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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 27, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ________ to _______
Commission file number 0-20046
RESOUND CORPORATION
(Exact name of Registrant as specified in its charter)
California 77-0019588
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
220 Saginaw Drive, Seaport Centre, Redwood City, California 94063
(Address, including zip code, of principal executive offices)
(650) 780-7800
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
--- ---
The number of shares of Registrant's Common Stock issued and outstanding as of
August 5, 1998 was 20,601,528 shares.
This document consists of 17 pages of which this is page 1.
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<TABLE>
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets.......................................................3
Consolidated Statements of Operations.............................................4
Consolidated Statements of Cash Flows.............................................5
Notes to Consolidated Financial Statements........................................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations............................................................10
Liquidity and Capital Resources................................................. 13
Factors That May Affect Future Operating Results.................................13
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................15
Item 2. Changes in Securities and Use of Proceeds........................................15
Item 3. Defaults upon Senior Securities..................................................15
Item 4. Submission of Matters to a Vote of Security Holders..............................15
Item 5. Other Information................................................................16
Item 6. Exhibits and Reports on Form 8-K.................................................16
SIGNATURES..................................................................................................17
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements:
RESOUND CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
June 27, December 31,
1998 1997
--------- -----------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $14,751 $ 19,853
Accounts receivable, net 22,161 17,966
Inventories 14,156 14,183
Other current assets 2,506 2,125
------- --------
Total current assets 53,574 54,127
Property and equipment, net 11,197 10,838
Goodwill 20,416 20,217
Other assets 3,380 4,593
------- --------
$88,567 $89,775
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans $ 2,296 $ 1,663
Accounts payable 8,817 8,735
Accrued liabilities 18,029 19,484
Long-term debt, current portion 2,388 4,362
------- ---------
Total current liabilities 31,530 34,244
Long-term liabilities:
Long-term debt, non-current portion 13,358 14,274
Employee benefits 3,806 3,738
Other accrued liabilities -- 500
-------- --------
Total long-term liabilities 17,164 18,512
Commitments and contingencies -- --
Shareholders' equity:
Common stock 97,936 96,785
Accumulated deficit (56,221) (57,878)
Cumulative translation adjustment (1,842) (1,888)
------- --------
Total shareholders' equity 39,873 37,019
------- --------
$88,567 $89,775
======= ========
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See notes to consolidated financial statements.
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RESOUND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------- ---------------------
June 27, June 30, June 27, June 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $33,884 $32,230 $65,027 $64,442
Cost of sales 14,987 14,731 29,444 29,842
------ ------ ------ ------
Gross profit 18,897 17,499 35,583 34,600
Operating expenses
Research and development 4,472 3,882 8,447 8,199
Selling, general and administrative 13,967 14,441 26,115 26,999
------ ------ ------ ------
Total operating expenses 18,439 18,323 34,562 35,198
------ ------ ------ ------
Income (loss) from operations 458 (824) 1,021 (598)
Interest expense, net (251) (384) (507) (782)
Other income (expense), net 673 83 1,520 (335)
------ ------ ------ ------
Income (loss) before income taxes 880 (1,125) 2,034 (1,715)
Provision for income taxes (1) 197 374 378 680
------ ------ ------ ------
Net income (loss) $ 683 $(1,499) $ 1,656 $(2,395)
======== ======== ======= ========
Net income (loss) applicable to common shareholders $ 683 $(1,574) $ 1,656 $(2,545)
======== ======== ======= ========
Basic and diluted net income (loss) per share $ 0.03 $ (0.08) $ 0.08 $ (0.13)
========= ======== ======== =========
Shares used in basic net income (loss) per share calculation 20,379 19,429 20,103 19,409
====== ====== ====== ======
Shares used in diluted net income (loss) per share calculation 21,429 19,429 20,982 19,409
====== ====== ====== ======
</TABLE>
(1) Consists principally of state and foreign income taxes.
See notes to consolidated financial statements.
