<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, 1997 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
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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)
(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, 1997 was 19,431,260 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> <C> <C>
Item 1. 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 - 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview...........................................................................7 - 8
Results of Operations..............................................................8 - 9
Liquidity and Capital Resources....................................................... 9
Item 3. Quantitative and Qualitative Disclosures about Market Risks............................9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.....................................................................10
Item 2. Changes in the Rights of Company Security Holders.....................................10
Item 3. Defaults upon Senior Securities.......................................................10
Item 4. Submission of Matters to a Vote of Security Holders...................................10
Item 5. Other Items...........................................................................10
Item 6. Exhibits and Reports on Form 8-K......................................................10
SIGNATURES..................................................................................................11
</TABLE>
2
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PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements:
RESOUND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
ASSETS
March 31, December 31,
1997 1996
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(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................... $ 7,051 $ 7,980
Accounts receivable, net .......................... 21,587 20,497
Inventories ....................................... 22,871 23,853
Prepaid expenses and other ........................ 3,957 4,218
--------- ---------
Total current assets ..................... 55,466 56,548
Property and equipment, net ............................ 12,337 13,494
Other assets ........................................... 3,764 4,899
Goodwill ............................................... 36,207 39,811
--------- ---------
$ 107,774 $ 114,752
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Loans and current debt ............................ $ 4,243 $ 4,717
Accounts payable .................................. 6,689 8,478
Accrued liabilities ............................... 19,345 17,976
--------- ---------
Total current liabilities ................ 30,277 31,171
Long-term debt ......................................... 18,121 19,515
Accrued pension ........................................ 4,265 5,110
Minority interest ...................................... 1,360 1,360
Commitments and contingencies .......................... -- --
Shareholders' equity:
Preferred stock ................................... 5,300 5,225
Common stock ...................................... 90,929 90,680
Accumulated deficit ............................... (40,172) (39,202)
Cumulative translation adjustment ................. (2,306) 893
--------- ---------
Total shareholders' equity ............... 53,751 57,596
--------- ---------
$ 107,774 $ 114,752
========= =========
</TABLE>
Note: The balance sheet at December 31, 1996 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.
3
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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, March 31,
1997 1996
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<S> <C> <C>
Net sales ...................................... $ 32,211 $ 27,264
Cost of sales .................................. 15,111 12,556
-------- --------
Gross profit .......................... 17,100 14,708
Operating expenses
Research and development .................. 4,327 3,068
Selling, general and administrative ....... 12,548 10,874
-------- --------
Total operating expenses ......... 16,875 13,942
-------- --------
Income from operations ......................... 225 766
Interest expense -- net ................... (397) (595)
-------- --------
Other expense / minority interest ......... (417) (2)
-------- --------
Income (loss) before income taxes (589) 169
Provision for income taxes (1) ............ 305 51
-------- --------
Net income (loss) .............................. $ (894) $ 118
======== ========
Net income (loss) applicable to common
shareholders ................................. $ (969) $ 118
======== ========
Net income (loss) per share .................... $ (0.05) $ 0.01
======== ========
Shares used in per share calculation ........... 19,389 16,119
======== ========
</TABLE>
(1) Consists principally of state and foreign income taxes.
See Exhibit 11.1 "Statement of Computation of Net Income (Loss) per Share"
See notes to condensed consolidated financial statements.
