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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1997, 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 incorporation or (I.R.S. Employer
organization) Identification No.)
220 Saginaw Drive, Seaport Centre, Redwood City, California 94063
(Address of principal executive offices)
Registrant's telephone number, including area code: (650) 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 [ ]
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 the 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 $107,570,900 as of February 26, 1998, 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 20,248,640 shares of the Registrant's Common Stock issued and
outstanding as of February 26, 1998.
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 21, 1998.
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INTRODUCTORY STATEMENT
Words such as "anticipates," "estimates," "expects," "believes" and the
like in this Annual Report on Form 10-K and in the Annual Report to Shareholders
identify forward-looking statements. These statements are subject to certain
risks and uncertainties that could cause the actual results to differ materially
from those projected. These risks and uncertainties are discussed below under
the captions "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future Operating
Results," and in the Company's reports filed with the Securities and Exchange
Commission. Copies of these reports are available from the Company upon request.
The Company assumes no obligation to update any forward-looking statements
contained herein.
Encore, ReSound and ReSource are registered trademarks of, and Advanced Program
Selection, APS, Cochlea Dynamics, P3, Premium, ReSound Digital and Tradition
are trademarks of, ReSound Corporation.
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 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"), In-the-Canal ("ITC"), and Completely-in-the-Canal ("CIC") versions.
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 313
people as of December 31, 1997. 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 19 retail
outlets. 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.
Viennatone also produces hearing device components such as hearing device cases
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"). It was renamed Sonar Hearing Health Corporation ("SHH"), and its
products are sold under the brand name "Sonar." 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
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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. In October 1997, the SHH sales force and marketing functions were
integrated into ReSound's existing U.S. organization. The newly integrated sales
force has actively encouraged the SHH customer base to convert to dispensing
ReSound devices. The SHH manufacturing facility will serve as a regional
manufacturing site supplying both the Sonar and ReSound devices. In Europe, SHH
has been integrated into ReSound's existing distribution structure.
The Sonar product line incorporates nonproprietary, nonlinear sound
processing technologies into ITC and ITE custom hearing devices. In addition,
the line now incorporates the proprietary programmable technology formerly owned
by 3M.
Through December 31, 1997, the Company sold over 890,000 hearing devices
worldwide. ReSound currently distributes its products through more than 6,300
authorized dispensers in over 35 countries worldwide. The Company sells its
products to retail chains and hearing device dispensers through wholly-owned
subsidiaries in Germany, the Netherlands, the United Kingdom, Ireland, 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. The Company has exclusive distribution
agreements for Japan with Hoya Medical Corporation and for South Korea with
Kwang Woo International, Inc.
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 group
(depending on the country) wears 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, the
failure of most hearing devices to provide 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.
The Company has chosen audiologists (hearing care professionals with
advanced degrees), acousticians and other qualified hearing device dispensers as
the primary channels for distributing 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 P3 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,
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patented, nonlinear type of sound processing designed to improve performance in
situations involving background noise and to avoid the need for manual volume
control. SHH offers a full line of both programmable and nonprogrammable
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 persons with hearing impairment. 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 patented its adaptive zoom
technology in 1995. The concept uses two miniature microphones connected to a
signal processing circuit to selectively enhance sounds coming from the front
(typically desirable speech) over ambient sound (typically undesirable noise).
The zoom technology is designed to improve signal to noise ratio and help
hearing impaired users understand speech in difficult listening environments.
The experience derived from this development effort is now of benefit to the
Company's digital signal processing program (in alliance with AudioLogic, Inc.
and GN Danavox A/S). ReSound launched its most recent programmable sound
processing, called "Cochlea Dynamics," 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 earlier ITE and BTE versions.
PRODUCTS
Core Technology
In 1996, ReSound introduced a second-generation signal processing chip
based on proprietary technology originally developed by AT&T Bell Laboratories.
This chip is smaller and more efficient than its predecessor and was featured in
the Company's first in-the-canal hearing device. Devices built around this
advanced technology can be digitally programmed to fit a wide range of hearing
losses and configurations. Using automatic multiband full dynamic range
compression circuitry, the devices specifically address a common psychoacoustic
problem called "loudness recruitment" associated with sensorineural hearing
loss. Incoming sound is separated into low and high frequency bands for
independent processing, and maximum gain is applied to the softest speech
components while progressively lower gain is provided for higher intensity
sounds. Very weak high frequency sounds like consonants are therefore amplified
much more than intense speech sounds such as vowels. This leads to better speech
understanding for the hearing-impaired user of ReSound products, since the
signals are now audible, yet not uncomfortably loud.
Current ReSound Brand Products
There are three major lines of ReSound brand products: the high end
Premium Series line, the midrange Encore Series line and the Advanced Program
Selection (APS) Tradition Series line, sold through a worldwide network of
professionals. Within each line, there are different configurations or
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types of product. The behind-the-ear or BTE version is a noncustom product worn
over and behind the ear. The device contains a microphone, sound processing
electronics, a receiver or speaker and an appropriate battery in a plastic case
and a sound output tube which attaches to a custom earmold. U.S. retail prices
for the Company's BTE devices typically range from $1,000 to $1,800 for one ear
(monaural) and $2,000 to $4,090 for both ears (binaural). The BTE version is
still very popular in Europe. The in-the-ear or ITE version comprises a custom
shell that matches the ear impression. The shell contains the microphone, the
sound processing electronics and the receiver. The shell fills the concha area
of the patient's ear. U.S. retail prices for the Company's ITE products
typically range from $1,400 to $2,000 for a monaural version and $2,800 to
$4,500 for a binaural version. The in-the-canal or ITC version is similar to the
ITE, but smaller; it fits in the ear canal. The completely-in-the-canal or CIC
version is the smallest custom configuration; this model fits completely in the
ear canal and is the most cosmetically appealing custom version. U.S. retail
prices for the Company's ITC and CIC products typically range from $1,800 to
$2,800 for a monaural version and $3,600 to $5,490 for a binaural version. ITE,
ITC and CIC configurations constitute the custom category, and these products
are very popular in the United States and in some parts of Asia and Europe.
The Premium Series products are multichannel, multiprogram devices. They
can support two and even three listening programs with an ultrasonic remote
control and feature optional telecoil and direct audio input capability. The
Encore Series products come with a single listening program. Both the Premium
and Encore products are digitally programmable using the ReSound fitting systems
which comprise the proprietary portable prescriptive programmer and the ReSource
fitting module for the industry standard platform NOAH. In late 1995, the
Company introduced a new line of products called the Tradition Series. The
Tradition Series hearing instruments contain the proven Cochlea Dynamics
processing, and can be digitally programmed either in the factory or at the
point-of-sale using the Company's proprietary ReSource fitting software. The
Tradition Series products feature seven programs derived from a patient's
audiometric data using a proprietary clustering technique applied to a database
of successful ReSound fittings. The Tradition Series products are available in
behind-the-ear and in-the-ear configurations.
Fitting Systems
The hearing device products are supported by two fitting systems that
can be used by dispensers at the point-of-sale - one a handheld system called
the P3 or portable prescriptive programmer and the second a PC-based fitting
module called ReSource for the industry standard NOAH platform. The ReSource
fitting module can be used with either the P3 or the industry standard
programming interface, HI-PRO. As of January 1998, there were approximately
9,600 NOAH users worldwide. For dispensers who do not wish to program the
devices in their clinics, the Company offers factory-programmed versions of
Tradition Series products. Advanced Program Selection technology ("APS"),
featured in the Tradition Series products, does not require special fitting
tools at the point-of-sale, so it is easy to fit and fine tune the devices. APS
devices are well suited for nontraditional distribution channels and certain
markets including Eastern Europe and parts of Asia due to its relative
simplicity vis-a-vis the more specialized knowledge required for programmable
devices.
Products Introduced in 1997
The Premium Series behind-the-ear model BT4 was introduced in April
1997. This device incorporates Cochlea Dynamics sound processing technology in a
custom-designed case available in
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a variety of colors. The innovative case design allows dispensers to easily
change the configuration of the device from an adult to a pediatric version and
from one case color to another. Telecoil and direct audio input are standard
features. The BT4 offers an integrated solution for the pediatric population
with moderate to severe hearing losses.
In the third quarter of 1997, the in-the-canal model IE4 was launched.
The IE4 is the smallest Encore Series product from ReSound. It is fully
programmable and has a single listening program.
During the fourth quarter of 1997, ReSound announced the CC4, a
completely-in-the-canal ("CIC") Premium Series product. By reducing the size of
one of the critical component chips, the overall hybrid size was reduced by 50%.
Therefore, the CC4 offers advanced technology in a small and attractive package.
The device, when worn, sits completely in the patient's ear canal and is
cosmetically very appealing. The CC4 also has a smooth frequency response due to
improved receiver construction. The CC4 combines the benefits of deep microphone
placement in the ear canal and the smaller residual volume between the
instrument and the eardrum with improvements in circuit design to offer improved
sound quality and 30% less current drain than the standard hybrid. In certain
key markets, the CC4 is built using a new shell material for improved strength
and durability. (The CC4 was first shipped commercially in December 1997.)
In addition to the product introductions noted above, ReSound ReSource
software upgrades were periodically introduced during 1997 to support
programming and fitting the new products in the market place.
Sonar and Viennatone Tactical Brand Products
During 1997, SHH introduced mini-canal configurations in all of its
major lines. In October 1997, the SHH sales force and marketing functions were
integrated into ReSound's existing U.S. organization.
Viennatone designs, manufactures and distributes linear and
nonproprietary compression circuit-based hearing devices for moderate and
moderate to severe hearing losses. During 1997, two new BTE products, the 130K
and 130DUO, were added to the successful 130 series. In October 1997, the
Contact Star, a high power bone conduction hearing device configured as an eye
glass aid, and the Silent Star, a Tinnitus product, were announced at the German
Congress. The Contact Star will replace two existing products. The Silent Star
is designed as a therapeutic noise generator for Tinnitus therapy.
Products in Progress
In 1996, ReSound formed a strategic alliance with AudioLogic, Inc., and
GN Danavox A/S to design and develop a new generation of digital signal
processing ("DSP") platform. ReSound is developing advanced DSP integrated
circuits which are expected to contain full software flexibility and enhance
ReSound's leading-edge sound processing technology. Through the development of
software, ReSound expects to have the ability to dramatically increase the
number and implementation speed of new sound processing functions a DSP device
can perform. It is anticipated that these features will include advanced
algorithms for multiband compression, feedback cancellation, automatic noise
reduction and zoom technology and other speech enhancements. The implementation
of the zoom function draws on Viennatone's patented multi-microphone technology.
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In 1997, ReSound formed an alliance with the Land Mobile Products Sector
of Motorola to design and develop leading-edge products for persons with hearing
impairment and communications markets. Both ReSound and Motorola are
contributing existing technology and are jointly developing new technology that
is anticipated to result in products for key Motorola markets and other
communication markets, as well as create a new generation of products for the
hearing health care markets which are served by ReSound.