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RESOUND CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Increase (decrease) in cash and cash equivalents (in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Six months ended
---------------------
June 27, June 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 1,656 $ (2,395)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization 3,640 3,774
Changes in assets and liabilities:
Accounts receivable (3,625) 1,369
Inventories 1,540 1,561
Other assets (1,095) 1,847
Accounts payable (282) (1,767)
Accrued liabilities (2,736) (1,245)
------- -------
Net cash provided by (used in) operating activities (902) 3,144
Cash flows from investing activities:
Acquisition of ReSound Autac (401) --
Acquisition of Apex Acoustics, Ltd. (750) --
Patent license fees 900 --
Change in translation adjustment 750 (335)
Additions of property and equipment (3,051) (1,218)
------- -------
Net cash used in investing activities (2,552) (1,553)
Cash flows from financing activities:
Borrowings (payments) on long-term debt, net (2,799) 1,782
Bank loans -- (651)
Issuance of common stock 1,151 245
------- -------
Net cash provided by (used in) financing activities (1,648) 1,376
------- -------
Net increase (decrease) in cash and cash equivalents (5,102) 2,967
Cash and cash equivalents at the beginning of the period 19,853 7,980
------- -------
Cash and cash equivalents at the end of the period $14,751 $10,947
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 594 $ 842
Income taxes $ 507 $ 667
Supplemental schedule of non-cash investing and financing activities:
Accrual of preferred stock dividend -- $ 150
</TABLE>
See notes to consolidated financial statements.
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ReSound Corporation
Notes to Consolidated Financial Statements
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles and the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting only of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the
three-month and six-month periods ended June 27, 1998 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1998. For further information, refer to the audited consolidated financial
statements for the year ended December 31, 1997 and footnotes thereto included
in the Company's 1997 Annual Report on Form 10-K.
In 1998, the Company adopted the policy of closing its fiscal quarters on the
last Saturday falling within the calendar quarter, except that the fiscal year
will end at the calendar year end.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share ("SFAS No. 128"). SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants, and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. Earnings per share amounts for all periods have been
restated to conform to the SFAS No. 128 requirement.
The following table sets forth the computation of basic and diluted net income
(loss) per share (in thousands, except per share data):
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------------- ---------------------
June 27, June 30, June 27, June 30,
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net income (loss) $ 683 $ (1,499) $ 1,656 $ (2,395)
Preferred dividends -- (75) -- (150)
--------- ---------- --------- ---------
Net income (loss) applicable to common shareholders $ 683 $ (1,574) $ 1,656 $ (2,545)
========= ========== ========= =========
Weighted average common shares - basic 20,380 19,429 20,324 19,409
Dilutive options 1,050 -- 879 --
--------- ---------- --------- ---------
Adjusted weighted average common shares - diluted 21,430 19,429 21,203 19,409
========= ========== ========= =========
Earnings per share - basic:
Net income (loss) per common share $ 0.03 $ (0.08) $ 0.08 $ (0.13)
========== ========== ========= =========
Earnings per share - diluted:
Net income (loss) per common share $ 0.03 $ (0.08) $ 0.08 $ (0.13)
========== ========== ========= =========
</TABLE>
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Had the Company been in a net income position for the three months and six
months ended June 30, 1997, diluted earnings per share for those periods would
have included 513,000 shares and 471,000 shares, respectively, related to
outstanding options not included above.
New Accounting Pronouncements
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standard No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. SFAS No. 130 requires unrealized
gains or losses on the Company's available-for-sale securities and foreign
currency translation adjustments, which prior to adoption were reported
separately in shareholders' equity, to be included in other comprehensive
income. Prior year financial statements have been reclassified to conform to the
requirements of SFAS No. 130.
During the second quarters of 1998 and 1997, total comprehensive income (loss)
amounted to $1,231,000 and $(1,101,000), respectively. During the first six
months of 1998 and 1997, total comprehensive income (loss) amounted to
$1,702,000 and $(5,196,000), respectively.
