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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 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)
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<S> <C>
California 77-0019588
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
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220 Saginaw Drive, Seaport Centre, Redwood City, California 94063
(Address of principal executive offices)
Registrant's telephone number, including area code: (415) 780-7800
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Preferred Share Purchase Rights
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $120,791,540 as of February 28, 1997, based upon
the closing sale price on the Nasdaq National Market reported for such date.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
There were 19,428,416 shares of Registrant's Common Stock issued and outstanding
as of February 28, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Annual Meeting of Shareholders to be held on May 22, 1997.
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INTRODUCTORY STATEMENT
Except for the historical information contained in this Annual Report
on Form 10-K, the matters discussed herein are forward-looking statements that
are subject to certain risks and uncertainties that could cause the actual
results to differ materially from those projected. Factors that could cause
actual results to differ materially include, but are not limited to, the timing
of orders and shipments, the timely development and market acceptance of new
products, the impact of competitive products and pricing, the Company's ability
to expand further into international markets, public policy relating to health
care reform in the United States and other countries, approval of its products
by government agencies such as the United States Food and Drug Administration,
and other risks detailed below and included from time to time in the Company's
other SEC reports and press releases, copies of which are available from the
Company upon request. The Company assumes no obligation to update any
forward-looking statements contained herein.
The Company's future results of operations may be adversely affected by
or fluctuate significantly due to various factors, including those factors
discussed below. These factors include the success and timing of new product
introductions by the Company or its competitors. Announcements of new products
that the Company may develop from time to time may cause hearing care
professionals or hearing impaired persons to defer purchases of existing
products or return previously purchased products, thereby adversely affecting
the Company's results of operations. In addition, there can be no assurance that
any of the Company's products under development can be commercialized on a
timely basis or at all, that they can be manufactured on a cost-effective basis,
that regulatory approvals, where necessary, can be obtained to permit the sale
and use of such products, that such products will not experience design or
manufacturing problems, or that there will be any significant degree of market
acceptance of these new products.
While the Company believes that the price/performance characteristics
of its products are competitive, increased competition or announcement of
leading edge products by other companies could create pricing pressures and
cause possible delays or reductions in the number of sales, which could
adversely affect the Company's results of operations. Increased competition with
these products could also adversely impact the Company's revenues and results of
operations.
In the past, the Company has been involved in a number of lawsuits. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Notes to Consolidated Financial Statements--Litigation." The
Company has incurred significant expenses in defending and settling such
litigation. From time to time the Company has been contacted by various other
parties who have alleged that certain of the Company's products infringe or may
infringe patents that such parties claim to hold. Management believes the
Company has not infringed any such patents and does not believe such claims, if
pursued, will result in a material adverse effect on the financial position or
results of operations of the Company. However, senior management and other
employees of the Company may be required to devote substantial amounts of time
in connection with such defenses, which may impact their ability to manage the
Company's business operations.
During the last fiscal year, the Company experienced various changes in
its management and technical staff. Competition for employees with technical,
management and other skills is intense in the hearing device industry. 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.
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Certain key components used in the Company's products are currently
available only from single or limited sources. Although the Company believes
that with adequate notice it can secure, if necessary, alternate sources for
such components, its 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 business, financial condition and results of operations.
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 geographic or vertical markets, and the
costs incurred to expand distribution in Europe and Asia. In connection with the
Company's increased 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.
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.
References made in this Annual Report on Form 10-K to "ReSound," the
"Company" or the "Registrant" refer to ReSound Corporation and its subsidiaries.
The following ReSound trademarks are mentioned in this Annual Report: P(3)
System, Advanced ReSound Processing, Cochlea Dynamics, Portable Prescriptive
Programming System, Real Zoom Technology, ReSound, Sonar, Sonar Hearing Health
and Viennatone.
PART I
ITEM 1. BUSINESS
OVERVIEW
Founded in 1984, ReSound Corporation 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 ("MFDRC") 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 with MFDRC
sound processing technology are offered in In-the-Ear ("ITE"), Behind-the-Ear
("BTE") and In-the-Canal ("ITC") versions.
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In December 1994, the Company acquired 100% of the shares of Viennatone
AG ("Viennatone"), a hearing instrument manufacturer based in Vienna, Austria.
Viennatone is an established company which had total 1994 revenues of
approximately $31 million. Viennatone designs, manufactures and distributes
approximately 100,000 hearing devices per year and employed approximately 360
people as of December 31, 1996. Viennatone primarily distributes through ReSound
subsidiaries in Germany, France and the United Kingdom and additionally sells
through approximately 30 distributors located throughout the world. In Austria,
Viennatone sells its hearing devices directly to consumers through 22 retail
outlets. Viennatone also produces hearing device components such as hearing
device cases, high reliability switches and telecoils.
In June 1996, the Company completed the purchase of certain assets of
the hearing health business activity of Minnesota Mining and Manufacturing
Company ("3M"). The Company has established a subsidiary in the United States,
Sonar Hearing Health Corporation, to manage this activity on an ongoing basis.
International distribution of former 3M products is undertaken through the
Company's international subsidiaries. Hearing health constituted a small
business activity in 3M's worldwide operations which was neither a division nor
subject to the maintenance of discrete accounting records such that financial
statements could be or are determinable. However, the Company believes that this
business activity generated revenues for 3M of approximately $9.3 million and
$16.6 million for the six months ended June 30, 1996, and for the year ended
December 31, 1995, respectively. The Company believes that profits, if any,
generated from the hearing health activity of 3M for the above-mentioned periods
were minimal, and that historically, such business activity may not have been
profitable.
The Sonar product line incorporates non-proprietary, nonlinear sound
processing technologies into ITC and ITE custom hearing devices. In addition,
the Sonar line now incorporates the proprietary programmable technology formerly
owned by 3M. Such products are now sold under the label "Sonar - with 3M
technology." The Viennatone product line spans all segments of the market, from
BTE products to high power instruments with a large number of options.
Viennatone is also a worldwide leader in bone conduction hearing instruments
markets.
Through December 31, 1996, the Company sold over 623,000 hearing
devices worldwide. ReSound currently distributes its products through more than
4,300 authorized dispensers worldwide. The Company sells its products to retail
chains and hearing device dispensers through wholly-owned subsidiaries in
Germany, the Netherlands, the United Kingdom, France, Austria, Sweden and
Australia and has non-exclusive distribution agreements with retail chains and
single stores in Canada, Spain, Belgium, Denmark and Switzerland. The Company
also operates a joint venture, ReSound Asia Ltd., which operates a retail store
in Hong Kong and manages sales to Taiwan, Singapore and the People's Republic of
China. The Company has an exclusive distribution agreement for Japan with Hoya
Medical Corporation.
It is estimated that between 8% and 10% of the population in developed
countries is hearing impaired. However, only about 10% to 25% of this hearing
impaired group (depending on the country) currently wear a hearing device. It is
estimated that the majority of the hearing impaired group experiences mild to
moderate impairment, and that relatively low market penetration has occurred in
this segment because of the failure of most hearing devices to provide adequate
sound quality, adequate speech intelligibility in noisy environments, the stigma
associated with wearing a hearing device, acoustic feedback, discomfort,
occlusion, mechanical problems and general lack of physician endorsement.
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The Company has chosen audiologists (hearing care professionals with
advanced degrees), acousticians and other qualified hearing device dispensers to
distribute its products. To assist in proper measurement of each patient's
hearing impairment, ReSound also sells a proprietary device programming system
that enables dispensers to assess each patient's hearing impairment through
computerized measurement, to select an appropriate individualized prescription
and to program each patient's hearing device appropriately. The Company has
developed a PC-based competitive fitting software module for NOAH (the
standardized industry platform that provides dispensers with an integrated
hearing care software system) called ReSource. This software module can either
be used in conjunction with ReSound's proprietary P(3) fitting system, or with
HI-PRO, an industry standard programming interface. Viennatone offers both
programmable and non-programmable devices. The Viennatone fitting system
consists of PC-based software and an inexpensive interface. Although the older
Viennatone products incorporate linear sound processing or a traditional type of
audio compression, Viennatone's newer products incorporate a proprietary,
patented, non-linear type of sound processing designed to improve performance in
situations involving background noise and avoid the need for manual volume
control. Sonar Hearing Health ("SHH") offers a full line of both programmable
and non-programmable instruments in both BTE and custom models. The programmable
instruments all use patented, technically advanced sound processing developed by
the former hearing health business activity of 3M. PC-based fitting systems are
used to adjust the programmable instruments at either point-of-sale or
point-of-manufacture.
ReSound's technology operates across the full dynamic range of speech,
separating incoming sounds into two frequency bands and amplifying low and high
intensity sounds differently within each band. Low intensity, high frequency
consonant sounds that are critical to speech intelligibility can be amplified
more than sounds that are already loud, such as background noise. Consequently,
since most sounds are amplified to an appropriate loudness and overamplification
is avoided, speech intelligibility and listening comfort may be greatly improved
for many hearing impaired patients. SHH's sound processing technology uses
proprietary integrated circuits to separate incoming sounds into two frequency
bands and provide independent processing in the two bands. Thus, low intensity,
high frequency sounds can be processed differently than high level, low
frequency sound such as background noise. Viennatone's most recent technology
relies on a custom integrated circuit connected to two microphones and capable
of adjusting the directional sensitivity to the level of background noise. In
quiet environments, the hearing device is equally sensitive to sounds from all
directions. As the level of low frequency background increases, the hearing
device becomes progressively and automatically more sensitive to sounds from a
frontal direction, the most likely direction for the desired speech signals.
ReSound has prototyped a system which combines the advantages of the two
patented technologies, the omni/directional microphone and the dynamic range
compression sound processing. ReSound launched its latest programmable sound
processing, called "Cochlea Dynamics" in an ITC hearing device in North America,
Europe and Japan in 1996. The device's sound processing circuit is 40% smaller,
consumes about 40% less power, and has equivalent or improved performance
compared to the Company's ITE version.
PRODUCTS
ReSound's strategy is to create innovative, proprietary,
technologically superior products that address the shortcomings of traditional
hearing devices. ReSound's hearing device products address inadequate speech
intelligibility by incorporating sound processing technology originally
developed by AT&T Bell Laboratories and subsequently enhanced and refined at
ReSound. This technology
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features multiband compression across a patient's full dynamic range of hearing.
Multiband compression offers patients the following benefits:
- Proper Levels of Amplification. Amplified sounds can be
heard at their normal loudness level.
- Soft Consonants Become Audible. The full range of soft sounds
becomes audible, so that soft consonants such as "f," "s" and
"t," which are critical for speech intelligibility, can be
heard without overamplifying normal sounds.
- Increased Speech Intelligibility. The ability of patients to
understand speech in noisy listening environments is enhanced.
The ReSound strategy is also supported by Sonar Hearing Health which
provides a full line of proprietary products incorporating technically advanced
sound processing developed at the former hearing health business activity of 3M.
These products use state-of-the-art PC-based fitting systems for instrument
adjustment at point-of-sale or point-of-manufacture.
Although the older Viennatone products incorporate linear sound
processing or a traditional type of audio compression, the new products
incorporate a proprietary, patented, non-linear type of sound processing
designed to improve performance in the presence of noise and avoid the need for
manual volume control.
ReSound's Current Products
ReSound currently offers the Personal Hearing System line of products,
which are marketed in several configurations and incorporate the ReSound
proprietary sound processing technology. These products continuously adjust the
amplification of sounds according to the acoustic environment and the patient's
range of hearing. This process is accomplished using two circuits known as
dynamic range compressors, as well as a compressor/limiter circuit that controls
the maximum power output of the device. Incoming sound signals are divided into
two frequency bands, passed through the dynamic range compressors, where
differential amplification occurs for sounds of different intensities, and then
recombined. As a result, low intensity, high frequency consonant sounds that are
critical to speech intelligibility can be amplified more than sounds that are
already loud, such as background noise. Consequently, since most sounds are
amplified to an appropriate loudness and overamplification is avoided, speech
intelligibility and listening comfort may be greatly improved for many hearing
impaired patients.
To operate the Company's Personal Hearing System products, the patient
may use a remote control, similar in size to a large fountain pen, to control
ultrasonically the output volume of the device and to switch between two
programs prescribed for different listening environments. The two listening
environment programs are stored in the remote control. Hearing care
professionals program the hearing devices most frequently to perform in either a
quiet or noisy setting, but they may change the program should the patient's
hearing change or another prescription be found more desirable. In addition, the
Company has developed an innovative, Portable Prescriptive Programming System,
the P3 System(TM), that enables the hearing care professional to program the
operating parameters of the patient's Personal Hearing System. In 1996, the
Company launched a new software package, "ReSource," designed to enable hearing
professionals with a personal computer to fit and program all
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of ReSound's programmable products. ReSource is designed to operate in
conjunction with an industry standard software platform called NOAH. There are
approximately 6,000 NOAH users worldwide as of January 1997. The ReSource
software can be operated without the P(3) fitting system, if desired.
Personal Hearing System
The Company's Personal Hearing System is available in ITE, BTE and ITC
versions.
ITE Version. The ITE version of the Personal Hearing System
incorporates programmable, multiband compression sound processing and was first
shipped in December 1989. ITE versions of hearing devices are the most popular
design in the hearing impaired market in the United States. The system consists
of a custom earmold shell containing a microphone, a speaker, an
industry-standard battery and sound processing electronics that store the
patient's personal hearing prescription in the hearing device. The ITE version
of the Personal Hearing System also includes a remote control that can be
programmed to contain an additional prescription; however, the ITE can also be
operated without the remote control, if desired. The hearing care professional
fitting the patient can program the system to address a wide range of mild to
severe hearing impairments. During 1995, ReSound added a new ITE to its product
line called Encore. This new product provides the same ReSound sound processing
circuit, but does not have a remote control and is limited to one hearing
program. The Encore product line is offered at a price approximately 1/3 lower
than ReSound's original ITE. The new Encore ITE has proven to be very successful
since its introduction and today it is the most popular ITE model. Retail prices
for the Company's ITE products typically range from $1,500 to $2,650 for one ear
(monaural) and $3,000 to $4,000 for both ears (binaural). A majority of hearing
device patients purchasing ReSound's ITE devices have selected binaural systems.
Because of the custom packaging required for the ITE product, it is sold to
international distributors at the sub-assembly level for assembly into ITE
custom shells provided by the local distributor.
BTE Version. The BTE version of the Personal Hearing System was
introduced by ReSound in January 1992. The BTE version does not require a custom
earmold shell, and is packaged in a standard miniature case worn above and
behind the ear. The Company's BTE version incorporates the ReSound proprietary
sound processing technology and, because it is worn behind the ear, reduces
feedback and occlusion. Feedback is a high-pitched squeal that occurs when too
much of the sound output from the hearing device speaker is picked up by the
hearing device microphone. Occlusion occurs when the ear canal is sealed by a
hearing device to prevent feedback and results in the person perceiving that his
or her voice is distorted and much louder than it is when the ear canal is not
obstructed. During 1995, ReSound introduced an Encore BTE which provides the
same ReSound sound processing circuit, but does not have a remote control and is
limited to one hearing program. U.S. retail prices for the Company's BTE devices
typically range from $1,400 to $2,600 for a monaural version and $2,800 to
$4,000 for a binaural version. The BTE versions of hearing devices are the most
popular design in the hearing impaired markets in most of Europe. In September
1994, the Company introduced a power BTE product which provides an increased
degree of amplification for patients with severe hearing loss.
A new BTE product was launched during the fourth quarter of 1996. This
product can be pre-programmed at the factory and the final stages of fine-tuning
require less training than had previously been required to set up each patient's
device appropriately. The device can also be programmed
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using proprietary, easy to use, PC software. This BTE product is designed to
expand further the distribution base of ReSound sound processing technology. A
similar ITE product was launched during the first quarter of 1997.
ITC Version. ReSound launched its latest programmable sound processing,
called "Cochlea Dynamics" in an ITC hearing device in North America in April,
1996. U.S. retail prices for the Company's ITC devices typically range from
$2,800 to $3,200 for a monaural version and $3,600 to $4,200 for a binaural
version. In May and November 1996, this product was launched in Europe and
Japan, respectively. The device's sound processing circuit is 40% smaller,
consumes about 40% less power, and has equivalent or improved performance
compared to the Company's ITE version.
Portable Prescriptive Programming System
The Company offers a proprietary 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. The Viennatone programmable products
can be programmed using a personal computer and a low-cost interface. Both
Viennatone and ReSound are participating in the new PC-based industry standard
software platform, NOAH, and are developing the compatible software. The Company
shipped its first programming system, the DHS, in December 1989. In January
1992, the Company began shipping its P(3) System, a programming system that
offers enhanced software and ease of use and that can program both the remote
control and the Company's ITE, BTE and ITC hearing devices. The P(3) System
programs the ReSound hearing devices and an optional remote control which can be
used to switch between prescriptions adapted to different listening environments
or to adjust volume, if desired. The ReSource software can be operated without
the P(3) fitting system, if desired.
The ReSound P(3) System is a hand-held computer that performs a
proprietary, interactive, audiologic test developed by ReSound and the Acoustics
Research Laboratory of AT&T Bell Laboratories to determine the patient's dynamic
range and hearing impairment at various frequencies and intensities. The
software for the P(3) System is based on extensive clinical data compiled by
ReSound. Using the test results from its proprietary test or standard
audiometric data, the P(3) System calculates appropriate fitting parameters for
the ReSound hearing device, and programs the patient's hearing device and remote
control with these parameters. The P(3) System is also designed to accommodate
future ReSound products and enhancements and is priced to the U.S. hearing care
professional at approximately $3,000.
Current Viennatone Products
The Viennatone product line is comprised of a full range of hearing
devices, both in terms of price and type. The Viennatone products span many
technologies, both traditional and new, ranging from low-cost BTE products to
higher-priced BTE products, newly-developed programmable ITE and BTE products,
and from devices worn on the body to eyeglass hearing devices.
The Viennatone fitting system consists of PC-based software and an
inexpensive interface. The Viennatone software can run on a stand-alone basis or
under NOAH, the emerging industry standard for fitting systems.
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New Products
In April 1996, the Company launched its newest sound processing,
incorporated first into an ITC hearing device. This new sound processing labeled
Cochlea Dynamics(TM) technology, has been under development since 1992, and is
protected by newly-issued U.S. patents (and corresponding foreign patents and
patent applications).
This new sound processing consists of digitally programmed multichannel
listening range expansion. When properly programmed for a hearing impaired
patient, this sound processing enables the patient, in most situations, to
listen to and understand comfortably a wider dynamic range of both bass and
treble sounds. In addition, the new electronic module, which incorporates two
new integrated circuits, is over 40% smaller than the previous generation and
consumes about 40% less power, allowing for the use of smaller hearing device
batteries.
In the first half of 1996, ReSound began shipping an improved version
of the Power BTE, a product sold to the more severely hearing impaired. The
improved version is believed to be more reliable, more cosmetically acceptable
and easier to manufacture and service.
In 1996, the Company launched a new software package, "ReSource,"
designed to enable hearing professionals with a personal computer to fit and
program all of ReSound's programmable products. ReSource is designed to operate
in conjunction with an industry standard software platform called NOAH. There
are approximately 6,000 NOAH users worldwide as of January 1997. The ReSource
software can be operated without the P(3) fitting system, if desired.
During 1996, the Company upgraded most of its installed base of P(3)
fitting systems, so as to allow improved performance in programming of its
newest generation of hearing devices.
ReSound currently is developing a BTE combining two proprietary and
unique technologies: the digitally programmed Multiband Full Dynamic Range
Compression sound processing technology and Real Zoom Technology(TM). The latter
was patented in 1995 by Viennatone (both in Europe and in the U.S.) and consists
of two miniature microphones connected to a custom-designed integrated circuit.
Under the direct manual control of the patient, the signal from each microphone
is added in such a way that the combined signal depends on the direction of
incoming sounds. Thus, the patient can adjust the directional sensitivity to
increase the detection of sounds from the frontal direction. To further the
patient's benefits, the combined signal is then processed by ReSound sound
processing. Thus, the first technology allows increased signal to noise
amplification ratio, while the combination with the second ensures that the
signal is perceived at the proper loudness by the patient.
In connection with the June 1996 acquisition of certain assets of the
hearing health business activity of 3M, the Company obtained a full line of both
programmable and non-programmable instruments in both BTE and custom models. The
programmable instruments all use patented, technically advanced sound processing
developed by the former hearing health business activity of 3M. SHH also has a
PC-based competitive fitting software module for NOAH.
In 1996, ReSound entered into a joint venture with AudioLogic Hearing
Systems (Boulder, Colorado) and GN Danavox a/s (Denmark), to develop a new
generation of digital signal processing ("DSP") integrated circuit and software.
In contrast with early DSP products recently introduced by
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competitors, this new technology is designed to allow all of the signal
processing functions to be programmed in software rather than embedded into the
circuitry of the DSP chip. As a result, the number of new sound processing
functions, and the speed of their implementation, should be dramatically
increased.
MANUFACTURING
The Company manufactures its hearing devices according to
specifications received from the hearing care professionals. In the case of an
ITE or ITC device, after receiving an impression of the patient's ear canal and
the programming requirements of the device, the Company manufactures the custom
earmold shell and assembles the electronic circuitry of the device. In the case
of a BTE device, the Company assembles the electronic circuitry into a case the
Company produces or purchases.