ReSound expects to introduce a small, low-cost, inconspicuous hearing
enhancement device that is anticipated to expand the available market for
hearing health care products. This new product will target the large, and
primarily untapped, mild-to-moderately impaired segment of the market and should
be available to consumers at attractive prices. It is expected that this device
will provide better sound quality than most other products currently available
for this target group.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating Results" for a
discussion of the risks and uncertainties involved in the development and
marketing of new products.
MANUFACTURING
The Company manufactures its hearing devices according to specifications
received from the hearing care professionals. In the case of an ITE, ITC or CIC
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,
ITC or CIC, 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, ITC or CIC 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 P3 system and remote
control used with its hearing devices. The Company's primary manufacturing
facilities are in Redwood City, California; Eagan, Minnesota; Cork, Ireland;
Munster, Germany; Grafenschachen, Austria; and Vienna, Austria. In addition,
small custom hearing device laboratories are located within the Company's
subsidiaries in the United Kingdom, France, Australia and Sweden.
The Company subcontracts for the manufacture of the P3 system from a
single supplier. The P3 System is purchased under a supply contract, while
other components are purchased pursuant to purchase orders on an as-needed
basis. With the acquisition of Sonar Design & Hortechnik GmbH in January 1994,
the Company established an ITE manufacturing capability in Germany. See also
"Sales and Marketing."
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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
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 United States, 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 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, ReSound Deutschland's and ReSound Redwood City, U.S.' ISO 9001 and
Cork, Ireland's ISO 9002 certifications will require periodic audits by a
registrar to maintain the certification. See also "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 two years to the end user 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 dispenser on the P3 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
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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
the challenge of appropriately training some of its dispensers, particularly in
the area of device programming. 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 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 its fitting
systems, 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 technology to the patient.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of the impact of warranty claims on the
Company's business.
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 dispensers of hearing devices and approximately 5,000 dispensing
audiologists in the United States. ReSound's products are positioned primarily
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 products. The Company's
sales staff, consisting of twenty people, six of whom are audiologists, supports
over 2,400 authorized dispensers in the United States, the majority of whom are
audiologists. In addition, retail chains and buying groups are becoming an
increasingly important factor in the distribution of hearing devices in the
United States for the industry, including ReSound. The Company believes that it
is well positioned to meet these changes in the United States distribution
structure.
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.
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 2002 with Hoya
Medical Corporation, a large Japanese company with substantial experience in the
contact and intraocular lens markets, including retail outlets. 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
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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 located in Munster, Germany. This entity was renamed ReSound
Deutschland in 1996. Coupling ReSound Deutschland'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, 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 Limited ("RSND Limited"), a British Virgin Islands
company which is a joint venture with a large Hong Kong group with diversified
business interests. Headquartered in Hong Kong, RSND Limited sells ReSound
products in Hong Kong through a Hong Kong based subsidiary. 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. In
1995, ReSound established subsidiaries in Australia and Sweden. Sales of the
Company's products to Taiwan, Singapore and the People's Republic of China are
currently made through the Australian subsidiary. The Company also has branch
operations in Canada and New Zealand, and has converted its branch operation in
Switzerland into a subsidiary, ReSound Autac GmbH, in connection with its
January 1998 acquisition of its Swiss distributor. International sales accounted
for 49% of the Company's total sales in 1997. See Note 12 of "Notes to the
Consolidated Financial Statements."
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 is generally provided and
reimbursement levels vary. The level of reimbursement decreased substantially in
Austria in 1996 and in Germany in 1997, and as a result, revenues were
negatively affected in those markets.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating Results" for a
discussion of the risks and uncertainties with respect to future changes in
government reimbursement levels.
GOVERNMENT REGULATION
The development, production and marketing of the Company's current
products and products planned for future introduction 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 in
other countries. In the United States, all medical device products are subject
to rigorous FDA review. Hearing aids are classified by the FDA as Class I
medical devices with a restricted status.
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
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production, refusal of the government to approve product license applications or
withdrawal of approvals, injunctions, civil fines and criminal prosecution.
Historically, in order to obtain FDA permission to market a new medical
device, the Company had to 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 entailed
extensive clinical tests. The testing, preparation of necessary applications and
processing of those applications by the FDA were typically expensive,
time-consuming and of uncertain outcome. In November 1997, President Clinton
signed into law the "Food and Drug Administration Modernization Act of 1997," a
three-year effort which amends provisions of the FDC Act relating to every
product under the FDA's authority. As a result, as of February 19, 1998, all
air-conduction hearing aids became exempt from this substantial equivalence
process.
Clinical testing of devices under development requires compliance with
federal and state regulations involving Investigational Device Exemptions
("IDE"). 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 for
the intended clinical protocol and maintaining required documentation relating
to the conduct of the investigational study. The FDA, at its discretion, may
also require additional post-marketing surveillance to monitor the performance
of products in the market. Marketing permission may be withdrawn if compliance
with regulatory requirements is not maintained or if significant problems occur
following initial marketing.
The Company also must register annually 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 new Quality System Regulation
("QSR"), effective July 1997; and medical device reporting ("MDR") regulations
and equivalent state regulations. These regulations impose certain procedural
and documentation requirements on the Company with respect to design,
manufacturing, labeling, advertising, safety and quality assurance activities.
The FDA actively enforces regulations prohibiting marketing of products
for non-indicated uses as well as products that violate design, safety and
performance claims and the other requirements mentioned above.
The new QSRs and more stringent European ISO regulations will likely
increase the Company's cost of regulatory compliance. 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.
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 significantly longer or shorter than that required for typical FDA approval.
International distribution, importation and manufacturing licensing may differ
substantially from even the new harmonized FDA regulations. Some countries have
historically required extensive product performance data, clinical evaluations
and physical device samples above
11
<PAGE> 12
and beyond the baseline FDA submission requirements. 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 and
sales in certain countries than in other countries. In 1995, the European Union
adopted the Medical Device Directive mandating the CE Mark for all 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 within Europe. Viennatone, ReSound Deutschland and the
Redwood City, California 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. Compliance with proposed revisions to the
European Medical Device Directive for electromagnetic compatibility, device
hazard and risk assessments and digital cellular telephone interference immunity
may result in significant regulatory compliance costs for the Company in the
future and may have a material adverse effect upon the Company's business,
financial condition and results of operations.
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.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating Results" for a
discussion of the risks and uncertainties with respect to government regulation.
RESEARCH AND DEVELOPMENT
ReSound's research and development staff consisted of 74 people at
December 31, 1997. Its responsibilities include integrated circuit development,
software development, mechanical and electroacoustic engineering, clinical
research, FDA-related regulatory affairs, long-term product development, and
development and maintenance of ReSound's intellectual property. The Company also
retains consultants with special expertise to augment internal product
development.
ReSound's research and development is primarily focused on the
development of a new generation of hearing health care products based on digital
signal processing technology (DSP), on the development of the fitting systems
required for this new generation of devices, on the development of new products
to address the needs of different segments of the hearing health care market, on
proprietary technology for hearing health care and human communications products
in conjunction with its alliance with Motorola, and on the enhancement of its
current hearing device products.
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,
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<PAGE> 13
is the President of the California Ear Institute at Stanford and a professor at
the Stanford University School of Medicine.
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 and 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 eight hearing device manufacturers, including ReSound, at December
31, 1997. In consideration, ReSound received cash payments from the partnership
members valued at $10.9 million (net) as of December 31, 1997. Any further
amounts paid to the partnership will be divided equally among the partners and
recognized as license revenue.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating Results" for a
discussion of the risks and uncertainties involved in new product development.
COMPETITION
The hearing device industry is intensely competitive. Many of the
Company's competitors, including Siemens, Oticon, Phonak, Philips, Starkey
Laboratories, Bausch & Lomb, Beltone Electronics, Widex and GN Danavox A/S 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 had DSP hearing
devices in the market since 1996. A number of other companies announced and
launched their DSP products in late 1997, the most notable of which is Siemens,
which introduced a complete line of DSP products. Philips has also announced DSP
products. The Company, through its joint venture with AudioLogic, Inc., and GN
Danavox A/S 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, ITC and
CIC hearing device products include price, product quality and reliability,
technical support and service, marketing and distribution channels.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating Results" for a
discussion of the risks and uncertainties with respect to competition.
PATENTS, TRADE SECRETS AND LICENSES
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
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<PAGE> 14
and elsewhere in the world. While the Company believes that its patents and
applications have value, it also believes that its competitive position depends
on its ability to develop new technology and to establish successful
relationships with strategic partners and outside suppliers.
The Company typically requires its employees, consultants and advisors
to execute a confidentiality agreement upon the commencement of an employment,
consulting or advisory relationship with the Company.
Certain patents used, or of potential use, by the Company in its
business are licensed from third parties. Most of these licenses are fully paid.
In addition, the Company has entered into agreements to license certain of its
own patents to third parties under various compensation arrangements.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors that May Affect Future Operating Results" for a
discussion of the protection afforded by the Company's patents and other
intellectual property, patent infringement litigation, and other risks and
uncertainties in connection with the Company's intellectual property.
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. 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, 1997, the Company had 974 employees, including 74 in
research and development, 595 in manufacturing, 180 in sales and marketing, and
125 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. 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 $5,000 during
fiscal 1997, excluding amounts paid to Dr. Richard Goode and Dr. Rodney Perkins
who are also members of the
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<PAGE> 15
Company's Board of Directors. See "Compensation of Directors" in the Company's
Proxy Statement for the 1998 Annual Meeting of Shareholders for information on
amounts paid to Dr. Goode and Dr. Perkins for consulting services and services
as members of the Company's Board of Directors.
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
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<PAGE> 16
of Health for research on advanced hearing devices and cochlear implants. Dr.
Gantz holds an M.D. from the University of Iowa.
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 45,553 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 6,575 square feet in Redwood City under a lease which expires in
December 2000. Sonar Hearing Health Corporation, in Eagan, Minnesota, leases
37,000 square feet under a noncancelable operating lease which expires in
December 2001. The Company's German subsidiary, ReSound GmbH Hortechnologie,
leases approximately 3,000 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. ReSound Deutschland leases approximately 12,000 square feet in
Munster, Germany. ReSound Ireland Limited leases a total of approximately 15,200
square feet in Cork, Ireland. 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 17 leased
retail stores which total approximately 16,000 square feet. Viennatone owns two
additional retail locations in Vienna which total approximately 1,600 square
feet. Subsidiaries of the Company operating in France, Germany, the United
Kingdom and Australia, in total lease approximately 13,000 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
Not Applicable.
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 represent 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 1996 HIGH LOW
- ----------- ---- ---
<S> <C> <C>
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
FISCAL 1997 HIGH LOW
- ----------- ---- ---
First Quarter ended March 31, 1997 8 3/8 5 7/8
Second Quarter ended June 30, 1997 7 3/4 3 3/4
Third Quarter ended September 30, 1997 6 4 3/8
Fourth Quarter ended December 31, 1997 6 15/16 5 1/8
</TABLE>
The Company had approximately 8,413 shareholders as of December 31,
1997, 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.