4
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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, March 31,
1997 1996
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Cash flows from operating activities:
<S> <C> <C>
Net income (loss) ...................................................... $ (894) $ 118
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 1,356 746
Changes in assets and liabilities:
Accounts receivable ................................................ (1,090) (1,065)
Inventories ........................................................ 982 105
Deposits and other current assets .................................. 1,396 (97)
Accounts payable ................................................... (1,789) (1,104)
Accrued liabilities ................................................ 523 378
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Net cash provided by (used in) operating activities ........... 484 (919)
Cash flows from investing activities:
Additions of property and equipment .................................... (695) (1,487)
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Net cash used in investing activities ......................... (695) (1,487)
Cash flows from financing activities:
Payments on long-term debt ............................................. (675) (575)
Loans payable ..................,,...................................... (292) (869)
Issuance of preferred stock ......,,.................................... -- 5,000
Issuance of common stock ............................................... 249 406
------- -------
Net cash provided by (used in) financing activities ........... (718) 3,962
------- -------
Net increase (decrease) in cash and cash equivalents ........................ (929) 1,556
Cash and cash equivalents at the beginning of the period .................... 7,980 5,091
------- -------
Cash and cash equivalents at the end of the period .......................... $ 7,051 $ 6,647
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest ........................................................... $ 434 $ 731
Income taxes ....................................................... $ 227 $ 309
Supplemental schedule of non-cash investing and financing activities:
Accrual of preferred stock dividend .................................... $ 75 $ --
</TABLE>
See notes to condensed consolidated financial statements.
5
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ReSound Corporation
Notes to Condensed Consolidated Financial Statements
NOTES A - 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 of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 31, 1997 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1997. For further information, refer to the audited consolidated financial
statements for the year ended December 31, 1996 and footnotes thereto included
in the Company's 1996 Annual Report on Form 10-K.
Earnings Per Share
Net income (loss) per share is computed using the net income (loss) applicable
to common shareholders and the weighted average number of shares outstanding.
For the three month period ended March 31, 1996, outstanding options to purchase
common shares are included in the calculation. The net loss for the three month
period ended March 31, 1997 is increased by the dividend accrued on Series B
Preferred Stock to arrive at net loss applicable to common shareholders.
In February 1997, Statement of Financial Accounting Standard No. 128 was issued
and is required to be adopted for both interim and annual periods ending after
December 15, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. Under the new requirements, the currently presented primary net
earnings per share will be replaced by basic earnings per share. The fundamental
difference is that basic earnings per share excludes the dilutive effect of
stock options. The computed basic earnings per share is not materially different
from earnings per share for the quarter ended March 31, 1997 and March 31, 1996.
Additionally, fully diluted earnings per share will be replaced by diluted
earnings per share, which will be calculated on a similar basis and will always
be required to be presented on the consolidated statement of operations. The
computed diluted earnings per share is not materially different from the
earnings per share as reported for these quarters.
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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,
1997 1996
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<S> <C> <C>
Raw materials $10,917 $ 9,934
Work in process 6,241 6,838
Finished products 5,713 7,081
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$22,871 $23,853
======= =======
</TABLE>
NOTE C - ACCOUNTING FOR INCOME TAXES
Income taxes have been provided for on a year-to-date basis and represent taxes
on profits earned at the Company's European subsidiaries in Ireland, Austria and
Holland, plus California taxes.
NOTE D - 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
Information contained in this Form 10-Q that is not historical fact, including
any statements about expectations for the fiscal year and beyond, involve
certain risks and uncertainties. This Form 10-Q contains "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act of
1995, many of which can be identified by the use of forward-looking terminology
such as "may", "will", "believe", "expect", "anticipate", "estimate", "plan",
"intend", or "continue" or the negative thereof or other variations thereon or
comparable terminology. There are a number of important factors with respect to
such forward-looking statements that could cause actual results to differ
materially from those contemplated in such forward-looking statements. Numerous
factors, such as economic and competitive conditions, incoming order levels,
timing of product shipments, product margins, new product development, and
reliance on key customers and international sales could cause actual results to
differ from those described in these statements and prospective investors and
stockholders should carefully consider these factors in evaluating these
forward-looking statements.
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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, the Introductory Statement and Management's
Discussion and Analysis of Financial Condition and Results of Operations for the
year ended December 31, 1996 contained in the Company's Annual Report on Form
10-K.