In June 1997, the Financial Accounting Standards Board issued Statement No. 131,
Disclosures About Segments of An Enterprise and Related Information ("SFAS No.
131"). SFAS No. 131 will require the Company to use the "management approach" in
disclosing segment information in its December 31, 1998 financial statements.
The adoption of SFAS No. 131 will not have an impact on the Company's results of
operations, cash flows, or financial position.
Reclassifications
Certain reclassifications have been made to prior year's amounts in order to
conform to the current year's presentation.
NOTE B - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market. The
components of inventory consist of the following (in thousands):
<TABLE>
<CAPTION>
June 27, December 31,
1998 1997
-------- ------------
<S> <C> <C>
Raw materials $ 8,219 $ 9,191
Work in process 2,142 2,869
Finished products 3,795 2,123
------- -------
$14,156 $14,183
======= =======
</TABLE>
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NOTE C - ACCOUNTING FOR INCOME TAXES
Income taxes have been provided for on a year-to-date basis and represent taxes
on profits earned at the Company's European subsidiaries in Ireland, Germany,
Switzerland, and Holland.
NOTE D - RESOUND AUTAC ACQUISITION
In January 1998, ReSound Autac GmbH, a newly formed subsidiary of the Company
located in Zurich, Switzerland, acquired all of the assets and liabilities of a
former Swiss distributor for $401,000. At the time of the transaction, that
distributor owed the Company $979,000 for previous financial assistance. The
agreement contains a clause which obligates the seller for a period of five
years not to compete in the area of manufacture or distribution of hearing
devices. Additionally, an employment agreement was negotiated with the seller
through December 31, 2002.
The allocation of the purchase price was as follows (in thousands):
<TABLE>
<S> <C>
Working capital acquired $ 507
Property and equipment, net 163
Goodwill 1,342
Bank loans (632)
Loan from ReSound (979)
-------
Total purchase price $ 401
=======
</TABLE>
NOTE E - APEX ACOUSTICS, LTD. ACQUISITION
In April 1998, ReSound-Viennatone Ltd. acquired all of the assets and
liabilities of Apex Acoustics, Ltd. from the Ultratone Group for $750,000.
Concurrent with the acquisition, the Company entered into a multi-year supply
agreement with Ultratone for custom hearing devices.
The allocation of the purchase price was as follows (in thousands):
<TABLE>
<S> <C>
Working capital acquired $ 494
Property and equipment, net 135
Goodwill 121
------
Total purchase price $ 750
=======
</TABLE>
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NOTE F - SPECIAL CHARGES
In the second half of 1997, the Company recorded special charges of $18.0
million associated with the Company's strategic restructuring program. This
program is designed to streamline operations and control costs through
management restructuring, operations consolidations, and increased focus on core
activities and product lines.
The special charges provided for costs associated with employee termination
benefits for approximately 100 employees from all functional areas in various
subsidiary locations; lease termination costs; the write-down of goodwill
associated with the acquired hearing health business activity of 3M (which was
renamed Sonar Hearing Health, "SHH"); the incremental impairments in the
carrying value of certain product inventories; and losses on supplier
commitments arising directly from the decision to exit product lines, as follows
(in thousands):
<TABLE>
<CAPTION>
Spending/
Total 1997 Balance Charges Balance
Special Spending/ Dec. 31, 6-mos ended June 27,
Charges Charges 1997 June 27, 1998 1998
------- ------- ---- ------------- ----
<S> <C> <C> <C> <C> <C>
Employee termination benefits and lease
termination costs (recorded as
Restructuring) $ 2,254 $ 765 $1,489 $ 894 $ 595
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 2,370 --
Write-down of capital assets to fair value
(recorded as Selling, General and
Administrative - $633, and Research and
Development - $123) 756 -- 756 756 --
Other exit costs (recorded as Selling,
General and Administrative) 1,566 -- 1,566 1,566 --
-------- -------- ------- ------- ------
$17,976 $11,795 $6,181 $5,586 $ 595
======== ======== ======= ======= ======
</TABLE>
During the six months ended June 27, 1998, the Company made approximately $1.4
million of cash payments relating to the special charges.