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<PAGE> 18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996(2) 1995 1994(3) 1993
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Net sales $ 130,463 $ 125,646 $ 107,330 $ 62,253 $ 35,686
Cost of sales 62,592(1) 57,241 53,626 26,461 15,025
--------- --------- --------- --------- ---------
Gross profit 67,871 68,405 53,704 35,792 20,661
Operating expenses:
Research and development 16,883(1) 14,898 11,181 8,862 5,179
Selling, general and administrative 54,189(1) 50,899 45,606 21,403 10,872
Restructuring 12,561(1) -- -- -- --
--------- --------- --------- --------- ---------
Total operating expenses 83,633 65,797 56,787 30,265 16,051
--------- --------- --------- --------- ---------
Income (loss) from operations (15,762) 2,608 (3,083) 5,527 4,610
Interest income (expense), net (1,222) (1,819) (1,860) 553 748
Other income (expense), net (578) (359) (368) 496 --
Provision for litigation and related costs -- -- -- (19,230) --
--------- --------- --------- --------- ---------
Income (loss) before income taxes (17,562) 430 (5,311) (12,654) 5,358
Provision for income taxes 876 1,397 591 1,635 536
--------- --------- --------- --------- ---------
Net income (loss) $ (18,438)(1) $ (967) $ (5,902) $ (14,289) $ 4,822
========= ========= ========= ========= =========
Net income (loss) applicable to common
shareholders $ (18,676) $ (1,192) $ (5,902) $ (14,289) $ 4,822
========= ========= ========= ========= =========
Basic net income (loss) per
common share(4) $ (0.96) $ (0.07) $ (0.38) $ (0.95) $ 0.33
========= ========= ========= ========= =========
Diluted net income (loss) per
common share (4) $ (0.96) $ (0.07) $ (0.38) $ (0.95) $ 0.28
========= ========= ========= ========= =========
Shares used in net income (loss)
per share calculation
Basic 19,518 17,591 15,439 15,089 14,826
========= ========= ========= ========= =========
Diluted 19,518 17,591 15,439 15,089 17,406
========= ========= ========= ========= =========
AS OF DECEMBER 31
-----------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Working capital $ 19,883 $ 25,957 $ 9,324 $ 5,995 $ 29,248
Total assets 89,775 114,752 83,370 95,116 40,846
Long-term obligations, net of
current portion 18,512 26,565 30,729 23,146 --
Accumulated deficit (57,878) (39,202) (38,010) (32,108) (17,819)
Shareholders' equity 37,019 57,596 18,221 21,169 32,793
</TABLE>
(1) Includes special charges of $18 million as follows: cost of sales - $3.1
million; selling, general and administrative - $2.2 million; research &
development - $0.1 million; restructuring - $12.6 million, of which $10.3
million is the result of write-down of goodwill.
(2) 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 of Notes to Consolidated Financial
Statements.
(3) 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 of Notes to Consolidated Financial Statements.
(4) Per share amounts for all periods have been restated to reflect the
requirements of SFAS No. 128. See Note 1 of Notes to Consolidated Financial
Statements.
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<PAGE> 19
UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
For the three months ended: Mar. 31 Jun. 30 Sep. 30 Dec. 31
------- ------- ------- -------
(In thousands, except per share data)
1997
- ----
<S> <C> <C> <C> <C>
Sales $ 32,211 $ 32,230 $ 31,934 $ 34,088
Gross profit 17,100 17,499 15,710 17,562
Net loss (894) (1,499) (13,295) (2,750)
Loss per share
basic and diluted (.05) (.08) (.69) (.14)
1996
- ----
Sales $ 27,264 $ 29,720 $ 33,821 $ 34,841
Gross profit 14,708 17,232 18,457 18,008
Net income (loss) 118 1,092 1,141 (3,318)
Income (loss) per share
basic and diluted .01 .06 .06 (.21)
</TABLE>
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, 1997,
the Company has sold over 890,000 hearing devices worldwide including over
267,000 in 1997, to more than 6,300 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, establishing a manufacturing facility in Ireland and entering into an
Asian distribution joint venture. In 1995, the Company formed wholly owned
subsidiaries in Australia and Sweden. The Company currently derives 49% 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 for approximately $3.5 million and 100,000 shares of ReSound
Common Stock. In 1996, this company was renamed ReSound Deutschland. ReSound
Deutschland, located in Munster, Germany, is a manufacturer and distributor of
both Sonar branded and ReSound branded hearing devices.
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<PAGE> 20
On August 9, 1994, the Company entered into a joint venture agreement
establishing ReSound Asia Limited ("RSND Limited") with a large Hong Kong group
with diversified business interests. RSND Limited sells ReSound products in Hong
Kong through a Hong Kong based subsidiary. ReSound holds a 50% equity position
in the joint venture 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 Austria
consisting of 19 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 1997, the Company sold
Viennatone's mechanical switch business for $1.5 million at the closing and
potential future royalty income of up to a further $1.5 million.
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 established a subsidiary in the United
States, Sonar Hearing Health Corporation ("SHH"), 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 separately acquired in July
1996 in connection with the above acquisition. These patents were contributed to
a partnership comprised of eight hearing device manufacturers, including
ReSound, at December 31, 1997. In consideration, ReSound received cash payments
from the partnership members of $10.9 million (net) as of December 31, 1997. Any
future 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 $14.5
million at December 31, 1997. In October 1997, the SHH sales force and marketing
functions were integrated into ReSound's existing U.S. organization. The newly
integrated sales force has actively encouraged the SHH customer base to convert
to dispensing ReSound devices.
The SHH manufacturing facility will serve as a regional manufacturing
site supplying both the Sonar and ReSound devices. In Europe, SHH has been
integrated into ReSound's existing distribution structure.
20
<PAGE> 21
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 consumer trial periods 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 programmable hearing device manufacturers. In 1997,
1996 and 1995, the provision for estimated sales returns in the U.S., expressed
as a percentage of domestic sales, has been 26%, 27% and 28%, 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 due in part to the much
higher proportion of standard BTE sales versus custom product sales than in the
U.S. along with regional retail chain and dispenser practices.
COSTS AND 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 1997, cost of sales as a percentage of net sales increased
to 48% from 46% in 1996 primarily due to the inclusion of special charges of
$3.1 million relating to a comprehensive program to streamline operations and
control costs as further described below.
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 two years for electronic
components and 12 months for the custom shell used for ITE, ITC and CIC devices.
In 1997, 1996 and 1995, the approximate provisions for estimated warranty cost
(and as a percentage of net sales domestically) were $5.1 million (7.7%), $4.4
million (7.6%), and $4.2 million (10.7%), 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 for the current hearing device product
line to continue to represent a significant component of cost of sales.
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 varying subsidiary
locations; lease termination costs; the write-down of goodwill associated with
the acquired hearing health business activity of 3M; the incremental
21
<PAGE> 22
impairments in 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>
<S> <C>
Employee termination benefits and lease termination costs $ 2,254
Write-down of SHH goodwill 10,307
Write-down of inventories to net realizable value and losses on supplier
commitments 3,093
Write-down of capital assets to fair value 756
Other exit costs 1,566
-------
$17,976
=======
</TABLE>
The 1997 increase in selling, general and administrative expenses was
primarily due to $2.2 million of special charges, as described above. 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.
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,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 48 46 50
---- ---- ----
Gross profit 52 54 50
Operating expenses:
Research and development 13 12 10
Restructuring 10 -- --
Selling, general and administrative 41 41 43
---- ---- ----
Total operating expenses 64 53 53
---- ---- ----
Income (loss) from operations (12) 1 (3)
Interest income (expense), net (1) (1) (2)
Other income (expense), net -- -- --
---- ---- ----
Income (loss) before income taxes (13) -- (5)
Provision for income taxes 1 1 1
---- ---- ----
Net loss (14)% (1)% (6)%
==== ==== ====
</TABLE>
Years Ended December 31, 1997 and 1996
Net sales increased by 3.8% to $130.5 million in 1997 compared to $125.6
million in 1996 due to new product introductions, continued strong sales of the
Encore product line, the inclusion of sales relating to products acquired from
3M Hearing Health for a full year, and the increased sales of the Company's ITE
and ITC hearing devices. These increases were partially offset by intensified
competition in the programmable segment of the hearing device market from
digital signal processing product offerings, pricing pressures from competitors'
analog products, a product mix shift to more moderately priced models, and
decreased international sales. Further, the Viennatone subsidiary experienced
increased competition and pricing pressures which resulted in an increase in
price and unit volume erosion during 1997. The total number of audiologists and
hearing device retailers
22
<PAGE> 23
increased in the U.S. from 2,220 at the end of 1996 to 2,400 at the end of 1997.
The number of acousticians and hearing device dispensers selling the Company's
products internationally was 3,715 at the end of 1997. International sales for
the twelve months ended December 31, 1997 were 10% lower in comparison with last
year due primarily to the adverse impact of foreign currency exchange
fluctuations. At constant foreign exchange rates, international sales increased
approximately 2%. International sales as a percentage of net sales in 1997 and
1996 were 49% and 56%, respectively. International sales were unfavorably
impacted by increased competition (as discussed above), slowing market
conditions in key European countries due in part to sluggish economies, and
negative changes in governmental reimbursement programs. Additionally, during
the fourth quarter of 1997, the German hearing device market was negatively
impacted by adverse publicity surrounding hearing device dispensers and ear,
nose and throat doctors regarding the distribution of hearing devices. Sales of
the Company's products in the German market were correspondingly negatively
impacted.
Cost of sales increased to $62.6 million in 1997 from $57.2 million in
1996. Gross profit decreased to $67.9 million in 1997 from $68.4 million in
1996, and as a percentage of net sales decreased to 52% in 1997 from 54% in
1996. The year-to-year decrease in gross profit was largely attributable to the
$3.1 million special charge for discontinued product lines, as part of a
comprehensive program to streamline operations. Additionally, average unit sales
prices have declined due to increasing competition and product mix sales shifts,
particularly in the U.S., from the higher priced Premium Series product line to
the more moderately priced Encore Series product line. This impact has been
largely offset by reductions in the cost of goods sold.
Research and development expenses increased by 13% to $16.9 million (13%
of net sales) for 1997 from $14.9 million (12% of net sales) for 1996. The
Company increased spending during the twelve months ended December 31, 1997
relative to the prior year for the continued development of new products being
introduced throughout 1997 and for products planned for future years. In April
1997, the Company introduced its Advanced ReSound Processing chip incorporating
ReSound's Cochlea Dynamics technology into a BTE and a CIC hearing device. 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, Inc., and GN Danavox A/S which was announced in April 1996 and
finalized on September 30, 1996. Expenses were also incurred for the development
of proprietary technology relating to potential communications products and
hearing devices in conjunction with an alliance with Motorola. Such expenses
were partially offset by $2.0 million of payments received from Motorola.
Restructuring charges of $12.6 million in 1997 resulted from the
write-down of goodwill associated with the acquired hearing health business
activity of 3M ($10.3 million), lease termination costs and employee termination
benefits relative to work force reductions.
Selling, general and administrative expenses increased by 6% to $54.2
million (41% of net sales) in 1997 from $50.9 million (41% of net sales) in
1996. This year-to-year increase in expenditures resulted mainly from the
inclusion of a full year of SHH expenses, and special charges of $2.2 million
relating to a strategic program to streamline operations and control costs.
