business shall be
made available on a limited basis at the discretion of
Corporation.
h. On the ninetieth (90th) day following Closing,
Corporation shall reimburse Buyer for all accounts
receivable not collected by Buyer by such date, provided
however that the Buyer shall assign such uncollected
accounts to Corporation.
5
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i. Corporation shall be liable for excessive and obsolete
inventory determined following an evaluation conducted by
Buyer's independent auditors prior to Closing.
j. In the event Buyer cannot or elects not to assume
certain agreements related to the Business, then Buyer and
Corporation will work together in a mutually acceptable
arrangement in order for Corporation to fulfill its
obligations under said agreements. Buyer shall receive a
non-exclusive license to the CID Patents included among
the Assets. Corporation shall not grant another
non-exclusive license for such patents without Buyer's
permission. Corporation will use its best efforts to
assist Buyer to negotiate a direct contractual
relationship with the owner of the CID Patents and will,
if requested by Buyer, assign to Buyer all rights under
its license agreement concerning the CID Patents or
relinquish all its rights under such agreement.
k. Corporation shall grant Buyer a royalty free license
for any patent used in the Business but not part of the
Assets.
ACCESS: To permit Buyer to conduct its due diligence
investigation, from March 20, 1996 and as long as this
Letter of Intent remains in effect, the Corporation will
permit the Buyer and its agents to have reasonable access
to the premises in which the Corporation conducts the
Business and to its books and records and will furnish to
Buyer such financial data, operating data, and other
information as Buyer shall reasonably request. The Buyer
agrees to retain all information so obtained from
Corporation on a confidential basis. Upon the termination
of this Letter of Intent for
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any reason, the Buyer shall return promptly to the
Corporation all printed information received by the Buyer
from the Corporation in connection with the proposed
transaction.
ORDINARY COURSE
OF BUSINESS: The parties agree that the Business will be operated from
the date hereof through the Closing in the ordinary course
of its business, consistent with past practices. Without
limiting the foregoing, there shall be no change in
accounting policies applied on a consistent basis and no
accruals for payment of investment bankers or counsel fees
with respect to the transaction for the Buyer or the
Corporation. There shall not be any change in or
restrictions placed on the payment of liabilities pending
the Closing. There shall not be any change in the method
by which bonuses or other payments are made to employees
of the Business.
EXCLUSIVITY: The parties agree to negotiate in good faith the
provisions of an Asset Purchase Agreement not later than
June 15, 1996 ("Exclusivity Period"). The parties agree
that during the Exclusivity Period the Buyer shall have
the exclusive right to negotiate with the Corporation for
the purchase of the Assets and during such Exclusivity
Period the Corporation agrees not to directly or through
intermediaries solicit, entertain or otherwise discuss
with any person any offers to purchase all or any portion
of the Assets or of the Business out of its ordinary
course of business.
7
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EARNEST
PAYMENT: Buyer and Corporation recognize that Corporation has
provided to Buyer valuable competitive and proprietary
information regarding the Business including but not
limited to information regarding the Business' customers,
products, manufacturing operations and personnel. Buyer
and Corporation each further recognize that in the event
the aforementioned transaction is not consummated, then
Corporation's Business will be irreparably damaged and
harmed. Accordingly, Buyer agrees that the first One
Million Dollars ($1,000,000) of the Purchase Price
referred to above shall constitute an earnest payment (the
"Earnest Payment") to be deposited immediately upon
payment in an interest bearing account at a reputable
institution acceptable to both Buyer and Corporation with
all interest accrued on such amount prior to the Closing
or the date the parties reasonably conclude that the
transaction contemplated hereby will not occur ("the
Termination Date"), whichever occurs first, to be paid to
Buyer. In the event the transaction is not consummated due
to (i) the failure to obtain the receipt of all required
approvals, consents and authorizations of state and
federal regulatory authorities, including but not limited
to expiration without regulatory challenge of the required
waiting period under the Hart-Scott-Rodino Improvements
Act of 1986; (ii) a material change in sales revenue or
costs defined as a 20% deviation of the Business; or (iii)
failure to obtain Corporation's management committees'
approval and Corporation's Board of Directors' approval,
then the Earnest Payment shall be returned to Buyer,
otherwise, Corporation retains the right to the Earnest
Payment and all
8
<PAGE> 9
interest earned thereon from and after the Termination
Date. In the event the transaction is consummated, then
the Earnest Payment shall constitute the first $1 million
of the Purchase Price.
COVENANT NOT
TO COMPETE: In the Asset Purchase Agreement, Corporation will agree
that it will not, directly or indirectly, through a
subsidiary or otherwise, compete with the Buyer in its
business for a period of five (5) years after the Closing.
NEWS RELEASE: Unless required in the opinion of Counsel, neither
Corporation nor Buyer will issue a news release or other
announcement concerning the transaction without the prior
approval of the other as to the contents of the
announcement and its release, which approval will not be
unreasonably withheld.
