<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the quarterly period ended March 28, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the transition period from to
Commission file number 0-20046
RESOUND CORPORATION
(Exact name of Registrant as specified in its charter)
California 77-0019588
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
220 Saginaw Drive, Seaport Centre, Redwood City, California 94063
(Address of principal executive offices)
(650) 780-7800
(Registrant's telephone number)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No ___
---
The number of shares of Registrant's Common Stock issued and outstanding as of
May 1, 1998 was 20,359,503 shares.
This document consists of 14 pages of which this is page 1.
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<TABLE>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets........................................3
Consolidated Statements of Operations..............................4
Consolidated Statements of Cash Flows..............................5
Notes to Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations.............................................10
Liquidity and Capital Resources.................................. 11
Factors That May Affect Future Operating Results..................12
Item 3. Quantitative and Qualitative Disclosures about Market Risks.......13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................13
Item 2. Changes in Securities and Use of Proceeds.........................13
Item 3. Defaults upon Senior Securities...................................13
Item 4. Submission of Matters to a Vote of Security Holders...............13
Item 5. Other Information.................................................13
Item 6. Exhibits and Reports on Form 8-K..................................13
SIGNATURES........................................................................14
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
RESOUND CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
March 28, December 31,
1998 1997
--------- ------------
<S> <C> <C>
(Note)
Current assets:
Cash and cash equivalents $ 17,990 $ 19,853
Accounts receivable, net 18,321 17,966
Inventories 12,833 14,183
Other current assets 2,799 2,125
-------- --------
Total current assets 51,943 54,127
Property and equipment, net 11,035 10,838
Goodwill 21,005 20,217
Other assets 3,577 4,593
-------- --------
$ 87,560 $ 89,775
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans $ 2,297 $ 1,663
Accounts payable 8,869 8,735
Accrued liabilities 18,944 19,484
Long-term debt, current portion 1,952 4,362
-------- --------
Total current liabilities 32,062 34,244
Long-term liabilities:
Long-term debt, non-current portion 13,698 14,274
Employee benefits 3,694 3,738
Other accrued liabilities --- 500
-------- --------
Total long-term liabilities 17,392 18,512
Commitments and contingencies -- --
Shareholders' equity:
Common stock 97,400 96,785
Accumulated deficit (56,904) (57,878)
Cumulative translation adjustment (2,390) (1,888)
-------- --------
Total shareholders' equity 38,106 37,019
-------- --------
$ 87,560 $ 89,775
======== ========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to consolidated financial statements.
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RESOUND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
-----------------------
March 28, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Net sales $ 31,143 $ 32,211
Cost of sales 14,457 15,111
-------- --------
Gross profit 16,686 17,100
Operating expenses
Research and development 3,975 4,327
Selling, general and administrative 12,148 12,548
-------- --------
Total operating expenses 16,123 16,875
-------- --------
Income from operations 563 225
Interest expense, net (256) (397)
Other income (expense), net 848 (417)
-------- --------
Income (loss) before income taxes 1,155 (589)
Provision for income taxes (1) 181 305
-------- --------
Net income (loss) $ 974 $ (894)
======== ========
Net income (loss) applicable to common shareholders $ 974 $ (969)
======== ========
Basic and diluted net income (loss) per share $ 0.05 $ (0.05)
======== ========
Shares used in basic net income (loss) per share
calculation 20,259 19,389
======== ========
Shares used in diluted net income (loss) per share
calculation 20,744 19,389
======== ========
</TABLE>
(1) Consists principally of foreign income taxes.
See notes to consolidated financial statements.
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RESOUND CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended
-------------------------
March 28, March 31,
1998 1997
--------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 974 $ (894)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 1,695 1,356
Changes in assets and liabilities:
Accounts receivable 168 (1,090)
Inventories 1,892 982
Other assets (1,592) 1,396
Accounts payable 134 (1,789)
Accrued liabilities (1,654) 887
-------- --------
Net cash provided by operating activities 1,617 848
Cash flows from investing activities:
Acquisition of ReSound Autac (401) ---
Patent license fees 900 ---
Change in translation adjustment (548) (616)
Additions of property and equipment (1,247) (695)
-------- --------
Net cash used in investing activities (1,296) (1,311)
Cash flows from financing activities:
Payments on long-term debt (2,799) (675)
Bank loans --- (40)
Issuance of common stock 615 249
-------- --------
Net cash used in financing activities (2,184) (466)
-------- --------
Net decrease in cash and cash equivalents (1,863) (929)
Cash and cash equivalents at the beginning of the period 19,853 7,980
-------- --------
Cash and cash equivalents at the end of the period $ 17,990 $ 7,051
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 287 $ 434
Income taxes $ 17 $ 227
Supplemental schedule of non-cash investing and
financing activities:
Accrual of preferred stock dividend --- $ 75
</TABLE>
See notes to consolidated financial statements.