The Company expects expenses generally to continue at comparable levels,
excluding the special charges, but to fluctuate as a percentage of sales. As
discussed above, the Company is undertaking programs to increase operational
efficiency and effectiveness in order to reduce expenses, but no assurance can
be given that reductions will be obtained, especially when measured on a
percentage of sales basis which may vary substantially on a quarter-to-quarter
basis.
23
<PAGE> 24
Interest income was $269,000 in 1997, compared to $184,000 in 1996. This
year-to-year increase is primarily due to an increase in the average cash and
short-term investment balances resulting from the increase in cash collections
of accounts receivable and the reduction of inventory kept on hand.
Interest expense was $1.5 million in 1997, compared to $2.0 million in
1996. This decrease is primarily due to the Company paying down debt in 1997.
Other expense was $578,000 in 1997 compared to $359,000 in 1996. The
year-to-year increase was primarily attributable to realized losses on foreign
currency transactions of $984,000 which were partially offset by a $300,000 gain
on sale of Viennatone's switch business and a $431,000 reduction in the
liability for a minority shareholder's interest in a subsidiary of Viennatone.
The 1996 amount consisted primarily of realized losses on foreign currency
transactions.
Income tax provisions were $876,000 in 1997 and $1.4 million in 1996.
Income taxes primarily represent taxes on profits earned at the Company's
European subsidiaries in Ireland, Germany and Holland. At December 31, 1997, the
Company had U.S. federal and state net operating loss carryforwards of
approximately $36.6 million and $11.6 million, respectively. The federal net
operating loss carryforwards will expire at various dates beginning in 2002
through 2012, if not utilized. The California net operating loss carryforwards
will expire at various dates beginning in 1998 through 2002, if not utilized.
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 $16.9 million at December 31,
1997, which will expire at various dates beginning in 1998 through 2003, if not
utilized.
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 Series product line, the inclusion of sales relating
to products acquired from 3M Hearing Health for a portion of the year, 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 prior 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 56% 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. (See Note 3 of "Notes to the Consolidated Financial Statements.") In
addition, the Company has benefited
24
<PAGE> 25
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 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, Inc., 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.
Interest income was $184,000 in 1996, compared to $326,000 in 1995. This
year-to-year decrease was 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 was 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. 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
Net cash provided by operations in 1997 was $13.1 million due primarily
to improved asset management. In 1997, accounts receivable decreased, as
compared to 1996, by $2.2 million. Inventories decreased, as compared to 1996,
by $6.6 million, excluding the impact of reserves for the
25
<PAGE> 26
discontinuance of certain product lines. During 1996, the Company used $1.6
million of cash in operations primarily to fund the Company's net current asset
position.
Investing Activities
Net cash provided by investing activities in 1997 was $150,000 which
resulted primarily from proceeds from the licensing of patent rights of $3.6
million and from the sale of the Viennatone switch activity of $1.5 million
offset by additions to property and equipment of $4.5 million. 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 used in financing activities in 1997 was $1.4 million due
primarily to reduction of long-term debt of $2.0 million offset by proceeds from
issuance of common stock of $642,000. 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 amounts were offset by reductions of long-term debt and loans payable of
$4.2 million and $3.6 million, respectively.
At December 31, 1997, the Company had available cash and cash
equivalents of $19.9 million. While the Company believes that available cash
will be sufficient to meet the Company's short-term operating and capital
requirements through December 31, 1998, 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 products, is expected to
increase. The Company's ability to grow and achieve profitability will depend
upon its ability to develop 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 bases, that regulatory
approvals, where necessary, can be obtained, or that the expected level of
customer acceptance will be met. In addition, announcements of new products may
cause hearing 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. See "Business -
Competition" for a discussion of the competitive environment.
26
<PAGE> 27
During the past year, the Company initiated a major restructuring
program. There can be no assurance that the Company will be able to implement
this program in a timely manner, consolidate targeted operations successfully,
or otherwise achieve the cost reductions and other restructuring benefits
anticipated.
Due to weak economic conditions in certain countries in Europe and
elsewhere, including Germany, Austria and France, governments in those countries
have reduced and/or are under increasing pressure to reduce the government
reimbursement levels available to consumers upon their purchases of hearing
devices. Recent reductions in reimbursement levels have had a negative impact on
the Company's revenues in the affected markets. Any future reimbursement
reductions can also be anticipated to have a negative impact on the Company's
revenues. The Company cannot predict whether or the extent to which further
reimbursement reductions will be implemented.
Similarly, it can be expected that the Company's sales results in Europe
will continue to be adversely impacted if the appreciation of the U. S. dollar
versus European currencies experienced in 1997 continues.
A much publicized dispute in Germany between ear, nose and throat
professionals who prescribe hearing devices and acousticians who dispense them,
negatively impacted the overall hearing health care market. Consumer demand for
hearing devices in the fourth quarter of 1997 in the German market was down
substantially from the fourth quarter of 1996, and sales of the Company's
products have correspondingly been unfavorably impacted. The Company cannot
predict how long and the extent to which its sales in Germany will continue to
be negatively impacted by this dispute.
The Company is subject to regulations by the FDA and numerous other
federal, state, local and international laws and regulations involving, among
other matters, the development, production and marketing of its products, safe
working conditions, manufacturing practices, and environmental protection.
Failure to comply with applicable regulatory statutes and regulations can result
in fines, suspensions, delays in marketing or loss of permission to market
products, seizures or recalls of products, operating restrictions, injunctions,
civil fines and criminal prosecution. Also, new regulatory requirements may
significantly increase the costs of compliance with these laws and regulations.
See "Business - Government Regulation" for a description of these laws and
regulations.
The Company has been issued or has applied for a substantial number of
patents. No assurance can be given that pending patent applications will be
approved, that current or future patents will provide or continue to provide
competitive advantages for the Company's products, will not be challenged or
circumvented, or will afford the same degree of protection for future products
as they do for current products. Also, the Company may be contacted by parties
claiming that the Company's products infringe such parties' patent or other
proprietary rights. The Company may also find it necessary to institute
litigation to enforce patents issued to it, to protect trade secrets or know-how
owned by it or to determine the scope and validity of the patents or other
proprietary rights of others. Resolution of these claims generally involves
complex legal and factual questions and is highly uncertain. The cost of
prosecuting or defending these suits is high, and adverse determinations could
subject the Company to significant liabilities to third parties and require the
Company to seek licenses from other parties, prevent the Company from
manufacturing and selling its products, and/or require the Company to redesign
its products, all of which could have a materially adverse effect on the
Company's financial condition. Also, there can be no assurance that
confidentiality agreements between the Company and its employees or consultants
will not be breached, or that the Company
27
<PAGE> 28
will have adequate remedies for any breach, or that it will otherwise be able to
protect its trade secrets. Furthermore, no assurance can be given that
competitors will not independently develop substantially equivalent proprietary
technology or disclose such technology, or that the Company can meaningfully
protect its rights in such unpatented proprietary technology. See "Business -
Patents, Trade Secrets and Licenses" for a discussion of the Company's patents
and other intellectual property.
During the last year, the Company experienced various changes in its
management and technical staff. Competition for employees with technical,
management and other skills is intense. The Company's failure to retain the
services of key personnel or to attract additional qualified employees could
materially and adversely affect the Company's business.
Certain key components used in the Company's products are currently
available only from single or limited sources. The Company's inability to obtain
sufficient sole source or limited source components or subassemblies as
required, or to develop alternative sources if and as required, would have a
material adverse effect on the Company's financial condition.
Other factors which could impact the Company's revenues and results of
operations include a significant reduction in product sales to certain
customers, economic downturns in certain markets, and the costs incurred to
expand distribution in Europe and Asia. In connection with the Company's
international sales, a number of risks are inherent in international
transactions. Fluctuations in the exchange rates between the U.S. dollar and
other currencies could increase the sales price of the Company's products in
international markets where the prices of the Company's products are denominated
in U.S. dollars or lead to currency exchange losses where the prices of the
Company's products are denominated in local currencies. International sales and
operations may also be limited or disrupted by the imposition of governmental
controls, regulation of medical devices, export license requirements, political
instability, trade restrictions, changes in tariffs, and difficulties in
staffing and managing international operations.
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 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.
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.
28
<PAGE> 29
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Ernst & Young LLP, Independent Auditors 30
Consolidated Financial Statements:
Consolidated Balance Sheets 31
Consolidated Statements of Operations 32
Consolidated Statement of Shareholders' Equity 33
Consolidated Statements of Cash Flows 34
Notes to Consolidated Financial Statements 35
29
<PAGE> 30
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, 1997 and 1996, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1997. Our audits also included the
financial statement schedule listed in the Index at item 14(a)(2). These
financial statements and schedule 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, 1997 and 1996, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1997, 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 23, 1998
30
<PAGE> 31
RESOUND CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
------------
1997 1996
--------- ---------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 19,853 $ 7,980
Accounts receivable, net of allowances for estimated
returns and doubtful accounts of $7,064 and $6,519
at December 31, 1997 and 1996, respectively 17,966 20,497
Inventories 14,183 23,853
Other current assets 2,125 4,218
--------- ---------
Total current assets 54,127 56,548
Property and equipment, net 10,838 13,494
Goodwill, net of accumulated amortization
of $4,547 and $3,379 at December 31, 1997
and 1996, respectively 20,217 39,811
Other assets 4,593 4,899
--------- ---------
$ 89,775 $ 114,752
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans $ 1,663 $ 1,924
Accounts payable 8,735 8,478
Accrued liabilities 19,484 17,976
Long-term debt, current portion 4,362 2,213
--------- ---------
Total current liabilities 34,244 30,591
Long-term liabilities:
Long-term debt, non-current portion 14,274 20,095
Employee benefits 3,738 5,110
Other accrued liabilities 500 1,360
--------- ---------
Total long-term liabilities 18,512 26,565
Commitments and contingencies
Shareholders' equity:
Preferred stock, $0.01 par value, 2,000,000 shares authorized;
Series B: 0 and 54,055 issued and outstanding at
December 31, 1997 and 1996, respectively -- 5,225
Common stock, $0.01 par value, 50,000,000 shares authorized;
20,147,720 and 19,384,000 shares issued and outstanding at
December 31, 1997 and 1996, respectively 96,785 90,680
Accumulated deficit (57,878) (39,202)
Cumulative translation adjustment (1,888) 893
--------- ---------
Total shareholders' equity 37,019 57,596
--------- ---------
$ 89,775 $ 114,752
========= =========
</TABLE>
See accompanying notes.