ReSound's manufacturing operations consist of coordination of
integrated circuit production, assembly and testing of electronic subsystems,
fabrication of custom earmolds, integration of the electronic components into
the device shell, and final testing of the complete system. Electronic assembly
operations include the attachment of three integrated circuits onto a printed
circuit board along with other components by an outside vendor. A microphone and
speaker are wired and attached to this circuit board which is then attached to a
faceplate and tested. The faceplates are stored in inventory until, in the case
of an ITE or ITC, an impression of the patient's ear canal and audiological
information are received from a hearing device dispenser. The Company then
produces the custom ITE or ITC shell and assembles the product. In the case of a
BTE device, the Company purchases a standard case from a supplier, or makes use
of a Viennatone case, and assembles the electronic circuitry into the case. The
Company subcontracts manufacture of its proprietary P(3) System(TM) and remote
control used with its hearing devices. The Company has manufacturing facilities
in Redwood City, California; Eagan, Minnesota; Cork, Ireland; Munster, Germany;
Grafenschachen, Austria; and Vienna, Austria.
The Company subcontracts for the manufacture of the P(3) System from a
single supplier. The P(3) System is purchased under a supply contract, while
other components are purchased pursuant to purchase orders on an as-needed
basis. In connection with the Company's acquisition of Sonar Design & Hortechnik
GmbH in January 1994, the Company has established an ITE manufacturing
capability in Germany. See "Sales and Marketing."
Viennatone manufactures its hearing devices in Vienna and
Grafenschachen, Austria. SHH manufactures its custom hearing devices in Eagan,
Minnesota. Viennatone and SHH manufacture the custom hearing instruments in
accordance with specifications received from the respective hearing care
professional. In the case of an ITE device, after receiving an impression of the
patient's ear canal and the programming requirements of the device, the custom
earmold shell is manufactured and the electronic circuitry of the device is
assembled. In the case of a BTE device, a standard case is manufactured and the
electronic circuitry is assembled into the device. Viennatone and SHH's
manufacturing operations consist of coordination of integrated circuit
production, assembly and testing of electronic subsystems, fabrication of custom
earmolds, integration of the electronic components into the device shell and
final testing of the complete system.
In the U.S., the Company is subject to inspection on a routine basis by
both the United States Food and Drug Administration ("FDA") and the states of
California and Minnesota to ensure compliance with the FDA's Good Manufacturing
Practice ("GMP") regulations and comparable state
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regulations that impose certain procedural and documentation requirements upon
the Company with respect to manufacturing and quality assurance activities.
Manufacturing sites outside of the United States which are supplying the U.S.
market are also subject to compliance with the FDA's GMP regulations and
inspections. Viennatone's, Sonar's and ReSound's U.S. ISO 9001 and Cork,
Ireland's ISO 9002 certifications will require periodic audits by a registrar to
maintain the certification. See "Government Regulation."
PRODUCT RETURNS, REPAIRS AND REMAKES
The Company believes that the hearing device industry in the United
States is characterized by a relatively high rate of product returns
(approximately 16 to 32 percent) and that these returns are due to a number of
factors. Many states have laws that require hearing device dispensers to allow
purchasers a minimum period of time for return of their hearing devices,
typically 30 days. In addition, the relatively poor performance of many existing
hearing devices may cause patients to return them. Further, patients may not be
able to judge the performance of a new hearing device at the dispenser's office.
Finally, the Company believes that many dispensers encourage potential
purchasers to try a variety of hearing devices on a trial basis, in part because
of the industry's liberal return policy.
ReSound allows its hearing devices sold in the U.S. and Canada to be
returned without charge for a period of 90 days after delivery to the dispenser.
In Europe and Asia, the Company sells primarily to chains of hearing device
dispensers, and all returns from the end user are the responsibility of these
chains. In addition, in the U.S. and Canada, ReSound currently offers warranties
of one to three years to the dispenser on the electronic components of its
hearing devices and a 12-month warranty against defects in the manufacture of
the custom shell. The Company offers a 12-month warranty to the distributor on
the P(3) System in the U.S. Internationally, the Company offers a 12-month
warranty to the distributor on the components of its hearing devices. In
Austria, the retail business is characterized by an average trial period of up
to 60 days. Austrian dealers typically offer a 12-month warranty commencing on
the date of invoice. However, Viennatone does not typically issue an invoice for
a hearing device until the patient has accepted the device.
The Company believes that its product returns are primarily the result
of the advanced sound processing of its products, which provides greater
amplification than other products and therefore requires a more precise fit of
the hearing device in order to reduce feedback. Other factors include the
relatively high price of the Company's products and inadequate training of some
of its dispensers. In addition, many repairs have been required on the Company's
ITE and ITC hearing devices due to blockage of the speaker by accumulated ear
wax. The natural production of ear wax in the ear canal can clog hearing devices
periodically. The Company reintroduced an ear wax guard system in May 1994 to
reduce the occurrence of this blockage. The Company has also experienced a high
rate of repair and remake requests related to imperfect fitting of the ITE and
ITC shell. The Company is attempting to reduce these occurrences by continuing
to improve fitting procedures, by improving the software used in the P(3)
System(TM), by teaching hearing care professionals more effective techniques for
screening patients, and by offering a standard trial unit that hearing care
professionals may utilize to demonstrate the ReSound(R) Personal Hearing System
for the patient. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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SALES AND MARKETING
In the United States and Canada, hearing devices typically have been
sold by hearing device dispensers and audiologists. There are approximately
6,000 hearing device dispensing specialists and 5,000 dispensing audiologists in
the United States. ReSound's products are positioned as premium- priced,
premium-performance devices. Because the Company's programmable product lines
are more technically advanced than many competitors' conventional hearing
products, the Company has targeted audiologists and qualified hearing device
specialists to distribute its Personal Hearing System products. The Company's
sales staff, consisting of fourteen people, six of whom are audiologists,
supports over 2,200 authorized dispensers in the United States, the majority of
whom are audiologists.
As part of its sales and marketing efforts, ReSound seeks to
differentiate itself to the hearing care professional by offering a
comprehensive training program to its network of dispensers. The Company's
training program is designed to educate the hearing device dispenser about
ReSound's products and to train the hearing device dispenser in the proper
fitting of patients. In addition, the Company's sales and marketing force
provides ongoing support and service to audiologists and hearing device
dispensers.
In July 1996, ReSound acquired the hearing health business activity of
3M. It was renamed Sonar Hearing Health Corporation ("SHH") and currently
operates as a separate business unit selling its line of programmable hearing
devices to audiologists and qualified hearing aid specialists. SHH's products
are sold through its own professional sales force of eight people who service a
customer base of over 800 dispensing sites throughout the United States. In
Europe, SHH has been integrated into ReSound's existing distribution structure.
ReSound employs several distribution channels to market and sell its
products internationally. The Company is a party to an exclusive distribution
agreement covering the Japanese market that expires in December 1997 with Hoya
Medical Corporation, a large Japanese company with substantial experience in the
contact and intraocular lens markets. During 1992, the Company expanded
distribution of its products into Germany, Belgium and Spain by entering into
non-exclusive distributor arrangements with leading retailers of hearing devices
in those countries. During 1993, an exclusive distributor arrangement with
France's leading hearing device retail chain was converted into a non-exclusive
distributor arrangement. In 1992, ReSound established a German subsidiary,
ReSound GmbH Hortechnologie ("ReSound GmbH"), for marketing and distribution of
its current and future products, primarily in Germany, Austria and Switzerland.
In 1994, this subsidiary, located in Munich, became the Company's European
headquarters. ReSound GmbH has captured a significant share of Germany's BTE
hearing device market. On January 1, 1994, ReSound completed the acquisition of
all of the outstanding ownership interest in Sonar Design & Hortechnik GmbH
("Sonar") located in Muenster, Germany. Coupling Sonar's significant ITE market
share and expertise in ITE design and manufacturing with ReSound's BTE devices
has given ReSound a complete line of high technology hearing devices in Germany.
Through this subsidiary, which was renamed ReSound Deutschland GmbH during 1996,
ReSound sells services and manufactures custom hearing devices for the German
market. In 1993, ReSound established a Dutch subsidiary, ReSound b.v., for
distribution of the Company's products in the Netherlands. In 1994, ReSound
established ReSound Asia Ltd., ("RSND Limited"), a British Virgin Islands
company which is a joint venture with a large Hong Kong group. Headquartered in
Hong Kong, RSND Limited commenced selling ReSound products in Hong Kong, Taiwan
and Singapore in 1994 and has exclusive rights to
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<PAGE> 13
distribute the Company's products in Hong Kong, Taiwan, Singapore and the
People's Republic of China, with the potential to expand its distribution rights
into Thailand and Malaysia. Viennatone sells to distributors in numerous
countries, to a majority-owned retail chain of stores in Austria and to
subsidiaries in the United Kingdom, France and Germany. It also sells to a
minority-owned Mexican subsidiary. In 1995, ReSound established subsidiaries in
Australia and Sweden. The Company also has branch operations in Canada and
Switzerland. International sales accounted for 55% of the Company's total sales
in 1996. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations." The Company intends to expand into other international
markets through appropriate distribution arrangements.
THIRD-PARTY REIMBURSEMENT
In the United States, third-party reimbursement generally is not
available for the purchase of hearing devices. As a result, the price of a
hearing device may be a key factor in the patient's decision to purchase such a
device. In international markets, reimbursement levels vary and are generally
provided. In 1996, however, the level of reimbursement in Austria decreased
substantially and, as a result, revenues were negatively affected in that
market. Changes or anticipated changes in reimbursement levels can affect the
Company's sales in the relevant geographic markets significantly. There can be
no assurance that such changes or anticipated changes would not have an adverse
effect on the Company's business in the future.
GOVERNMENT REGULATION
The development, production and marketing of the Company's current
products and products under development are subject to regulation by numerous
governmental authorities in the United States (including the FDA, the California
Department of Health Services and the state of Minnesota) and other countries.
In the United States, medical device products are subject to rigorous FDA
review. The United States Federal Food, Drug, and Cosmetic Act (the "FDC Act")
and other federal statutes and regulations govern or influence the design,
testing, manufacture, labeling, sale, storage, record keeping, approval,
advertising and promotion of such products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production, refusal of the government to approve product
license applications or withdrawal of approvals, injunctions, civil fines and
criminal prosecution.
In order to obtain FDA permission to market a new medical device, the
Company must submit proof of substantial equivalence in a 510(k) pre-market
notification submission or proof of safety and efficacy in a Pre-Market Approval
Application ("PMAA"). In many cases, such proof entails extensive clinical
tests. The testing, preparation of necessary applications and processing of
those applications by the FDA is expensive, time-consuming, lengthy and
uncertain. Applicants seeking a 510(k) clearance must show that the device is
substantially equivalent to another legally marketed predicate device. The
510(k) process can require clinical testing of the applicable device under an
Investigational Device Exemption ("IDE"), while the pre-market approval process
always requires clinical data. The review of a PMAA generally takes one to two
years from the date the application is accepted for filing, but may take
significantly longer. It generally takes from four to twelve months from
submission to obtain clearance of a 510(k) notification, but may take longer.
Recently, the FDA has been requiring more rigorous demonstration of substantial
equivalence in 510(k) notifications than in the past. There is no assurance that
the FDA will act favorably or quickly in making such reviews, and significant
difficulties or costs may be encountered by the Company in its efforts to
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<PAGE> 14
obtain FDA approvals that could delay or preclude the Company from marketing any
product it may develop. The FDA may also require post-marketing testing and
surveillance to monitor the effects of products or place conditions on any
approvals that could restrict commercial applications of such products.
Marketing permission may be withdrawn if compliance with regulatory requirements
is not maintained or if problems occur following initial marketing. In addition,
delays imposed by the governmental approval process may materially reduce the
period during which the Company may have the exclusive right to exploit patented
products or technologies unless the Company is successful in obtaining patent
term restoration.
The Company's clinical research programs for uncleared or unapproved
devices are subject to the IDE regulations of the FDA and California and
Minnesota state regulations. These regulations govern many important aspects of
the clinical investigation of medical products, including obtaining informed
consent from clinical subjects, securing the approval of an Institutional Review
Board and maintaining required documentation relating to the conduct of the
investigational study. In addition, for some devices, these regulations may
require the Company to obtain approval from the FDA prior to the commencement of
clinical investigations of new products or of expanded applications for any
commercially available product.
If the PMAA procedure is being utilized, the results of the
pre-clinical and clinical studies and other information such as the device
description, GMP regulation compliance, bio-compatibility and labeling materials
regarding the medical device under study are submitted to the FDA in the form of
a PMAA for approval to commence commercial sales. In responding to the PMAA, the
FDA may grant marketing approval, with or without conditions, require additional
testing or information, or deny the application.
Regardless of whether a 510(k) notification or PMAA is required, the
Company also must register as a medical device manufacturer with the FDA and be
licensed by the Food and Drug Branch of the California Department of Health
Services and the state of Minnesota. The Company is subject to inspection on a
routine basis by both the FDA and the states of California and Minnesota for
compliance with the FDA's GMP and medical device reporting ("MDR") regulations
and comparable state regulations. Those regulations impose certain procedural
and documentation requirements upon the Company with respect to manufacturing
and quality assurance activities. Additionally, the Company must comply with
various FDA requirements for design, safety, advertising, labeling, record
keeping and reporting of negative experiences in the use of regulated products.
The FDA actively enforces regulations prohibiting marketing of products for
non-indicated uses as well as products that violate design, safety and the other
FDA regulations mentioned above. Failure to comply with applicable regulatory
requirements can result in, among other things, fines, suspensions or loss of
permission to market products, seizures or recalls of products, operating
restrictions, injunctions, civil fines and criminal prosecution. The FDA has
proposed changes to the GMP regulations and has promulgated new MDR regulations,
both of which will likely increase the cost of compliance with GMP requirements.
The Company also is subject to numerous federal, state and local laws relating
to such matters as safe working conditions, manufacturing practices,
environmental protection, fire hazard control and disposal of hazardous or
potentially hazardous substances. Changes in existing requirements or adoption
of new requirements, such as design control and postmarket surveillance, could
have a material adverse effect on the Company's business, financial condition,
and results of operations. Although the Company believes that it is in
compliance with all applicable regulations of the FDA and the states of
California and Minnesota, current regulations depend heavily on administrative
interpretation, and there can be no assurance that the
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<PAGE> 15
Company will not incur significant costs to comply with laws and regulations in
the future or that laws and regulations will not have a material adverse effect
upon the Company's business, financial condition or results of operations.
Sales of medical device products outside the United States are subject
to international regulatory requirements that vary widely from country to
country. The time required to obtain approvals required by other countries may
be longer or shorter than that required for FDA approval, and requirements for
licensing may differ from FDA requirements. Some countries have historically
permitted human studies earlier in the product development cycle than the United
States. Other countries, such as Japan, have standards similar to those of the
FDA. This disparity in the regulation of medical devices may result in more
rapid product approvals in certain countries than in the United States, while
approvals in countries such as Japan or France may require longer than in the
United States. The European Union has completed the Medical Device Directive for
obtaining CE-Marking for medical devices to be sold within the Union. The
Company has obtained the required certifications of quality and regulatory
systems and is now applying the CE Marking on its products for Europe.
Viennatone, Sonar and the Redwood City facility have obtained and are
maintaining the ISO 9001 and EN 46001 quality system certifications. ReSound
Ireland has achieved and is maintaining ISO 9002 certification. Individual
country requirements regarding third party reimbursements, advertising,
professional training, language of labeling materials and other areas continue
to apply and may make certain markets more difficult to penetrate.
Certain of the Company's products also may be subject to U.S. Federal
Communications Commission ("FCC") regulation, which establishes radio frequency
emission standards for certain electronic equipment. Products that fail to
comply with these regulations may not be sold in the United States until
appropriate modifications are made. Various countries in which the Company
markets its products, or in which the Company may do so in the future, also have
regulatory agencies or standards authorities that perform functions comparable
to the FCC, and the Company will need to comply with these requirements to the
extent that it markets covered products in such countries.
RESEARCH AND DEVELOPMENT
ReSound's research and development staff consisted of 83 people at
December 31, 1996. Its responsibilities include integrated circuit development,
software development, mechanical and electroacoustic engineering, clinical
research, regulatory affairs, magnetic transduction design and development and
biomaterials (including polymers) engineering. The Company also retains
consultants with special expertise to augment internal product development.
ReSound's research and development is primarily focused on the
enhancement of its current hearing device products, development of new BTE, ITE,
ITC and Completely-in-the-Canal ("CIC") acoustic products, fitting systems and
transducers.
Some acoustic and magnetic clinical investigations are conducted at the
California Ear Institute at Stanford in Palo Alto, California which has an
affiliation with the faculty at the Stanford University School of Medicine. Dr.
Rodney Perkins, Chairman of the Company's Board of Directors, is the President
of the California Ear Institute at Stanford and a professor at the Stanford
University School of Medicine.
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Over the last few years, Viennatone has increased its research and
development investment, resulting in several new patents and new technologies.
These new technologies include the development of a custom IC for providing
automatic, gradual mixing between an omni and a directional microphone.
Furthermore, Viennatone has developed a unique parametric filter IC.
With the acquisition of SHH, the Company obtained a large portfolio of
patents and intellectual property for programmable devices. SHH also provides
ReSound with technology related to materials, electronic packaging,
manufacturing engineering of custom shells as well as analog signal processing.
Certain programmable and DSP patents obtained from the SHH acquisition,
were made available to the industry through a partnership formed in 1996
comprised of six hearing device manufacturers, including ReSound, at December
31, 1996. In consideration, ReSound received cash payments from the initial
partnership members valued at $7.3 million (net), as of December 31, 1996, and
has rights to an additional $3.6 million as future partnership interests or
licenses are sold. If and when such funds are received, the related intangible
assets will be reduced accordingly. Thereafter, any amounts paid to the
partnership will be divided equally among the partners and recognized as license
income.
COMPETITION
The hearing device industry is intensely competitive. Many of the
Company's competitors, including Siemens Corporation, Oticon, Phonak, Philips,
Starkey Laboratories, Bausch & Lomb, Beltone Electronics, Widex and Danavox may
have substantially greater financial, manufacturing, marketing or technical
resources than those of the Company. In addition, the Company is aware that
several of its competitors have advanced programs for the development of
technologically advanced hearing devices. Oticon and Widex have recently
introduced digital signal processing ("DSP") hearing devices. The Company,
through its joint venture with AudioLogic Hearing Systems (Boulder, Colorado)
and GN Danavox a/s (Denmark) is developing a new generation of DSP integrated
circuit and software. There can, however, be no assurance that the Company's
competitors will not develop products that may be more effective in treating
hearing loss than the Company's products, or that the Company's technologies and
products may not be rendered obsolete or uncompetitive by such developments.
Principal competitive factors in the market for the Company's existing BTE, ITE
and ITC hearing device products include price, product quality and reliability,
technical support and service, marketing and distribution channels.
PATENTS, TRADE SECRETS, LICENSES AND RELATED LITIGATION
The Company's policy is to protect its proprietary position by, among
other methods, filing United States and international patent applications to
protect technology, inventions and improvements that are important to the
development of its business and, in this regard, the Company owns and has filed
applications for a number of patents and patent applications in the United
States and elsewhere in the world. No assurance can be given that pending patent
applications will be approved or that any patents will provide competitive
advantages for the Company's products or will not be challenged or circumvented.
The Company also relies upon trade secrets and technical know-how and
continuing technological innovation to develop and maintain its competitive
position. The Company typically
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requires its employees, consultants and advisors to execute a confidentiality
agreement upon the commencement of an employment, consulting or advisory
relationship with the Company. There can be no assurance, however, that these
agreements will not be breached or that the Company will have adequate remedies
for any breach. Furthermore, no assurance can be given that competitors will not
independently develop substantially equivalent proprietary information and
techniques or otherwise gain access to the Company's proprietary technology or
disclose such technology or that the Company can meaningfully protect its rights
in such unpatented proprietary technology.
In February 1987, ReSound obtained a worldwide, royalty-bearing license
from AT&T to certain AT&T technical information, including electronics
schematics and software, for use in hearing assistance applications. The license
required the Company to pay a royalty based on net sales of products utilizing
the licensed technology until the completion of the Company's initial public
offering in March 1993. AT&T may terminate the license if the Company is in
breach of the license agreement. The Company believes that it is presently in
compliance with the terms of the license agreement. Under an amendment to the
license agreement effective as of January 1988, AT&T assigned to the Company
three patents related to the Company's sound processing technology that had been
developed through use of the licensed AT&T technical information. Under this
amendment, AT&T was granted back an exclusive license to these three patents for
use in applications other than in hearing assistance applications. AT&T also
received a right to grant sublicenses to the patents to third parties where
required under its pre-existing agreements with such parties.
On April 28, 1995, the Company settled its then pending patent
infringement lawsuit with Dr. Paul Yanick. In exchange for a one-time lump-sum
royalty payment, the lawsuit was dismissed and the Company received a fully-paid
license to use all of Dr. Yanick's trade secrets and patent technology,
including the four patents involved in the lawsuit. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Notes to
Consolidated Financial Statements - Litigation."
On October 19, 1995, the Company announced that it had reached
agreement to settle the then pending patent lawsuit with A&L Technology. As a
result of the settlement, the lawsuit was dismissed and the Company received a
fully-paid license to use A&L's United States Letters Patent No. 4,396,806 in
its hearing device products both in the United States and overseas. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Notes to Consolidated Financial Statements - Litigation."
The Company was the defendant in a lawsuit filed in September 1993 in
the United States District Court, District of Minnesota, by 3M alleging that the
Company's hearing devices and programming systems infringed the claims of three
patents owned by the plaintiff. This lawsuit was dismissed in June 1996 upon the
Company's purchase of certain assets, including the related patents, of the
hearing health business activity of 3M.