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ReSound Corporation
Notes to Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three-month period ended March 28, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the audited consolidated financial
statements for the year ended December 31, 1997 and footnotes thereto included
in the Company's 1997 Annual Report on Form 10-K.
In 1998, the Company adopted the policy of closing its fiscal quarters on the
last Saturday falling within the calendar quarter, except that the fiscal year
will end at the calendar year end.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("SFAS No. 128"). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Earnings per share amounts for all periods have been
restated to conform to the SFAS No. 128 requirement.
The following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended
-----------------------
March 28, March 31,
1998 1997
--------- ----------
<S> <C> <C>
Net income (loss) $ 974 $ (894)
Preferred dividends
--- (75)
-------- --------
Net income (loss) applicable to common shareholders $ 974 $ (969)
======== ========
Weighted average common shares - basic 20,259 19,389
Dilutive options 485 --
-------- --------
Adjusted weighted average common shares - diluted 20,744 19,389
======== ========
Earnings per share - basic:
Net income (loss) per common share $ 0.05 $ (0.05)
======== ========
Earnings per share - diluted:
Net income (loss) per common share $ 0.05 $ (0.05)
======== ========
</TABLE>
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Had the Company been in a net income position for the three months ended March
31, 1997, diluted earnings per share for that period would have included 619,000
shares related to outstanding options not included above.
New Accounting Pronouncements
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
During the first quarters of 1998 and 1997, total comprehensive income (loss)
amounted to $472,000 and $(4,093,000), respectively.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures About Segments of An Enterprise and Related Information ("SFAS No.
131"). SFAS No. 131 will require the Company to use the "management approach" in
disclosing segment information in its December 31, 1998 financial statements.
The adoption of SFAS No. 131 will not have an impact on the Company's results of
operations, cash flows, or financial position.
Reclassifications
Certain reclassifications have been made to prior year's amounts in order to
conform to the current year's presentation.
NOTE B - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market. The
components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
March 28, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Raw materials $ 8,416 $ 9,191
Work in process 2,318 2,869
Finished products 2,099 2,123
------- -------
$12,833 $14,183
======= =======
</TABLE>
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NOTE C - ACCOUNTING FOR INCOME TAXES
Income taxes have been provided for on a year-to-date basis and represent taxes
on profits earned at the Company's European subsidiaries in Ireland, Germany,
Switzerland and Holland.
NOTE D - RESOUND AUTAC ACQUISITION
In January 1998, ReSound Autac GmbH, a newly formed subsidiary of the Company
located in Zurich, Switzerland, acquired all of the assets and liabilities of a
former Swiss distributor for $401,000. At the time of the transaction, that
distributor owed the Company $979,000 for previous financial assistance. The
agreement contains a clause which obligates the seller for a period of five
years not to compete in the area of manufacture or distribution of hearing
devices. Additionally, an employment agreement was negotiated with the seller
through December 31, 2002.
The effects of this acquisition on the March 28, 1998 Consolidated Statement of
Cash Flows were as follows (in thousands):
<TABLE>
<S> <C>
Working capital acquired $ 507
Property and equipment, net 163
Goodwill 1,342
Bank loans (632)
Loan from ReSound (979)
-------
Total purchase price $ 401
=======
</TABLE>
NOTE E - SPECIAL CHARGES
In the second half of 1997, the Company recorded special charges of $18.0
million, associated with the Company's strategic restructuring program. This
program is designed to streamline operations and control costs through
management restructuring, operations consolidations, and increased focus on core
activities and product lines.