31
<PAGE> 32
RESOUND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 130,463 $ 125,646 $ 107,330
Cost of sales 62,592 57,241 53,626
--------- --------- ---------
Gross profit 67,871 68,405 53,704
Operating expenses:
Research and development 16,883 14,898 11,181
Selling, general and administrative 54,189 50,899 45,606
Restructuring 12,561 -- --
--------- --------- ---------
Total operating expenses 83,633 65,797 56,787
--------- --------- ---------
Income (loss) from operations (15,762) 2,608 (3,083)
Other income (expense):
Interest income 269 184 326
Interest expense (1,491) (2,003) (2,186)
Other income (expense), net (578) (359) (368)
--------- --------- ---------
Total other income (expense) (1,800) (2,178) (2,228)
--------- --------- ---------
Income (loss) before income taxes (17,562) 430 (5,311)
Provision for income taxes 876 1,397 591
--------- --------- ---------
Net loss $ (18,438) $ (967) $ (5,902)
========= ========= =========
Net loss applicable to common shareholders $ (18,676) $ (1,192) $ (5,902)
========= ========= =========
Basic and diluted net loss per share $ (0.96) $ (0.07) $ (0.38)
========= ========= =========
Shares used in basic and diluted net loss
per share calculation 19,518 17,591 15,439
========= ========= =========
</TABLE>
See accompanying notes.
32
<PAGE> 33
RESOUND CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Unrealized
Gain
(Loss) on
Securities
Available Cumulative Total
Preferred Common Accumulated for Translation Shareholders'
Stock Stock Deficit Sale Adjustment Equity
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
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
Accrued dividends on
Preferred stock 238 -- (238) -- -- --
Conversion of preferred
stock and accrued
dividends of $463 into 600
shares of common stock (5,463) 5,463 -- -- -- --
Exercise of stock options
for 44 shares of common stock -- 149 -- -- -- 149
Issuance of 88 shares of
common stock for employee
stock purchase plan -- 493 -- -- -- 493
Net loss -- -- (18,438) -- -- (18,438)
Translation adjustment -- -- -- -- (2,781) (2,781)
-------- -------- -------- -------- -------- --------
Balance at December 31, 1997 $ -- $ 96,785 $(57,878) $ -- $ (1,888) $ 37,019
======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
33
<PAGE> 34
RESOUND CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(18,438) $ (967) $ (5,902)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 7,915 6,066 5,830
Loss on disposal of property and equipment 82 -- --
Noncash portion of special charges 17,157
Gain on sale of Viennatone switch activity (300)
Changes in assets and liabilities:
Accounts receivable 2,238 (982) (3,335)
Inventories 6,631 (1,732) (2,495)
Other assets (1,202) (3,435) (259)
Accounts payable 257 (1,711) 3,087
Accrued liabilities (1,254) 1,663 2,134
Provision for litigation and related costs -- (492) (16,604)
-------- -------- --------
Net cash provided by (used in)
operating activities 13,086 (1,590) (17,544)
-------- -------- --------
Cash flows from investing activities:
Acquisition of Sonar Hearing Health -- (25,443) --
Purchase of minority shareholder's interest in a
subsidiary of Viennatone -- (1,857) --
Proceeds from sale of Viennatone switch activity 1,500
Proceeds from patent contributions to partnership (net) 3,600 7,300 --
Purchase of short-term investments -- -- (5,582)
Sales and maturities of short-term investments -- -- 13,780
Change in translation adjustment (465) 538 (745)
Additions of property and equipment (4,485) (7,547) (4,168)
-------- -------- --------
Net cash provided by (used in)
investing activities 150 (27,009) 3,285
-------- -------- --------
Cash flows from financing activities:
Loans payable -- (3,630) (5,709)
Borrowings under long-term debt -- -- 10,000
Payments on long-term debt (2,005) (4,222) (1,706)
Proceeds from issuance of preferred stock -- 5,000 --
Proceeds from issuance of common stock 642 34,340 941
-------- -------- --------
Net cash provided by (used in)
financing activities (1,363) 31,488 3,526
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 11,873 2,889 (10,733)
Cash and cash equivalents at the beginning of the year 7,980 5,091 15,824
-------- -------- --------
Cash and cash equivalents at the end of the year $ 19,853 $ 7,980 $ 5,091
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 1,815 $ 2,104 $ 2,767
======== ======== ========
Income taxes $ 1,436 $ 1,102 $ 1,360
======== ======== ========
Supplemental schedule of non-cash investing
and financing activities:
Issuance of common stock on conversion of
promissory notes $ -- $ 2,048 $ --
Accrual of preferred stock dividend $ 238 $ 225 $ --
Conversion of preferred stock to common stock $ 5,463 $ -- $ --
</TABLE>
See accompanying notes.
34
<PAGE> 35
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 period. The
resulting translation adjustments are recorded directly to the cumulative
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 other income
(expense), net. Such losses were $984,000, $175,000 and a gain of $104,000 in
1997, 1996 and 1995, respectively.
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 49%, 56% and 65% of net sales for the years ended December 31,
1997, 1996 and 1995, 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 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: 1997, 26%; 1996, 27%; and 1995,
28%. Most returns are resolved or settled within several months of the initial
sale. In Europe and Asia, returns are not material.
35
<PAGE> 36
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Warranty Costs
The Company provides at the time of sale for the estimated cost of
remaking and repairing products under warranty. Such costs are included in Cost
of Sales. 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
1997, 1996 and 1995, the approximate U.S. provisions for estimated warranty cost
(and as a percentage of U.S. net sales) were $5.1 million (8%), $4.4 million
(8%) and $4.2 million (11%), 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.
Research and Development Expenses
All research and development costs are expensed as incurred and consist
mainly of personnel costs, outside services, materials, supplies, and general
and administrative expenses.
The Company is engaged in research and development efforts to design and
develop technologies that are anticipated to result in human communications and
hearing health care products. During 1997, the Company entered into a joint
development agreement with Motorola whereby Motorola has committed to provide
joint development funds, technology and other resources for this project through
January 2000. As of December 31, 1997, Motorola had paid $2.0 million to ReSound
as part of this commitment. Such funds received by the Company have been
recorded as a reduction of the Company's research and development expenses.
Payments from Motorola in 1998 will approximate the 1997 amount, with lower
levels of payments thereafter, through the end of the joint development
agreement.
The Company is not required to make any royalty payments under the terms
of this agreement. However, to the extent that the technology being developed is
using certain technology under a current sublicense agreement, the Company is
required to make royalty payments on sales of developed products sold worldwide
that may incorporate this technology.
Advertising Expenses
The Company accounts for advertising costs as expense in the period in
which the costs are incurred. Advertising expense for 1997, 1996 and 1995 was
approximately $4.3 million, $2.8 million and $2.3 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.
36
<PAGE> 37
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Per Share Data
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
loss per share (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net loss $(18,438) $ (967) $ (5,902)
Preferred dividends (238) (225) --
-------- -------- --------
Net loss applicable to common shareholders $(18,676) $ (1,192) $ (5,902)
======== ======== ========
Weighted average shares of common stock outstanding 19,518 17,591 15,439
Effect of dilutive securities -- -- --
-------- -------- --------
Shares used in basic and diluted net loss per share
calculations 19,518 17,591 15,439
======== ======== ========
Basic and diluted net loss per share $ (0.96) $ (0.07) $ (0.38)
======== ======== ========
</TABLE>
Had the Company been in a net income position, diluted earnings per
share would have included 434,000, 255,000 and zero shares related to
outstanding options not included above for the years ended December 31, 1997,
1996 and 1995, respectively.
Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with original
maturities of 90 days or less from the date of purchase to be cash equivalents.
37
<PAGE> 38
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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. There were none at December 31, 1997
and 1996.
Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market. Inventories at December 31, 1997 and 1996 consist of the following (in
thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Raw materials $ 9,191 $ 9,934
Work in progress 2,869 6,838
Finished goods 2,123 7,081
------- -------
Total $14,183 $23,853
======= =======
</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, 1997
and 1996 is as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- ---------
<S> <C> <C>
Land and building $ 3,011 $ 3,716
Machinery and equipment 25,637 25,685
Furniture, fixtures and improvements 10,271 9,572
------- --------
38,919 38,973
Accumulated depreciation and amortization (28,081) (25,479)
------- --------
Total property and equipment, net $10,838 $13,494
======= ========
</TABLE>
Goodwill
Goodwill resulted from the unallocated excess purchase cost of
acquisitions recorded using the purchase method of accounting and is being
amortized over 20 years. Goodwill is reviewed for impairment whenever events or
circumstances indicate an impairment might exist, or at least annually.
Other Assets
Other long-term assets consist primarily of patents which are being
amortized over useful lives ranging from five to ten years.
38
<PAGE> 39
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Accrued Liabilities
Accrued liabilities at December 31, 1997 and 1996 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996
------- -------
<S> <C> <C>
Accrued compensation $ 4,077 $ 4,279
Accrued warranty 5,869 5,100
Income taxes payable 484 1,415
Other 9,054 7,182
------- -------
Total $19,484 $17,976
======= =======
</TABLE>
Fair Value of Financial Instruments
The Company has evaluated the estimated fair value of financial
instruments. The amounts reported for cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses approximate the fair value due
to their short maturities. It was not practicable to estimate the fair value of
the Company's bank loans, short-term debt and long-term debt because of the lack
of a quoted market price and the inability to estimate fair value without
incurring excessive costs. The amounts recorded at December 31, 1997 represent
future minimum payments on debt obligations.
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.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, Reporting Comprehensive Income ("SFAS No. 130") and Statement No. 131,
Disclosures About Segments of An Enterprise and Related Information ("SFAS No.
131"). SFAS No. 130 establishes rules for reporting and displaying comprehensive
income. SFAS No. 131 will require the Company to use the "management approach"
in disclosing segment information. Both statements are effective for the Company
during 1998. The Company does not believe that the adoption of either SFAS No.
130 or SFAS No. 131 will have a material impact on the Company's results of
operations, cash flows, or financial position.
39
<PAGE> 40
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Reclassifications
Certain reclassifications have been made to prior year's amounts in
order to conform to the current year's presentation.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
The Company acquired all the outstanding stock of two European-based
companies in 1994 and certain assets of Minnesota Mining and Manufacturing
Company's ("3M") 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.
ReSound Deutschland
On January 1, 1994, the Company's existing German subsidiary acquired
all the shares of Sonar Design & Hortechnik GmbH, a German company, for
approximately $3.5 million in cash and 100,000 shares of the Company's common
stock. In 1996, this company was renamed ReSound Deutschland. ReSound
Deutschland is a manufacturer and distributor of both Sonar branded and ReSound
branded hearing devices
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 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 various
subsidiaries of the Company. 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.
Sonar Hearing Health Corporation
In June 1996, the Company completed the acquisition of certain assets of
the hearing health business activity of 3M and established a subsidiary, Sonar
Hearing Health Corporation ("SHH"), to manage this activity on an ongoing basis.
The acquisition was accounted for as a purchase and the operating results of SHH
have been included in the consolidated statements of operations since the
40
<PAGE> 41
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
acquisition date. The total purchase price of approximately $25.4 million
consisted of a cash payment of $24.9 million and $500,000 for related
acquisition expenses. The allocation of the purchase price is as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Net tangible assets acquired, principally receivables $ 4,132
and inventories
Patents 7,500
Goodwill 13,811
-------
Total purchase price $25,443
=======
</TABLE>
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 the patents acquired from 3M valued at $7.5 million,
patents valued at $2.5 million were separately acquired by the Company in July
1996 in connection with the above acquisition. These patents were contributed to
a partnership formed in 1996 comprised of eight hearing device manufacturers
including ReSound. In consideration, ReSound received cash payments from the
partnership members of $10.9 million (net) as of December 31, 1997 and has
rights to additional receipts as future licenses are sold. Any such future
amounts paid to the partnership will be divided equally among the partners and
recognized as license income.