From time to time, the Company has been contacted by various other
parties who have alleged that certain of the Company's products infringe or may
infringe patents that such parties claim to hold. Management believes the
Company has not infringed on any such patents and does not believe such claims,
if pursued, will result in a material adverse effect on the financial position
or results of operations of the Company.
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A substantial number of patents have been issued that relate to, or
could relate to, the design and manufacture of hearing devices. As a result, the
Company may in the future be contacted by parties claiming that the Company's
products infringe their patent or other proprietary rights. Any future
litigation could result in substantial costs and the diversion of effort by
management of the Company. 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. Adverse
determinations in any litigation could subject the Company to significant
liabilities to third parties and require the Company to seek licenses from other
parties or prevent the Company from manufacturing and selling its products or
require the Company to redesign its products, all of which could have a
materially adverse effect on the Company's business, financial condition and
results of operations.
PRODUCT LIABILITY AND INSURANCE
Medical device companies are subject to an inherent risk of product
liability and other liability claims in the event that the use of their products
or a medical procedure associated with prescribing and fitting their products
results in personal injury claims. Although the Company has not experienced any
product liability claims to date, any such claims could have an adverse effect
on the Company. The Company currently maintains liability insurance with
coverage of $21 million per occurrence and an annual aggregate maximum of $21
million. There can be no assurance that product liability or other claims will
not exceed such insurance coverage limits or that such insurance will continue
to be available on commercially acceptable terms, or at all.
EMPLOYEES
As of December 31, 1996, the Company had 1,024 employees, including 83
in research and development, 569 in manufacturing, 257 in sales and marketing
and 115 in administration. The Company believes it maintains competitive
compensation, benefits, equity participation and work environment policies to
assist in attracting and retaining qualified personnel. Viennatone's employees
are compulsorily covered by a collective bargaining agreement with respect to
the electronics industry and are compulsorily members of the Austrian Chamber of
Workers. The Company believes that the success of its business will depend, in
part, on its ability to attract and retain qualified personnel. The Company
believes its relationship with its employees is good.
ADVISORY BOARDS
The Company has a Scientific Advisory Board and a Medical Advisory
Board comprised of leading scientists and physicians in the acoustic, auditory
and electrical engineering fields. Both Boards meet and consult with the
Company's management and technical staff on an as-needed basis. The Company
estimates that members of the Advisory Boards spend on average one day per
quarter on Company matters. Some members of the Boards may also receive
compensation for consulting or clinical work performed for the Company under
consulting contracts. The aggregate compensation paid by the Company under these
consulting arrangements was approximately $9,000 during fiscal 1996, excluding
amounts paid to Dr. Richard Goode and Dr. Rodney Perkins, who are also members
of the Company's Board of Directors.
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The current members of the Scientific Advisory Board are:
Jont Allen, Ph.D., a member of the technical staff of AT&T Bell
Laboratories in the acoustics research department. Dr. Allen was involved in the
development of AT&T's internal hearing device venture, with particular emphasis
on the fitting system, and has experience in acoustics, cochlear modeling and
related electrical engineering fields. Dr. Allen holds a Ph.D. from the
University of Pennsylvania.
Harry Levitt, Ph.D., Distinguished Professor at City University of New
York for the Center of Research in Speech and Hearing Science. Dr. Levitt is one
of the world's leading scientists in the hearing aid field. He regularly
presents, often as an invited speaker, at the most important hearing aid
conferences. Dr. Levitt has over 200 publications in major audiology journals
and textbooks.
Brian Moore, Ph.D., Professor of Auditory Perception at Cambridge
University in England. Dr. Moore has performed extensive basic and applied
research in the fields of hearing, hearing impairment, hearing device design,
and signal processing, with long-term Program Grant support from the Medical
Research Council (U.K.). He has authored or edited more than eight books and has
published over 220 book chapters and research articles. Dr. Moore holds a Ph.D.
from Cambridge University.
Edgar Villchur, President and Director of Research of the Foundation
for Hearing Aid Research. Mr. Villchur was the founder of Acoustics Research, a
manufacturer of stereophonic equipment, and has been a visiting scientist at the
Massachusetts Institute of Technology and the Albert Einstein School of
Medicine. Mr. Villchur has authored many books and papers on the reproduction of
sound and signal processing for the hearing impaired. Mr. Villchur holds an
M.S.Ed. from the City College of New York.
The current members of the Medical Advisory Board are:
Derald E. Brackmann, M.D., senior otologic surgeon at the House Ear
Institute in Los Angeles. Dr. Brackmann is past President of the Academy of
Otolaryngology--Head and Neck Surgery and past President of the American
Neurotologic Society. He has published extensively on clinical topics in
otologic surgery (ear surgery). Dr. Brackmann is Clinical Professor of
Otolaryngology at the University of Southern California School of Medicine. Dr.
Brackmann holds an M.D. from the University of Illinois School of Medicine.
Professor Doctor Ugo Fisch, Professor and Chairman of the Department of
Otolaryngology at the University Hospital in Zurich. Dr. Fisch is a leading
surgeon in the fields of otologic surgery and neurotologic surgery (surgery of
the neural components of the ear and related structures) and has over 30 years
of research and teaching experience. Dr. Fisch is an Honorary Fellow of the
Royal College of Surgeons of England. Dr. Fisch holds an M.D. from the
University of Zurich.
Bruce J. Gantz, M.D., Professor of Otolaryngology--Head and Neck
Surgery at the University of Iowa College of Medicine. Dr. Gantz has received
extensive funding from the National Institutes of Health for research on
advanced hearing devices and cochlear implants. Dr. Gantz holds an M.D. from the
University of Iowa.
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William House, M.D., widely recognized as the founder of the field of
neurotologic surgery. Dr. House did his pioneering work in cochlear implants and
the development of advanced neurotologic surgical procedures at the House Ear
Institute in Los Angeles. He has over 35 years experience in research and
development of implantable hearing devices. Dr. House holds a D.D.S. from the
University of California at Berkeley and an M.D. from the University of Southern
California School of Medicine.
Richard L. Goode, M.D. and Rodney Perkins, M.D., members of the Board
of Directors, also serve on the Medical Advisory Board.
ITEM 2. DESCRIPTION OF PROPERTIES
The Company leases 47,600 square feet of office, research and
development and manufacturing space in Redwood City, California under a
non-cancelable operating lease and sublease through June 2000. Additionally, the
Company leases 6,600 square feet in Redwood City under a lease which expires in
December 2000. Sonar Hearing Health, in Eagan, Minnesota, leases 14,000 square
feet under a non-cancelable operating lease which expires in December 1999. The
Company's German subsidiary, ReSound GmbH Hortechnologie, leases approximately
3,500 square feet of space in Munich; and the Company's Dutch subsidiary,
ReSound b.v., leases approximately 2,500 square feet of space in Oosterhout.
During the first quarter of 1994, Sonar increased its leased manufacturing and
administrative space in Munster from approximately 3,400 square feet to
approximately 12,000 square feet. ReSound Ireland Limited leases a total of
approximately 15,200 square feet in Cork, Ireland. ReSound acquired Viennatone
AG in early December 1994. Viennatone's leased headquarters building, located in
Vienna, Austria, consists of approximately 32,500 square feet. Viennatone also
has a leased manufacturing facility in Grafenschachen, Austria, which consists
of approximately 8,200 square feet. Viennatone operates 22 leased retail stores
which total approximately 19,000 square feet. Viennatone owns two additional
retail locations in Vienna which total approximately 1,600 square feet.
Subsidiaries of Viennatone operating in France, Germany, the United Kingdom and
Mexico lease approximately 11,000 square feet of building space. The Company
expects that it may require additional space in the future and that such space
will be available on acceptable terms if required.
ITEM 3. LEGAL PROCEEDINGS
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Notes to Consolidated Financial Statements --
Litigation."
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol RSND. The prices per share reflected in the table below represents the
range of low and high closing sale prices for the Company's Common Stock as
reported in the Nasdaq National Market for the quarters indicated.
<TABLE>
<CAPTION>
FISCAL 1995..............................................HIGH LOW
---- ---
<S> <C> <C>
First Quarter ended April 2, 1995 ................... 10 5/8 6 3/4
Second Quarter ended July 2, 1995 ................... 9 3/8 7 3/8
Third Quarter ended October 1, 1995 ................. 9 1/4 7 5/8
Fourth Quarter ended December 31, 1995 .............. 9 3/8 6 3/4
FISCAL 1996..............................................HIGH LOW
---- ---
First Quarter ended March 31, 1996................... 12 1/2 6 7/8
Second Quarter ended June 30, 1996 .................. 13 1/2 10 1/4
Third Quarter ended September 30, 1996 .............. 12 5/8 7 1/4
Fourth Quarter ended December 31, 1996 .............. 9 1/2 6 7/8
</TABLE>
The Company had approximately 7,624 shareholders as of December 31,
1996, including beneficial owners included in securities position listings as
described in Rule 17Ad-8.
The Company has never paid cash dividends on its capital stock. The
Company currently anticipates that it will retain all available funds for use in
the operation and expansion of its business, and does not anticipate paying any
cash dividends in the foreseeable future.
21
<PAGE> 22
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
(in thousands, except per share data)
1996 (1) 1995 1994 (2) 1993 1992
------- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Net sales $ 125,646 $ 107,330 $ 62,253 $35,686 $ 16,686
Cost of sales 57,241 53,626 26,461 15,025 9,075
--------- --------- -------- ------- --------
Gross profit 68,405 53,704 35,792 20,661 7,611
Operating expenses:
Research and development 14,898 11,181 8,862 5,179 3,526
Selling, general and administrative 50,899 45,606 21,403 10,872 5,124
--------- --------- -------- ------- --------
Total operating expenses 65,797 56,787 30,265 16,051 8,650
--------- --------- -------- ------- --------
Income (loss) from operations 2,608 (3,083) 5,527 4,610 (1,039)
Interest income (expense), net (1,819) (1,860) 553 748 (5)
Other income (expense), net (359) (368) 496 -- --
Provision for litigation and related costs -- -- (19,230) -- --
--------- --------- -------- ------- --------
Income (loss) before income taxes 430 (5,311) (12,654) 5,358 (1,044)
Provision for income taxes 1,397 591 1,635 536 --
---------- --------- -------- ------- --------
Net income (loss) $ (967) $ (5,902) $(14,289) $ 4,822 $ (1,044)
========= ========= ======== ======= ========
Net income (loss) applicable to common shareholders $ (1,192) $ (5,902) $(14,289) $ 4,822 $ (1,044)
========= ========= ======== ======= ========
Net income (loss) per common share $ (0.07) $ (0.38) $ (0.95) $ 0.35 $ (0.19)
========= ========= ======== ======= ========
Shares used in net income (loss) per share calculation 17,591 15,439 15,089 13,973 5,502
========= ========= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------
(in thousands) 1996 1995 1994 1993 1992
---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital $ 25,377 $ 9,324 $ 5,995 $ 29,248 $ 4,932
Total assets 114,752 83,370 95,116 40,846 9,157
Long-term obligations, net of current portion 25,985 30,729 23,146 -- 109
Accumulated deficit (39,202) (38,010) (32,108) (17,819) (22,641)
Shareholders' equity 57,596 18,221 21,169 32,793 5,958
</TABLE>
(1) Includes the operating results of Sonar Hearing Health Corporation,
established from the purchase of certain assets of the hearing health business
activity of 3M in June 1996. See Note 2 in Notes to Consolidated Financial
Statements.
(2) Includes the operating results of Sonar Design & Hortechnik GmbH and
Viennatone AG from their purchase dates of January and December 1994,
respectively. See Note 2 in Notes to Consolidated Financial Statements.
22
<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was primarily engaged in research and development from its
inception in February 1984 through December 1989, when it commenced shipments of
its first In-the-Ear ("ITE") hearing devices and its Digital Hearing System
("DHS"), a hearing testing and programming system. Through December 31, 1996,
the Company has sold over 623,000 hearing devices worldwide including over
229,000 in 1996, to over 4,300 audiologists and hearing device dispensers. In
general, the Company's net sales have increased primarily from higher volumes of
product shipments and a broader product line (due to both internal growth and
acquisitions) rather than from increases in product prices. Increases in the
number of audiologists and hearing device dispensers selling the Company's
hearing instruments have contributed to the higher volume of shipments.
In the last several years, the Company has established significant
operations outside the United States. In 1994, the Company significantly
expanded its business by acquiring two existing hearing health care companies in
Europe, established a manufacturing facility in Ireland and entered into an
Asian distribution joint venture. In 1995, the Company formed wholly owned
subsidiaries in Australia and Sweden. The Company currently derives over 55% of
its revenues outside the United States.
ACQUISITIONS AND STRATEGIC ALLIANCES
In 1994, the Company completed two acquisitions. On January 1, 1994,
the Company acquired all the outstanding ownership interests in Sonar Design &
Hortechnik GmbH ("Sonar") for approximately $3.5 million and 100,000 shares of
ReSound Common Stock. Sonar, located in Munster, Germany, is a leading German
manufacturer and distributor of custom ITE hearing devices. The acquisition of
Sonar allows the Company to market custom ITE hearing devices in Europe,
containing ReSound technology, as well as devices containing Sonar technology.
During 1996, Sonar was renamed ReSound Deutschland.
On August 9, 1994, the Company entered into a joint venture agreement
establishing ReSound Asia Limited ("ReSound Limited") with a group of companies
based in Hong Kong. ReSound Limited has been granted exclusive distribution of
ReSound hearing health care products in Hong Kong, Taiwan, Singapore and the
People's Republic of China with the potential to expand its distribution rights
into Thailand and Malaysia. ReSound holds a majority equity position in the
partnership and provides technical and clinical expertise to the joint venture.
On December 9, 1994, a newly-formed Austrian subsidiary of the Company
acquired 100% of the shares of Viennatone AG, an Austrian company, for
approximately $27.7 million, and the Company's German subsidiary acquired the
net assets of a related business for approximately $0.6 million, or a total of
approximately $28.3 million (Viennatone AG owns an 80% interest in its Austrian
distribution company, Viennatone BVG). Viennatone, based in Vienna, Austria,
designs, manufactures and distributes BTE, ITE and other hearing devices and
components worldwide. The acquisition of Viennatone provided the Company with
Viennatone's electroacoustic and electromechanical technologies; expanded
distribution of ReSound products through Viennatone's established subsidiaries
in the United Kingdom, France, and Germany, as well as a retail chain in
23
<PAGE> 24
Austria consisting of 22 stores; and access to high quality hearing device cases
and components. In 1996, the Company purchased the remaining minority interest
in Viennatone Hannover for $1.9 million in cash.
In June 1996, the Company completed the purchase of certain assets of
the hearing health business activity of Minnesota Mining and Manufacturing
Company ("3M") for $25.4 million and has established a subsidiary in the United
States, Sonar Hearing Health Corporation, to manage this activity on an ongoing
basis. International distribution of former 3M products is undertaken through
the Company's international subsidiaries. To finance this purchase and provide
working capital, the Company raised approximately $32.9 million (net proceeds)
through the private sale of 3,212,176 shares of common stock. Hearing health
constituted a small business activity in 3M's worldwide operations which was
neither a division nor subject to the maintenance of discrete accounting records
such that financial statements could be or are determinable. However, the
Company believes that this business activity generated revenues for 3M of
approximately $9.3 million and $16.6 million for the six months ended June 30,
1996, and for the year ended December 31, 1995, respectively. The total purchase
price of $25.4 million included a cash payment of $24.9 million and $500,000 for
related acquisition expenses. Together with patents acquired from 3M valued at
$7.5 million, patents valued at $2.5 million were acquired in July 1996 in
connection with the above acquisition. These patents were contributed to a
recently formed partnership comprised of six hearing device manufacturers,
including ReSound, at December 31, 1996. In consideration, ReSound received cash
payments from the initial partnership members of $7.3 million (net) as of
December 31, 1996, and has rights to an additional $3.6 million as future
partnership interests or licenses are sold. Thereafter, any amounts paid to the
partnership will be divided equally among the partners. Cash receipts from the
sale of partnership interests has lowered the net purchase price of the hearing
health business activity of 3M to $18.1 million at December 31, 1996.
SALES
The Company recognizes revenue upon shipment of products. Net sales
consist of gross sales less discounts and allowances for estimated returns. In
general, the Company has a 90-day return policy for sales in the United States.
The Company believes that the hearing device industry in the U.S. is
characterized by a relatively high rate of returns due to a number of factors,
including liberal return policies required by law in many states. However, the
Company's return rates in the U.S. are within the range it believes are
experienced by other hearing device manufacturers. In 1996, 1995, and 1994 the
provision for estimated sales returns in the U.S., expressed as a percentage of
domestic sales, has been 27%, 28%, and 23%, respectively. Because of the need to
provide a return policy competitive with industry practice in the U.S. and
because of the importance of the initial fitting process, the Company expects
sales returns will continue at a relatively high rate. In Europe and Asia,
returns are not material.
COSTS & EXPENSES
Cost of sales consists of manufacturing costs, royalty expenses,
quality assurance costs and costs and accruals associated with warranty repairs
and product remakes. In 1996, cost of sales as a percentage of net sales
decreased to 46% from 50% in 1995. The 1995 cost of sales included $2.8 million
in royalties to A&L Technology stemming from a disputed patent and higher
manufacturing costs of approximately $2.3 million necessitated by a temporary
re-design of all affected products pending settlement of the A&L Technology
patent suit.
24
<PAGE> 25
The Company provides for estimated warranty cost at the time of sale
and adjusts these estimates based on subsequent experience. The period over
which warranty claims may be made in the U.S. is one to three years for
electronic components and 12 months for the custom shell used for ITE and ITC
devices. In 1996, 1995 and 1994, the approximate provisions for estimated
warranty cost (and as a percentage of net sales domestically) were $4.4 million
(8%), $4.2 million (11%), and $3.0 million (10%), respectively. The period over
which warranty claims may be made in Europe and Asia is 12 months, and the
amount of these claims has been of lesser significance. The Company experiences
a high rate of warranty claims related to damage and blockage of the speaker
caused by moisture and accumulated ear wax. The Company expects such claims to
continue to be significant and expects warranty costs to continue to represent a
significant component of cost of sales.
The 1996 increase in selling, general and administrative expenses was
primarily the result of the acquisition of certain assets of the hearing health
business activity of 3M. The 1995 increase in selling, general and
administrative expenses was primarily related to acquisitions and the
establishment of wholly owned subsidiaries in Australia and Sweden. In 1994, the
Company established distribution in Asia through a joint venture located in Hong
Kong and initiated sales in the United Kingdom, Denmark, and Sweden.
International sales as a percentage of net sales in 1996, 1995 and 1994 were
55%, 65% and 51%, respectively.
PATENT AND OTHER LITIGATION
On April 28, 1995, the Company settled its then-pending patent
infringement lawsuit with Dr. Paul Yanick. In exchange for a one-time lump-sum
royalty payment, the lawsuit was dismissed and the Company received a fully-paid
license to use all of Dr. Yanick's trade secrets and patent technology,
including the four patents involved in the lawsuit.
On October 19, 1995, the Company announced that it had reached
agreement to settle both the patent lawsuit with A&L Technology and the
shareholder class action lawsuit previously filed on behalf of certain
shareholders.
The patent infringement lawsuit brought against the Company by A&L
Technology was dismissed and the Company received a fully-paid license to use
A&L's United States Letters Patent No. 4,396,806 in its hearing device products
both in the United States and overseas. In addition, A&L Technology relinquished
its claims to receive approximately $13.5 million in damages, attorneys' fees,
royalties and interest previously awarded by the court in the action. In
exchange, the Company on October 19, 1995, the Company made a cash payment to
A&L Technology of $7.0 million and released all claims to a $2.8 million royalty
paid to A&L Technology in 1995.
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. At the settlement
hearing relating to the final distribution of the shareholder settlement fund,
an objection was raised to the provisions of the settlement agreement relating
to attorney's fees and certain other matters. The judge rejected the objector's
claim and approved the proposed terms of the distribution. Notice of appeal was
filed by the objector on July 10, 1996, and the appeal is currently pending
before the Ninth Circuit Court of Appeals.
25
<PAGE> 26
The Company was the defendant in a lawsuit filed in September 1993 in
the United States District Court, District of Minnesota, by 3M alleging that the
Company's hearing devices and programming systems infringed the claims of three
patents owned by the plaintiff. This lawsuit was dismissed in June 1996 upon the
Company's purchase of certain assets, including the related patents, of the
hearing health business activity of 3M.
From time to time, the Company has been contacted by various other
parties who have alleged that certain of the Company's products infringe or may
infringe patents that such parties claim to hold. Management believes the
Company has not infringed on any such patents and does not believe such claims,
if pursued, will result in a material adverse effect on the financial position
or results of operations of the Company.