The special charges provided for costs associated with employee termination
benefits for approximately 100 employees from all functional areas in various
subsidiary locations; lease termination costs; the write-down of goodwill
associated with the acquired hearing health business activity of 3M (which was
renamed Sonar Hearing Health, "SHH"; the incremental impairments in
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the carrying value of certain product inventories; and losses on supplier
commitments arising directly from the decision to exit product lines, as follows
(in thousands):
<TABLE>
<CAPTION>
Spending/
Total 1997 Balance Charges Balance
Special Spending/ Dec. 31, 3-mos ended March 28,
Charges Charges 1997 March 28, 1998 1998
--------- --------- -------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Employee termination benefits and
lease termination costs
(recorded as Restructuring) $ 2,254 $ 765 $ 1,489 $ 444 $ 1,045
Write-down of SHH goodwill
(recorded as Restructuring) 10,307 10,307 -- -- --
Write-down of inventories to net
realizable value and losses on
supplier commitments (recorded
as Cost of Sales) 3,093 723 2,370 1,637 733
Write-down of capital assets to
fair value (recorded as Selling,
General and Administrative -
$633, and Research and
Development - $123) 756 -- 756 694 62
Other exit costs (recorded as
Selling, General and
Administrative) 1,566 -- 1,566 1,141 425
------- ------- ------- ------- -------
$17,976 $11,795 $ 6,181 $ 3,916 $ 2,265
======= ======= ======= ======= =======
</TABLE>
The activities contemplated in the restructuring program are expected to be
substantially completed by June 30, 1998. Management anticipates no material
change in the estimated cost of such activities. During the quarter ended March
28, 1998, the Company made approximately $1.0 million of cash payments relating
to the special charges.
NOTE F - USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements, which can be identified by
words such as "may," "will," "believe," "expect," "anticipate," "estimate,"
"plan," "intend" and the like. These
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statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from those contemplated in the statements.
These risks and uncertainties are discussed in the section below entitled
"Factors That May Affect Future Operating Results" and in the Company's reports
filed with the Securities and Exchange Commission, including its Report on Form
10-K for the year ended December 31, 1997.
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part I - Item 1
of this Quarterly Report and the audited consolidated financial statements and
notes thereto, the Introductory Statement and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
RESULTS OF OPERATIONS
Three months ended March 28, 1998 and March 31, 1997
Net sales decreased by 3% to $31.1 million in the quarter ended March 28, 1998,
from $32.2 million in the quarter ended March 31, 1997. International sales
accounted for 49 percent of ReSound's net sales during the first quarter of
1998, compared to 51 percent during the same quarter in 1997. International
sales for the first quarter were $15.4 million, a decrease of 7 percent from the
same period last year. The decrease in international sales was the result of
weaker European currencies compared to the U.S. dollar, and poor hearing device
market conditions in Germany and Austria together with management and employee
turnover at Viennatone, the Company's Austrian subsidiary. Additionally,
economic uncertainty in Japan coupled with lower shipments to the Company's
Japanese distributor (to improve the balance of inventory levels to in-market
sales) contributed to sales reductions in the Asia-Pacific region in the first
quarter of 1998 when compared to the prior year first quarter. First quarter
U.S. sales of $15.7 million were consistent with the same period last year, due
primarily to unit volume growth being offset by declines in average unit sales
prices as a result of increasing competition and product mix sales shifts from
the Company's higher priced Premium Series product line to the Company's more
moderately priced Encore Series product line. The Premium Series product line
was enhanced by the addition of the Company's completely-in-the-canal device,
the CC4, which first shipped in volume during the first quarter of 1998. Due to
strong customer demand and a supplier constraint, a substantial volume of orders
for this product were in backlog status at March 28, 1998.
Gross profit was 53.6 percent of net sales in the first quarter of 1998,
compared to 53.1 percent of net sales for the same quarter of 1997. The
quarter-to-quarter increase in gross profit resulted primarily from lower
component costs and improved manufacturing efficiencies in the custom business,
partially offset by margin erosion at Viennatone due to unfavorable sales mix
and pricing pressures.
Research and Development ("R&D") spending during the first quarter of 1998 was
$4.0 million (12.8 percent of net sales) compared to $4.3 million (13.4 percent
of net sales) in the same quarter of 1997. The reduction in first quarter 1998
R&D expenses was primarily due to compliance with planned spending on the
program for ReSound's Digital Signal Processing technology platforms, partially
offset by an increase in the development activities for the ReSound hearing
enhancer program.
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Selling, General and Administrative expenses ("SG&A") were $12.1 million or 39.0
percent of net sales for the first quarter of 1998, compared to $12.5 million,
or 39.0 percent of net sales in the first quarter of 1997. The reduction in SG&A
expenses in absolute dollars resulted primarily from the effects of
consolidation of certain sales and marketing activities in the U.S., and
improved cost controls, partially offset by higher business system
implementation costs and one-time severance costs in Viennatone and incremental
SG&A expenses resulting from the acquisition of ReSound Autac in January 1998.
Net interest expense was $256,000 for the first quarter of 1998 compared to
$397,000 for the first quarter of 1997. This quarter-to-quarter decrease is
attributable to reduction of debt and the effect of the stronger U.S. dollar
compared to European currencies.