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NOTE G USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results inevitably will differ from those estimates, and such differences
may be material to the financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Form 10-Q contains forward-looking statements, which can be identified by
words such as "may," "will," "believe," "expect," "anticipate," "estimate,"
"plan," "intend," and the like. These statements are subject to certain risks
and uncertainties that could cause actual results to differ materially from
those contemplated in the statements. These risks and uncertainties are
discussed in the section below entitled "Factors That May Affect Future
Operating Results" and in the Company's reports filed with the Securities and
Exchange Commission, including its Report on Form 10-K for the year ended
December 31, 1997.
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and notes thereto included in Part I - Item 1
of this Quarterly Report and the audited consolidated financial statements and
notes thereto, the Introductory Statement and Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997.
RESULTS OF OPERATIONS
Three months ended June 27, 1998 and June 30, 1997
Net sales increased by 5% to $33.9 million in the quarter ended June 27, 1998,
from $32.2 million in the quarter ended June 30, 1997. International sales
accounted for 48 percent of the Company's net sales during the second quarters
of 1998 and 1997. International sales for the second quarter were $16.4 million,
an increase of 7 percent from the same quarter last year. Double-digit
percentage sales growth occurred at the Company's sales subsidiaries in Holland,
Sweden, Switzerland, and the UK. Additionally, Viennatone's sales to
distributors in Southern and Eastern Europe and Arabia rose substantially over
prior year levels. These revenue gains were partially offset by weaker European
currencies compared to the U.S. dollar, poor hearing device market conditions in
Germany and Austria, and lower shipments to the Company's Japanese distributor
as a result of poor economic conditions in Japan. Sales in the U.S. and Canada
increased 3 percent for the quarter ended June 27, 1998 to $17.5 million from
$16.9 million for the quarter ended June 30, 1997, due primarily to unit volume
growth being offset by declines in average unit sales prices as a result of
increasing competition and product mix sales shifts from the Company's higher
priced Premium Series product line to the Company's more moderately priced
Encore Series product line. The Premium Series product line was enhanced by the
addition of the Company's completely-in-the-canal device, the CC4, which first
shipped in volume during the first quarter of 1998. Initial component supply
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problems with the CC4 that caused a backlog of orders in the first quarter of
1998 were resolved during the second quarter, and the backlog situation was
eliminated.
Gross profit was 55.8 percent of net sales in the second quarter of 1998
compared to 54.3 percent of net sales in the second quarter of 1997. The
quarter-to-quarter increase in gross profit was largely attributable to an
improved product mix, including an increase in CC4 sales in the second quarter,
as well as progress made in reducing custom product costs through improved
manufacturing efficiencies, SKU rationalization, and lower component procurement
expenses.
Research and Development ("R&D") spending during the second quarter of 1998 was
$4.5 million (13.2 percent of net sales) compared to $3.9 million (12.0 percent
of net sales) during the same quarter of 1997. The quarter-to-quarter increase
in R&D was primarily due to increased spending on the development of the
Company's Digital Signal Processing (DSP) and hearing enhancer programs and
products being developed in alliance with Motorola.
Selling, General, and Administrative ("SG&A") expenses were $14.0 million (41.2
percent of net sales) during the second quarter of 1998 compared to $14.4
million (44.8 percent of net sales) during the same quarter of 1997. The
decrease in SG&A expenses resulted primarily from the effects of improved cost
controls partially offset by increased sales and marketing activities in the
U.S., increased spending at Viennatone's retail operation, one-time severance
costs, and incremental expenses resulting from the acquisitions of ReSound Autac
in January 1998 and Apex Acoustics, Ltd. in April 1998.
Net interest expense was $251,000 for the second quarter of 1998 compared to
$384,000 for the second quarter of 1997. This quarter-to-quarter decrease is
attributable to reduction of debt, the effect of the stronger U.S. dollar
compared to European currencies, and increased interest income due to higher
average cash balances.