A substantial number of patents have been issued that relate to or
could relate to the design and manufacture of hearing devices. As a result, the
Company may in the future be contacted by parties claiming that the Company's
products infringe their patent or other proprietary rights. Any future
litigation could result in substantial costs and the diversion of effort by
management of the Company. 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. Adverse
determinations in any litigation could subject the Company to significant
liabilities to third parties and require the Company to seek licenses from other
parties or prevent the Company from manufacturing and selling its products or
require the Company to redesign its products, all of which could have a
materially adverse effect on the Company's business, financial condition and
results of operations.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statements of operations data as a percentage of net sales:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 46 50 42
---- ---- ----
Gross profit 54 50 58
Operating expenses:
Research and development 12 10 14
Selling, general and administrative 41 43 35
---- ---- ----
Total operating expenses 53 53 49
---- ---- ----
Income (loss) from operations 1 (3) 9
Interest income (expense), net (1) (2) 1
Other income (expense), net -- -- 1
---- ---- ----
Income (loss) before income taxes -- (5) 11
Provision for litigation and related costs -- -- (31)
---- ---- ----
Income (loss) before income taxes -- (5) (20)
Provision for income taxes 1 1 3
---- ---- ----
Net loss (1)% (6)% (23)%
==== ==== ====
</TABLE>
26
<PAGE> 27
Years Ended December 31, 1996 and 1995
Net sales increased by 17% to $125.6 million in 1996 compared to $107.3
million in 1995 due to the introduction of the ITC hearing device, continued
strong sales of the Encore product line, the inclusion of sales relating to
products acquired from 3M Hearing Health, increased sales of the Company's ITE
and BTE hearing devices, and an increase in the number of audiologists (hearing
care professionals with advanced degrees), acousticians, and hearing device
dispensers selling the Company's products. The total number of audiologists and
hearing device retailers increased in the U.S. from 1,392 at the end of 1995 to
2,200 at the end of 1996. The number of acousticians and hearing device
dispensers selling the Company's products internationally increased from 2,050
at the end of 1995 to 2,120 at the end of 1996. International sales for the
twelve months ended December 31, 1996, were level with the comparable period
last year due to unfavorable changes in governmental reimbursement policies in
Europe, an increasingly competitive marketplace, and weaker European currencies
compared to the U.S. dollar. International sales as a percentage of net sales in
1996 and 1995 were 55% and 65%, respectively.
Cost of sales increased to $57.2 million in 1996 from $53.6 million in
1995. Gross profit increased to $68.4 million in 1996 from $53.7 million in
1995, and as a percentage of net sales increased to 54% in 1996 from 50% in
1995. The year-to-year increase in gross profit was largely attributable to the
$2.8 million in royalty payments and the higher manufacturing costs of
approximately $2.3 million incurred in 1995 due to the A&L Technology patent
litigation. In addition, the Company has benefited from improved efficiencies at
its Ireland manufacturing facility which supplies all ReSound BTE hearing
devices and faceplate assemblies worldwide.
Research and development expenses increased by 33% to $14.9 million
(12% of net sales) for 1996 from $11.2 million (10% of net sales) for 1995. The
Company increased spending during the twelve months ended December 31, 1996
relative to the prior year for the continued development of new products being
introduced throughout 1996 and for products planned for future years. In May
1996, the Company introduced its Advanced ReSound Processing(TM) chip
incorporating ReSound's Cochlea Dynamics technology into an In-the-Canal hearing
device, a ReSound software fitting system, ReSource, based on the industry
standard NOAH PC system platform and an improved Behind-the-Ear Power hearing
device. In 1996 the Company also upgraded its installed base of Portable
Prescriptive Programming fitting systems. In addition, expenses were incurred
for the development of a standard hardware platform for Digital Signal
Processing technology as part of an alliance with AudioLogic Hearing Systems and
GN Danavox a/s which was announced in April 1996 and finalized on September 30,
1996.
Selling, general and administrative expenses increased by 12% to $50.9
million (41% of net sales) in 1996 from $45.6 million (43% of net sales) in
1995. This year-to-year increase in expenditures resulted from the acquisition
of the 3M Hearing Health business activity and increased expenses related to
increased sales volume. These increases were offset by a labor agreement reached
in Austria which reduced SG&A expenses on a one-time basis by approximately $1.3
million in 1996.
The Company expects expenses generally to continue at high levels, but
to fluctuate as a percentage of sales. The Company is undertaking a program to
reduce expenses, but no assurance can be given that reductions will be obtained,
especially on a percentage of sales basis which may vary substantially on a
quarter to quarter basis.
27
<PAGE> 28
Interest income was $184,000 in 1996, compared to $326,000 in 1995.
This year-to-year decrease is primarily due to a reduction in the average cash
and short-term investment balances resulting from cash payments made to settle
litigation in the fourth quarter of 1995.
Interest expense was $2.0 million in 1996, compared to $2.2 million in
1995. This decrease is primarily due to the Company paying down debt in 1996.
Other expense was $359,000 in 1996 compared to $368,000 in 1995. Both
amounts consisted primarily of realized losses on foreign currency transactions.
Income tax provisions were $1.4 million in 1996 and $591,000 in 1995.
Income taxes primarily represent taxes on profits earned at the Company's
European subsidiaries in Ireland, Austria, the United Kingdom and Holland. The
Company had net operating loss carryforwards of approximately $31.0 million for
United States' federal purposes and $8.6 million for United States' state
purposes as of December 31, 1996. Each international subsidiary is subject to
income taxes in the countries in which it operates. The income of these
subsidiaries is not included in the Company's U.S. federal and state income tax
returns. The Company had foreign net operating loss carryforwards of
approximately $7.0 million at December 31, 1996, which will expire at various
dates beginning in 1997 through 2002, if not utilized.
Years Ended December 31, 1995 and 1994
Net sales increased by 72% to $107.3 million in 1995 compared to $62.3
million in 1994 due primarily to higher sales of the Company's ITE and BTE
hearing devices, an increase in the number of audiologists (hearing care
professionals with advanced degrees), acousticians, and hearing device
dispensers selling the Company's products and the inclusion of a full year's
sales of Viennatone, acquired in December 1994. The total number of audiologists
and hearing device retailers increased in the U.S. from 1,118 at the end of 1994
to 1,392 at the end of 1995. The Company experienced increased international
sales in Austria, Belgium, Canada, Denmark, France, Germany, Hong Kong, Japan,
the Netherlands, Portugal, Spain, Switzerland, Taiwan, and the United Kingdom.
The number of acousticians and hearing device dispensers selling the Company's
products internationally increased from 1,630 at the end of 1994 to 2,050 at the
end of 1995.
Cost of sales increased to $53.6 million in 1995 from $26.5 million in
1994. Gross profit increased to $53.7 million in 1995 from $35.8 million in
1994, and as a percentage of net sales declined to 50% in 1995 from 58% in 1994.
This decline in gross profit as a percentage of net sales in 1995 was primarily
attributable to payment of $2.8 million in royalties to A&L Technology stemming
from a disputed patent and higher manufacturing costs of approximately $2.3
million necessitated by a temporary re-design of all affected products. In
September 1994, ReSound established a new manufacturing facility in Cork,
Ireland which has supplied the majority of ReSound standard BTE and faceplates
for custom ITE hearing devices since mid-year 1995.
Research and development expenses increased by 26% to $11.2 million
(10% of net sales) for 1995 from $8.9 million (14% of net sales) for 1994. This
increase was attributable to the hiring of additional engineering personnel,
payments to outside consultants and contractors for new product development
associated with acoustic products and the engineering costs of Viennatone. In
1994, the Company introduced a Sculptured ITE hearing device in the U.S. market,
and a Power BTE hearing device in worldwide markets. The Company continued to
incur research and development expenses
28
<PAGE> 29
at a substantial level for the development of additional new products, such as
an In-the-Canal ("ITC") hearing device, the incorporation of a directional
microphone with ReSound sound processing technology into the Company's BTE
hearing device products, the development of the Advanced ReSound Processing(TM)
chip, and the development of new software and fitting systems. The expenses
relating to designing around the A&L Technology patent represented approximately
$500,000 of 1995 research and development costs.
Selling, general and administrative expenses increased by 113% to $45.6
million (43% of net sales) in 1995 from $21.4 million (35% of net sales) in
1994. This increase was attributable to additional staffing due to higher sales
volumes, the expansion of distribution of the Company's products into several
additional countries, and the inclusion of Viennatone for a full year. In 1995,
$15.1 million of selling, general and administrative expenses related to
Viennatone. During 1995, ReSound established wholly owned subsidiaries in
Australia and Sweden.
Interest income was $326,000 in 1995, compared to $680,000 in 1994.
This decrease was attributable to the reduction and eventual elimination of
investing activity by ReSound in 1995. There was less cash on hand during the
course of the year due to $16.6 million paid to settle the A&L Technology,
shareholder class action and Yanick lawsuits.
Interest expense was $2.2 million in 1995, compared to $127,000 in
1994. This increase was due, principally, to $17.3 million in bank borrowings
established in December 1994 and to the issuance of $10 million of convertible
notes in February 1995 related to the acquisition of Viennatone AG.
Other expense of $368,000 in 1995 was related to the operating losses
incurred by the Company's joint venture in Hong Kong and the minority interest
expenses incurred at the Viennatone subsidiary, partially offset by
approximately $175,000 of realized gains on foreign currency transactions. Other
income was $496,000 in 1994 and consisted primarily of realized gains on foreign
currency transactions.
Income tax provisions were $591,000 in 1995 and $1.6 million in 1994.
Income taxes primarily represent taxes on profits earned at the Company's
European subsidiaries in Ireland, Austria, the United Kingdom and Holland. The
Company had net operating loss carryforwards of approximately $30.0 million for
federal purposes and $12.6 million for state purposes as of December 31, 1995.
Each international subsidiary is subject to income taxes in the countries in
which it operates. The income of these subsidiaries is not included in the
Company's U.S. federal and state income tax returns.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
During 1996, the Company used $1.6 million of cash in operations
primarily to fund the Company's net current asset position. During 1995, the
Company used $17.5 million of cash in operations, of which $16.6 million was
paid in litigation and related costs.
29
<PAGE> 30
Investing Activities
Net cash used in investing activities in 1996 was $27.0 million and
resulted primarily from the acquisition of certain assets of the 3M hearing
health business activity for $25.4 million, additions to property and equipment
of $7.5 million and the purchase of a minority shareholder's interest in a
subsidiary of Viennatone for $1.9 million. These amounts were primarily offset
by net proceeds from the licensing of patent rights for $7.3 million.
Financing Activities
Net cash provided by financing activities in 1996 was $31.5 million.
This amount resulted primarily from the issuance of Common and Preferred Stock
for $34.3 million and $5.0 million, respectively. These amount were offset by
reductions of long-term debt and loans payable of $4.2 million and $3.6 million,
respectively.
At December 31, 1996, the Company had available cash and cash
equivalents of $8.0 million. While the Company believes that available cash will
be sufficient to meet the Company's short-term operating and capital
requirements through at least December 31, 1997, the Company may be required to
raise additional capital for its currently envisaged long-term needs and in
connection with any future acquisitions.
30
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 32
Consolidated Financial Statements:
Consolidated Balance Sheets 33
Consolidated Statements of Operations 34
Consolidated Statement of Shareholders' Equity 35
Consolidated Statements of Cash Flows 36
Notes to Consolidated Financial Statements 37
</TABLE>
31
<PAGE> 32
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
ReSound Corporation
We have audited the accompanying consolidated balance sheets of ReSound
Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. Our audits also included the
financial statement schedule listed in the Index at item 14(a)(2). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ReSound Corporation at December 31, 1996 and 1995, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Palo Alto, California
January 28, 1997
32
<PAGE> 33
RESOUND CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
1996 1995
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 7,980 $ 5,091
Accounts receivable, net of allowances for estimated
returns and doubtful accounts of $4,774 and $4,123
at December 31, 1996 and 1995, respectively 20,497 17,746
Inventories 23,853 18,466
Other current assets 4,218 2,441
---------- -----------
Total current assets 56,548 43,744
Property and equipment, net 13,494 9,300
Other assets 4,899 2,634
Goodwill, net of accumulated amortization
of $3,379 and $1,779 39,811 27,692
----------- ----------
$ 114,752 $ 83,370
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans and short-term notes payable $ 2,504 $ 8,134
Accounts payable 8,478 10,189
Accrued liabilities 17,976 12,643
Provision for litigation and related costs --- 492
Long-term debt, current portion 2,213 2,962
------- -----------
Total current liabilities 31,171 34,420
Long-term liabilities:
Long-term debt, non-current portion 19,515 22,988
Employee benefits 5,110 6,216
Other accrued liabilities 1,360 1,525
------- -------
Total long-term liabilities 25,985 30,729
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value, 2,000,000 shares authorized;
Series B: 54,055 issued and outstanding at December 31, 1996 5,225 ---
Common stock, $0.01 par value, 50,000,000 shares authorized;
19,384,000 and 15,610,000 shares issued and outstanding at
December 31, 1996 and 1995, respectively 90,680 54,292
Accumulated deficit (39,202) (38,010)
Cumulative translation adjustment 893 1,939
----------- ---------
Total shareholders' equity 57,596 18,221
----------- ---------
$ 114,752 $ 83,370
========= ========
</TABLE>
See accompanying notes.
33
<PAGE> 34
RESOUND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net sales $ 125,646 $ 107,330 $ 62,253
Cost of sales 57,241 53,626 26,461
-------- -------- --------
Gross profit 68,405 53,704 35,792
Operating expenses:
Research and development 14,898 11,181 8,862
Selling, general and administrative 50,899 45,606 21,403
-------- -------- --------
Total operating expenses 65,797 56,787 30,265
-------- -------- --------
Income (loss) from operations 2,608 (3,083) 5,527
Other income (expense):
Interest income 184 326 680
Interest expense (2,003) (2,186) (127)
Other income (expense), net (359) (368) 496
Provision for litigation and related costs --- --- (19,230)
-------- ----------- -----------
Total other income (expense) (2,178) (2,228) (18,181)
--------- --------- ----------
Income (loss) before income taxes 430 (5,311) (12,654)
Provision for income taxes 1,397 591 1,635
--------- --------- ----------
Net loss $ (967) $ (5,902) $(14,289)
========== ========= =========
Net loss applicable to common shareholders $ (1,192) $ (5,902) $(14,289)
========== ========= =========
Net loss per share $ (0.07) $ (0.38) $ (0.95)
========= ======== ==========
Shares used in net loss per share calculation 17,591 15,439 15,089
========= ======== ==========
</TABLE>
See accompanying notes.
34
<PAGE> 35
RESOUND CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss) on
Securities Cumulative Total
Preferred Common Accumulated Available for Translation Shareholders'
Stock Stock Deficit Sale Adjustment Equity
--------- ------ ----------- ---------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1993 $ -- $50,846 $(17,819) $ -- $ (234) $ 32,793
Exercise of stock options for 229
shares of common stock -- 227 -- -- -- 227
Issuance of 38 shares of common
stock for employee stock
purchase plan -- 291 -- -- -- 291
Issuance of 100 shares of common
stock in connection with
acquisition -- 1,987 -- -- -- 1,987
Net loss -- -- (14,289) -- -- (14,289)
Unrealized loss on securities
available-for-sale -- -- -- (675) -- (675)
Translation adjustment -- -- -- -- 835 835
------- -------- -------- ------ ------- ---------
Balance at December 31, 1994 -- 53,351 (32,108) (675) 601 21,169
Exercise of stock options for 341
shares of common stock -- 570 -- -- -- 570
Issuance of 51 shares of common
stock for employee stock
purchase plan -- 333 -- -- -- 333
Exercise of stock options for 15
shares for directors' option plan -- 38 -- -- -- 38
Net loss -- -- (5,902) -- -- (5,902)
Change in unrealized loss on
securities available-for-sale -- -- -- 675 -- 675
Translation adjustment -- -- -- -- 1,338 1,338
------- -------- -------- ------ ------- ---------
Balance at December 31, 1995 -- 54,292 (38,010) -- 1,939 18,221
Issuance of 54 shares of 6%
convertible redeemable
preferred stock 5,000 -- -- -- -- 5,000
Issuance of 71 shares of common
stock for employee stock
purchase plan -- 385 -- -- -- 385
Exercise of stock options for 225
shares of common stock -- 1,055 -- -- -- 1,055
Issuance of 3,212 shares of
common stock under private
placement (net proceeds) -- 32,900 -- -- -- 32,900
Issuance of 266 shares of common
stock upon conversion of
Company's promissory note and
related interest -- 2,048 -- -- -- 2,048
Net loss -- -- (967) -- -- (967)
Accrued dividends on preferred
stock 225 -- (225) -- -- --
Translation adjustment -- -- -- -- (1,046) (1,046)
------ ------- -------- ----- ------- --------
Balance at December 31, 1996 $5,225 $90,680 $(39,202) $ -- $ 893 $ 57,596
====== ======= ======== ===== ======= ========
</TABLE>
See accompanying notes.
35
<PAGE> 36
RESOUND CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (967) $ (5,902) $(14,289)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 6,066 5,830 2,828
Loss on disposal of property and equipment --- --- 30
Changes in assets and liabilities:
Accounts receivable (982) (3,335) (1,457)
Inventories (1,732) (2,495) (2,301)
Other assets (3,435) (259) (1,144)
Accounts payable (1,711) 3,087 1,610
Accrued liabilities 1,663 2,134 (28)
Provision for litigation and related costs (492) (16,604) 17,096
------ ------- --------
Net cash provided by (used in) operating activities (1,590) (17,544) 2,345
------- -------- -------
Cash flows from investing activities:
Acquisitions:
Sonar --- --- (4,118)
Viennatone --- --- (26,155)
Sonar Hearing Health (25,443) --- ---
Purchase of minority shareholder's interest in a subsidiary of Viennatone (1,857) --- ---
Proceeds from patent contributions to partnership (net) 7,300 --- ---
Purchase of short-term investments --- (5,582) (41,693)
Sales and maturities of short-term investments --- 13,780 52,595
Change in translation adjustment 538 (745) 835
Additions of property and equipment (7,547) (4,168) (5,849)
------ ------ --------
Net cash provided by (used in) investing activities (27,009) 3,285 (24,385)
-------- ------ ---------
Cash flows from financing activities:
Loans payable (3,630) (5,709) 13,532
Borrowings under long-term debt --- 10,000 17,374
Payments on long-term debt (4,222) (1,706) ---
Proceeds from issuance of preferred stock 5,000 --- ---
Proceeds from issuance of common stock 34,340 941 518
------ ------- ------
Net cash provided by financing activities 31,488 3,526 31,424
------ ------- ------
Net increase (decrease) in cash and cash equivalents 2,889 (10,733) 9,384
Cash and cash equivalents at the beginning of the year 5,091 15,824 6,440
------ ------- --------
Cash and cash equivalents at the end of the year $7,980 $ 5,091 $ 15,824
====== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $2,104 $ 2,767 $ 127
====== ======== =========
Income taxes $1,102 $ 1,360 $ 142
====== ======== =========
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock on acquisition of Sonar $ --- $ --- $ 1,987
Issuance of common stock on conversion of promissory notes $2,048 $ --- $ ---
Accrual of preferred stock dividend $ 225 $ --- $ ---
</TABLE>
s
See accompanying notes.
36
<PAGE> 37
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
ReSound Corporation (the "Company") was incorporated in the State of
California on February 3, 1984. The Company is a hearing health care company
which is involved in the research, development, manufacturing and distribution
of technologically advanced hearing devices and diagnostic fitting systems.
Shipments of products commenced in December 1989. The Company formed one
European subsidiary in late 1992, and a second European subsidiary in 1993. In
1994, the Company significantly expanded its business by acquiring two existing
hearing health care companies in Europe, Sonar Design & Hortechnik GmbH and
Viennatone AG (see Note 2. "Acquisitions"). The Company also established a
European manufacturing facility and an Asian distribution joint venture in 1994.
In 1995, the Company formed subsidiaries in Australia and Sweden. In 1996, the
Company completed the purchase of certain assets of the hearing health business
activity of 3M and established a subsidiary, Sonar Hearing Health Corporation,
to manage this activity on an ongoing basis (see Note 2. "Acquisitions").
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company's wholly owned subsidiaries. All significant intercompany accounts have
been eliminated.
Except for the Company's European manufacturing subsidiary located in
Ireland, for which the U.S. dollar is the functional currency, the functional
currency for each international subsidiary generally is its respective local
currency. Accordingly, all assets and liabilities related to these subsidiaries
are translated at the current exchange rates at the end of each quarter. The
resulting translation adjustments are recorded directly to the foreign currency
translation adjustment account included in shareholders' equity. Sales and
expenses are translated at average exchange rates in effect during the period.
Foreign currency transaction gains and losses are included in results of
operations.
Sales and Credit Risk
The Company sells its products to audiologists, acousticians, hearing
device chains and hearing device dispensers primarily in North America, Europe,
and Asia. The Company performs on-going credit evaluations of its customers and
generally does not require collateral. The Company maintains reserves for
potential credit losses, and such losses have been within management's
expectations.
The Company's sales to customers outside of the United States accounted
for approximately 55%, 65% and 51% of net sales for the years ended December 31,
1996, 1995 and 1994, respectively. 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
37
<PAGE> 38
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
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.
Sales are recognized when products are shipped. Net sales consist of
product sales less discounts and estimated returns. Estimated U.S. returns are
provided for at time of shipment. Company policy allows for a 90-day return
period on U.S. sales. The provisions for expected returns, expressed as a
percentage of gross U.S. sales, were as follows: 1996--27%, 1995--28%, and
1994--23%. Most returns are resolved or settled within several months of the
initial sale. In Europe and Asia, returns are not material.
Cost of Sales
Cost of sales consists of costs associated with products sold, which
include estimated warranty costs. The Company provides at the time of sale for
the estimated cost of remaking and repairing products under warranty. In the
U.S., the warranty period is one year for the custom hearing device shell and
one to three years for electronic components. Because of the length of the
warranty period, adjustments to the originally recorded provisions, both
increases and decreases, may be necessary from time to time. In 1996, 1995 and
1994, the approximate U.S. provisions for estimated warranty cost (and as a
percentage of U.S. net sales) were $4.4 million (8%), $4.2 million (11%) and
$3.0 million (10%), respectively. The period over which warranty claims may be
made in Europe and Asia is one year. The amount of these claims has not been
material.