Other income was $848,000 for the first quarter of 1998 compared to other
expense of $417,000 in the corresponding quarter of 1997. In the first quarter
of 1998, income resulted primarily from receipts of $750,000 under a patent
license agreement. The agreement requires similar payments to be made to the
Company in each of the remaining quarters of 1998. The other expense in the
first quarter of 1997 resulted from losses on foreign exchange.
Income taxes have been provided for on a year-to-date basis and represent taxes
on profits earned at ReSound's European subsidiaries in Ireland, Germany,
Switzerland and Holland.
The Company had net income of $974,000 in the quarter ended March 28, 1998,
compared to a net loss of $894,000 in the quarter ended March 31, 1997. The
increase in net income in the current quarter was primarily the result of lower
SG&A expenses, patent license income and the absence of foreign exchange losses,
partially offset by lower gross profit.
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended March 28, 1998 the Company generated $1,617,000 in
cash from operations, compared to $848,000 in the three months ended March 31,
1997. Cash generated from operations in the first quarter of 1998 included
non-cash charges of $1.7 million relating to depreciation and amortization. In
addition, positive cash flows from operations primarily resulted from
improvements in inventory management of $1.9 million, and net income for the
period of $1.0 million. This positive cash flow from operations was partially
offset by increases in other assets of $1.6 million and reductions in accrued
liabilities of $1.7 million caused primarily by spending and other charges in
connection with the Company's restructuring program.
Net cash used in investing activities for the three months ended March 28, 1998
of $1.3 million resulted from additions of property and equipment, cash used in
the acquisition of ReSound Autac and changes in the cumulative translation
adjustment account. These amounts were offset by $900,000 of fees received for
licensing certain technology acquired by the Company in 1996 and 1997.
The primary financing activity in the three months ended March 28, 1998 was the
payment of long-term debt of $2.8 million.
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At March 28, 1998, the Company had available cash and cash equivalents of $18.0
million. While the Company believes that available cash will be sufficient to
meet the Company's short-term operating and capital requirements for at least
the next twelve months, the Company may be required to raise additional capital
for its currently envisaged long-term needs and in connection with any future
acquisitions.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Competition, especially from new digital hearing device products, is expected to
continue to increase. The Company's ability to grow and maintain profitability
will depend upon its ability to develop, individually and jointly with current
or future strategic partners, or otherwise acquire and effectively market,
competitive DSP and other products. There can be no assurance that the Company
can develop and introduce these products in a timely manner, or that these
products will be able to compete effectively against current or new competing
products. The development or acquisition of new products is always subject to
technological risks and uncertainties which could cause termination of the
development of the product or termination of or delay in the introduction of the
product, or which could significantly decrease the originally anticipated level
of customer acceptance of the product. Also, there can be no assurance that a
new product can be manufactured on a cost-effective basis, that regulatory
approvals, where necessary, can be obtained, or that the expected level of
customer acceptance will be met. Also, there can be no assurance that the
Company will be able to continue its successful relationships with its current
strategic partners or establish successful relationships with new strategic
partners. In addition, announcements of new products may cause hearing care
professionals or hearing impaired persons to defer purchases of existing
products or return previously purchased products. The Company's failure to
introduce competitive products in a timely manner would have a material, adverse
impact on the Company's financial condition and results of operations.
The Company anticipates that it will continue to experience, at least for the
near-term, lower average unit sales prices of its products due to aggressive
competitive pricing and product mix shift to the Company's more moderately
priced products. In order to offset this, the Company will need to increase unit
sales volume, about which there can be no assurance. The Company also expects
that the negative impact caused by weak economic conditions and/or reductions in
government reimbursement levels available to consumers purchasing hearing
devices in Austria, France and Germany, reduced shipments to its Japanese
distributor, and unsettled economic conditions in Japan will continue, at least
for the near term. Also, while the Company believes that the backlog it
experienced during the first quarter of 1998 for its completely-in-the-canal
(CIC) device, the CC4, will be significantly reduced by the end of the second
quarter of this year, there can be no assurance that the component delivery
problems that caused the backlog will be resolved in time to achieve this
reduction. While the Company has mechanisms in place to lessen the negative
impact of foreign currency fluctuations, continued or increased weakness of
European currencies against the US Dollar also are likely to adversely impact
the Company's sales in Europe. Finally, there can be no assurance that the
Company will be able to complete its restructuring program in a timely manner,
consolidate targeted operations successfully, and otherwise achieve the cost
reductions and other restructuring benefits anticipated to result from the
restructuring.