As further discussed in Note 7, Special Charges, the goodwill remaining
from this acquisition was written off during 1997.
Viennatone - Switch Production
On December 23, 1997, the Company sold the net assets of its switch
production activity which was performed at the ReSound Viennatone Hortechnologie
AG subsidiary. The net gain on disposal of the discontinued activity is recorded
in other income (expense), net and consists of the following (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Proceeds from sale $1,500
Costs:
Net book value of assets sold 200
Write-off of goodwill allocated to switch production 1,000
------
Net gain $ 300
======
</TABLE>
41
<PAGE> 42
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
In connection with this transaction, the Company is also entitled to
receive a royalty on the sale of switches made by the acquirer to third parties
for a period of three years from the sale. The royalty will only be earned once
a minimum sales level has been achieved and such royalty will not exceed $1.5
million. This revenue will be recorded as received. Additionally, the Company
has committed to purchase a minimum number of switches from the acquirer for the
next three years. The minimum purchase commitment is not in excess of the
Company's projected needs for these items.
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 plaintiffs' attorneys'
fees and expenses were 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.
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.
42
<PAGE> 43
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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.
The Company is also subject to other legal proceedings and claims that
arise in the ordinary course of its business. While management currently
believes the amount of ultimate liability, if any, with respect to these actions
will not materially affect the financial position, results of operations, or
liquidity of the Company, the ultimate outcome of any litigation is uncertain.
Were an unfavorable outcome to occur, the impact could be material to the
Company.
NOTE 4. BANK LOANS
The Company maintains international bank loans, primarily to Viennatone
from an Austrian bank. Total amounts due under these agreements were $1.7
million and $1.9 million at December 31, 1997 and 1996, respectively. These
loans bear interest at rates varying from 4.75% to 5.00%.
NOTE 5. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1997 and 1996
(in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
8% convertible promissory note to shareholder due in February 2000 $ 10,000 $ 10,000
Bank Austria loan to ReSound Horgerate GmbH:
8.25% term loan, due in quarterly installments over
seven years beginning June 30, 1995 8,234 11,728
Bank loan to ReSound Deutschland GmbH: 12% term loan, due
in bi-annual installments over six years beginning September 1995 383 528
Bank term loan to ReSound Pty. Ltd. 19 52
-------- --------
18,636 22,308
Less current portion (4,362) (2,213)
-------- --------
Non-current portion $ 14,274 $ 20,095
======== ========
</TABLE>
The 8% note is convertible into 1,000,000 shares of the Company's common
stock at $10.00 per share. The Bank Austria loan is denominated in Austrian
schillings and secured by the capital stock of Viennatone.
The maturities of long-term debt are as follows (in thousands): 1998,
$4,362; 1999, $1,972; 2000, $11,970; 2001, $229; 2002, $70; thereafter, $33.
43
<PAGE> 44
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 6. VIENNATONE ACCRUED EMPLOYEE BENEFITS
Viennatone's accrued employee benefits by category as of year end are as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Pensions $ 443 $1,011
Termination indemnities 2,321 2,875
Employees' long service premium 507 596
------ ------
Total $3,271 $4,482
====== ======
</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.
The status of the defined benefit plan as of year end is as follows (in
thousands):
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Accumulated benefit obligation (ABO) $ 443 $ 957
Projected benefit obligation (PBO) 443 1,011
Service cost -- 91
Net periodic pension cost -- --
Interest 29 68
</TABLE>
The interest rate used was 7%.
The expected projected benefit obligation ("PBO") for 1998 has been
estimated as $443,000. Differences between expected and projected benefit
obligations are not material. The pension accrual has been recorded at the
amount of projected benefit obligation at December 31, 1997 and 1996. 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
44
<PAGE> 45
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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>
1997 1996
---- ----
<S> <C> <C>
Accumulated benefit obligation (ABO) $1,640 $1,942
Projected benefit obligation (PBO) 2,321 2,875
Service cost 182 217
Net periodic pension cost -- --
Interest 156 202
</TABLE>
The interest rate used was 7%.
The expected projected benefit obligation for 1998 has been estimated as
$2.3 million. Differences between expected and projected benefit obligations are
not material. The termination indemnities accrual has been recorded at the
amount of the PBO at December 31, 1997 and 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 calculated at $507,000 and $596,000 at December
31, 1997 and 1996, respectively.
NOTE 7. 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;
the incremental impairments in the carrying value of certain product
inventories; and losses on
45
<PAGE> 46
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
supplier commitments arising directly from the decision to exit product lines,
as follows (in thousands):
<TABLE>
<CAPTION>
Total Balance
Special Spending/ Dec. 31,
Charges Charges 1997
------- ------- -------
<S> <C> <C> <C>
Employee termination benefits and lease termination costs (recorded as $ 2,254 $ 765 $ 1,489
Restructuring)
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
Write-down of capital assets to fair value (recorded as Selling,
General and Administrative - $633, and Research and Development - $123) 756 -- 756
Other exit costs (recorded as Selling, General and Administrative) 1,566 -- 1,566
------- ------- -------
$17,976 $11,795 $ 6,181
======= ======= =======
</TABLE>
The activities contemplated in the restructuring program will be
substantially completed by June 30, 1998. Management anticipates no material
change in the estimated cost of such activities. As of December 31, 1997, the
Company had made approximately $819,000 of cash payments relating to the special
charges.
NOTE 8. COMMITMENTS
Leases
The Company leases its present facilities and certain equipment under
noncancelable operating lease agreements for periods of up to 20 years. Some of
the leases have renewal options ranging from two to three years and contain
provisions for maintenance, taxes or insurance. Rent expense was $2.3 million,
$1.7 million and $1.3 million in 1997, 1996 and 1995, respectively.
The following is a schedule by year of future minimum lease payments at
December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING OPERATING
DECEMBER 31, LEASES
------------ ------
<S> <C>
1998 $1,867
1999 1,845
2000 874
2001 327
2002 264
Thereafter 399
------
Total minimum payments required $5,576
======
</TABLE>
46
<PAGE> 47
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
401(k) Plan
Under the Company's retirement savings plan (the "401(k) Plan"), a U.S.
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. All U.S. full-time employees who have
three months of service are eligible to participate in the 401(k) Plan. The
Company contributed $222,700, $138,000 and $83,000 to the 401(k) Plan in 1997,
1996 and 1995, respectively.
NOTE 9. 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. The Series B Preferred Stock had a cumulative dividend
rate of six percent, payable in shares of the Company's common stock on the date
of any conversion. In October 1997, all of the outstanding preferred stock and
accumulated dividends of $463,000 were converted into 600,600 shares of common
stock of the Company.
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.
Warrants
In conjunction with a convertible promissory note issued in November
1995 (subsequently repaid in June 1996), the Company issued two warrants to
purchase 38,897 shares each of common stock at an initial exercise price of
$7.7125 per share. These warrants may be exercised at any time and expire on
October 30, 2000. As of December 31, 1997, these warrants have not been
exercised. The values ascribed to these warrants are not material.
In conjunction with a guaranteed bank loan funded in October 1995 and
subsequently repaid in July 1996, 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. This warrant may be exercised at any time and expires on October 29,
2000. In addition, the Company issued warrants to purchase an aggregate of
105,492 shares of common stock to the six directors who guaranteed the debt at
an initial exercise price of $8.13 per share. These warrants may be exercised at
any time and expire on December 1, 2000. As of December 31, 1997, these warrants
have not been exercised. The values ascribed to these warrants are not
material.
47
<PAGE> 48
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Fixed Stock Option Plans
At December 31, 1997, the Company had three 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 ("SFAS 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 SFAS 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.
In April 1997, the Board of Directors authorized the repricing of
options granted to employees and directors to purchase 2,626,877 shares of
common stock effective as of the close of business on April 25, 1997, to the
then fair market value of $4.4375 per share. Under the terms of the repricing,
the repriced options that were not vested at April 25, 1997 were subject to a
one year extension of their vesting terms, and any repriced options that were
vested at April 25, 1997 are not exercisable during the one year period
commencing April 25, 1997. The term of the repriced options was extended by one
year.
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 1997, 1996 and 1995: risk-free
interest rates of 6.0 percent, 6.3 percent and 6.3 percent, respectively,
expected volatility of 0.61, 0.57 and 0.57, respectively, an expected option
life of 0.8 years beyond each respective vesting period and dividend yield of
zero.
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 SFAS 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.
48
<PAGE> 49
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
(in thousands, except per
share data)
<S> <C> <C> <C>
Net loss applicable to common shareholders:
As reported $(18,676) $(1,192) $(5,902)
Pro forma(1) $(21,963) $(2,990) $(7,725)
Net loss per share:
As reported $(0.96) $(0.07) $(0.38)
Pro forma(1) $(1.13) $(0.17) $(0.50)
</TABLE>
(1) Because FSAS 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
4,000,000 shares have been reserved for issuance as of December 31, 1997.
Options for shares of common stock may be granted to employees and consultants.
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).
1997 Stock Plan
Under the 1997 Stock Plan, which expires in 2007, a total of 650,000
shares have been reserved for issuance as of December 31, 1997. Options for
shares of common stock and stock purchase rights may be granted to employees and
consultants. 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.
49
<PAGE> 50
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
Additional information relative to the Company's fixed stock option
plans is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- ----------------------- -----------------------
Weighted- Weighted- Weighted-
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------- ----- ------- ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding -
beginning of year 3,600,867 $8.85 3,379,533 $ 8.50 2,555,172 $7.82
Granted 350,200 $4.54 931,650 $ 9.23 1,507,150 $8.11
Exercised (44,553) $3.61 (225,358) $ 4.68 (357,333) $1.70
Canceled (500,115) $9.14 (484,958) $ 9.07 (325,456) $8.82
Outstanding -
end of year 3,406,399 $4.71 3,600,867 $ 8.85 3,379,533 $8.50
Exercisable at
end of year 1,546,296 1,534,494 1,032,902
Weighted-average fair
value of options
granted during the year $4.54 $ 4.13 $3.67
</TABLE>
<TABLE>
<CAPTION>
Outstanding and Exercisable By Price Range as of December 31, 1997
Options Outstanding Options Exercisable
------------------------------------------------- ---------------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding As of Contractual Exercise Exercisable As of Exercise
Exercise Prices December 31, 1997 Life Price December 31, 1997 Price
--------------- ----------------- ---- ----- ----------------- -----
<S> <C> <C> <C> <C> <C>
$ 0.20 - $ 0.30 9,125 0.7 $ 0.20 9,125 $ 0.20
$ 0.40 - $ 0.50 119,669 3.4 $ 0.49 119,669 $ 0.49
$ 1.50 - $ 1.50 550 0.6 $ 1.50 550 $ 1.50
$ 2.50 - $ 3.00 42,607 0.0 $ 3.00 42,607 $ 3.00
$ 4.00 - $ 6.25 3,014,579 3.5 $ 4.55 1,282,003 $ 4.46
$ 7.13 - $ 9.88 164,869 2.5 $ 8.02 52,759 $ 8.02
$11.00 - $12.65 25,000 3.0 $12.32 9,583 $11.86
$19.88 - $19.88 30,000 1.0 $19.88 30,000 $19.88
--------------- ----------- --- ------ ----------- ------
$ 0.20 - $19.88 3,406,399 3.4 $ 4.74 1,546,296 $ 4.57
</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 400,000 shares of common
stock have been reserved for issuance to employees. As of December 31, 1997,
247,803 shares had been issued under this plan, including 87,938 shares issued
in 1997.