Founded in 1984, 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. The Company's
hearing device products utilize proprietary sound processing technology
originally developed by AT&T Bell Laboratories and subsequently enhanced and
refined by ReSound. ReSound's Multiband Full Dynamic Range Compression sound
processing technology enables ReSound(R) hearing devices to be individually
programmed to adjust the amplification of sound continuously in response to the
acoustic environment and each patient's residual range of hearing. ReSound's
current products are offered in In-the-Ear ("ITE"), Behind-the-Ear ("BTE") and
In-the-Canal ("ITC") versions.
RESULTS OF OPERATIONS
Three months ended March 31, 1997 and March 31, 1996
Net sales increased by 18% to $32.2 million in the quarter ended March 31, 1997,
from $27.3 million in the quarter ended March 31, 1996. International sales
accounted for 51 percent of ReSound's net sales during the first quarter of
1997, compared to 64 percent during the same quarter in 1996. International
sales for the first quarter were $16.5 million, a decrease of 6 percent from the
same period last year. The decrease in international sales was the result of
weaker European currencies compared to the U.S. dollar, unfavorable changes in
governmental reimbursement policies in Europe and an economic slowdown in
Germany. First quarter U.S. sales of $15.7 million increased 62 percent from the
same period last year due, primarily, to the inclusion of sales relating to
products obtained through the acquisition of certain assets of the Hearing
Health business activity of 3M in the second quarter of 1996 and continued
strong sales of the Company's ITC and Encore(TM) hearing device products. The
Company established a subsidiary, Sonar Hearing Health Corporation, to manage
the former 3M Hearing Health business activity on an ongoing basis.
Gross profit was 53.1 percent of net sales in the first quarter of 1997,
compared to 53.9 percent of net sales for the same quarter of 1996. The
quarter-to-quarter decrease in gross profit was largely attributable to
increased warranty and product return costs in the U.S. and the impact of the
stronger U.S. dollar compared to European currencies.
Research and Development ("R&D") spending during the first quarter of 1997 was
$4.3 million (13.4 percent of net sales) compared to $3.1 million (11.3 percent
of net sales) in the same quarter of 1996. The first quarter of 1997 included
approximately $1.9 million of R&D spending for ReSound's software-based Digital
Signal Processing technology, Sonar Hearing Health R&D, and advanced development
programs not included in the first quarter of 1996. In the first quarter of
1997, the Company incurred development expenses related to the introduction of
an ITE configuration of its Advanced Program Selection (APS) product line.
8
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Selling General and Administrative expenses ("SG&A") were $12.5 million, or 38.8
percent of net sales for the first quarter of 1997, compared to $10.9 million,
or 39.9 percent of net sales in the first quarter of 1996. This increase
includes approximately $1.2 million of SG&A at the Company's Sonar Hearing
Health subsidiary which was acquired in June 1996.
Net interest expense was $397,000 for the first quarter of 1997 compared to
$595,000 for the first quarter of 1996. This quarter-to-quarter decrease is
attributable to reduction of debt and the effect of the stronger U.S. dollar
compared to European currencies.
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 and
Holland, plus California taxes.
The Company had a net loss of $894,000 in the quarter ended March 31, 1997,
compared to net income of $118,000 in the quarter ended March 31, 1996. The
decrease was primarily the result of foreign currency losses resulting from the
stronger U.S. dollar compared to European currencies, increased R&D spending
associated with the development of new products and increased SG&A costs related
to the Company's Sonar Hearing Health subsidiary which was acquired in June
1996.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1997 the Company generated $484,000 in cash
from operations, compared to the use of $919,000 in cash in operations in the
three months ended March 31, 1996. Cash generated from operations in the first
quarter of 1997 included non-cash charges of $1.4 million relating to
depreciation and amortization. In addition, positive cash flows from operations
were generally due to decreases in deposits and other current assets and
inventories of $1.4 million and $1.0 million, respectively. These positive cash
flows from operations were partially offset by a net loss of $894,000, an
increase in accounts receivable of $1.1 million and a decrease in current
liabilities of $1.3 million.