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The Company has determined that it will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. All required software
modifications and replacements are expected to be completed not later than
March, 1999, which is prior to the estimated occurrence of any year 2000 issues.
While the Company believes its planning efforts are adequate to address its year
2000 concerns, there can be no guarantee that the systems of other companies on
which the Company's systems and operations rely will be converted on a timely
basis and will not have a material effect on the Company. The cost of the year
2000 initiatives is not expected to be material to the Company's results of
operations or financial position.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.34: Agreement in Contemplation of Separation
(b) Exhibit 27: Financial data schedule
(c) Reports on Form 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOUND CORPORATION
/s/ Arthur T. Taylor
--------------------------------------------
Arthur T. Taylor
Vice President, Finance and
Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: May 6, 1998
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INDEX TO EXHIBITS
Exhibit
Number Description
- -------- -----------
10.34 Agreement in Contemplation of Separation
27 Financial Data Schedule
<PAGE> 1
EXHIBIT 10.34
AGREEMENT IN CONTEMPLATION
OF
SEPARATION
THIS AGREEMENT (the "Agreement") in contemplation of separation is
entered into this __ day of January, 1998, by and between RESOUND CORPORATION
("Company") and PETER RIEPENHAUSEN ("Employee").
WHEREAS, Company and Employee have mutually agreed to terminate the
employment relationship and to establish a consulting arrangement between them.
NOW, THEREFORE, IT IS AGREED as follows:
1. Employee's resignation as Chief Executive Officer, President and an
employee of Company shall be effective on the taking of office by a replacement
full-time chief executive officer of Company (the "Resignation Date").
Employee's resignation from any other positions with any other entity which may
be deemed to be an affiliate of Company shall also be effective on the
Resignation Date. For purposes of this Agreement, Employee's Termination Date
shall be the earlier of the Resignation Date or the date on which Employee's
employment relationship with Company is terminated by either Employee or Company
(the "Termination Date"). Company and Employee acknowledge and agree that,
notwithstanding the execution of this Agreement, Employee's employment is and
shall continue to be at-will, as defined under applicable law.
2. In contemplation of the separation, the parties agree:
(a) Company shall retain Employee as a consultant as set forth in
Section 7 below.
(b) During the three month period following the Termination Date,
Employee shall be Vice Chairman of Company's Board of Directors and remain a
member of the Board of Directors. Thereafter, Employee shall continue as a
member of the Board of Directors only at the discretion of the Company's
President and Chief Executive Officer and the Board of Directors. Employee
agrees to submit his letter of voluntary resignation to the Board of Directors
when requested to do so by Company's President and Chief Executive Officer or
the Board of Directors. In all events, Employee's continued service as a member
of the Board of Directors shall be subject to Employee's election to such
position by the shareholders of the Company. Employee shall continue as a member
of the search committee for a replacement chief executive officer at the
pleasure of the Board of Directors so long as he remains a member of the Board
of Directors.
(c) In accordance with applicable law, but in any event within three
days of the Termination Date, Company will pay to Employee all accrued salary
and pay for accrued personal time off (collectively, the "Termination Payment").
<PAGE> 2
(d) If Company substantially achieves the targets specified by the
Board of Directors with respect to incentive compensation for the position of
Chief Executive Officer for 1998, Employee will be entitled to receive a pro
rata share of the applicable bonus payable for 1998 based upon the portion of
the 1998 calendar year he was employed as Chief Executive Officer of Company.
(e) The Change of Control Agreement between the parties, dated April
24, 1997, shall remain in effect until the Termination Date.
3. Employee acknowledges and agrees that upon payment of the Termination
Payment he will have received all salary, accrued personal time off,
commissions, bonuses, compensation or other such sums due to him. In light
thereof, the parties acknowledge and agree that California Labor Code Section
206.5 is not applicable to the parties hereto. That section provides in
pertinent part as follows:
No employer shall require the execution of any release of any
claim or right on account of wages due, or to become due, or made
as an advance on wages to be earned, unless payment of such wages
has been made.
4. Employee's participation in Company's employee benefit programs,
including without limitation, the long term and short term disability, 401(k),
and employee stock purchase plans, shall cease as of the Termination Date,
except as provided in Sections 5 and 6 below. No additional personal time off
shall accrue following the Termination Date.
5. Employee shall continue to receive Company's standard medical,
dental, vision and life insurance benefits at Company expense until the earlier
of Employee's commencement of a full-time position with another employer or the
end of the Consulting Term (as defined in Section 7). Employee agrees and
acknowledges that the qualifying event contemplated by COBRA shall be deemed to
be the Termination Date.