Advertising Expenses
The Company accounts for advertising costs as expense in the period in
which the costs are incurred. Advertising expense for 1996, 1995 and 1994 was
approximately $2.8 million, $2.3 million and $1.5 million, respectively.
Income Taxes
The Company accounts for income taxes under the liability method. The
Company's net operating loss carryforwards for U.S. purposes have not been given
benefit in the financial statements.
Per Share Data
Net loss per share is computed using the loss attributable to common
stock shareholders and the weighted average number of common shares outstanding.
38
<PAGE> 39
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Cash Equivalents and Short-term Investments
The Company considers all highly liquid investments with original
maturities from the date of purchase of 90 days or less to be cash equivalents.
Short-term investments are considered as available-for-sale and are
carried at fair value with the unrealized gains and losses recorded as a
separate component of shareholders' equity.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories at December 31, 1996 and 1995 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1996 1995
----
<S> <C> <C>
Raw materials $ 9,934 $ 8,879
Work in progress 6,838 4,431
Finished goods 7,081 5,156
------- -------
Total $23,853 $18,466
======= =======
</TABLE>
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a
straight-line basis. Assets under capitalized leases are amortized over the
shorter of the term of the lease or their useful lives, and such amortization is
included with depreciation expense. Property and equipment at December 31, 1996
and 1995 is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Machinery and equipment $21,160 $14,320
Furniture, fixtures and improvements 7,513 4,527
------- --------
28,673 18,847
Accumulated depreciation and amortization (15,179) (9,547)
------- ---------
Total property and equipment, net $13,494 $ 9,300
======= ========
</TABLE>
Goodwill
The unallocated excess purchase costs (goodwill) related to business
acquisitions in 1994 (Sonar Design & Hortechnik GmbH and Viennatone AG) and the
1996 purchase of certain assets of the hearing health business activity of 3M,
are being amortized over 20 years.
39
<PAGE> 40
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Accrued Liabilities
Accrued liabilities at December 31, 1996 and 1995 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accrued compensation $ 4,279 $ 2,397
Accrued warranty 5,100 3,759
Income taxes payable 1,415 1,691
Other 7,182 4,796
-------- -------
Total $17,976 $12,643
======= =======
</TABLE>
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.
NOTE 2. ACQUISITIONS
The Company acquired all the outstanding stock of two European-based
companies in 1994 and certain assets of 3M's hearing health business activity in
1996. In each instance, the acquisitions were accounted for as purchase
transactions. The acquired assets and liabilities were recorded at their
estimated fair values at the date of acquisition, and the unallocated excess
purchase price amounts (goodwill) are being amortized on a straight line basis
over 20 year periods. The operating results of each subsidiary have been
included in the consolidated statements of operations from the respective
acquisition dates.
Sonar
On January 1, 1994, the Company's existing German subsidiary acquired
all the shares of Sonar Design & Hortechnik GmbH ("Sonar"), a German company,
for approximately $3.5 million in cash and 100,000 shares of the Company's
common stock. Sonar is a manufacturer and distributor of both Sonar branded and
ReSound branded hearing devices. In 1996, this Company was renamed ReSound
Deutschland.
Viennatone
On December 9, 1994, a newly-formed Austrian subsidiary of the Company
acquired 100% of the shares of Viennatone AG, an Austrian company, for
approximately $27.7 million, and the
40
<PAGE> 41
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Company's German subsidiary acquired the net assets of a related business for
approximately $0.6 million, or a total of approximately $28.3 million
(Viennatone AG owns an 80% interest in its Austrian distribution company,
Viennatone BVG). To finance the acquisition, the Austrian subsidiary borrowed
approximately $17.3 million from an Austrian bank. The balance of the purchase
price was provided by available cash funds of the Company and $6.85 million in
loans against the Company's short-term investment securities. Viennatone
manufactures and markets hearing devices through subsidiaries in Germany, France
and the United Kingdom. It uses both independent distributors and, in Austria,
its own retail chain. In 1996, the Company purchased the remaining minority
interest in Viennatone Hannover for $1.9 million in cash.
The effects of these acquisitions on the 1994 consolidated statement of
cash flows were as follows (in thousands):
<TABLE>
<CAPTION>
Sonar Viennatone
----- ----------
<S> <C> <C>
Working capital acquired (excluding cash) $ 848 $ 9,318
Property and equipment, net 177 2,795
Goodwill 5,673 21,683
Long-term obligations (excluding financing for
acquisition) (593) (7,641)
---------- ---------
Less common stock issued for Sonar 6,105 26,155
Effect on cash flows - net cash used (1,987) ---
---------- --------
$ 4,118 $ 26,155
========== ========
</TABLE>
The following unaudited pro forma consolidated results for 1994 as if
both acquisitions had been consummated on January 1, 1994 (in thousands, except
per share amounts):
<TABLE>
<CAPTION>
1994
-------
<S> <C>
Net sales $91,295
Income before provisions for litigation and income taxes 9,487
Loss before income taxes (9,743)
Net loss (12,626)
Net loss per share $ (0.84)
Average shares outstanding 15,089
</TABLE>
The pro forma results, which were based upon certain assumptions and
estimates which the Company believes are reasonable, do not purport to be
indicative of the results that actually would have occurred had the acquisitions
occurred on January 1, 1994.
41
<PAGE> 42
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Sonar Hearing Health
In June 1996, the Company completed the purchase of certain assets of
the hearing health business activity of 3M and established a subsidiary, Sonar
Hearing Health Corporation, to manage this activity on an ongoing basis. The
total purchase price of $25.4 million consisted of a cash payment of $24.9
million and $500,000 for related acquisition expenses. To finance this purchase
and provide working capital, the Company raised approximately $32.9 million (net
proceeds) through the private sale of 3,212,176 shares of common stock.
Hearing health constituted a small business activity in 3M's worldwide
operations which was neither a division nor subject to the maintenance of
discrete accounting records such that financial statements could be or are
determinable. However, the Company believes that this business activity
generated revenues for 3M of approximately $9.3 million (unaudited) and $16.6
million (unaudited) for the six months ended June 30, 1996, and for the year
ended December 31, 1995, respectively. The Company believes that profits, if
any, generated from the hearing health activity of 3M for the above-mentioned
periods were minimal, and it may not have been profitable as a historical
activity.
In addition to patents acquired from 3M valued at $7.5 million, patents
valued at $2.5 million were acquired in July 1996 in connection with the above
acquisition. These patents were contributed to a partnership formed in 1996
comprised of six hearing device manufacturers, including ReSound, at December
31, 1996. In consideration, ReSound received cash payments from the initial
partnership members of $7.3 million (net) as of December 31, 1996 and has rights
to an additional $3.6 million as future partnership interests or licenses are
sold. If and when such funds are received, the related intangible assets will be
reduced accordingly. Thereafter, any amounts paid to the partnership will be
divided equally among the partners and recognized as license income.
The annual amortization resulting from the recognition of the
intangible assets acquired from 3M on the Company's balance sheet (net of
patents contributed to a partnership, as described above) will be approximately
$188,500 and $655,000 for the patents and goodwill, respectively, and are being
amortized over useful lives from 10 to 20 years.
The effects of the purchase of certain assets of the hearing health
business activity of 3M on the 1996 consolidated statement of cash flows were as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Net tangible assets acquired, $ 4,132
principally receivables
and inventories
Patents 7,500
Goodwill 13,811
--------
Total purchase price $ 25,443
========
</TABLE>
42
<PAGE> 43
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 3. LITIGATION
On April 28, 1995 the Company settled its then pending patent
infringement lawsuit with Dr. Paul Yanick. In exchange for a one-time lump-sum
royalty payment, the lawsuit was dismissed and the Company received a fully-paid
license to use all of Dr. Yanick's trade secrets and patent technology,
including the four patents involved in the lawsuit.
On October 19, 1995 the Company announced that it had reached agreement
to settle both the patent lawsuit with A&L Technology ("A&L") and the
shareholder class action lawsuit previously filed on behalf of certain
shareholders.
The patent infringement lawsuit brought against the Company by A&L was
dismissed and the Company received a fully-paid license to use A&L's United
States Letters Patent No. 4,396,806 in its hearing device products both in the
United States and overseas. In addition, A&L relinquished its claims to receive
approximately $13.5 million in damages, attorneys' fees, royalties and interest
previously awarded by the court in the action. In exchange, on October 19, 1995,
the Company made a cash payment to A&L of $7.0 million and released all claims
to a $2.8 million royalty paid to A&L in 1995.
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. At the settlement
hearing relating to the final distribution of the shareholder settlement fund,
an objection was raised to the provisions of the settlement agreement relating
to attorney's fees and certain other matters. The judge rejected the objector's
claim and approved the proposed terms of the distribution. Notice of appeal was
filed by the objector on July 10, 1996, and the appeal is currently pending
before the Ninth Circuit Court of Appeals.
The Company was the defendant in a lawsuit filed in September 1993 in
the United States District Court, District of Minnesota, by 3M alleging that the
Company's hearing devices and programming systems infringed the claims of three
patents owned by the plaintiff. This lawsuit was dismissed in June 1996 upon the
Company's purchase of certain assets, including the related patents, of the
hearing health business activity of 3M.
From time to time, the Company has been contacted by various other
parties who have alleged that certain of the Company's products infringe or may
infringe patents that such parties claim to hold. Management believes the
Company has not infringed any such patents and does not believe such claims, if
pursued, will result in a material adverse effect on the financial position or
results of operations of the Company.
43
<PAGE> 44
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
In 1994 the Company provided a total of $19.2 million as the estimated
cost of resolving the above-described patent infringement suits and the
shareholder class action suit brought against it. In 1995 the provision
remaining amounted to $492,000. The Company had no provision for litigation and
related cost at December 31, 1996.
NOTE 4. BANK LOANS (CURRENT) AND SHORT-TERM NOTES PAYABLE
Following are the individual loans and notes comprising bank loans
(current) and short-term notes payable at December 31, 1996 and 1995 (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Convertible promissory note $ --- $2,000
Bank term loan --- 1,667
Bank guaranteed loan --- 1,714
International bank loans 2,504 2,753
------ ------
Total $2,504 $8,134
------ ------
</TABLE>
The Company's convertible promissory note was issued in November 1995,
was due July 1, 1996 and bore interest at prime plus two percent. In connection
with this note, the Company issued two warrants to purchase 38,897 shares each,
of common stock, at an initial exercise price of $7.7125 per share, exercisable
immediately and expiring October 30, 2000. As of December 31, 1996, these
warrants had not been exercised. In June 1996, the principal and accrued
interest on this note was converted into 265,506 shares of common stock (at
$7.7125 per share).
In October 1995, the Company borrowed $2 million under a bank term loan
at an interest rate of prime plus 2%. This term loan was repayable in 12 monthly
installments beginning November 1995. This loan was fully repaid in September
1996.
In October 1995, the Company borrowed $1.7 million under a guaranteed
loan from a bank at an interest rate of prime plus one percent. This loan was
fully repaid in July 1996. This loan was guaranteed by certain directors of the
Company. In connection with this loan, the Company issued a warrant to purchase
49,230 shares of common stock to the bank at an initial exercise price of $8.13
per share, exercisable immediately, expiring October 29, 2000. In addition, in
connection with agreements to execute and deliver personal guarantees to the
bank with respect to this loan, the Company issued warrants to purchase an
aggregate of 105,492 shares of common stock to the six directors who executed
such guarantees at an initial exercise price of $8.13 per share, exercisable
immediately, expiring December 1, 2000.
The international bank loans at December 31, 1996 and 1995 include
loans and credit lines, primarily to Viennatone, from Austrian banks.
44
<PAGE> 45
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996 and 1995
(in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
8% convertible promissory note to shareholder due in February 2000. $10,000 $10,000
Bank Austria loans to ReSound Horgerate GmbH:
8.25% term loan, due in quarterly installments over
7 years beginning June 30, 1995 11,728 15,602
8% revolving credit line of $1,836 through June 30, 1995
and $987 thereafter until November 30, 1999 --- 348
------- -------
21,728 25,950
Less current portion 2,213 2,962
-------- -------
Non-current portion $19,515 $22,988
======= =======
</TABLE>
The 8% note is convertible into 1,000,000 shares of common stock at $10
per share, beginning in February 1996. The Bank Austria loans are denominated in
Austrian schillings and secured by the capital stock of Viennatone.
The maturities of long-term debt are as follows (in thousands): 1997 -
$2,213; 1998 - $2,198; 1999 - $2,198; 2000 - $12,198; 2001 - $2,198; thereafter
- - $723.
NOTE 6. VIENNATONE ACCRUED EMPLOYEE BENEFITS
Viennatone's accrued employee benefits by category are as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Pensions $1,011 $1,072
Termination indemnities 2,875 2,935
Employees' long service premium 596 2,209
------ -------
Total $4,482 $6,216
====== ======
</TABLE>
Pensions
Viennatone has an unfunded defined benefit pension plan under which a
number of senior management employees in Austria have pension entitlements.
Viennatone's liability under this pension plan is funded partially by
contributions to an insurance company and partially by fixed interest marketable
securities held by Viennatone in accordance with Austrian tax requirements.
45
<PAGE> 46
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
The status of the defined benefit plan as of year end is as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated benefit obligation (ABO) $ 957 $1,042
Projected benefit obligation (PBO) 1,011 1,092
Service cost 91 90
Net periodic pension cost --- (96)
Interest 68 74
</TABLE>
The interest rate used was 7%.
The expected projected benefit obligation ("PBO") for 1997 has been
estimated as $1.1 million. Differences between expected and projected benefit
obligations are not material. The pension accrual has been recorded with the
amount of projected benefit obligation. The weighted average discount rate used
to evaluate the increase in rate of compensation was 4%.
Termination Indemnities
Viennatone provides for termination benefits as earned in accordance
with Austrian law. Indemnities range from two to twelve months salary based on
length of service. Employees are entitled to indemnities after three years of
employment or according to contract. Payments are made upon normal retirement or
other cause of termination, except voluntary departures or terminations for
cause. The amount accrued at the year end represents the projected benefit
obligation. This calculation has been made under the assumption that the
majority of expected payments will be upon normal retirement. The liability is
also partially funded by fixed interest marketable securities held by Viennatone
in accordance with Austrian tax requirements.
The status of the accrual for termination indemnities as of year end is
as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Accumulated benefit obligation (ABO) $1,942 $1,877
Projected benefit obligation (PBO) 2,875 2,935
Service cost 217 202
Net periodic pension cost --- 285
Interest 202 196
</TABLE>
The interest rate used was 7%.
The expected projected benefit obligation for 1997 has been estimated
as $3.2 million. Differences between expected and projected benefit obligations
are not material.
46
<PAGE> 47
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Employees' Long Service Premium
According to the Viennatone work agreement, employees are entitled to a
premium after ten years of service. Such a premium is also paid out after 15,
25, 35 and 45 years of service. A calculation of the total liability as of the
balance sheet date is made on a discounted cash-flow basis, using an interest
rate of 5.5%. The liability was $596,000 at December 31, 1996 and $2.2 million
at December 31, 1995. This year to year decrease is due to a 1996 renegotiation
of the agreement between Viennatone and its union workers.
NOTE 7. COMMITMENTS
Leases
The Company leases 47,600 square feet of office, research and
development and manufacturing space in Redwood City, California under a
non-cancelable operating lease and sublease through June 2000. Additionally, the
Company leases 6,600 square feet in Redwood City under a lease which expires in
December 2000. Sonar Hearing Health, in Eagan, Minnesota, leases 14,000 square
feet under a non-cancelable operating lease which expires in December 1999. Rent
expense was $1.0 million, $520,000 and $522,000 in 1996, 1995 and 1994,
respectively.
The following is a schedule by year of future minimum lease payments at
December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASES
----------- ---------
<S> <C>
1997 $1,323
1998 1,296
1999 1,236
2000 642
2001 214
Thereafter 214
------
Total minimum payments required $4,925
======
</TABLE>
401(k) Plan
Under the Company's retirement savings plan (the "401(k) Plan"), an
employee may defer and invest up to 19% of his or her annual compensation,
subject to an annual dollar limitation. The Company has elected to make matching
contributions in the amount of 25% of the employee's contributions, up to a
potential maximum of $2,250 per employee. The Company contributed $138,000,
$83,000 and $72,000 to the 401(k) Plan in 1996, 1995 and 1994, respectively.
47
<PAGE> 48
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 8. SHAREHOLDERS' EQUITY
Preferred Stock
In March 1996, the Company issued 54,055 shares of Series B Preferred
Stock for an aggregate purchase price of $5.0 million in a private placement to
an existing shareholder. These shares are convertible at the option of the
holder into 540,550 shares of common stock at an effective conversion price of
$9.25 per share. Automatic conversion will occur on the earliest of a) the
approval of holders of a majority of the outstanding shares of all series of the
Company's Preferred Stock, b) immediately prior to the closing of a sale of the
Company, or c) March 31, 1999. The Series B Preferred Stock has a cumulative
dividend rate of six percent, payable in shares of the Company's common stock on
the date of any conversion. At December 31, 1996 approximately $225,000 has been
recorded to reflect such dividends.
Common Stock
In June 1996, the Company raised approximately $32.9 million (net
proceeds) through the private sale of 3,212,176 shares of common stock. The
proceeds from this sale were used in connection with the purchase of certain
assets of the hearing health business activity of 3M and to provide working
capital. These proceeds reflect most of the proceeds shown as issuance of common
stock on the Company's consolidated statements of cash flows for the year ended
December 31, 1996.
Fixed Stock Option Plans
At December 31, 1996, the Company had two stock-based compensation
plans (described below). ReSound uses the intrinsic method in accordance with
APB 25 to account for its plans. Accordingly, no compensation cost has been
recognized for its stock purchase plan. Compensation cost applicable to
ReSound's fixed stock plans was immaterial for each of the three years
presented. Pro forma information regarding net income (loss) and net income
(loss) per share is required by Statement of Financial Accounting Standard No.
123 ("FAS 123"), which requires that the information be determined as if ReSound
had used the fair value method to account for its stock- based compensation
awards granted subsequent to December 31, 1994. Had compensation cost for the
Company stock-based compensation awards (including 1988 Stock Option Plan and
1992 Employee Stock Purchase Plan) been determined at the grant date (subsequent
to December 31, 1994) using the fair value method in accordance with FAS 123,
the Company's net loss applicable to common shareholders and net loss per share
would have been increased to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes multiple option-pricing model. The following weighted
average assumptions were used for grants in 1996 and 1995: risk-free interest
rates of 6.3 percent, an expected option life of 0.81 years beyond each
respective vesting period, expected volatility of 0.57 and dividend yield of
zero.
48
<PAGE> 49
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
The Black-Scholes model used by the Company to calculate option values
for purposes of this note, as well as other currently accepted option valuation
models (as called for in accordance with FAS 123), were developed to estimate
the fair value of stock options that are freely tradable and fully transferable
and that have no vesting restrictions. These models also require highly
subjective assumptions, including future stock price volatility and expected
time until exercise, which greatly affect the calculated values. Accordingly,
management believes that this model does not necessarily provide a reliable
measure of the fair value of the Company's option awards.
<TABLE>
<CAPTION>
1996 1995
---- ----
(in thousands, except
per share data)
<S> <C> <C>
Net loss applicable to common shareholders:
As reported $(1,192) $(5,902)
Pro forma (1) $(2,709) $(7,056)
Net loss per share:
As reported $ (0.07) $ (0.38)
Pro forma (1)...................................... $ (0.15) $ (0.46)
</TABLE>
- --------
(1) Because FAS 123 is applicable only to awards granted subsequent to December
31, 1994, its pro forma effect will not be fully reflected until 1998.
1992 Directors' Stock Option Plan
Under the 1992 Directors' Stock Option Plan, the Company has reserved
300,000 shares of common stock for issuance to non-employee directors. Such
options may only be non-qualified stock options issued at not less than fair
market value, and all options granted must be exercised within five years from
the date of grant. Each eligible director is to be granted annually on December
31 an option to purchase 5,000 shares, exercisable after four years. Each new
director is to receive an initial option grant to purchase 20,000 shares, which
becomes exercisable in 25 percent increments annually beginning after one year.
1988 Stock Option Plan
Under the 1988 Stock Option Plan, which expires in 1998, a total of
4,650,000 shares have been reserved for issuance as of December 31, 1996.
Options for shares of common stock may be granted to employees and consultants
at not less than fair market. Options are exercisable at such times and under
such conditions as determined by the board of directors. Options granted
generally vest at the rate of 1/48th of the number of shares subject to such
option at the end of each month for a period of 48 months from date of grant.
However, certain options granted to replenish existing options do not begin
vesting for up to 36 months from the date of grant (when vesting commences, it
is generally prorated on a monthly basis over periods up to 48 months).
