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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 September 26, 1998 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission file number 0-20046
RESOUND CORPORATION
(Exact name of Registrant as specified in its charter)
California 77-0019588
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
220 Saginaw Drive, Seaport Centre, Redwood City, California 94063
(Address, 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
November 1, 1998 was 20,634,850 shares.
This document consists of 18 pages of which this is page 1.
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<TABLE>
<S> <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.........................................................9
Liquidity and Capital Resources............................................. 12
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............................................................16
Item 2. Changes in Securities and Use of Proceeds....................................16
Item 3. Defaults upon Senior Securities..............................................16
Item 4. Submission of Matters to a Vote of Security Holders..........................16
Item 5. Other Information............................................................16
Item 6. Exhibits and Reports on Form 8-K.............................................16
SIGNATURES.......................................................................................17
INDEX TO EXHIBITS................................................................................18
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. Consolidated Financial Statements:
RESOUND CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands)
ASSETS
<TABLE>
<CAPTION>
September 26, December 31,
1998 1997
-------- --------
(Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 12,800 $ 19,853
Accounts receivable, net 22,225 17,966
Inventories 14,263 14,183
Other current assets 2,832 2,125
-------- --------
Total current assets 52,120 54,127
Property and equipment, net 11,226 10,838
Goodwill 13,595 20,217
Other assets 3,076 4,593
-------- --------
$ 80,017 $ 89,775
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans $ 3,680 $ 1,663
Accounts payable 8,193 8,735
Accrued liabilities 23,284 19,484
Long-term debt, current portion 2,524 4,362
-------- --------
Total current liabilities 37,681 34,244
Long-term liabilities:
Long-term debt, non-current portion 12,579 14,274
Employee benefits 3,987 3,738
Other accrued liabilities -- 500
-------- --------
Total long-term liabilities 16,566 18,512
Shareholders' equity:
Common stock 98,449 96,785
Accumulated deficit (73,414) (57,878)
Cumulative translation adjustment 735 (1,888)
-------- --------
Total shareholders' equity 25,770 37,019
-------- --------
$ 80,017 $ 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 Nine Months Ended
Sept. 26, Sept. 30, Sept. 26, Sept. 30,
1998 1997 1998 1997
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net sales $ 30,255 $ 31,934 $ 95,282 $ 96,376
Cost of sales 16,505(1) 16,224(2) 45,949(1) 46,066(2)
-------- -------- -------- --------
Gross profit 13,750 15,710 49,333 50,310
Operating expenses
Research and development 3,120 4,244 11,567 12,443
Selling, general and administrative 16,632(1) 13,028(2) 42,747(1) 40,026(2)
Restructuring and other charges 11,846(1) 11,184(2) 11,846(1) 11,184(2)
-------- -------- -------- --------
Total operating expenses 31,598 28,456 66,160 63,653
-------- -------- -------- --------
Loss from operations (17,848) (12,746) (16,827) (13,343)
Interest expense, net (225) (296) (732) (1,078)
Other income (expense), net 1,061 (36) 2,581 (371)
-------- -------- -------- --------
Loss before income taxes (17,012) (13,078) (14,978) (14,792)
Provision for income taxes (3) 180 217 558 896
-------- -------- -------- --------
Net loss (17,192) (13,295) (15,536) (15,688)
Preferred dividends -- (75) -- (225)
-------- -------- -------- --------
Net loss applicable to common shareholders $(17,192) $(13,370) $(15,536) $(15,913)
======== ======== ======== ========
Basic and diluted net loss per common share $ (0.84) $ (0.69) $ (0.76) $ (0.82)
======== ======== ======== ========
Shares used in basic and diluted net
loss per common share calculation 20,504 19,441 20,416 19,391
======== ======== ======== ========
</TABLE>
(1) Includes special charges of $16.6 million as follows: cost of sales -- $1.8
million; selling, general and administrative -- $3.0 million; restructuring
and other charges -- $11.8 million (of which $8.1 million is the result of
write-down of goodwill).
(2) Includes special charges of $13.6 million as follows: cost of sales -- $1.8
million; selling, general and administrative -- $0.6 million; restructuring
and other charges -- $11.2 million (of which $10.3 million is the result of
write-down of goodwill).