6. All options granted to Employee under Company's 1988 Stock Option
Plan, including all options previously repriced by Company, shall continue to
vest according to their respective terms set forth in the option agreements
issued to Employee, as modified by the terms of the Option Repricing Agreement
executed by Employee in April 1997 until the end of the Consulting Term set
forth in paragraph 7 below and shall remain exercisable to the extent vested for
a period of sixty (60) days after the end of the Consulting Term. The Board of
Directors may further elect in its sole discretion to accelerate all or a
portion of the remaining options not then vested at the end of the Consulting
Term, but shall not be obligated to do so. All options not exercised during this
period shall expire at the end of such 60-day period. Employee understands and
agrees that if qualified as incentive stock options under applicable tax law
when granted, the options shall retain such status for three (3) months after
the Termination Date and that thereafter such options will be treated for tax
purposes as nonstatutory stock options.
7. Employee will make himself available at reasonable times and places
to perform consulting services for Company during the period beginning on the
Termination Date and ending three months thereafter (the "Initial Consulting
Term"). Employee will be paid a
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<PAGE> 3
consulting fee during the Initial Consulting Term at the rate equal to his
salary in effect on the date of this Agreement per month, payable on Company's
normal payroll dates in accordance with its normal payroll practices. Employee
will also make himself available at reasonable times and places to perform
further consulting services for Company for an additional period of twelve
months after the conclusion of the Initial Consulting Term (collectively with
the Initial Consulting Term, the "Consulting Term"). For such additional
services, Company shall pay to Employee on the aforesaid payroll schedule a
consulting fee at the rate equal to his monthly salary in effect on the date of
this Agreement and, in addition, shall pay to Employee $150 for each hour of
consulting services (which for purposes of this Section 7 shall include any
services performed by Employee pursuant to Section 12 of this Agreement) in
excess of twenty (20) hours per month performed by Employee after the Initial
Consulting Term. All consulting assignments and pertinent terms, including
additional compensation, shall be determined by the Chief Executive Officer of
Company. Company will use reasonable efforts to provide written notice of
consulting assignments for any given month at the beginning of the month. The
Consulting Term and all obligations of Company and Employee to each other under
this Section 7 shall terminate upon Employee's commencement of a full-time
position with another employer. Employee hereby agrees to notify Company of his
acceptance of any such position.
8. Company shall reimburse Employee for reasonable expenses incurred on
behalf of Company during the Consulting Term, provided that such expenses are
substantiated in accordance with Company policies.
9. Employee understands and agrees that his obligations to Company under
his existing Proprietary Information and Assignment of Inventions Agreement
between Employee and Company (the "Proprietary Information Agreement"), a copy
of which is attached hereto as Exhibit A, shall continue through the Consulting
Term and shall thereafter survive termination of his relationship with Company
under this Agreement. Employee agrees that at all times hereafter he shall
continue to maintain the confidentiality of all confidential and proprietary
information of Company as provided by the Proprietary Information Agreement and
that he shall not intentionally divulge, furnish or make available to any party
any of the trade secrets, patents, patent applications, price decisions or
determinations, inventions, customers, proprietary information or other
intellectual property of Company, until after such time as such information has
become publicly known otherwise than by act of collusion of Employee.
10. During the Consulting Term Employee may engage in other part-time
employment, consulting or businesses, provided such activity does not preclude
him from making himself available to provide consulting services to Company as
provided above and further provided that Employee will notify Company prior to
engaging in any such employment, consulting or business with or for the benefit
of any party that is competitive with the present, proposed, or reasonably
anticipated business activities of Company.
11. Until the end of the Consulting Term, Employee will not: (a) divert
or attempt to divert, directly or indirectly, any business of Company; (b)
induce or attempt to induce directly or indirectly, any person to terminate his
or her employment or consulting arrangement with Company or to provide services
as an employee or consultant involving the design, manufacture,
-3-
<PAGE> 4
or sale of acoustic hearing devices to Employee or any other party; or (c)
induce or attempt to induce any customer, supplier, licensor or other business
partner of Company to cease doing business with Company or in any way interfere
with the existing business relationship between any such customer, supplier,
licensor or business partner and Company.
12. Employee will make himself available at reasonable times and upon
reasonable notice to give deposition and trial testimony and otherwise to assist
Company's attorneys in the prosecution or defense of legal proceedings involving
Company. Company will make reasonable efforts to accommodate any other
employment Employee may have. Employee shall receive an additional fee of $150
for each hour of time spent in such matters after the end of the Consulting
Term.