REIMBURSEMENT
OF EXPENSES: Each party shall bear its own cost involved in the
negotiation, documentation and conclusion of the
transaction contemplated herein. Buyer will pay the filing
fee associated with the Hart-Scott- Rodino Improvements
Act of 1986.
This offer is contingent upon: (i) the completion by the Buyer, to its
satisfaction, of due diligence on the Business, its markets, prospects and
potential; (ii) satisfactory completion of legal due diligence, including,
without limitation, review of material
9
<PAGE> 10
contracts and due diligence with respect to evaluation of potential liabilities
related to environmental and other issues and tax matters; (iii) receipt of all
required approvals, consents and authorizations of state and federal regulatory
authorities, including but not limited to expiration without regulatory
challenge of the required waiting period under the Hart-Scott-Rodino
Improvements Act of 1986; (iv) receipt of all required consents of third
parties; (v) the occurrence of no material adverse change in sales revenue or
cost, as defined as 20% deviation from forecasts made available to Buyer prior
to the date of this letter; and (vi) the completion of satisfactory legal
documentation including adequate indemnifications and representations; (vi)
Buyer obtaining adequate financing for the Purchase Price on or prior to the
Closing; (vii) approved by appropriate management committees and Boards of
Directors of Buyer and Corporation.
The parties agree that any discussions or information in any form related to the
possible terms of the transaction (including but not limited to valuations of
any of the Assets by either party as part of the negotiations) have been
disclosed in part in contemplation of settlement of the pending patent
litigation involving the parties and shall be inadmissible as evidence in any
patent litigation between the partners should the transaction contemplated
hereby not take place.
This Letter of Intent may be executed in several counterparts and all so
executed shall constitute one letter binding on all the parties hereto even
though all the parties are not signatories to the original or the same
counterpart.
Our signature on this Letter of Intent shall not be valid unless you have
executed and we have received from you a copy of this Letter of Intent with your
original signature on it. If the foregoing is acceptable to you, kindly execute
a copy of this letter to us at your earliest convenience.
10
<PAGE> 11
Very truly yours,
RESOUND CORPORATION
By: /s/ Paul Busse
---------------------------------
Paul Busse
Sr. Vice President, Finance & Administration
& Chief Financial Officer
ACCEPTED AND AGREED TO:
MINNESOTA MINING AND
MANUFACTURING COMPANY
By: /s/ George Meredith
---------------------------------
George Meredith
Executive Vice President
Life Sciences & Corporate Services
cc: Peter Riepenhausen
11
<PAGE> 12
EXHIBIT A
ASSETS
a. Fixed Assets, machinery, manufacturing equipment, laboratory and test
equipment, and office equipment, raw materials, packaging, factory
supplies, work-in-progress, and finished goods inventories, accounts
receivable, customer lists and business records as may exist at the Closing
(and not materially different in value and quality from those in existence
as of the date of this letter) directly and primarily related to the
Business.
b. Trademarks and trade names specific to the Business, and all associated
goodwill and rights to inventions disclosed by employees of the Business,
patent applications as well as all divisions, reissues,
continuations-in-part, renewals, extensions and counterparts thereof in any
country of all patents relevant to the Business.
c. Corporation's entire right, title, and interest under any claims specific
to the Business against any party which claim arose at any time prior to,
and up to the Closing, including but not limited to all of Corporation's
rights under any claim in any choses in action against Buyer and others
related to intellectual property included in the Assets specific to the
Business, which arose at any time prior to and up to the Closing.
d. The Assets shall not include the agreements related to HearX and the HearX
stock (and rights related to the HearX stock).
12
<PAGE> 1
EXHIBIT 10.25
RESOUND CORPORATION
220 SAGINAW DRIVE
SEAPORT CENTRE
REDWOOD CITY, CA 94063
MARCH 8, 1996
MR. HENRIK RHENMAN
S-E-BANKEN LAKEMEDELSFOND
ST R2
10640 STOCKHOLM, SWEDEN
PURCHASE OF SERIES B PREFERRED STOCK
DR. MR. RHENMAN:
THIS LETTER IS INTENDED TO CONFIRM THE TERMS OF OUR AGREEMENT
CONCERNING THE PURCHASE BY S-E-BANKEN LAKEMEDELSFOND ("BUYER") OF SERIES B
PREFERRED STOCK OF RESOUND CORPORATION, A CALIFORNIA CORPORATION ("SELLER").