Other income was $673,000 for the second quarter of 1998 compared to $83,000 for
the second quarter of 1997. In the second quarter of 1998, income resulted
primarily from receipts of $750,000 under a patent license agreement offset by
foreign exchange losses. The agreement requires similar payments to be made to
the Company in each of the remaining quarters of 1998.
Income taxes have been provided for on a year-to-date basis and represent taxes
on profits earned at the Company's European subsidiaries in Ireland, Germany,
Switzerland, and Holland.
The Company had net income of $683,000 in the quarter ended June 27, 1998
compared to a net loss of $1.5 million in the quarter ended June 30, 1997. The
increase in net income was primarily the result of increased gross profit, lower
SG&A expenses, and patent license income, partially offset by foreign exchange
losses of $132,000 compared to foreign exchange gains of $66,000 in the same
prior year quarter.
Six months ended June 27, 1998 and June 30, 1997
Net sales increased by 1% to $65.0 million in the six months ended June 27,
1998, from $64.4 million in the six months ended June 30, 1997. International
sales accounted for 48 percent of ReSound's net sales during the first six
months of 1998, compared to 49 percent during the same
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period of 1997. International sales for the six months ended June 27, 1998 were
$31.3 million, down from $31.5 million the same period last year. The decrease
in international sales was the result of weaker European currencies compared to
the U.S. dollar and poor hearing device market conditions in Germany and Austria
together with management and employee turnover at Viennatone, the Company's
Austrian subsidiary. Additionally, economic uncertainty in Japan coupled with
lower shipments to the Company's Japanese distributor (to improve the balance of
inventory levels to in-market sales) contributed to sales reductions in the
Asia-Pacific region in the first six months of 1998 when compared to the same
period last year. Sales in the U.S. and Canada increased 2 percent for the six
months ended June 27, 1998, to $33.7 million from $33.0 million for the
comparable prior year period. This increase was primarily due to unit volume
growth being offset by declines in average unit sales prices as a result of
increasing competition and product mix sales shifts from the Company's higher
priced Premium Series product line to the Company's more moderately priced
Encore Series product line. The Premium Series product line was enhanced by the
addition of the Company's completely-in-the-canal device, the CC4, which first
shipped in volume during the first quarter of 1998.
Gross profit was 54.7 percent of net sales in the first six months of 1998,
compared to 53.7 percent of net sales for the same period of 1997. The
improvement in gross margin was largely attributable to an improved product mix,
including the addition of CC4 sales, as well as progress made in reducing custom
product costs through improved manufacturing efficiencies, SKU rationalization,
and lower component procurement expenses.
R&D spending during the first six months of 1998 was $8.4 million (13.0 percent
of net sales) compared to $8.2 million (12.7 percent of net sales) during the
same period of 1997. The increase in 1998 R&D expenses was primarily due to
planned spending on the program for ReSound's Digital Signal Processing
technology platforms, an increase in the development activities for the ReSound
hearing enhancer program, and products being developed in alliance with
Motorola.
SG&A expenses were $26.1 million (40.2 percent of net sales) for the first six
months of 1998 compared to $27.0 million (41.9 percent of net sales) for the
first six months of 1997. The decrease in SG&A expenses resulted primarily from
the effects of improved cost controls partially offset by increased spending at
Viennatone's retail operation, one-time severance costs, and incremental
expenses resulting from the acquisitions of ReSound Autac in January, 1998 and
Apex Acoustics, Ltd. in April, 1998.
Net interest expense was $507,000 for the first six months of 1998 compared to
$782,000 for the first six months of 1997. This decrease is attributable to
reduction of debt, the effect of the stronger U.S. dollar compared to European
currencies, and increased interest income due to higher average cash balances.
Other income was $1.5 million for the first six months of 1998 compared to other
expense of $335,000 for the first six months of 1997. In the first six months of
1998, income resulted primarily from receipts of $1.5 million under a patent
license agreement. The agreement requires similar payments to be made to the
Company in each of the remaining quarters of 1998. The other expense in the
first six months of 1997 primarily resulted from losses on foreign exchange.