13. Employee will cooperate with Company in providing information with
respect to all reports required to be filed by Company with the Securities and
Exchange Commission as they relate to required information with respect to
Employee.
14. Each party agrees to refrain from (and Company shall take reasonable
steps to cause its executive officers and directors to refrain from) any
disparagement or criticism of the other party (and in the case of Company, its
officers, directors and employees).
15. The parties agree to use their best efforts to maintain in
confidence the existence and terms of this Agreement, except as may be disclosed
in a press release and except for disclosures required by law or necessary to
effectuate the terms of this Agreement. Employee understands and acknowledges
that Company may be required to file a copy of this Agreement with the
Securities and Exchange Commission and to disclose its terms in Company's next
proxy statement. Notwithstanding the foregoing, each party shall be permitted to
discuss the provisions of this Agreement in confidence with its attorneys,
accountants, tax advisors and, in the case of Employee, his spouse. Company will
use reasonable efforts to consult with Employee prior to the issuance of any
press release announcing Employee's resignation. Employee agrees not to disclose
that he has resigned or is going to resign, until Company makes an announcement
thereof or to the extent that such disclosure is specifically permitted by
Company's Board of Directors or its authorized committee. Notwithstanding the
foregoing, Employee shall be permitted to disclose his resignation to selected
individuals if and only to the extent necessary to enable Employee to solicit
new employment, provided any such person agrees in writing or is bound by
professional ethical principles not to disclose such information. Unless
specifically permitted by Company's Board of Directors or its authorized
committee, Employee will not make any such disclosure to any Company employee,
consultant, customer, supplier or present or prospective Company business
partner prior to the date Company makes such announcement.
16. In consideration for the obligations of both parties set forth in
this Agreement, Employee and Company, on behalf of themselves, and their
respective heirs, executors, officers, directors, employees, investors,
shareholders, administrators and assigns, hereby fully and forever release each
other and their respective heirs, executors, officers, directors, employees,
investors, shareholders, administrators and assigns (collectively, the
"Releasees"), of and from any claim, duty, obligation or cause of action
relating to any matters of any kind pertaining to
-4-
<PAGE> 5
Employee's employment relationship with Company, whether presently known or
unknown, suspected or unsuspected, that any of them may possess arising from any
omissions, acts or facts that have occurred up until and including the date of
this Agreement including, without limitation:
(a) any and all claims relating to or arising from Employee's
employment relationship with Company and the termination of that relationship;
(b) any and all claims relating to, or arising from, Employee's right
to purchase, or actual purchase of shares of stock of Company other than as
provided in Section 6 above and pursuant to the specific terms of the stock
option agreements referenced therein;
(c) any and all claims for wrongful discharge of employment; breach
of contract, both express and implied; breach of a covenant of good faith and
fair dealing, both express and implied, negligent or intentional infliction of
emotional distress; negligent or intentional misrepresentation; negligent or
intentional interference with contract or prospective economic advantage;
negligence; and defamation;
(d) any and all claims for violation of any federal, state or
municipal statute, including, but not limited to, Title VII of the Civil Rights
Act of 1964, the Civil Rights Act of 1991, the Age Discrimination in Employment
Act of 1967, the Americans with Disabilities Act of 1990, and the California
Fair Employment and Housing Act;
(e) any and all claims arising out of any other laws and regulations
relating to employment or employment discrimination; and
(f) any and all claims for attorneys' fees and costs.
Company and Employee agree that the release set forth in this Section 16
shall be and remain in effect in all respects as a complete general release as
to the matters released. This release does not extend to any obligations
incurred or specified under this Agreement.
17. Employee acknowledges that he is waiving and releasing any rights he
may have under the Age Discrimination in Employment Act of 1967 ("ADEA") and
that this waiver and release is knowing and voluntary. Employee and Company
agree that this waiver and release does not apply to any rights or claims that
may arise under ADEA after the Effective Date of this Agreement. Employee
acknowledges that the consideration given for this waiver and release agreement
is in addition to anything of value to which Employee was already entitled.
Employee further acknowledges that he has been advised by this writing that (a)
he should consult with an attorney prior to executing this Agreement; (b) he has
at least twenty-one (21) days within which to consider this Agreement; (c) he
has seven (7) days following his execution of this Agreement to revoke the
Agreement (the "Revocation Period"). This Agreement shall be effective upon the
expiration of the Revocation Period (the "Effective Date").