1. PURCHASE OF STOCK:
(a) AT THE CLOSING (AS DEFINED BELOW), BUYER WILL PURCHASE
FROM SELLER AND SELLER WILL SELL AND ISSUE TO BUYER 54,055 SHARES OF SERIES B
PREFERRED STOCK ("PREFERRED STOCK") OF SELLER AT A PRICE OF U. S. $92.50 PER
SHARE (TOTAL PURCHASE PRICE OF U. S. $5,000,000). THE TERMS OF THE PREFERRED
STOCK ARE SET FORTH IN EXHIBIT A ATTACHED HERETO.
(b) THE CLOSING OF THE PURCHASE AND SALE OF THE PREFERRED
STOCK ("CLOSING") WILL TAKE PLACE AT 10:00 A.M. ON FRIDAY, APRIL 5, 1996, AT THE
OFFICES OF VENTURE LAW GROUP, 2800 SAND HILL ROAD, MENLO PARK, CA 94025, OR AT
SUCH OTHER TIME, DATE OR PLACE AS SELLER AND BUYER MAY AGREE. AT THE CLOSING,
SELLER WILL DELIVER TO BUYER A STOCK CERTIFICATE IN BUYER'S NAME FOR THE
PREFERRED STOCK BEING PURCHASED TOGETHER WITH A CERTIFICATE SIGNED BY SELLER'S
PRESIDENT THAT THE REPRESENTATIONS OF SELLER IN SECTION 3(a) BELOW ARE TRUE AND
A LEGAL OPINION OF VENTURE LAW GROUP, COUNSEL FOR SELLER, IN CUSTOMARY FORM
CONFIRMING THE ACCURACY OF THE REPRESENTATIONS OF SELLER IN SECTION 3(b) BELOW.
(c) BUYER HAS DEPOSITED WITH SELLER U. S. $5,000,000 AS OF THE
DATE OF THIS LETTER, WHICH WILL BE CREDITED AGAINST THE PURCHASE PRICE OF THE
PREFERRED STOCK AT THE CLOSING. IF THE CLOSING HAS NOT OCCURRED BY MAY 31, 1996,
SELLER WILL PROMPTLY REFUND SUCH DEPOSIT TO BUYER.
(d) BUYER IS AWARE THAT SELLER IS PRESENTLY NEGOTIATING THE
PURCHASE OF CERTAIN PATENTS AND OTHER ASSETS OF THE HEARING DEVICE BUSINESS
CURRENTLY OPERATED BY MINNESOTA MANUFACTURING & MINING CO. ("3M"). IF THE
CLOSING OCCURS AND IF THE 3M TRANSACTION IS NOT COMPLETED BY JUNE 30, 1996,
SELLER WILL AT SUCH TIME ISSUE TO BUYER FOR NO
<PAGE> 2
ADDITIONAL CONSIDERATION A THREE YEAR WARRANT IN CUSTOMARY FORM TO PURCHASE
100,000 SHARES OF SELLER'S COMMON STOCK AT A PRICE PER SHARE OF 125% OF THE
COMMON STOCK CLOSING PRICE ON MARCH 8, 1996 ("WARRANT"). BUYER SHALL HAVE UNTIL
JUNE 30, 1999 TO EXERCISE SUCH WARRANT.
(e) THE PREFERRED STOCK, THE WARRANT AND SHARES OF COMMON
STOCK ISSUABLE UPON EXERCISE OR CONVERSION OF THE PREFERRED STOCK OR WARRANT ARE
REFERRED TO IN THIS AGREEMENT AS THE "SECURITIES".
2. REPRESENTATIONS BY BUYER: BUYER REPRESENTS TO SELLER THAT (i) BUYER
IS PURCHASING THE SECURITIES FOR INVESTMENT AND NOT WITH A VIEW TOWARDS THEIR
RESALE, AND (ii) BUYER IS FAMILIAR WITH THE BUSINESS AND AFFAIRS OF SELLER AND
HAS DISCUSSED THE STATUS OF SELLER'S BUSINESS WITH ITS PRESIDENT AND CHIEF
FINANCIAL OFFICER. BUYER UNDERSTANDS THAT THE CERTIFICATES EVIDENCING THE
SECURITIES WILL BEAR A LEGEND IMPOSED BY SELLER RESTRICTING FURTHER SALE OR
TRANSFER OF THE SECURITIES EXCEPT IN COMPLIANCE WITH ALL APPLICABLE FEDERAL AND
STATE SECURITIES LAWS.
3. REPRESENTATIONS BY SELLER: SELLER REPRESENTS TO BUYER AS FOLLOWS:
(a) SELLER HAS PROVIDED TO BUYER COPIES OF THE MOST RECENT
DISCLOSURE DOCUMENTS FILED BY IT WITH THE U. S. SECURITIES AND EXCHANGE
COMMISSION ("SEC"). SUCH DOCUMENTS WERE CORRECT AND COMPLETE AS OF THE DATE THEY
WERE FILED. THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IN SELLER'S BUSINESS OR
AFFAIRS SINCE THE DATE OF SUCH FILINGS.