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Income taxes have been provided for on a year-to-date basis and represent taxes
on profits earned at the Company's European subsidiaries in Ireland, Germany,
Switzerland, and Holland.
The Company had net income of $1.7 million in the six months ended June 27, 1998
compared to a net loss of $2.4 million in the six months ended June 30, 1997.
The increase in net income was primarily the result of increased gross profit,
lower SG&A expenses, patent license income, and a significant reduction of
foreign exchange losses, to $114,000 from $443,000 in the prior year six- month
period.
LIQUIDITY AND CAPITAL RESOURCES
In the six months ended June 27, 1998 the Company used $902,000 of cash in
operations, compared to $3.1 million in cash generated from operations in the
six months ended June 30, 1997. Cash used in operations in the first six months
of 1998 included an increase in accounts receivable of $3.6 million, primarily
due to large tender contract shipments late in the second quarter, increasingly
larger shipments of CC4 products as supplier component deliveries improved and
backlog cleared, and shipments resulting from newly formed distributor
relationships in Europe. Other uses of cash in operations include increases in
other assets of $1.1 million and reductions in accrued liabilities of $2.7
million caused primarily by spending and other charges in connection with the
Company's restructuring program initiated in the second half of 1997. The above
uses of cash in operations were partially offset by non-cash charges of $3.6
million relating to depreciation and amortization, improvements in inventory
management of $1.5 million, and net income for the period of $1.7 million.
Net cash used in investing activities for the six months ended June 27, 1998 of
$2.6 million resulted from additions of property and equipment and cash used in
the acquisitions of ReSound Autac and Apex Acoustics, Ltd. These amounts were
partially offset by changes in the cumulative translation adjustment account and
by $900,000 in patent fees received for licensing certain technology acquired by
the Company in 1996 and 1997.
The primary financing activity in the six months ended June 27, 1998 was the
payment of long-term debt of $2.8 million partially offset by proceeds of $1.2
million from the issuance of common stock.
At June 27, 1998, the Company had available cash and cash equivalents of $14.8
million. While the Company believes that available cash will be sufficient to
meet the Company's short-term operating and capital requirements for at least
the next twelve months, the Company may be required to raise additional capital
for its currently envisaged long-term needs, and in connection with its
previously announced restructuring program, which will commence in August, 1998,
and in connection with any future acquisitions.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Competition, especially from new digital hearing device products, is expected to
continue to increase. The Company's ability to grow and maintain profitability
will depend upon its ability to develop, individually and jointly with current
or future strategic partners, or otherwise acquire and effectively market,
competitive DSP and other products. There can be no assurance that the Company
can develop and introduce these products in a timely manner, or that these
products will be able to compete effectively against current or new competing
products. The development or
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acquisition of new products is always subject to technological risks and
uncertainties which could cause termination of the development of the product or
termination of or delay in the introduction of the product, or which could
significantly decrease the originally anticipated level of customer acceptance
of the product. Also, there can be no assurance that a new product can be
manufactured on a cost-effective basis, that regulatory approvals, where
necessary, can be obtained, or that the expected level of customer acceptance
will be met. Also, there can be no assurance that the Company will be able to
continue its successful relationships with its current strategic partners or
establish successful relationships with new strategic partners. In addition,
announcements of new products may cause hearing care professionals or hearing
impaired persons to defer purchases of existing products or return previously
purchased products. The Company's failure to introduce competitive products in a
timely manner would have a material, adverse impact on the Company's financial
condition and results of operations.