Net cash used in investing activities for the three months ended March 31,
1997 of $695,000 resulted from additions of property and equipment.
The primary financing activity in the three months ended March 31, 1997 was the
payment of long-term debt of $675,000.
At March 31, 1997, the Company had available cash and cash equivalents of $7.1
million. The Company believes this will be sufficient to meet the Company's
operating expenses and capital requirements for at least the next twelve months.
From time to time, the Company may also consider the acquisition of, or evaluate
investments in, certain products and businesses complementary to the Company's
business. Any such acquisition or investment may require additional capital
resources.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
9
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The shareholder class action suit, filed against the Company, its
directors and certain of its officers, and against the underwriters of its
initial public offering on behalf of purchasers of ReSound's common stock
between March 4, 1993 and March 13, 1995, was settled on October 19, 1995 and
resulted in a settlement fund of $8.0 million from which plaintiff's attorneys'
fees and expenses will be deducted. Fifty percent of the fund was paid by the
Company on October 30, 1995, and the balance was paid by the Company's insurance
carriers. The Court approved the settlement on June 12, 1996, however an
objection was raised to the provision of the settlement agreement relating to
attorney's fees and certain other matters. The Court rejected the claim and
approved the proposed terms of the distribution. The objector appealed this
decision to the U.S. Court of Appeals for the Ninth Circuit, which dismissed the
appeal on procedural grounds on April 21, 1997.
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.
ITEM 5. OTHER ITEMS
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...
(a) Exhibit 11.1: Statement of computation of net income (loss)
per share
(b) Exhibit 27: Financial data schedule
(c) Report on Form 8-K
None
10
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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/ Christopher H. Pascoe
------------------------------------
Christopher H. Pascoe
Vice President, Corporate Controller
(Acting Principal Financial Officer)
Date: May 12, 1997
11
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EXHIBIT INDEX
<TABLE>
Exhibit
No. Description
- ------ -----------
<S> <C>
11.1 Statement of computation of net income (loss) per share
27 Financial Data Schedule
</TABLE>
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Exhibit 11.1
RESOUND CORPORATION
STATEMENT OF COMPUTATION OF NET INCOME (LOSS) PER SHARE
(in thousands except per share data)
<TABLE>
<CAPTION>
March 31, March 31,
--------- ---------
1997 1996
---- ----
<S> <C> <C>
Net income (loss) applicable to common shareholders ............... $ (969) $ 118
======== ========
Average common shares outstanding (1) ............................. 19,389 15,690
Net effect of dilutive stock options (based on treasury stock
method .......................................................... -- 429
-------- --------
Total shares for primary and fully diluted net income per share (2) 19,389 16,119
======== ========
Net income (loss) per share ....................................... $ (0.05) $ 0.01
======== ========
</TABLE>
Notes:
(1) Actual shares issued and outstanding as of March 31, 1997 were 19,428,760.
(2) Fully diluted amounts do not differ materially.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 7,051
<SECURITIES> 0
<RECEIVABLES> 28,321
<ALLOWANCES> 6,734
<INVENTORY> 22,871
<CURRENT-ASSETS> 55,466
<PP&E> 37,957
<DEPRECIATION> 25,620
<TOTAL-ASSETS> 107,774
<CURRENT-LIABILITIES> 30,277
<BONDS> 23,746
0
5,300
<COMMON> 90,929
<OTHER-SE> 42,478
<TOTAL-LIABILITY-AND-EQUITY> 107,774
<SALES> 0
<TOTAL-REVENUES> 32,211
<CGS> 15,111
<TOTAL-COSTS> 15,111
<OTHER-EXPENSES> 17,292
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 397
<INCOME-PRETAX> (589)
<INCOME-TAX> 305
<INCOME-CONTINUING> (894)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (969)
<EPS-PRIMARY> (.05)
<EPS-DILUTED> (.05)
</TABLE>