49
<PAGE> 50
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Additional information relative to the Company's fixed stock option
plans is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Options Average Options Average Options Average
------- Exercise Price ------- Exercise Price ------- Exercise Price
-------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning
of year.................... 3,409,534 $8.49 2,555,172 $7.82 1,724,987 $ 6.14
Granted.................... 856,150 $9.38 1,537,150 $8.11 1,625,074 $11.28
Exercised.................. (225,359) $4.68 (357,333) $1.70 (228,533) $ 0.99
Canceled................... (415,290) $9.07 (325,455) $8.82 (566,356) $15.40
Outstanding - end of year 3,625,035 $8.88 3,409,534 $8.49 2,555,172 $ 7.82
Exercisable at end of year 1,534,494 1,032,902 673,593
Weighted-average fair
value of options granted
during the year................. $4.13 $3.67
</TABLE>
Outstanding and Exercisable By Price Range as of December 31, 1996
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------------------------------------------
Number Weighted-Average Weighted- Number Weighted-
Range of Outstanding As of Remaining Average Exercisable As of Average
Exercise Prices December 31, 1996 Contractual Life Exercise Price December 31, 1996 Exercise Price
--------------- ----------------- ---------------- -------------- ----------------- --------------
<S> <C> <C> <C> <C> <C>
$ 0.2000 -- $ 0.4000 15,466 2.45 $ 0.2843 15,466 $ 0.2843
$ 0.5000 -- $ 1.5000 115,319 4.46 $ 0.5048 115,319 $ 0.5048
$ 2.5000 -- $ 4.0000 135,176 4.45 $ 3.1212 135,176 $ 3.1212
$ 6.8750 -- $10.5000 2,715,331 8.11 $ 8.6072 1,060,245 $ 8.8845
$11.0000 -- $12.6500 573,263 7.94 $12.0688 200,933 $11.8474
$19.5000 -- $20.2500 70,500 4.46 $19.8216 16,375 $19.5477
- -------------------- ---- -------- --------- --------
$ 0.2000 -- $20.2500 3,625,035 7.73 $ 8.8750 1,543,494 $ 8.1664
</TABLE>
1992 Employee Stock Purchase Plan
Under the 1992 Employee Stock Purchase Plan, substantially all
employees may purchase common stock through payroll deductions at a price equal
to 85% of its fair market value as of certain specified dates. Stock purchases
under this plan are limited to 10% of an employee's compensation, and in no
event may exceed $8,500 per year. Under this plan a total of 200,000 shares of
common stock have been reserved for issuance to employees. As of December 31,
1996, 159,865 shares had been issued under this plan, including 71,000 shares
issued in 1996.
50
<PAGE> 51
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 9. INCOME TAXES
The provisions for income taxes for 1996, 1995 and 1994
consist of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ 87
State -- -- 23
Foreign 1,769 735 1,155
------- ----- ------
Subtotal 1,769 735 1,265
Deferred:
Foreign (372) (144) 370
------- ----- ------
Total provision: $ 1,397 $ 591 $1,635
======= ===== ======
</TABLE>
Foreign pre-tax income was $5,004,000, $1,215,000 and $2,469,000 in
1996, 1995 and 1994, respectively.
The difference between the provision for taxes on income and the amount
computed by applying the federal statutory income tax rate to income before
provision for taxes is explained below (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Tax at federal statutory rate $ 150 $(1,859) $(4,429)
Unbenefited losses 3,307 3,325 5,482
Income taxed at higher/(lower) rates (1,840) (888) 465
Other (220) 13 117
------- ------- -------
Provision for taxes on income $ 1,397 $ 591 $ 1,635
======= ======= =======
</TABLE>
At December 31, 1996, the Company had U.S. federal and state net
operating loss carryforwards of approximately $31,000,000 and $8,600,000,
respectively. The federal net operating loss carryforwards will expire at
various dates beginning in 2002 through 2011, if not utilized. The California
net operating loss carryforwards will expire at various dates beginning in 1997
through 2001, if not utilized. The Company had foreign net operating loss
carryforwards of approximately $7.0 million at December 31, 1996, which will
expire at various dates beginning in 1997 through 2002, if not utilized.
Utilization of net operating losses may be subject to an annual
limitation due to ownership change limitations provided in the Internal Revenue
Code of 1986 and similar state provisions.
As part of the acquisitions of Sonar and Viennatone, amortization of a
portion of goodwill generated by the acquisitions will be deductible for German
and Austrian tax purposes.
51
<PAGE> 52
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. Based upon the
Company's earnings history, a valuation allowance for deferred tax assets of
$19,637,000 and $16,346,000 at December 31, 1996 and 1995, respectively, is
required to reduce the Company's net deferred tax assets to the amount
realizable at present. Significant components of the Company's deferred tax
assets and liabilities for federal and California income taxes as of December
31, 1996 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 11,100 $ 11,300
Tax credits (expiring 2000 - 2011) 1,800 1,100
Allowance for returns and doubtful accounts 1,200 1,100
Litigation reserve 200 200
Depreciation and amortization 2,900 300
Warranty accruals 1,400 1,500
Inventory accrual 500 550
Other 900 935
-------- --------
Total gross deferred tax assets 20,000 16,985
Less valuation allowance (19,637) (16,346)
-------- --------
Total deferred tax asset 363 639
Deferred tax liabilities:
Other (363) (1,011)
-------- --------
Total deferred tax liability (363) (1,011)
-------- --------
Net deferred tax liability $ -- $ (372)
======== ========
</TABLE>
The valuation allowance was $14,602,000 as of January 1, 1995.
NOTE 10. RELATED PARTY TRANSACTIONS
Hoya Corporation
Hoya Corporation ("Hoya"), a shareholder of the Company during 1996,
purchases from the Company certain inventory for resale in Japan under an
exclusive distribution agreement entered into in June 1990. Sales to Hoya in
1996, 1995 and 1994 totaled $3.4 million, $1.9 million, and $1.6 million,
respectively. Accounts receivable from Hoya at December 31, 1996 and 1995 were
$569,000 and $375,000, respectively.
California Ear Institute at Stanford
Dr. Rodney Perkins, the Chairman of the Company's Board of Directors
and a shareholder of the Company, is also the President of the California Ear
Institute ("CEI") at Stanford. Sales of the
52
<PAGE> 53
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
Company's products to CEI in 1996, 1995 and 1994 totaled $192,000, $68,000, and
$79,000, respectively. Accounts receivable from CEI were $16,000 and $69,000 at
December 31, 1996 and 1995, respectively.
NOTE 11. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company operates in a single industry segment consisting of the
design, development, manufacturing and marketing of hearing devices for the
hearing impaired. Its hearing device products utilize proprietary sound
processing technology originally developed by AT&T and subsequently enhanced and
refined by the Company; and technologies acquired through the purchases of
Sonar, Viennatone and certain assets of the hearing health business activity of
3M. No one customer accounted for 10% or more of net revenues in fiscal 1996,
1995 or 1994. Sales in the United States to unaffiliated customers included
export sales of $1,872,000, $1,573,000 and $4,392,000 in 1996, 1995 and 1994,
respectively.
Information regarding geographic areas is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1996
-----------------
United
States Europe Elimination Total
------ ------ ----------- -----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 57,951 $ 67,695 $ -- $125,646
Intercompany transfers 2,329 48,375 (50,704) --
-------- -------- -------- --------
Net sales 60,280 116,070 (50,704) 125,646
Income (loss) from operations (2,018) 5,099 (473) 2,608
Identifiable assets 29,377 45,564 -- 74,941
Goodwill 13,750 26,061 -- 39,811
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995
-----------------
United
States Europe Elimination Total
------ ------ ----------- -----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $ 39,239 $68,091 $ -- $ 107,330
Intercompany transfers 9,482 28,982 (38,464) --
-------- ------ -------- ---------
Net sales 48,721 97,073 (38,464) 107,330
Income from operations (5,979) 4,063 (1,167) (3,083)
Identifiable assets 12,824 42,854 -- 55,678
Goodwill -- 27,692 -- 27,692
</TABLE>
53
<PAGE> 54
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
December 31, 1994
-----------------
United
States Europe Elimination Total
------ ------ ----------- -----
<S> <C> <C> <C> <C>
Sales to unaffiliated customers $34,928 $27,325 $ -- $62,253
Intercompany transfers 10,328 2,544 (12,872) --
------- ------- -------- -------
Net sales 45,256 29,869 (12,872) 62,253
Income from operations 3,387 2,967 (827) 5,527
Identifiable assets 24,269 43,745 -- 68,014
Goodwill -- 27,102 -- 27,102
</TABLE>
54
<PAGE> 55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement within 120 days
after the end of its fiscal year pursuant to Regulation 14A (the "Proxy
Statement") for its annual meeting of shareholders to be held May 22, 1997 and
the information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company and the Chairman
of the Company's Board of Directors is incorporated by reference from the
information under the caption "Election of Directors--Nominees" in the
Registrant's Proxy Statement.
The names of the Company's officers and certain information about them
as of December 31, 1996, are set forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Peter Riepenhausen............................. 60 President, Chief Executive Officer and Director
Vincent Pluvinage, Ph.D........................ 38 Executive Vice President
Stephan Becker-Vogt............................ 46 Senior Vice President and President, ReSound
Europe
Paul A. Busse.................................. 54 Senior Vice President, Finance and Administration,
Chief Financial Officer and Assistant Secretary
John H. Giroux................................. 52 Senior Vice President and President, ReSound
U.S.A.
Joseph E. Black................................ 53 Vice President, Human Resources
</TABLE>
Mr. Riepenhausen has served as the President and Chief Executive
Officer since May 1994 and as a director since July 1993. He also served as
Chairman of ReSound's German subsidiary from its establishment in November 1992
until April 1994. From January 1990 until he became President and Chief
Executive Officer of ReSound, Mr. Riepenhausen was an independent management
consultant. From January 1993 until August 1994, Mr. Riepenhausen was President
International of Chiron Vision Corporation, a manufacturer and distributor of
ophthalmic devices, on a part-time basis. Mr. Riepenhausen is currently a
director of Chiron Vision Corporation. From 1984 to December 1989, Mr.
Riepenhausen served as Executive Vice President and Vice Chairman of the Board
of Directors of The Cooper Companies Inc., a health care products company, and
was responsible for its worldwide pharmaceutical business. Prior to 1984, Mr.
Riepenhausen was President and Chief Executive Officer of Blendax Werke R.
Schneider GmbH & Co., a European health care products company. Prior to that, he
was Senior Vice President with overall management responsibility for the Eastern
hemisphere for PepsiCo. Inc. Mr. Riepenhausen is also a director of Advanced
Polymer Systems Inc., a manufacturer of controlled release delivery systems for
dermatological products, Caradon Europe Limited, plc, a European manufacturer of
heating and
55
<PAGE> 56
sanitary products and Weru AG, a manufacturer of doors and windows. Mr.
Riepenhausen attended the Akademie fur Welthandel in Wiesbaden, Germany and
apprenticed as a Commercial Agent with diploma as "Industriekaufmann" at
Siemens-Schuckert in Bad Neustadt, Cologne and Erlangen, Germany.
Dr. Pluvinage joined the Company in March 1987 as Director of
Bioengineering. In March 1989, Dr. Pluvinage was elected Vice President,
Research and Development. From May 1991 to November 1992, Dr. Pluvinage served
as Vice President, Research and International Operations. From November 1992 to
June 1993, Dr. Pluvinage served as Vice President, International Operations and
from June 1993 until January 1996, he served as President, International
Operations. In January 1996, Dr. Pluvinage was elected Executive Vice President
of the Company. Dr. Pluvinage is also a director and Chairman of the Board of
RSND Asia Ltd., the Company's Asian joint venture, a member of the supervisory
board of ReSound Viennatone AG and Chairman of the Board of ReSound GmbH
Hortechnologie. Before joining the Company, from June 1985 to March 1987, Dr.
Pluvinage worked at AT&T Bell Laboratories, where he was in charge of digital
processing hardware and clinical research in connection with sound processing.
He was a member of the internal venture at AT&T Bell Laboratories that
originally developed the technology that is employed in ReSound's current
products. Dr. Pluvinage holds a Ph.D. in bioengineering from the University of
Michigan and an engineering degree (summa cum laude) in applied physics
engineering from Universite Catholique de Louvain in Belgium.
Mr. Becker-Vogt joined the Company in August 1992, establishing the
Company's German subsidiary and becoming its Managing Director in November 1992.
In January 1995 he was promoted to Vice President Europe. In January 1996, he
was elected Senior Vice President of the Company and President of ReSound
Europe. Mr. Becker-Vogt is also a Director of ReSound bv, the Netherlands.
Before joining the Company, Mr. Becker-Vogt was Managing Director of both
Pilkington Barnes-Hind, Germany and of Contacta Vienna, the leading Optometric
Clinic in Austria, from 1989 to 1992. From 1983 to 1989 he was Managing
Director, and from 1980 to 1983 he was Director, Sales and Marketing, of
CooperVision, Germany. From 1973 to 1979, Mr. Becker-Vogt was Sales Manager of
Burton Parsons Chemicals, Germany, a Chicago-based ophthalmic pharmaceutical
company. Mr. Becker-Vogt was educated in banking and received his diploma as
"Bankkaufmann," granted by the Chamber of Commerce, Dusseldorf.
Mr. Busse has been Senior Vice President, Finance and Administration,
Chief Financial Officer and Assistant Secretary of the Company since June 1993.
From October 1992 until June 1993, he served as Vice President, Finance and
Administration and Chief Financial Officer. Before joining ReSound, Mr. Busse
was President, Chief Operating Officer and Chief Financial Officer of Graphtec
Precision Image Corp., a manufacturer and seller of electronic plotters, from
1988 to 1992. From 1984 to 1988, Mr. Busse headed his own consulting business.
From 1983 to 1984, Mr. Busse was Senior Vice President and Chief Financial
Officer for System Industries, a manufacturer of disk and tape systems. Mr.
Busse was Vice President and CFO of Azurdata Inc., a manufacturer of data entry
terminals from 1980 to 1983. From 1974 to 1980, Mr. Busse was Vice President and
Treasurer of Pertec Computer Corp., a computer systems and peripheral company.
Prior to 1974, Mr. Busse held various financial and accounting management
positions at Ford Aerospace Corp., a division of Ford Motor Co. Mr. Busse holds
an M.B.A. degree from Northwestern University and a B.A. from Valparaiso
University and is licensed as a CPA in the state of Washington. Mr. Busse
announced his resignation from the Company in January 1997, effective upon a
successor being named.
56
<PAGE> 57
Mr. Giroux joined the Company in January 1991 as Vice President,
Marketing. He was elected Vice President, Sales and Marketing in December 1991
and in June 1993 was promoted to Senior Vice President, Sales and Marketing. In
January 1996, he was elected Senior Vice President of the Company and President
of ReSound U.S.A. Mr. Giroux has 26 years of experience in the marketing of
consumer health care products. Before joining the Company, Mr. Giroux was Vice
President of Marketing for Allergan Optical at Allergan, Inc., a manufacturer of
pharmaceutical ophthalmologics, from February 1988 to June 1990. Prior to
joining Allergan, Inc., Mr. Giroux was Vice President at Ogilvy & Mather
Worldwide, an advertising firm, from July 1984 to February 1988. Prior to July
1984, Mr. Giroux was Vice President, Sales and Marketing of the Consumer
Products Division of G.D. Searle and Company, a pharmaceutical company. Mr.
Giroux holds a B.A. in economics from Providence College.
Mr. Black joined the Company in August 1995 as Vice President, Human
Resources. Mr. Black has 26 years of experience in human resource management and
consulting positions. From 1987 until joining the Company, Mr. Black headed his
own consulting business since 1987. Prior to that time, Mr. Black was Corporate
Director of Organizational Development at CooperVision Inc. from 1985 to 1987.
From 1982 to 1985, Mr. Black was Human Resources Director for Eaton Corp. -
Semiconductor Equipment Operations. From 1972 to 1982, Mr. Black held various
human resource management positions at GenCorp - Aerojet General. From 1969 to
1972, Mr. Black held various human resource staff and management positions at
Singer Co. - Link Simulation. Mr. Black holds an M.S.O.D. degree from Pepperdine
University and a B.A. from Parsons College.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the captions
"Compensation of Executive Officers" and "Transactions with Management and
Others" in the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Common
Stock Ownership of Certain Beneficial Owners and Management" in the Registrant's
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the captions
"Compensation of Executive Officers" and "Transactions with Management and
Others" in the Registrant's Proxy Statement.
57
<PAGE> 58
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(1) Financial Statements and Report of Ernst &
Young, LLP, Independent Auditors
Report of Ernst & Young LLP, Independent
Auditors. 32
Consolidated Balance Sheets at December 31,
1996 and 1995. 33
Consolidated Statements of Operations -
Years ended December 31, 1996, 1995 and 1994. 34
Consolidated Statement of Shareholders' Equity -
Three Years ended December 31, 1996, 1995 and 1994. 35
Consolidated Statements of Cash Flows -
Years ended December 31, 1996, 1995 and 1994. 36
Notes to Consolidated Financial Statements. 37
(2) Financial Statement Schedules
The following financial statement
schedule is included herein:
Schedule II - Valuation and Qualifying Accounts 62
All other schedules are omitted because they are not required
or the required information is included in the financial
statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
</TABLE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Registrant. (3)
3.2 Bylaws of Registrant, as amended. (1)
4.1 Certificate of Determination of Rights, Preferences and Privileges of Series B Preferred
Stock of ReSound Corporation. (6)
10.1 1988 Stock Option Plan, as amended. (5)
</TABLE>
58
<PAGE> 59
<TABLE>
<S> <C>
10.2 1992 Directors' Stock Option Plan, as amended. (5)
10.3 Form of Directors' and Officers' Indemnification Agreement. (1)
10.4 Amendment Number Eight to and Restatement of Registration Rights
Agreement of ReSound Corporation dated as of August 21, 1992, as
amended October 19, 1992. (1)
10.5 Contract Consulting Agreement dated July 25, 1996 with Dr. Rodney
Perkins. (9)
10.6 Contract Consulting Agreement dated July 25, 1996 with Dr. Richard L.
Goode. (9)
10.7 Lease Agreement between the Registrant and Seaport Centre Phase II
dated June 15, 1988, as amended on August 31, 1988, March 21, 1991,
November 27, 1991 and December 28, 1992. (1)
10.8 Fifth Amendment dated December 5, 1995 to Lease Agreement with Seaport
Centre Phase II (Exhibit 10.7). (6)
10.9 Sublease between the Registrant and Devices for Vascular Intervention,
Inc. dated as of December 29, 1995. (6)
10.10 Technical Information and Patent License Agreement with American
Telephone and Telegraph Company dated as of February 27, 1987, as
amended effective January 1, 1988. (1)
10.11 Custom IC Agreement with American Telephone and Telegraph Company dated
1987, as supplemented on April 6, 1990, April 24, 1990, July 15, 1992
and December 11, 1992, for the manufacture of custom integrated
circuits. (1)(2)
10.13 Loan and Security Agreement with Silicon Valley Bank dated as of
December 23, 1994. (5)
10.16 Loan Agreement between the Registrant, ReSound GmbH and Bank Austria
Aktiengesellschaft dated December 7, 1994. (4)
10.17 Note Purchase Agreement between the Registrant and Cagen Holdings
Limited dated as of February 21, 1995 and related Convertible
Promissory Note. (5)
10.18 Note Purchase Agreement between the Registrant and The Mingly
Corporation Limited dated as of February 21, 1995 and related
Convertible Promissory Note. (5)
10.19 Note Purchase Agreement between the Registrant and Charter Ventures II,
L.P. dated as of February 21, 1995 and related Convertible Promissory
Note. (5)
10.20 Loan and Security Agreement with Silicon Valley Bank dated October 27,
1995, and related Registration Rights Agreement, Patent Mortgage and
Collateral Assignment Agreement and Warrant. (6)
10.21 Note and Warrant Purchase Agreement between the Registrant and Cagen
Holdings Limited dated as of November 21, 1995 and related Convertible
Promissory Note and Warrant. (6)
</TABLE>
59
<PAGE> 60
<TABLE>
<S> <C>
10.22 Note and Warrant Purchase Agreement between the Registrant and Charter
Ventures II, L.P. dated as of November 21, 1995 and related Convertible
Promissory Note and Warrant. (6)
10.23 Form of Common Stock warrant dated December 1, 1995 issued to certain
directors of the Registrant. (6)
10.24 Purchase Agreement by and between the Registrant and Minnesota Mining
and Manufacturing Company dated June 28, 1996. (8)
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.
(7)
10.26 AudioLogic Hearing Systems, L.P. Amended and Restated Agreement of
Limited Partnership dated as of September 30, 1996. (7) (10)
10.27 Series C Convertible Preferred Stock and Common Stock Purchase
Agreement dated September 30, 1996. (7)
10.28 Development, Licensing and Distribution Agreement by and among
AudioLogic, Inc., GN Danavox A/S, ReSound Corporation and AudioLogic
Hearing Systems, L.P. dated September 30, 1996. (7) (10)
10.29 The Assignment Agreement between ReSound Corporation and K/S HIMPP.25.
(7)
10.30 Lease Agreement dated September 24, 1996 between the Registrant and Don
and Carole Tanklage dba Tanklage Properties. (9)
11.1 Statement of Computation of Net Loss Per Share. (9)
22.1 Subsidiaries of Registrant. (9)
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 63). (9)
24.1 Power of Attorney (see pages 64 and 65). (9)
27.1 Financial Data Schedule. (9)
(b) Reports on Form 8-K:
None
</TABLE>
- --------------------
(1) Incorporated by reference to exhibits filed in response to Item 16(a),
"Exhibits," of the Registrant's Registration Statement on Form S-1 and
Amendment No. 1, Amendment No. 2 and Amendment No. 3 thereto (File No.
33-46527), which became effective on March 4, 1993.
(2) Confidential treatment granted by order effective February 24, 1993.
60
<PAGE> 61
<TABLE>
<S> <C>
(3) Incorporated by reference to exhibits filed in response to Item 14,
"Exhibits, Financial Statement Schedules and Reports on Form 8-K," of
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1993.
(4) Incorporated by reference to exhibits filed in response to Item 7,
"Financial Statements, Pro Forma Financial Information and Exhibits,"
of the Registrant's Report on Form 8-K dated December 9, 1994.
(5) Incorporated by reference to exhibits filed in response to Item 14,
"Exhibits, Financial Statement Schedules and Reports on Form 8-K," of
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994.