(3) 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>
Nine Months Ended
-----------------------
Sept. 26, Sept. 30,
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(15,536) $(15,688)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 6,439 3,977
Restructuring and other charges 11,846 10,688
Changes in assets and liabilities:
Accounts receivable (3,690) 383
Inventories 1,433 7,233
Other assets (2,963) (1,169)
Accounts payable (906) (2,836)
Accrued liabilities (1,064) (51)
-------- --------
Net cash provided by (used in) operating activities (4,441) 2,537
Cash flows from investing activities:
Acquisition of ReSound Autac (401) --
Acquisition of Apex Acoustics, Ltd. (750) --
Patent license fees 900 1,800
Change in cumulative translation adjustment 3,327 2,176
Additions of property and equipment (5,294) (1,028)
-------- --------
Net cash provided by (used in) investing activities (2,218) 2,948
Cash flows from financing activities:
Payments on long-term debt (3,442) (2,116)
Bank loans 1,384 395
Issuance of common stock 1,664 544
-------- --------
Net cash used in financing activities (394) (1,177)
-------- --------
Net increase (decrease) in cash and cash equivalents (7,053) 4,308
Cash and cash equivalents at the beginning of the period 19,853 7,980
-------- --------
Cash and cash equivalents at the end of the period $ 12,800 $ 12,288
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ 887 $ 1,259
Income taxes $ 509 $ 1,086
Supplemental schedule of non-cash investing and financing activities:
Accrual of preferred stock dividend -- $ 225
</TABLE>
See notes to consolidated financial statements.
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ReSound Corporation
Notes to Consolidated Financial Statements
(Unaudited)
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 nine-month periods ended September 26, 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. Common equivalent shares
from stock options are excluded from the computation of diluted net loss per
common share for all periods presented as their effect is antidilutive.
Had the Company been in a net income position for the three months and nine
months ended September 26, 1998, diluted earnings per share for those periods
would have included 494,587 shares and 676,537 shares, respectively, related to
outstanding options not included above.
Had the Company been in a net income position for the three months and nine
months ended September 30, 1997, diluted earnings per share for those periods
would have included 397,000 shares and 182,000 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
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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.
During the third quarters of 1998 and 1997, total comprehensive loss amounted to
$14,615,000 and $12,670,000, respectively. During the first nine months of 1998
and 1997, total comprehensive loss amounted to $12,913,000 and $17,864,000,
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>
September 26, December 31,
1998 1997
------- -------
<S> <C> <C>
Raw materials $ 8,440 $ 9,191
Work in process 2,787 2,869
Finished products 3,036 2,123
------- -------
$14,263 $14,183
======= =======
</TABLE>
NOTE C - ACCOUNTING FOR INCOME TAXES
Income taxes have been provided for on a year-to-date basis and represent taxes
on profits earned at the Company's European subsidiaries in Ireland, Germany,
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.
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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>
As part of the Company's strategic restructuring program announced in the third
quarter of 1998, the goodwill associated with the purchase of ReSound Autac GmbH
was written off during the third quarter of 1998.
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, the largest
hearing device retail chain in the United Kingdom, 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>
NOTE F - SPECIAL CHARGES
In the third quarter of 1998, the Company announced a strategic restructuring
program designed to realign the Company's organizational structure, streamline
internal processes, and consolidate facilities worldwide in order to achieve
sustained profitability. This program is anticipated to result in a work force
reduction of up to 100 people worldwide and special charges in the second half
of 1998 of up to $18.0 million. Of this estimated amount, approximately $9.5
million reflects non-cash items for the write-down of goodwill and discontinued
product lines. The remaining charges of up to $8.5 million reflect cash and
non-cash items pertaining primarily to employee severance and consolidation
activities.
In the third quarter of 1998, the Company recorded special charges associated
with this restructuring program of $16.6 million as follows: Cost of sales --
$1.8 million (for write-down of inventories to net realizable value and losses
on supplier commitments); Selling, general and administrative -- $3.0 million
(for write-down of capital assets to fair value and other exit costs);
Restructuring and other --
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$11.8 million (for write-down of goodwill -- $8.1 million, and employee
termination benefits and lease termination costs -- $3.7 million). The Company
anticipates incurring up to an additional $1.4 million in special charges in the
fourth quarter of 1998 relating to this strategic restructuring program. The
remaining 1997 restructuring accrual of approximately $500,000 at the end of the
third quarter 1998 will be fully utilized by mid-year 1999.
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 Report on 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 September 26, 1998 and September 30, 1997
Net sales decreased by 5 percent to $30.3 million in the quarter ended September
26, 1998, from $31.9 million in the quarter ended September 30, 1997.
International sales accounted for 47 percent of the Company's net sales during
the third quarter of 1998 compared to 45 percent during the third quarter of
1997. International sales for the third quarter of 1998 were $14.4 million, a
decrease of 1 percent from the same quarter last year. The quarter-to-quarter
decrease in international sales was the result of 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. Furthermore, the
Company's Austrian export business with Eastern Europe was negatively impacted
by the current economic and political turmoil occurring in that part of the
world. These revenue losses, however, were partially offset by double-digit
percentage sales growth at the Company's sales subsidiaries in Holland, Sweden,
Switzerland, and the UK, as well as increased sales to new
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customers in Latin America and Asia. Sales in the U.S. and Canada decreased by 9
percent to $15.9 million in the quarter ended September 26, 1998, from $17.5
million in the quarter ended September 30, 1997, primarily due to increased
pricing pressures on analog devices, erosion of the Company's Sonar Hearing
Health business, and an understaffed U.S. sales force.