The Company anticipates that it will continue to experience, at least for the
near term, lower average unit sales prices of its products due to aggressive
competitive pricing and product mix shift to the Company's more moderately
priced products. In order to offset this, the Company will need to increase unit
sales volume, about which there can be no assurance. The Company also expects
that the negative impact caused by weak economic conditions and/or reductions in
government reimbursement levels available to consumers purchasing hearing
devices in Austria, France, and Germany, reduced shipments to its Japanese
distributor, and unsettled economic conditions in Japan will continue, at least
for the near term. While the Company has mechanisms in place to lessen the
negative impact of foreign currency fluctuations, continued or increased
weakness of European currencies against the US Dollar also are likely to
adversely impact the Company's sales in Europe. Finally, there can be no
assurance that the Company will be able to complete its restructuring program in
a timely manner, consolidate targeted operations successfully, and otherwise
achieve the cost reductions and other restructuring benefits anticipated to
result from the restructuring.
The Company has determined that it will need to modify or replace significant
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and beyond. All required software
modifications and replacements are expected to be completed not later than
March, 1999, which is prior to the estimated occurrence of any year 2000 issues.
While the Company believes its planning efforts are adequate to address its year
2000 concerns, there can be no guarantee that the systems of other companies on
which the Company's systems and operations rely will be converted on a timely
basis and will not have a material effect on the Company. The cost of the year
2000 initiatives is not expected to be material to the Company's results of
operations or financial position.
14
<PAGE> 15
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders of the Company was held on May 21, 1998.
(b) The following directors were elected at the meeting.
<TABLE>
<CAPTION>
SHARES PRESENT
NOMINEE FOR WITHHELD ABSTAIN BUT NOT VOTING
- ------- --- -------- ------- --------------
<S> <C> <C> <C> <C>
Richard L. Goode 16,615,287 83,421 0 0
Russell D. Hays 16,620,918 77,790 0 0
Eugene Kleiner 16,619,718 78,990 0 0
Rodney Perkins 16,619,018 79,690 0 0
Philip S. Schlein 16,619,018 79,690 0 0
Robert C. Wilson 16,452,498 246,210 0 0
</TABLE>
(c) The shareholders voted to authorize the amendment of the Company's 1992
Employee Stock Purchase Plan to increase the number of shares of Common
Stock reserved for issuance thereunder by 200,000 shares to an aggregate of
600,000 shares. The results of that vote were as follows:
<TABLE>
<CAPTION>
SHARES
PRESENT BUT
IN FAVOR OPPOSED ABSTAIN NOT VOTING
---------- ------- ------- -----------
<S> <C> <C> <C>
15,674,728 463,233 55,494 505,253
</TABLE>
15
<PAGE> 16
(d) The shareholders voted to ratify and approve the selection of Ernst & Young
LLP as independent auditors for the Company for the fiscal year ending
December 31, 1998. The results of that vote were as follows:
<TABLE>
<CAPTION>
SHARES
PRESENT BUT
IN FAVOR OPPOSED ABSTAIN NOT VOTING
---------- ------- ------- -----------
<S> <C> <C> <C>
16,650,282 27,380 21,046 0
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 27: Financial data schedule
(b) Reports on Form 8-K
None
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
RESOUND CORPORATION
/s/ Christopher H. Pascoe
----------------------------------
Christopher H. Pascoe
Vice President, Corporate Controller
(Principal Financial and Accounting Officer)
Date: August 7, 1998
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
27 Financial data schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-27-1998
<CASH> 14,751
<SECURITIES> 0
<RECEIVABLES> 28,420
<ALLOWANCES> 6,259
<INVENTORY> 14,156
<CURRENT-ASSETS> 53,574
<PP&E> 42,212
<DEPRECIATION> 31,015
<TOTAL-ASSETS> 88,567
<CURRENT-LIABILITIES> 31,530
<BONDS> 0
0
0
<COMMON> 97,936
<OTHER-SE> (58,063)
<TOTAL-LIABILITY-AND-EQUITY> 88,567
<SALES> 65,027
<TOTAL-REVENUES> 65,027
<CGS> 29,444
<TOTAL-COSTS> 64,006
<OTHER-EXPENSES> (1,520)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 507
<INCOME-PRETAX> 2,034
<INCOME-TAX> 378
<INCOME-CONTINUING> 1,656
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,656
<EPS-PRIMARY> .08
<EPS-DILUTED> .08
</TABLE>