(6) Incorporated by reference to exhibits filed in response to Item 14,
"Exhibits, Financial Statement Schedules and Reports on Form 8-K," of
the Registrant's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995.
(7) Incorporated by reference to exhibits filed in response to Item 14,
"Exhibits, Financial Statement Schedules and Reports on Form 8-K," of
the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1996.
(8) Incorporated by Reference to exhibits filed Report on Form 8-K with the
Securities and Exchange Commission on July 15, 1996 (as amended and
filed September 12, 1996).
(9) Filed herewith.
(10) Confidential treatment granted by order effective March 1997.
</TABLE>
61
<PAGE> 62
SCHEDULE II
RESOUND CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED AGAINST BALANCE AT
BEGINNING SALES OR TO RETURNS/ END OF
DESCRIPTION PERIOD EXPENSE WRITE OFFS PERIOD
----------- ---------- --------------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1994:
Allowances for estimated
returns and doubtful accounts $ 1,708 $ 10,786 $ 9,811 $ 2,683
Reserves for warranty expenses 1,796 3,594 2,028 3,362
------- -------- -------- --------
$ 3,504 $ 14,380 $ 11,839 $ 6,045
======= ======== ======== ========
Year ended December 31, 1995:
Allowances for estimated
returns and doubtful accounts $ 2,683 $ 12,820 $ 11,380 $ 4,123
Reserves for warranty expenses 3,362 5,174 3,951 4,585
------- --------- --------- --------
$ 6,045 $ 17,994 $ 15,331 $ 8,708
======= ========= ========= ========
Year ended December 31, 1996:
Allowances for estimated
returns and doubtful accounts $ 4,123 $ 16,041 $ 15,390 $ 4,774
Reserves for warranty expenses 4,585 5,981 5,466 5,100
------- --------- --------- --------
$ 8,708 $ 22,022 $ 20,856 $ 9,874
======= ========= ========= ========
</TABLE>
62
<PAGE> 63
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to incorporation by reference in the Registration Statement
(Form S-8 Nos 333- 09303 and 33-61302) pertaining to the 1988 Stock Option Plan,
the 1992 Employee Stock Purchase Plan and the 1992 Directors Stock Option Plan
of ReSound Corporation and in the Registration Statement (Form S-3/A No.
333-10189) of ReSound Corporation and related Prospectus of our report dated
January 28, 1997, with respect to the consolidated financial statements and
schedule of ReSound Corporation, included in this Annual Report (form 10-K), for
the year ended December 31, 1996.
/s/ Ernst & Young LLP
-------------------------
Ernst & Young
Palo Alto, California
March 27, 1997
63
<PAGE> 64
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
Date: March 27, 1997 By: /s/ Peter Riepenhausen
----------------------
Peter Riepenhausen
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Rodney Perkins, Peter Riepenhausen and
Paul A. Busse, jointly and severally, his attorneys-in-fact, each with the power
of substitution, for him in any and all capacities, to sign any amendments to
this Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact, or his
substitute or substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- -----
<S> <C> <C>
/s/ Rodney Perkins, M.D. Chairman of the Board of Directors March 27, 1997
----------------------------------------
(Rodney Perkins, M.D.)
/s/ Peter Riepenhausen President, Chief Executive Officer March 27, 1997
---------------------------------------- and Director
(Peter Riepenhausen)
/s/ Paul A. Busse Senior Vice President of Finance March 27, 1997
---------------------------------------- and Administration and Chief
(Paul A. Busse) Financial Officer (Principal Financial
and Accounting Officer) and
Assistant Secretary
/s/ Robert K. Anderson Director March 27, 1997
----------------------------------------
(Robert K. Anderson)
/s/ Richard L. Goode, M.D. Director March 27, 1997
----------------------------------------
(Richard L. Goode, M.D.)
/s/ Donald M. Kendall Director March 27 1997
----------------------------------------
(Donald M. Kendall)
</TABLE>
64
<PAGE> 65
<TABLE>
<S> <C> <C>
/s/ Eugene Kleiner Director March 27, 1997
----------------------------------------
(Eugene Kleiner)
/s/ Philip S. Schlein Director March 27, 1997
----------------------------------------
(Philip S. Schlein)
/s/ Robert C. Wilson Director March 27, 1997
----------------------------------------
(Robert C. Wilson)
</TABLE>
65
<PAGE> 1
Exhibit 10.5
RESOUND CORPORATION
CONTRACT CONSULTING AGREEMENT
This agreement, commencing between Rodney Perkins, M.D. and RESOUND
CORPORATION, a California corporation, respectively referred to hereinafter as
"Consultant" and "Company", is for the purpose of expressing the mutual
obligations of Consultant and Company as follows:
1. Consultant agrees to perform the duties set forth in Section 2 below
for a period not to exceed six (6) months, beginning July 1, 1996
through December 31, 1996, and will be compensated for said services at
the rate of $5,833.00 per month by Company.
2. Consultant's duties:
Product Development
Marketing and financial consulting
3 Timing of payment will be within thirty (30) days from time of
submission of an invoice unless otherwise agreed upon, but in no case
will exceed forty-five (45) days after termination of this agreement.
4. Either the Company or the Consultant may terminate this agreement at
any time by giving of written notice of such intention to terminate to
the other party. The expiration or termination of this agreement shall
not terminate the obligation of the Consultant specified hereinafter.
5. Consultant agrees not to disclose, publish or reveal to any other party
whatsoever any trade secrets, techniques, inventions, discoveries,
technology or processes which relate to the practices and businesses of
the Company (collectively, the "Information") and to treat all such
Information as secret and confidential, both during the duration of
this agreement and after its termination. Consultant further agrees not
to make use of, either directly or indirectly, any of the Information
which Consultant receives from the Company other than with the specific
prior written authorization of an authorized officer of the Company.
<PAGE> 2
Page Two
6. All concepts, designs, design analyses, inventions, improvements, trade
secrets and other proprietary information created in whole or in part
by Consultant during the term of this agreement which relate to or are
useable with respect to the subject matter of this consulting agreement
or its design, manufacture or use shall be the sole property of the
Company. Consultant agrees to promptly and fully disclose in writing
all such concepts, designs, design analyses, inventions, improvements,
trade secrets and other proprietary property to the Company and to
execute patent applications relating to such inventions and assignments
of the entire interest therein to the Company as requested, whether or
not within the term of this agreement.
7. All notes and records and copies thereof made or maintained by
Consultant relating to his or her performance of this agreement are the
property of Company and will be delivered to Company upon termination
of this agreement.
8. Consultant agrees to indemnify Company against any losses or expenses
sustained by Company, including reasonable attorney's fees, by reason
of the breach by Consultant of any term of this agreement.
9. Nothing contained in this agreement shall be construed to constitute a
partnership, joint venture, agency or employment relationship between
the Company and Consultant, it being understood that Consultant shall
at all times remain an independent contractor, and that the Company
shall in no event be liable for the debts, liabilities or other
obligations of the Consultant. Consultant shall have no authority to
bind or otherwise obligate the Company to any contract or agreement and
Consultant agrees that he will not represent to third parties that he
has the authority to do so.
10. The rights and obligations of the parties under this agreement shall be
binding upon, and inure to the benefit of, their respective successors
and assigns:
RESOUND CORPORATION
By /s/ Paul A. Busse
-------------------------------------------
Paul A. Busse
Senior Vice President, Finance and
Administration and Chief Financial Officer
CONSULTANT
By /s/ Rodney Perkins, M.D.
--------------------------------------------
Rodney Perkins, M.D.
<PAGE> 3
<PAGE> 1
Exhibit 10.6
RESOUND CORPORATION
CONTRACT CONSULTING AGREEMENT
This agreement, commencing as of July 1, 1996 between Richard L. Goode, M.D. and
RESOUND CORPORATION, a California corporation, respectively referred to
hereinafter as "Consultant" and "Company", is for the purpose of expressing the
mutual obligations of Consultant and Company as follows:
1. Consultant agrees to perform the duties set forth in Section 2 below
for a period not to exceed six (6) months, commencing July 1, 1996, and
will be compensated for said services at the rate of $2500.00 per month
by Company.
2. Consultant's duties:
R&D Support
3 Timing of payment will be within thirty (30) days from time of
submission of an invoice unless otherwise agreed upon, but in no case
will exceed forty-five (45) days after termination of this agreement.
4. Either the Company or the Consultant may terminate this agreement at
any time by giving of written notice of such intention to terminate to
the other party. The expiration or termination of this agreement shall
not terminate the obligation of the Consultant specified hereinafter.
5. Consultant agrees not to disclose, publish or reveal to any other party
whatsoever any trade secrets, techniques, inventions, discoveries,
technology or processes which relate to the practices and businesses of
the Company (collectively, the "Information") and to treat all such
Information as secret and confidential, both during the duration of
this agreement and after its termination. Consultant further agrees not
to make use of, either directly or indirectly, any of the Information
which Consultant receives from the Company other than with the specific
prior written authorization of an authorized officer of the Company.
<PAGE> 2
Page Two
6. All concepts, designs, design analyses, inventions, improvements, trade
secrets and other proprietary information created in whole or in part
by Consultant during the term of this agreement which relate to or are
useable with respect to the subject matter of this consulting agreement
or its design, manufacture or use shall be the sole property of the
Company. Consultant agrees to promptly and fully disclose in writing
all such concepts, designs, design analyses, inventions, improvements,
trade secrets and other proprietary property to the Company and to
execute patent applications relating to such inventions and assignments
of the entire interest therein to the Company as requested, whether or
not within the term of this agreement.
7. All notes and records and copies thereof made or maintained by
Consultant relating to his or her performance of this agreement are the
property of Company and will be delivered to Company upon termination
of this agreement.
8. Consultant agrees to indemnify Company against any losses or expenses
sustained by Company, including reasonable attorney's fees, by reason
of the breach by Consultant of any term of this agreement.
9. Nothing contained in this agreement shall be construed to constitute a
partnership, joint venture, agency or employment relationship between
the Company and Consultant, it being understood that Consultant shall
at all times remain an independent contractor, and that the Company
shall in no event be liable for the debts, liabilities or other
obligations of the Consultant. Consultant shall have no authority to
bind or otherwise obligate the Company to any contract or agreement and
Consultant agrees that he will not represent to third parties that he
has the authority to do so.
10. The rights and obligations of the parties under this agreement shall be
binding upon, and inure to the benefit of, their respective successors
and assigns:
RESOUND CORPORATION
By /s/ Paul A. Busse
-------------------------------------------
Paul A. Busse
Senior Vice President, Finance and
Administration and Chief Financial Officer
CONSULTANT
By /s/ Richard L. Goode, M.D.
-------------------------------------------
Richard L. Goode, M.D.
<PAGE> 1
Exhibit 10.30
LEASE
THIS LEASE, executed in duplicate as of this 24th day of September 1996, by and
between Don and Carole Tanklage dba Tanklage Properties hereafter called
LESSOR, and RESOUND CORPORATION, A California Corporation hereafter called the
LESSEE (Lessor and Lessee being for convenience herein, in the singular number
and masculine gender), WITNESSETH: Lessor hereby leases to Lessee, and Lessee
hereby leases from Lessor, for and in consideration of the rent herein reserved
and covenants herein contained and upon the conditions hereof, that certain
real property situated in the City of Redwood City, County of San Mateo, State
of California, commonly known as 30 Stein am Rhein Court, Units J, K, & L and
described as follows: Approximately 6575 sq. ft. as per exhibits A, B, C, D, &
E "AS IS" attached.
A. The term of this lease shall be for four (4) years, beginning on the 15th
day of December 1996 and ending on the 14th day of December 2000 inclusive, for
a monthly base rental of $4,208.00 per month in advance, commencing with the
first day of said term and on the same day of each succeeding month thereof.
Receipt of the first month's rent in the amount of $ -0- is hereby
acknowledged.
B. As consideration for the execution of this lease, the Lessee
shall pay to the Lessor the sum of $3,945.00*, receipt of which is hereby
acknowledged. In the event Lessee is not then in default under terms of this
lease, said sum of $3,945.00* shall be applied toward rental due for the last
month of the extended term, in lieu of the last month of the initial term.
C. The base rental above set forth shall be subject to escalation as follows:
At the end of the first twelve (12) months of the lease term, the monthly
rental shall be increased as follows for the next and each succeeding twelve
(12) month period of the lease term:
(a) The Consumer Price Index, for all Urban consumers, as published
by the U.S. Department of Labor, Bureau of Labor Statistics, All Items for the
United States Average (1967 = 100) is the "Index" herein referred to. Said
Index as published shall be used herein, whether or not certain items may
hereafter be added or deleted therefrom by the Bureau of Labor Statistics, or
whether a "successor index" is published.
(b) The "Base Year Index" shall be the average monthly Index over the
twelve (12) month period ending with the calendar month immediately preceding
the month in which the term of this lease commences.
(c) Commencing with the second twelve (12) months of the lease term,
and continuing thereafter for each remaining twelve (12) month], monthly rent
for each such period of the term shall be increased in the same ratio that the
average monthly Index for the previous twelve (12) months preceding the month
in which such rental period commences, shall have increased over the Base Year
Index. In no event shall the rental for any month of the lease term be less
than the base rental for the first month of the lease term.
IT IS HEREBY AGREED BY LESSOR AND LESSEE that this lease is made upon the
following terms, covenants and conditions:
1. RENTAL. The Lessee will pay said rental monthly in advance and
without deductions to Lessor at the office listed as Lessor's address under
lessor's signature hereto, or at such place or places as Lessor may in writing
designate, without grace or previous demand.
2. POSSESSION. If Lessor is unable to deliver possession of the
premises to Lessee for damages therefor, but there shall in such event be a
deduction of rent for the pro rata period during which possession is delayed.
Neither such delay nor occupancy by Lessee prior to the commencement date shall
extend or shorten the term, but Lessee shall pay rent for such latter period at
the initial monthly rate.
3. USES OF PREMISES. The Lessee shall during the term hereof
exclusively conduct therein and thereon the sole business of administration,
warehousing and distribution of hearing aid products.
Roof surfaces shall not be penetrated by Lessee or his agents without
prior written consent of Lessor.
The premises shall not be used for living quarters.
<PAGE> 2
Motor vehicle parking, if any, provided to Lessee under this lease
shall be non-exclusive, subject to reallocation by Lessor from time to time,
and Lessee agrees that no vehicle will be parked on the leased premises for
longer than eighteen (18) hours in any twenty-four (24) hour period. Lessee
agrees that in the event this provision is violated, the motor vehicle may at
Lessor's option be towed away at Lessee's expense.
Lessee shall not use solid hard tires on any fork lifts or dollies on
paved parking, truck loading or driveway areas, and in the event Lessee
violates this provision, Lessee shall be responsible for the cost of
resurfacing the entire area.
Lessee shall not use any machinery on said premises the use of which
will shake or vibrate the improvements thereon, or any part thereof, to such a
degree that injury will be done to such improvements.
No use of said premises shall be made, or any act committed thereon,
which would increase the existing rate of fire insurance upon the improvements
upon said premises or cause a cancellation of such insurance; that Lessee shall
not commit any act on said premises, the doing of which is prohibited by any
condition or restriction or record affecting the title to or the right to
occupy that property; that no public sale or auction shall be conducted on said
premises; and that Lessee shall not in the use of said premises violate any
present or future law, ordinance or regulation of any public authority; and
that no waste or public or private nuisance shall be committed on said
premises.
No corrosive chemicals, acids, inflammable liquids, paints, dangerous
or toxic substances or similar materials shall be used or stored on the leased
premises. Lessee shall comply with all federal, state and local environmental
laws, ordinances and regulations, and shall indemnify Lessor against any
liability, claims and expense at any time incurred for violation of this
subparagraph, including any sum assessed against Lessor for any violations of
said laws, regulations or ordinances or incurred at any time for the
elimination of toxic substance effects or soil removal. Lessee agrees in this
connection to waive the statute of limitations applicable to any action brought
hereunder.
4. ALTERATIONS. No alterations shall be made on or of said premises
without the written consent of Lessor first have been obtained, and any
alterations of said premises or additions thereto shall, when affixed to the
realty, become a part thereof, except moveable furniture and trade fixtures.
(See paragraph #34)
No additional lock or locks shall be placed by Lessee on any door, nor
shall any existing lock be re-keyed, unless written consent of Lessor shall
first have been obtained. Two keys will be furnished by Lessor. All keys
shall be surrendered to Lessor upon termination of the lease term.
The following items, whether installed by Lessor or Lessee shall be
deemed permanent improvements and not trade fixtures, but shall be subject to
the election by Lessor to require removal of any or all of them at the
termination of the lease:
Electrical wiring, panels and conduit; all piping and ductwork;
heating units, air conditioners, lighting fixtures, ballasts, globes and tubes;
and hot water heaters, shelving and counters, and partition walls.
5. REPAIRS. Lessee accepts said premises (including glazing, outside
adjacent sidewalks and parking areas, if any) in their present condition,
acknowledging same to be in good order and repair; Lessee shall maintain the
said premises in as good order and repair as when received, damage by fire,
war, earthquake, or reasonable use wand wear thereof, excepted; unless said
fire be caused by the negligence of Lessee, his employees or invitees. Lessee
waives the provisions of Sections 1941 and 1942 of the California Civil Code,
or any other law which would permit Lessee to make repairs at Lessor's expense.
Lessee agrees to water, maintain and replace, when necessary, any
shrubbery, landscaping, exterior lighting, sprinklers and other such facilities
provided by Lessor on the leased premises. If parking and landscaping are
provided for an entire building or building site, the maintenance cost of such
parking and landscaping, including sweeping service, by a service designated by
Lessor shall be prorated on a square footage or other equitable basis as
calculated by Lessor. Lessee agrees to pay this cost in addition to the
monthly rental.
<PAGE> 3
Included in repairs and maintenance for which the Lessee is obligated
to pay are: replacement when necessary of light globes, fluorescent tubes,
ballasts and starters in all lighting equipment; and for repairs to doors,
storefronts and windows, including glazing, door closers, locks and frames,
landscape sprinkler system, toilet fixtures, fire sprinkler and fire sprinkler
supervisory systems, due to damage from any cause. This list is not intended
to be exclusive and shall not limit the general provisions hereof concerning
repairs.
For the duration of the lease, Lessee agrees to maintain and pay for a
service contract which meets the manufacturer's recommendations of the air
conditioning and heating systems installed in the leased premises. Lessor shall
not be obligated to repair minor settlement cracks on walls or floor of the
leased premises, and shall not be responsible for the leaking of said walls due
thereto or as the result of porosity thereof.
6. INDEMNIFICATION OF LESSOR; INSURANCE Lessee assumes all risk of
injury to person and property in or about said premises, including lessee's
property, and will hold Lessor free and harmless from liability therefor,
including costs and counsel fees. Lessee shall secure and keep in force a
public liability insurance policy on an occurrence basis covering leased
premises, including parking areas, if any, included in this lease, insuring
Lessee and naming Lessor as an additional insured, and a copy of same shall be
delivered to Lessor. Said insurance Policy shall have minimum limits of
coverage of $500,000 personal injury and property damage. Lessee shall further
insure, at his expense, the glass, glazing, window frames, skylights, door,
mullions and storefront window wall, if any, in said premises in a company and
in an amount acceptable to Lessor; loss, if any, to be payable to Lessor. A
copy of said policy shall be delivered to Lessor; and if the Lessee does not so
deliver said policy to Lessor, Lessor may insure said glass and glazing, and
collect the cost thereof from Lessee. All policies shall be kept current and
provide for non-cancellation and non-modification without 30 days advance
notice advance notice to Lessor.
7. UTILITIES. Lessee will pay, when due, all charges incurred by him
for water, light, power, heat, gas, garbage removal, sewer charges (rental, tax
assessment or other), telephone and other services furnished to said premises,
including fire sprinkler supervisory. If any such charges are assessed to a
larger building of which the leased premises are a part, such charges shall be
appropriately prorated on the basis of area by the Lessor. All such charges
incurred by Lessor for the common areas of an entire premises of which the
leasehold is a part, including but not limited to walkways, driveways, parking
areas and landscaping, shall be prorated on square footage or other equitable
basis as calculated by Lessor. lessee agrees to pay this cost in addition to
the monthly rental.
8. ASSIGNMENT. Lessee shall not assign this lease, or any interest
therein, or sub-lease said premises, or any portion thereof, or license the use
thereof, or any portion thereof, without the written consent of Lessor first
had and obtained; that consent given by Lessor to one or more assignments,
sub-leases or licenses shall not be construed as a subsequent or continuing
consent; and that any such assignment, sub-letting or licensing (including
transfer by operation or law) without such consent shall at Lessor's option
terminate this lease. In the event of any assignment or sub-lease hereunder
whether consented to by Lessor or not, Lessee agrees to pay Lessor monthly 100%
of the excess of the rent provided under assignment or sub-lease over the rent
specified herein.
9. SUBORDINATION TO DEED OF TRUST. This lease at the option of
Lessor shall be subordinate to any deed of trust now existing or which Lessor
may in the future execute covering said premises. Lessee agrees forthwith upon
request of lessor to execute such documents providing subordination of this
lease to any such deed of trust executed now or in the future. Lessee shall
from time to time upon (10) days, prior written request by Lessor execute,
acknowledge and deliver to Lessor (a) a statement in writing certifying, if
such be true, that his Lease is unmodified and in full force and effect (or if
there have been modifications that the same is in full force and effect as
modified and stating the modifications) and the dates to which rental and other
charges have been paid; and (b) such other instruments as may reasonably be
required or requested by any mortgagee, beneficiary of a deed of trust or
holder of any other encumbrance on the Premises.