50
<PAGE> 51
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 10. INCOME TAXES
The provision for income taxes for 1997, 1996 and 1995 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ -- $ -- $ --
State 16 -- --
Foreign 860 1,769 735
------- ------- -------
Subtotal 876 1,769 735
Deferred:
Foreign -- (372) (144)
------- ------- -------
Total provision: $ 876 $ 1,397 $ 591
======= ======= =======
</TABLE>
Foreign pre-tax income was $7.0 million, $5.0 million and $1.0 million
in 1997, 1996 and 1995, 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 income taxes is presented below (in thousands):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Tax at federal statutory rate $(6,110) $ (151) $(1,859)
Unbenefited losses 7,971 3,307 3,325
Income taxed at higher/(lower) rates (994) (1,840) (888)
Other 9 81 13
------- ------- -------
Provision for income taxes $ 876 $ 1,397 $ 591
======= ======= =======
</TABLE>
At December 31, 1997, the Company had U.S. federal and California net
operating loss carryforwards of approximately $36.6 million and $11.6 million,
respectively. The federal net operating loss carryforwards will expire at
various dates beginning in 2002 through 2012, if not utilized. The California
net operating loss carryforwards will expire at various dates beginning in 1998
through 2002, if not utilized. The Company had foreign net operating loss
carryforwards of approximately $16.9 million at December 31, 1997, which will
expire at various dates beginning in 1998 through 2003, 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.
51
<PAGE> 52
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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
$26.7 million and $19.6 million at December 31, 1997 and 1996, 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, 1997 and 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
Deferred tax assets
U.S. net operating loss carryforwards $ 13,500 $ 11,100
Foreign net operating loss carryforwards 3,300 400
Tax credits (expiring 2000 - 2012) 2,300 1,800
Allowance for returns and doubtful accounts 2,100 1,200
Depreciation and amortization 2,600 2,900
Warranty accruals 1,800 1,400
Other 1,100 1,200
-------- --------
Total gross deferred tax assets 26,700 20,000
Less valuation allowance (26,700) (19,637)
-------- --------
Total deferred tax asset -- 363
Deferred tax liabilities
Other -- (363)
-------- --------
Total deferred tax liability -- (363)
-------- --------
Net deferred tax liability $ -- $ --
======== ========
</TABLE>
The valuation allowance was $16.3 million as of January 1, 1996.
Deferred tax assets as of December 31, 1997 include approximately
$2,200,000 relating to the exercise of stock options, which will be credited to
equity when realized.
NOTE 11. RELATED PARTY TRANSACTIONS
Hoya Corporation
Hoya Corporation ("Hoya"), a shareholder of the Company until 1997,
purchases from the Company certain inventory for resale in Japan under an
exclusive distribution agreement entered into in June 1990. Sales to Hoya in
1997, 1996 and 1995 totaled $3.4 million, $3.4 million and $1.9 million,
respectively. Accounts receivable from Hoya at December 31, 1997 and 1996 were
$653,000 and $569,000, respectively.
52
<PAGE> 53
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
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 Company's products to CEI in 1997,
1996 and 1995 totaled $119,000, $192,000 and $68,000 respectively. Accounts
receivable from CEI were $30,000 and $16,000 at December 31, 1997 and 1996,
respectively.
NOTE 12. INDUSTRY SEGMENT, GEOGRAPHIC AND CUSTOMER INFORMATION
The Company currently 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
ReSound Deutschland, 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 1997, 1996 or 1995.
Information regarding geographic areas is as follows (in thousands):
<TABLE>
<CAPTION>
December 31, 1997
----------------------------------------------------------------
United Rest of
States Europe the World (1) Elimination Total
------ ------ ------------- ----------- -----
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 66,753 $ 56,920 $ 6,790 $ -- $ 130,463
Intercompany transfers 864 39,302 -- (40,166) --
--------- --------- --------- --------- ---------
Net sales 67,617 96,222 6,790 (40,166) 130,463
Income (loss) from operations (21,865) 6,550 (186) (261) (15,762)
Identifiable assets 32,920 35,171 1,467 -- 69,558
Goodwill -- 20,217 -- -- 20,217
December 31, 1996
----------------------------------------------------------------
United Rest of
States Europe the World (1) Elimination Total
------ ------ ------------- ----------- -----
Sales to unaffiliated customers $ 55,289 $ 64,536 $ 5,821 $ -- $125,646
Intercompany transfers 2,329 48,375 -- (50,704) --
-------- -------- -------- -------- --------
Net sales 57,618 112,911 5,821 (50,704) 125,646
Income (loss) from operations (13,687) 16,782 (14) (473) 2,608
Identifiable assets 28,052 46,139 750 -- 74,941
Goodwill 13,750 26,061 -- -- 39,811
</TABLE>
53
<PAGE> 54
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
December 31, 1995
------------------------------------------------------------------
United Rest of
States Europe the World (1) Elimination Total
------ ------ ------------- ----------- -----
<S> <C> <C> <C> <C> <C>
Sales to unaffiliated customers $ 37,457 $ 64,112 $ 5,761 $ -- $ 107,330
Intercompany transfers 9,482 28,982 -- (38,464) --
--------- --------- --------- --------- ---------
Net sales 46,939 93,094 5,761 (38,464) 107,330
Income (loss) from operations (12,886) 10,798 172 (1,167) (3,083)
Identifiable assets 12,171 43,084 423 -- 55,678
Goodwill -- 27,692 -- -- 27,692
</TABLE>
(1) Rest of the World comprises the Asia-Pacific region, Latin America and
Canada.
NOTE 13. SUBSEQUENT EVENT
In January 1998, ReSound Autac GmbH, a newly formed subsidiary of the
Company, acquired all of the assets and liabilities of a former distributor for
600,000 Swiss Francs ($410,000 at December 31, 1997). 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 aids. Additionally, an
employment agreement has been negotiated with the seller through December 31,
2002.
54
<PAGE> 55
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
55
<PAGE> 56
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 21, 1998 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 executive officers and certain information
about them as of March 25, 1998, are set forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Russell D. Hays....................... 53 President, Chief Executive Officer and Director
Stephan Becker-Vogt................... 47 Senior Vice President and President, ReSound Europe
Warren Brainard-Smith................. 54 Senior Vice President, Asia Pacific, Latin America
John H. Giroux........................ 53 Senior Vice President and President, ReSound U.S.A.
Andreas Joder......................... 42 Senior Vice President, Operations
Arthur T. Taylor...................... 41 Vice President, Finance and Chief Financial Officer
Joseph E. Black....................... 54 Vice President, Human Resources
David R. Muhlitner.................... 58 Vice President, Secretary and General Counsel
Chaslav V. Pavlovic................... 49 Vice President, Research and Development
Steven H. Puthuff..................... 57 Vice President and General Manager, Communications
Division
</TABLE>
Russell D. Hays joined ReSound as President and Chief Executive Officer,
and was elected to its Board of Directors, in February 1998. From 1995 to 1998,
Mr. Hays served as Executive Vice President and President of the Hospital
Business of Nellcor Puritan Bennett, a medical device company that develops and
markets products that diagnose, monitor and treat respiratory disorders. From
1992 to 1995, Mr. Hays served as President and Chief Executive Officer of
Enzytech, Inc., a company that develops and markets drug delivery technologies.
From 1985 to 1992, Mr. Hays held senior management positions with Baxter
Healthcare Corporation, most recently as Vice President and General Manager of
the Immunotherapy Division of Baxter Biotech, and before that in the areas of
strategic planning and business development, marketing and business development,
and technology assessment and development. Prior to this, he held various
positions with Stryker Corporation, Baxter Travenol Labs, Inc., Amerace
Corporation, Reynolds Products, Inc., and Schaub Engineering Company. Mr. Hays
holds an M.B.A. from the J. L. Kellogg Graduate School at Northwestern
University and a B.S. in Physics from Elmhurst College.
56
<PAGE> 57
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. Brainard-Smith joined the Company as Senior Vice President for the
Asia Pacific and Latin America region in November 1996. Prior to joining
ReSound, Mr. Brainard-Smith was Senior Vice President Pan Asia for Allergan,
Inc., a manufacturer of ophthalmic, dermatological and pharmaceuticals from 1991
to 1996. He joined Allergan in 1983 as Regional Director Latin America and was
promoted to Vice President Americas in 1985 with added responsibility for
Allergan's Canadian business. He became Senior Vice President, Americas in 1987,
and Senior Vice President, Americas Pacific in 1990. Prior to 1983, Mr.
Brainard-Smith was with American Hospital Supply, a Chicago-based manufacturer
and supplier of hospital equipment, medical devices and laboratory supplies. He
began his career in sales with the Scientific Products Division, was promoted to
General Manager, AHS Puerto Rico/Caribbean in 1976 and Managing Director, AHS
Mexico in 1979. Mr. Brainard-Smith holds a MIM from the American Graduate School
of International Management, an M.S. in Medical Microbiology from the University
of Arizona and a B.S. from the University of Wisconsin.
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 27 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., 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. Joder joined the Company in April 1996 as Senior Vice President,
Operations. His worldwide responsibility includes Quality Assurance and
Manufacturing. Mr. Joder has 21 years of experience in the design and
manufacturing of electronic products, including 10 years with electro-medical
products. Before joining the Company, Mr. Joder was Vice President of Operations
at Schiller AG in Switzerland, a manufacturer of electro-cardiographs,
spirometers and blood pressure measurement equipment from 1993 to 1996. From
1987 to 1993, Mr. Joder held various Operations Management functions at Siemens
Audiologische Technik GmbH including a three-year assignment as head of R&D at
Rexton in the USA. Prior experience includes research into ultrasound, magnetic
and electro-optical product concepts and the design of the first solid-state
electricity meter at Lands & Gyre ERG. Mr. Joder holds a degree as physics
assistant and a university degree in electronics engineering from Technical
University Lucerne, Switzerland.
57
<PAGE> 58
Mr. Taylor joined the Company in June 1997 as Chief Financial Officer
and Vice President, Finance. Before joining ReSound, Mr. Taylor was Vice
President, Controller for the Europe/ Africa/Middle East region of Allergan,
Inc., from 1993 to mid-1997 where he was based outside of London, England. From
1989 to 1993, Mr. Taylor was Vice President, Corporate Finance for Allergan,
Inc. From 1986 to 1989, Mr. Taylor held various financial and accounting
management positions at Allergan, Inc. From 1983 to 1986, Mr. Taylor held
various financial and accounting management positions for American Hospital
Supply Corporation which was purchased by Baxter Travenol, Inc. From 1981 to
1983, Mr. Taylor was a Contract Administrator and Financial Analyst with Ford
Aerospace and Communications Corporation, a wholly owned subsidiary of Ford
Motors. Mr. Taylor holds an MBA degree from the University of Southern
California and a B.S. from the University of California, Berkeley, and has been
a Certified Management Accountant since 1985.