(b) SELLER IS A CALIFORNIA CORPORATION IN GOOD STANDING.
SELLER HAS TAKEN ALL NECESSARY CORPORATE ACTIONS TO ISSUE THE SECURITIES TO
BUYER IN ACCORDANCE WITH THE TERMS OF THIS AGREEMENT, AND NO FURTHER U. S. OR
STATE GOVERNMENTAL APPROVAL IS REQUIRED IN CONNECTION WITH SUCH ISSUANCE. THE
SECURITIES WHEN ISSUED WILL BE DULY AND VALIDLY ISSUED AND OUTSTANDING.
4. REGISTRATION RIGHTS: AT ANY TIME AFTER MARCH 15, 1997 (BUT NOT MORE
OFTEN THAN ONCE IN ANY TWELVE MONTH PERIOD AFTER SUCH DATE), SELLER WILL AT
BUYER'S REQUEST FILE A REGISTRATION STATEMENT WITH THE SEC ON FORM S-3 (IF
SELLER THEN QUALIFIES) TO PERMIT BUYER TO RESELL SHARES OF COMMON STOCK ISSUABLE
UPON EXERCISE OR CONVERSION OF THE SECURITIES. PRIOR TO THE FIRST SUCH
REGISTRATION BUYER AND SELLER WILL ENTER INTO A REGISTRATION RIGHTS AGREEMENT IN
SUBSTANTIALLY THE SAME FORM AS THE REGISTRATION RIGHTS AGREEMENT PREVIOUSLY IN
EFFECT AMONG SELLER AND PURCHASERS OF ITS PREFERRED STOCK PRIOR TO SELLER'S
INITIAL PUBLIC OFFERING, BUT ONLY TO THE EXTENT THAT SUCH AGREEMENT CONCERNED
REGISTRATIONS OF COMMON STOCK ON FORM S-3.
5. GENERAL PROVISIONS: THIS AGREEMENT IS THE ENTIRE AGREEMENT BETWEEN
BUYER AND SELLER WITH RESPECT TO SALE OF THE SECURITIES, SUPERSEDES ALL PRIOR
AGREEMENTS AND UNDERSTANDINGS AND MAY ONLY BE AMENDED OR WAIVED IN WRITING
SIGNED BY BUYER AND SELLER. THIS AGREEMENT SHALL BE GOVERNED BY CALIFORNIA LAW.
NOTICES SHALL BE SENT BY FAX AND AIR
-2-
<PAGE> 3
FREIGHT DELIVERY TO THE ADDRESSES SET FORTH ABOVE (TO THE ATTENTION OF THE
PRESIDENT) OR TO SUCH OTHER ADDRESSES AS EITHER PARTY MAY SPECIFY TO THE OTHER.
RESOUND CORPORATION S. E. BANKEN LAKEMEDELSFOND
BY: /s/ PAUL BUSSE BY: /s/ HENRICK RHENMAN
-3-
<PAGE> 4
EXHIBIT A
Certificate of Determination
See Exhibit 4.1 to Annual Report on Form 10-K for Fiscal Year Ended December 31,
1995
-4-
<PAGE> 1
Exhibit 11.1
RESOUND CORPORATION
STATEMENT OF COMPUTATION OF NET INCOME PER SHARE
(in thousands except per share data)
<TABLE>
<CAPTION>
March 31, April 2,
--------- --------
1996 1995
------- -------
<S> <C> <C>
Net income ........................................................... $ 118 $ 410
======= =======
Average common shares outstanding (1) ................................ 15,690 15,325
Net effect of dilutive stock options (based on treasury stock method), 429 378
------- -------
Total shares for primary and fully diluted net income per share (2) .. 16,119 15,703
======= =======
Net income per share ................................................. $ 0.01 $ 0.03
======= =======
</TABLE>
Notes:
(1) Actual shares issued and outstanding as of March 31, 1996 were 15,710,678.
(2) Fully diluted amounts do not differ materially.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 6647
<SECURITIES> 0
<RECEIVABLES> 22934
<ALLOWANCES> 4123
<INVENTORY> 18361
<CURRENT-ASSETS> 46581
<PP&E> 31321
<DEPRECIATION> 21762
<TOTAL-ASSETS> 85037
<CURRENT-LIABILITIES> 32035
<BONDS> 30409
0
5000
<COMMON> 54698
<OTHER-SE> (37105)
<TOTAL-LIABILITY-AND-EQUITY> 85037
<SALES> 0
<TOTAL-REVENUES> 27264
<CGS> 12556
<TOTAL-COSTS> 12556
<OTHER-EXPENSES> 13940
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 595
<INCOME-PRETAX> 169
<INCOME-TAX> 51
<INCOME-CONTINUING> 118
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 118
<EPS-PRIMARY> (.01)
<EPS-DILUTED> (.01)
</TABLE>