10. DESTRUCTION OF PREMISES. In the event the premises are totally
destroyed, then this lease will be forthwith terminated. In the event the
demised premises are part of a building and such building is damaged to such an
extent that the cost of repairs exceeds one-third of the cost of replacement of
said building, then at the option of the Lessor, this lease shall terminate.
In the event of partial destruction of the premises, which Lessor elects to or
is bound to repair, the same shall be repaired by Lessor as soon as reasonably
possible if such repairs can be made in ninety (90) working days after receipt
of all
<PAGE> 4
permits under the laws, ordinances and regulations applicable thereto, and also
if necessary financing therefor is obtainable on a reasonable basis from local
lending agencies; but if such repairs cannot be so made, then this lease, at
the option of Lessor, shall terminate; but if not so terminated, then Lessor
shall repair the same as soon as reasonable possible. During the time such
repairs are being made Lessor shall not unreasonably interfere with Lessee's
business, and the rent for such period shall be reduced proportionately to the
extent Lessee is deprived of the use of the premises. lessee wives the
provisions of sections 1932 subdivision 2) and 1933 (subdivision 4) of the
California Civil Code. In the event of partial or total destruction, Lessee
shall have the right to cancel this lease.
11. DEFAULT. In the event Lessee defaults in the terms hereof,
Lessor, at his option, and in addition to any other rights he may have, may
re-enter and repossess said premises and remove all property therefrom and
store the same at the expense of Lessee. Lessor, upon default of Lessee, may
relet said premises or any portion thereof, in a changed condition or
otherwise, for such rental and upon such terms as he deems reasonable, and hold
Lessee for the difference received, plus expenses of reletting and collecting
such rental, and the rental herein provided. No such re-entry or taking of
possession by Lessor shall be deemed an election to terminate this lease unless
Lessee is served with notice of said termination by Lessor or same be decreed
by a court of competent jurisdiction.
In the event Lessee shall breach this lease and abandon the demised
premises, Lessor may also elect to continue the lease in effect and Lessor may
enforce all rights and remedies hereunder, including the right to recover rent
as it becomes due, all pursuant to the provisions of Section 1951.4 of the
California Civil Code. In the even of such election by Lessor to continue the
lease, Lessee hereby irrevocably appoints Lessor the agent of Lessee to enter
upon the demised premises and remove any and all persons and/or property
whatsoever situated upon said premises, and to place all or any portion of said
property, except such property as may become the property of Lessor, in storage
for the account of and at the expense of Lessee; and, in such case, Lessor may
relet the demised premises upon such terms as to it may seem fit, and if a
sufficient sum shall not be thus realized, after paying expenses of such
reletting and collecting, to satisfy the rent and such other sums as may be
reserved herein to be paid, Lessee shall satisfy and pay any deficiency, and
pay the expenses of such reletting and collecting. Lessee hereby releases
Lessor and agrees to save harmless Lessor from any cost, loss or damage arising
out of or caused by any such entry or reentry upon the demised premises and/or
the removal of persons and/or property and storage of such property by Lessor
or his agents.
12. ATTORNEY'S FEES. In the event of any suit, action or proceeding
brought by either party for the breach of any term hereof, or to enforce any
provisions hereof, or for unlawful detainer, the losing party will pay to the
other reasonable counsel fees in said action or proceeding as fixed by the
court.
In the event Lessee is in default in payment of rent for any period or
in Lessee's performance of any covenant hereof, and the Lessor engages an
attorney to prepare a notice of such default for service on the Lessee, the
Lessee agrees to reimburse the Lessor for the services of such attorney; and in
the event the default is cured prior to institution of suit, the fee for the
preparation of such notice shall be a reasonable amount therefor, plus actual
costs of service.
13. ENTRY AND INSPECTION. Lessor reserves the right to enter said
premises at all reasonable times for the purpose of repairing, altering or
maintaining the improvements thereon, inspecting said premises, showing the
same to prospective encumbrances, lessees, insurers, or purchasers, posting any
notice or sign deemed necessary by him to protect his title or interest in said
property; and during the last one hundred twenty (120) days of the term hereof
placing and maintaining therein customary "for sale" or "to let" signs.
14. WAIVER. The waiver by Lessor of any breach hereof shall not be
deemed a waiver of any subsequent breach of the terms hereof.
15. HOLDING OVER. Should Lessee remain in said premises after the
expiration of this lease, such holding over shall be construed as a tenancy
from month to month upon such increase in rental, if any, as established by
notice from Lessor, but otherwise on the terms and conditions hereof so far as
applicable, including rent, and the provisions for cost of living increases
therein (if any) and tax reimbursement. This paragraph shall in no sense imply
any consent by Lessor to such holding over.
<PAGE> 5
16. NOTICES TO LESSEE. All notices required by law or this lease to
be given to Lessee by Lessor may be given personally to Lessee or mailed to him
by United States mail, postage prepaid and addressed to Lessee at the premises,
whether or not Lessee has abandoned or vacated them.
17. TRANSFER OF SECURITY. In the event any security be given by the
Lessee to secure the faithful performance of this lease, Lessor shall not be
chargeable with interest thereon, and in the event of a sale of said premises
he may transfer such security to the purchaser and be relieved of further
liability therefor.
18. INSOLVENCY OR BANKRUPTCY. To the extent permitted by law, the
interest of Lessee in such premises and this lease, at the option of Lessor,
shall terminate in the event of levy of execution against Lessee upon such
interest (provided Lessee fails for a period of five (5) days to discharge or
bond against said levy), or upon Lessee filing or having filed against him
bankruptcy proceeding or other proceedings under the bankruptcy statutes, or
upon Lessee making a general assignment for the benefits of creditors, or upon
the appointment of a receiver to take possession of all or substantially all of
Lessee's assets.
19. LIENS. In the event any lien is filed against said premises for
any claim against Lessee, Lessee shall remove the same forthwith; but failing
to do so, Lessor may remove the same at the expense of Lessee. Lessee may,
however, dispute the validity of such lien, but as a condition thereof, shall
file with Lessor a surety bond covering the amount thereof.
20. SIGNS. Lessee shall not place any signs, visible from the
exterior, or any part of the premises without the written consent of Lessor.
Upon the expiration of this lease, Lessee shall remove all signs or decorations
placed on or in said premises and shall repair any damage done by placing,
maintaining or removing of said signs or other equipment on the roof or other
portions of the premises. Lessee may place professionally designed signs in
and on said building advertising Lessee's business after written approval by
Lessor, and governmental entities. Signs shall include tethered airborne
objects and mobile units.
21. SURRENDER OF PREMISES. Lessee agrees to surrender the premises
at the termination of the tenancy herein created, in the same condition as
herein agreed they have been received, damage caused by war, earthquake, and
ordinary wear and tear excepted; and upon the surrender of the premises, either
at the expiration of the term or otherwise, Lessee agrees to remove all
personal property and rubbish from the premises; but if not so removed by
Lessee, Lessor may have the same removed at Lessee's expense. In the event of
surrender of this lease, Lessor shall have the option of terminating all
existing sub-leases or of assigning said sub-leases to Lessor. At the time
of termination of this lease, Lessor may require any or all of the alterations
or additions installed by Lessee or by Lessor for the benefit of Lessee at
Lessee's request, to be removed and the premises restored to their original
condition,whether or not said alterations or additions have become part of the
premises under paragraph 4 hereof.
22. SUCCESSORS AND ASSIGNS. The covenants and conditions herein
contained, subject to the provisions as to assignment, shall apply to and bind
the heirs, executors, administrators, successors and assigns of Lessor and
Lessee. The term "Lessor" as used herein shall mean only the owner or owners
at the time in question of the fee title or a Lessee's interest in a ground
lease of the Premises, and except as expressly herein provided, in the event of
any transfer of such title or interest, Lessor herein named (and in case of any
subsequent transfers the then grantor) shall be relieved from and after the
date of such transfer of all liability as respects Lessor's obligations
thereafter to be performed, provided that any funds in the hands of Lessor or
the then grantor at the time of such transfer, in which Lessee has an interest,
shall be delivered to the grantee. The obligations contained in this Lease to
be performed by Lessor shall, subject as aforesaid, be binding on Lessor's
successors and assigns, only during their respective periods of ownership.
23. TIME. Time is of the essence of this lease.
24. RECORDING. This lease shall not be recorded by Lessee, but in
the event the interest of Lessee herein is shown as an exception to title in
any title company report of title, Lessee agrees to execute and deliver to
Lessor a quitclaim deed covering all Lessee s interest in said premises,
forthwith upon termination of this lease.
<PAGE> 6
25. TAX INCREASES. Lessee agrees to pay Lessor the amount of any
increase in city, county and district real estate taxes assessed against said
premises, in excess of the taxes for the fiscal year 96-97. Included in
"taxes" shall be any levy, tax, charge or fee levied by a governmental entity
on parking spaces or privileges or parking uses in the leased premises and any
tax on Lessor's gross rental receipts (other than income tax).
Also included in said taxes shall be any future special assessments
for local improvements of any sort. If said assessments are permitted to go to
bond, the total amount of the annual installment shall be added to the tax bill
for the purpose of the computation of any increase in taxes; if Lessor
discharges said assessment and does not permit the same to go to bond, the
amount which each annual installment, less interest, would have been if the
same had gone to bond, shall be annually added to Lessor's tax bill for the
purpose of tax increase computation.
Lessee shall pay Lessor the amount of any such increase in real
property taxes, as above defined, in two equal installments, one on December 1
and the other on April 1 of the said fiscal tax years. Submission of copies of
tax bills by Lessor shall be evidence of and notice of the amount of said
taxes. The amount of said increase shall be prorated in the event this lease
commences or terminates during any fiscal tax year, and in such event the
split-period, portable semi-annual installment of the tax increase shall be
paid either thirty (30) days prior to the termination of this lease or within
ten (10) days of notification by the Lessor to the Lessee of the amount of said
increase.
In the event said tax reimbursement payments are not made to Lessor on
or before the dates herein set forth, the Lessee shall pay to Lessor a ten
percent (10%) per annum late charge for such delinquency to be added to the tax
reimbursement payment due. If said taxes and assessments are assessed against
the entire building and building site, the taxes and assessments allocated to
the leased premises shall be prorated on a square footage or other equitable
basis, as calculated by Lessor.
If the assessed value of the Lessor's premises is increased by the
inclusion therein of a value placed upon the personal property or improvements
of the Lessee, and if the Lessor pays the taxes based on such increased
assessment, the Lessee shall, upon demand, repay to the Lessor the portion of
such taxes resulting from such increase in assessment.
26. OUTSIDE STORAGE. No materials, supplies, equipment, finished
products or semi-finished products, raw materials or articles of any nature
shall be stored upon or permitted to remain on any portion of the leased
premises outside of the building constructed thereon, except with the prior
written consent of the Lessor. Notwithstanding the above, Lessee has the right
to provide trash dumpsters.
No waste materials or refuse shall be dumped upon or permitted to
remain unreasonably upon any part of the leased premises outside of building
proper, unless approved by Lessor.
27. OTHER RULES. Lessor reserves the right to make such other
reasonable rules and regulations, including parking regulations, as in Lessor's
judgment may from time to time be necessary for the safety, cleanliness and
orderly operation of the leased premises for the benefit of all the tenants in
the area. Lessee agrees to require its employees, executive, invitees and
customers to abide by such rules and regulations, including parking
regulations.
28. CONDEMNATION. In the event more than ten percent (10%) of the
building area or more than twenty percent (20%) of the surrounding land in the
demised premises shall be condemned by any public authority under eminent
domain, this lease shall terminate and the award for damages shall belong
entirely to Lessor, except as to trade fixtures of Lessee. If a lesser portion
of the premises be condemned, the Lessee shall be entitled to a reasonable
abatement of rent proportionate to the loss of use of space being leased. The
granting by Lessor of storm drainage or utility easements over the demised
premises shall not involve any reduction in rent, unless such easements
materially affect Lessee's use of the demised premises.
29. NOTICES TO LESSOR. All notices required by law or this lease to
be given to Lessor by Lessee shall be mailed to Lessor, registered or certified
mail, return receipt requested, by United States Mail, postage prepaid to
Lessor at the following address or such other address as Lessor may direct in
writing:
<PAGE> 7
1025A Tanklage Road
San Carlos, CA 94070
30. ROOF MAINTENANCE. Notwithstanding the provisions of Paragraph 5,
Lessor shall maintain the roof and structural components of the leased
premises, such duty to repair being subject to the condition precedent that
Lessee shall give prior written notice of at least 24 hours to Lessor (during
working hours) specifying the need for such repairs. Structural components are
defined as outside walls (excluding windows, doors, doorframes, storefront,
glazing, door closers, locks and hardware), footings, columns, floor slab, and
roof structure systems. The Lessee, however, shall be obligated to make any
and all repairs caused by any act or omission of Lessee, his employees or
invitees.
31. ADDITIONAL CLAUSES TO THIS LEASE. The following additional
paragraphs have been included in this lease as attachments thereto: No. 32, 33
and 34. In the event any of the provisions of said added paragraphs conflicts
with the provisions of paragraphs 1 through 31 hereof, the additional
paragraphs shall control and shall be effective.
IN WITNESS WHEREOF, Lessor and Lessee have executed this lease the day
and year first above written.
<TABLE>
<S> <C> <C>
Don and Carole Tanklage dba RESOUND CORPORATION a California
LESSOR: TANKLAGE PROPERTIES LESSEE: Corporation
/s/ Don Tanklage /s/ Paul Busse
---------------- --------------
Don Tanklage, (owner) Paul Busse, Chief Financial Officer
Address: 1025 Tanklage Road, Unit A Address: 200 Saginaw Drive
San Carlos, California 94070 Redwood City, California 94063
</TABLE>
32. Lessee shall not generate or cause any of the following; Noise,
vibrations, odor or dust discernible or audible to adjoining tenants and in the
event of any complaint by any adjoining tenant, Lessor or and Municipal entity
or agency, then Lessee shall cure such breach of the lease within 60 days of
said notice.
33. Notwithstanding the alterations provisions of this lease, Lessee
shall be allowed to install, at Lessee's expense, an alarm system which shall
remain the property of the Lessee. At the termination of the lease, Lessee
agrees to remove alarm system and repair any damage to premises which resulted
from the alarm system installation.
34. Any other provisions of this lease not withstanding, the parties
hereby agree that the demised premises may be subject to the terms and
conditions of the Americans with Disabilities Act of 1990 (herein after the
"ADA"), as a result of Lessee's use of said premises. The parties further
agree and acknowledge that it shall be the sole responsibility of the Lessee to
comply with any and all provisions of the ADA, as such compliance may be
required to operate the demised premises. The Lessee further agrees to
indemnify and hold the Lessor harmless against any claims which may arise out
of Lessee's failure to comply with the ADA. Such indemnification shall
include, but not necessarily be limited to reasonable attorney's fees, court
cost and judgments as a result of said claims.
<PAGE> 8
TANKLAGE PROPERTIES License no. 401618
GENERAL OUTLINE SPECIFICATION - For Future Improvements
GENERAL:
1) Lessor to review and approve all plans and specifications prior to
submittal for permit.
2) Submit all plans and Title 24 calculations for approval from local building
department and secure all necessary permits.
3) Lessor to inspect all work at same intervals as local building department.
4) All workmanship to be equal to the best practices in modern construction.
5) Do not drill into or through glulam beams, purlins, or any major structural
element.
6) Do not support any piping or equipment, etc., from 2x4 roof members; employ
purlins or place additional 2x6 frame between purlins for support.
7) Do not route piping or conduits over or on roof surface (except condensate
drains).
8) All roof penetrations to be approved by owner and coordinated with owners
roofing subcontractor
ROOFING:
1) All roof penetrations to be mopped in by original roofing subcontractor
2) Clean roof of all debris and trash to assure roof and drains are clear of
all construction materials.
HARDWARE:
1) Any locks to be re-keyed must be keyed to Tanklage's master key system and
should also pass meter room.
2) Provide Lessor with a key to all re-keyed locks.
FIRE SPRINKLER:
1) Install additional heads as required to conform to local codes, I.S.O and
Fire Marshall.
HEAT, VENT & A/C:
1) No equipment to be located on roof closer than 25 ft. from outside wall,
keep out of normal line of sight.
2) All A/C units, fans, blowers, plenums, etc. added to roof to be primed and
painted to match existing.
3) All equipment to be mounted on built up curbs with G.I. covers. All
penetrations necessary for this equipment to be incorporated within
this curb (i.e. duct penetrations, electrical conduit, gas lines, etc.).
4) No curb, fan or any type of roof penetration to be located less than 16"
from skylight, roof hatch, parapet wall or other roof penetration.
5) Provide sight screens as required by local codes.
PLUMBING:
1) Do not sawcut concrete, jackhammer only. All reinforcing steel to remain
intact.
<TABLE>
<S> <C>
Exhibit "A"
/s/ Don Tanklage /s/ Paul Busse
----------------- ---------------
Don Tanklage Paul Busse
</TABLE>
<PAGE> 9
TANKLAGE PROPERTIES
OUTLINE SPECIFICATIONS
Lease space at 30 Stein am Rhein Court, Redwood City, California Units J, K & L
Office and warehouse space to be leased "AS IS"
OFFICE: Painted sheetrock walls - 8 ft. high
Painted sheetrock ceiling and T-bar suspended ceiling system
Carpet glued direct with rubber base
Prefinished wood doors and H.M. frames
Electric heat Unit "L"
Heat Pump H,V,A/C system - Unit J & K
Normal office lighting and plugs
Aluminum and glass entry units with 3' x 7' door
Tenant Improvements to be completed in Units J, K & L:
a) Shampoo carpet in offices.
b) Provide one unit heater in unit "J", BTU output to be per Title 24
requirements
c) Painted surfaces in the office areas to remain "AS IS" with the
exception of those areas which need repair. Repaired areas
will be touched up with a similar, but not exact color paint.
TOILET ROOMS:
Enameled sheetrock walls and ceiling
Marlite wainscote - 4 ft. high
Sheetvinyl flooring
Prefinished wood doors and H.M. frames
Water closed and lavy, exhaust fan
Light, switch and plug
Electric water heater
T.P. holder and mirror
WAREHOUSE:
Lights - "AS IS"
Finishes - unfinished concrete floors, fire taped sheetrock wall,
gravity vents and skylights per plan, foil insulation at underside
roof.
Electrical service and distribution to be "AS IS".
Note: No loads to be hung from 2x4 roof joists
No lines to run above or no roof
All roof penetrations to be approved by owner and coordinated with
owners roofing subcontractor.
ALL HEATING AND LIGHTING SUBJECT TO TITLE 24 REGULATIONS
<TABLE>
<S> <C>
Exhibit "B"
/s/ Don Tanklage /s/ Paul Busse
----------------- ---------------
Don Tanklage Paul Busse
</TABLE>
<PAGE> 1
Exhibit 11.1
RESOUND CORPORATION
STATEMENT OF COMPUTATION OF NET LOSS PER SHARE
(in thousands except per share data)
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net loss applicable to common shareholders ($1,192) ($5,902) ($14,289)
==============================
Average number of common and common equivalent shares:
Average common shares outstanding 17,591 15,439 15,089
Dilutive options (1) -- -- --
------------------------------
Total shares for primary net loss per share 17,591 15,439 15,089
==============================
Net loss per share (2) ($0.07) ($0.38) ($0.95)
==============================
</TABLE>
Notes:
(1) Dilutive options have not been included in the calculation of primary
earning per share since their inclusion would have had an anti-dilutive
effect.
(2) Fully diluted amounts do not differ. Preferred stock is not included in
the calculation of the fully diluted earnings per share since their
inclusion would have had an anti-dilutive effect.
<PAGE> 1
Exhibit 22.1
RESOUND CORPORATION
SUBSIDIARIES OF
REGISTRANT
<TABLE>
<CAPTION>
Subsidiary Jurisdiction Also Doing Business As
- ---------- ------------ ----------------------
<S> <C> <C>
RSND Asia Limited British Virgin Islands ReSound Asia Limited
ReSound Pty Ltd. Australia
ReSound GmbH Germany
Hortechnologie
ReSound-Sonar GmbH Germany ReSound Deutschland GmbH
Hortechnologie und Design
ReSound-Viennatone Austria Viennatone AG
ReSound BV Netherlands
ReSound-Viennatone Ltd. United Kingdom
ReSound-Viennatone France Viennatone S.A.R.L.
ReSound AB Sweden
ReSound Ireland Ltd. Ireland
Viennatone GmbH & Co. OHG Germany
ReSound Holdings Ltd. Bermuda
Sonar Hearing Health Corporation Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 7,980
<SECURITIES> 0
<RECEIVABLES> 25,271
<ALLOWANCES> 4,774
<INVENTORY> 23,853
<CURRENT-ASSETS> 56,548
<PP&E> 28,673
<DEPRECIATION> 15,179
<TOTAL-ASSETS> 114,752
<CURRENT-LIABILITIES> 31,171
<BONDS> 25,985
0
5,225
<COMMON> 90,680
<OTHER-SE> 38,309
<TOTAL-LIABILITY-AND-EQUITY> 114,752
<SALES> 0
<TOTAL-REVENUES> 125,646
<CGS> 57,241
<TOTAL-COSTS> 57,241
<OTHER-EXPENSES> 66,156
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,819
<INCOME-PRETAX> 430
<INCOME-TAX> 1,397
<INCOME-CONTINUING> (967)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,192)
<EPS-PRIMARY> (.07)
<EPS-DILUTED> (.07)
</TABLE>