Mr. Black joined the Company in August 1995 as Vice President, Human
Resources. Mr. Black has 27 years of experience in human resource management and
consulting positions. From 1987 until joining the Company, Mr. Black headed his
own consulting business. 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.
Mr. Muhlitner joined the Company as Vice President and General Counsel
in April 1997, and was appointed Secretary of the Company in October 1997. From
1985 until joining the Company, Mr. Muhlitner held various legal positions with
Amdahl Corporation, most recently as Associate General Counsel. Prior to that
time, Mr. Muhlitner was in private practice and held various positions with
other companies as in-house counsel and with the Securities and Exchange
Commission. He holds a J.D. degree from the University of Michigan Law School
and a B.A. from Dartmouth College, and is a member of the California and
District of Columbia bars.
Mr. Pavlovic joined the Company in February 1994 as Vice President of
Research. In December 1996, he was promoted to Vice President for Research and
Development. He is a Full Professor of Audiology at the University of Provence
since March 1993 (working directly with the University from March 1993 through
February 1994). Before joining the Company, Mr. Pavlovic was Associate Professor
of Audiology at the University of Iowa from December 1985 through February 1993;
Coordinator of the European project EURAUD (European Audiological Tests and
Station); Chair, American National Standards Institute S3-79 Writing Group
(Calculation of the Articulation Index); USA representative to the International
Standards Organization ISO/TC 43/SC 1; Coordinator of the Overall Quality
Assessment Subgroup, European Consortium for Speech Assessment Methods (SAM,
Project Esprit); Coordinator of participating French laboratories on projects
TIDE and OSCAR (pattern extraction hearing aids); Member, American National
Standards Institute S12-8 Writing Group (rating noise with respect to speech
interference); Member of the Editorial Board, Acoustics; Staff Editor, Journal
d'Acoustique; Board of Directors, Journal d'Acoustique; and Member, Technical
Committee on Speech Communication, Acoustical Society of America. Mr. Pavlovic
has produced more than 50 publications and over 60 major international
presentations. Mr. Pavlovic has a Ph.D. in Audiology from Wichita State
University, and an M.S. and B.S. in Electrical Engineering from Salford
University, England and the University of Belgrade, Yugoslavia, respectively.
58
<PAGE> 59
Mr. Puthuff was a consultant for ReSound from 1991 until he was hired
permanently in September 1997. From 1994 through 1996, Mr. Puthuff served as
ReSound's Vice President of Engineering, Worldwide and Executive Consultant to
the President, directing the Company's worldwide engineering efforts. Mr.
Puthuff has over 35 years of experience in Silicon Valley high technology
companies. Starting his career at IBM, Mr. Puthuff developed an extensive
background in communications, disk drives, storage systems, computers, software
and electronic instrumentation serving in various engineering and management
capacities for Wavetek, Aerojet General Corporation, Digital Development
Corporation and as Vice President of Engineering for Memorex Corporation. In the
process, Mr. Puthuff became the co-founder of several corporations, including
Fortune Systems as Vice President of Engineering; Britton Lee, Inc., as Vice
President of Engineering; Savin Information Systems as General Manager; Sequence
Inc., as President and CEO; Integrated Financial Systems, International as
President, CEO and Chairman; and Econotech as Chairman and CEO. Mr. Puthuff has
a B.S. in Electrical Engineering from Arizona State University.
Information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference from the
information under the caption, "Section 16(a) Beneficial Ownership Reporting
Compliance," in the Registrant's Proxy Statement.
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.
59
<PAGE> 60
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. 30
Consolidated Balance Sheets at December 31,
1997 and 1996. 31
Consolidated Statements of Operations -
Years ended December 31, 1997, 1996 and 1995. 32
Consolidated Statement of Shareholders' Equity -
Three Years ended December 31, 1997. 33
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, 1996 and 1995. 34
Notes to Consolidated Financial Statements. 35
(2) Financial Statement Schedules
The following financial statement
schedule is included herein:
Schedule II - Valuation and Qualifying Accounts 64
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>
Exhibit
Number Description
- ------ -----------
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)
60
<PAGE> 61
10.1 1988 Stock Option Plan, as amended. (5.1)
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)
10.16 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)
61
<PAGE> 62
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 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)
10.31 ReSound Corporation 1997 Stock Plan. (11)
10.32 Separation Agreement. (12)
10.33 Change of Control Agreement. (13)
22.1 Subsidiaries of Registrant. (14)
23.1 Consent of Ernst & Young LLP, Independent Auditors. (14)
24.1 Power of Attorney (see page 65). (14)
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
- ----------
(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.
62
<PAGE> 63
(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.
(5.1) Incorporated by reference to exhibits filed in response to Item 8,
"Exhibits," of the Registrant's Statement on Form S-8 (File No.
333-09303), which became effective July 31, 1996.
(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 in response to Item 7,
"Financial Statements and Exhibits" of Registrant's Report on Form 8-K
filed with the Securities and Exchange Commission on July 15, 1996 (as
amended and filed September 12, 1996).
(9) Incorporated by reference to exhibits filed in response to Item 7,
"Financial Statements and Exhibits," 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, 1997.
(10) Confidential treatment granted by order effective March 1997.
(11) Incorporated by reference to exhibits filed in response to Item 8,
"Exhibits," of the Registrant's Registration Statement on Form S-8 (File
No. 333-46585), which became effective February 4, 1998.
(12) 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
June 30, 1997.
(13) 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, 1997.
(14) Filed herewith.
63
<PAGE> 64
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, 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 $17,786 $15,390 $ 6,519
Reserves for warranty expenses 4,585 5,981 5,466 5,100
-------- ---------- -------- --------
$ 8,708 $23,767 $20,856 $11,619
======= ======= ======= =======
Year ended December 31, 1997:
Allowances for estimated
returns and doubtful accounts $ 6,519 $20,730 $20,185 $ 7,064
Reserves for warranty expenses 5,100 6,625 5,856 5,869
-------- -------- -------- --------
$11,619 $27,355 $26,041 $12,933
======= ======= ======= =======
</TABLE>
64
<PAGE> 65
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 25, 1998 By: /s/ Russell D. Hays
--------------------------------------
Russell D. Hays
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, Russell D. Hays and
Arthur T. Taylor, 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 25, 1998
- -----------------------------
(Rodney Perkins, M.D.)
/s/ Russell D. Hays President, Chief Executive Officer March 25, 1998
- ----------------------------- and Director (principal
(Russell D. Hays) executive officer)
/s/ Arthur T. Taylor Vice President, Finance and March 25, 1998
- ----------------------------- Chief Financial Officer (principal
(Arthur T. Taylor) financial and accounting officer)
/s/ Richard L. Goode, M.D. Director March 25, 1998
- -----------------------------
(Richard L. Goode, M.D.)
/s/ Donald M. Kendall Director March 25, 1998
- -----------------------------
(Donald M. Kendall)
/s/ Eugene Kleiner Director March 25, 1998
- -----------------------------
(Eugene Kleiner)
/s/ Peter Riepenhausen Director March 25, 1998
- -----------------------------
(Peter Riepenhausen)
/s/ Philip S. Schlein Director March 25, 1998
- -----------------------------
(Philip S. Schlein)
/s/ Robert C. Wilson Director March 25, 1998
- -----------------------------
(Robert C. Wilson)
</TABLE>
65
<PAGE> 66
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
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. (5.1)
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)
10.16 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)
<PAGE> 67
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 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)
10.31 ReSound Corporation 1997 Stock Plan. (11)
10.32 Separation Agreement. (12)
10.33 Change of Control Agreement. (13)
22.1 Subsidiaries of Registrant. (14)
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 65). (14)
24.1 Power of Attorney (see page 66). (14)
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
None
- ----------
(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.
<PAGE> 68
(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.
(5.1) Incorporated by reference to exhibits filed in response to Item 8,
"Exhibits," of the Registrant's Statement on Form S-8 (File No.
333-09303), which became effective July 31, 1996.
(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 in response to Item 7,
"Financial Statements and Exhibits" of Registrant's Report on Form 8-K
filed with the Securities and Exchange Commission on July 15, 1996 (as
amended and filed September 12, 1996).
(9) Incorporated by reference to exhibits filed in response to Item 7,
"Financial Statements and Exhibits," 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, 1997.
(10) Confidential treatment granted by order effective March 1997.
(11) Incorporated by reference to exhibits filed in response to Item 8,
"Exhibits," of the Registrant's Registration Statement on Form S-8 (File
No. 333-46585), which became effective February 4, 1998.
(12) 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
June 30, 1997.
(13) 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, 1997.
(14) Filed herewith.
<PAGE> 1
EXHIBIT 22.1
ReSound-Viennatone
Hortechnologie AG
Austria
ReSound-Viennatone SARL
France
ReSound-Viennatone
Hortechnologie AG & Co. OHG
Germany
ReSound GmbH
Hortechnologie
Germany
ReSound Deutschland GmbH
Germany
ReSound Ireland Limited
Ireland
ReSound Holdings Limited
Ireland
ReSound Ireland Sales Limited
Ireland
ReSound BV
Netherlands
ReSound AB
Sweden
ReSound-Viennatone Ltd.
United Kingdom
ReSound Pty Ltd.
Australia
ReSound Ltd.
Hong Kong
ReSound Asia, Limited
British Virgin Islands
ReSound AUTAC GmbH
Switzerland
<PAGE> 1
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to incorporation by reference in the Registration Statement
(Form S-8 Nos. 333-09303, 33-61302 and 333-46585) pertaining to the 1988 Stock
Option Plan, the 1992 Employee Stock Purchase Plan and the 1992 Directors' Stock
Option Plan, and the 1997 Stock 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 23, 1998, 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, 1997.
/s/ Ernst & Young LLP
-----------------------------------
Ernst & Young LLP
Palo Alto, California
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-01-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 19,853
<SECURITIES> 0
<RECEIVABLES> 25,030
<ALLOWANCES> 7,064
<INVENTORY> 14,183
<CURRENT-ASSETS> 54,127
<PP&E> 38,919
<DEPRECIATION> 28,081
<TOTAL-ASSETS> 89,775
<CURRENT-LIABILITIES> 34,244
<BONDS> 0
0
0
<COMMON> 96,785
<OTHER-SE> (59,766)
<TOTAL-LIABILITY-AND-EQUITY> 37,019
<SALES> 130,463
<TOTAL-REVENUES> 130,463
<CGS> 62,592
<TOTAL-COSTS> 83,633
<OTHER-EXPENSES> 309
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,491
<INCOME-PRETAX> (17,562)
<INCOME-TAX> 876
<INCOME-CONTINUING> (18,438)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (18,438)
<EPS-PRIMARY> (.96)
<EPS-DILUTED> (.96)
</TABLE>