18. The Parties represent that they are not aware of any claim by either
of them other than the claims that are released by this Agreement. Employee and
Company acknowledge that
-5-
<PAGE> 6
they have been advised by legal counsel and are familiar with the provisions of
California Civil Code Section 1542, which provides as follows:
A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE
CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT
THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM
MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE
DEBTOR.
Employee and Company, being aware of said Code section, agree to
expressly waive any rights they may have thereunder, as well as under any other
statute or common law principles of similar effect.
19. Employee and Company covenant and agree that they will never,
individually or with any person or in any way, commence, aid in any way, except
as required by due legal process, prosecute or cause or permit to be commenced
or prosecuted against any Releasee, any action or other proceeding based upon
any claim which is released by the Agreement. This Agreement shall be deemed
breached and a cause of action shall be deemed to have accrued immediately upon
the commencement or prosecution of any action or proceeding contrary to this
Agreement.
In the event of any breach of this Section 18, the aggrieved Releasee
shall be entitled to recover from the breaching party not only the amount of any
judgment which may be awarded against such Releasee, but also all such other
damages, costs and expenses, taxable or otherwise, in preparing the defense of
or defending against, or seeking or obtaining an abatement of or injunction
against any action or proceeding brought in violation of this Section 18, and in
prosecuting any claim, counterclaim or cross-claim based on this Agreement.
20. Employee represents and warrants that no other person had or has any
claims in the claims referred to in Sections 15 and 16 above; that he has the
sole right and exclusive authority to execute this Agreement; that he has the
sole right to receive the consideration paid therefor; and that he has not sold,
assigned, transferred, conveyed or otherwise disposed of any claim or demand
released by this Agreement. Company represents and warrants that the undersigned
has the authority to act on behalf of Company and to bind to this Agreement.
21. Employee acknowledges that upon breach of the provisions contained
in Sections 9, 10, 12 or 14 of this Agreement, Company would sustain irreparable
harm from such breach, and, therefore, Employee agrees that in addition to any
remedies which the Company may have under this Agreement or otherwise, Company
shall be entitled to obtain equitable relief, including specific performance and
injunctions, restraining Employee from committing or continuing any such
violation of this Agreement. Employee understands and agrees that upon his
material or intentional breach of any provision of this Agreement, in addition
to and without limiting any other remedies the Company may have under this
Agreement or otherwise, Employee's benefits as provided in Section 5, his
consulting fees as provided in Section 7, and his option exercise rights as
provided in Section 6, shall immediately terminate.
-6-
<PAGE> 7
22. Each party represents that he or it has carefully read and
understands the scope and effect of the provisions of this Agreement. Neither
party has relied upon any representations or statements made by the other party
which are not specifically set forth in this Agreement.
23. The parties shall each bear their own costs, attorneys' fees and
other fees incurred in connection with this Agreement.
24. In the event that any provision hereof becomes or is declared by a
court of competent jurisdiction to be illegal, unenforceable or void, this
Agreement shall continue in full force and effect without said provision.
25. This Agreement represents the entire agreement and understanding
between Company and Employee concerning Employee's separation from Company and
supersedes and replaces any and all prior agreements and understandings
concerning Employee's relationship with and compensation by Company, other than
the Change of Control Agreement described in Section 2(e) above, the Proprietary
Information Agreement described in Section 9, and the Employee's Indemnification
Agreement with the Company, dated June 11, 1992, a copy of which is attached
hereto as Exhibit B.
26. This Agreement may only be amended in writing signed by Employee and
a duly authorized officer of Company.
27. This Agreement shall be governed by the laws of the State of
California, without giving effect to the principles of conflict of laws.
28. This Agreement may be executed in counterparts, and each counterpart
shall have the same force and effect as an original and shall constitute an
effective, binding agreement on the part of each of the undersigned.
29. This Agreement is executed voluntarily and without any duress or
undue influence on the part or behalf of the parties hereto, with the full
intent of releasing all claims. The parties acknowledge that:
(a) They have read this Agreement;
(b) They have been represented by legal counsel of their own choice;
(c) They understand the terms and consequences of this Agreement and
of the releases it contains; and
(d) They are fully aware of the legal and binding effect of this
Agreement.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties have executed this Agreement as
of the respective dates set forth below.
RESOUND CORPORATION
By: /s/Rodney Perkins
Title: Chairman
Dated: January 26, 1998
PETER RIEPENHAUSEN, an individual
/s/Peter Riepenhausen
Dated: January 26, 1998
-8-
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