Gross profit was 45.4 percent of net sales in the third quarter of 1998 compared
to 49.2 percent of net sales in the third quarter of 1997. The
quarter-to-quarter decrease in gross profit was largely attributable to market
pricing pressures on analog devices, unabsorbed overhead costs resulting from
volume reductions of custom hearing devices, a decline in the product mix of
higher margin behind-the-ear devices, and a decrease in direct labor efficiency
due to new hires. Special charges of $1.8 million for write-down of inventories
and losses on supplier commitments were incurred in the third quarters of both
1998 and 1997. Excluding special charges, gross profit for the third quarter of
1998 was 51.4 percent of net sales compared to 54.8 percent of net sales for the
same period last year.
Research and development ("R&D") spending during the third quarter of 1998 was
$3.1 million (10.3 percent of net sales) compared to $4.2 million (13.3 percent
of net sales) during the same quarter of 1997. The quarter-to-quarter decrease
in R&D spending was primarily due to the near completion of the developmental
phase of the ReSound Digital 5000, the Company's Digital Signal Processing
technology platform.
Selling, general and administrative ("SG&A") expenses were $16.6 million (55.0
percent of net sales) during the third quarter of 1998 compared to $13.0 million
(40.8 percent of net sales) during the same quarter of 1997. The
quarter-to-quarter increase in SG&A expenses was primarily due to a $3.0 million
charge relating to facilities consolidation and other expenses under the
Company's restructuring program as well as additional expenses resulting from
this year's acquisitions of ReSound Autac and Apex Acoustics. Excluding special
charges, SG&A expenses were $13.6 million (45.1 percent of net sales) during the
third quarter of 1998 compared to $12.4 million (38.9 percent of net sales)
during the same period last year.
Net interest expense was $225,000 for the third quarter of 1998 compared to
$296,000 for the third quarter of 1997. This quarter-to-quarter decrease was
primarily attributable to a reduced level of debt.
Other income was $1.1 million for the third quarter of 1998 compared to other
expense of $36,000 for the third quarter of 1997. In the third quarter of 1998,
income primarily resulted from receipts of $750,000 under a patent license
agreement. This agreement requires similar payments to be made to the Company in
the fourth quarter of 1998. The other expense in the third quarter of 1997
primarily resulted from losses on foreign exchange.
Income taxes have been provided for on a year-to-date basis and represent taxes
on profits earned at the Company's European subsidiaries in Ireland, Germany,
and Holland.
The Company had a net loss of $17.2 million in the quarter ended September 26,
1998 compared to a net loss of $13.3 million in the quarter ended September 30,
1997. Excluding the impact of special charges, the Company had a net loss of
$0.6 million in the third quarter of 1998 compared to net income of $0.3 million
in the same prior year period. The quarter-to-quarter decrease in net income
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was primarily attributable to decreased gross profit and increased SG&A
expenses, partially offset by patent license income.
Nine months ended September 26, 1998 and September 30, 1997
Net sales decreased by 1 percent to $95.3 million in the nine months ended
September 26, 1998, from $96.4 million in the nine months ended September 30,
1997. International sales accounted for 48 percent of the Company's net sales
during the first nine months of 1998 compared to 49 percent during the first
nine months of 1997. International sales for the nine months ended September 26,
1998 were $45.7 million, down from $47.5 million in 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 contributed
to sales reductions in the Asia-Pacific region in the first nine months of 1998
when compared to the same period last year. Sales in the U.S. and Canada
increased 1 percent for the nine months ended September 26, 1998 to $49.6
million from $48.9 million for the comparable prior year period. Although total
units shipped increased, sales were flat primarily due to increased pricing
pressures on analog devices 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.
Gross profit was 51.8 percent of net sales in the first nine months of 1998
compared to 52.2 percent of net sales in the same period of 1997. The decrease
in gross profit was largely attributable to market pricing pressures on analog
devices, unabsorbed overhead costs resulting from volume reductions of custom
hearing devices, a decline in the product mix of higher margin behind-the-ear
devices, and a decrease in direct labor efficiency due to new hires. Special
charges of $1.8 million for write-down of inventories and losses on supplier
commitments were incurred in the first nine months of both 1998 and 1997.
Excluding special charges, gross profit for the first nine months of 1998 was
53.7 percent of net sales compared to 54.1 percent of net sales for the same
period last year.
R&D spending during the first nine months of 1998 was $11.6 million (12.1
percent of net sales) compared to $12.4 million (12.9 percent of net sales)
during the same period of 1997. R&D spending was primarily for the Company's
Digital Signal Processing technology platforms, the ReSound hearing enhancer
program, and products being developed in alliance with Motorola.
SG&A expenses were $42.7 million (44.9 percent of net sales) during the first
nine months of 1998 compared to $40.0 million (41.5 percent of net sales) during
the first nine months of 1997. The increase in SG&A expenses was due primarily
to a $3.0 million charge relating to the Company's restructuring program and
incremental expenses resulting from this year's acquisitions of ReSound Autac
and Apex Acoustics. Excluding special charges, SG&A expenses were $39.7 million
(41.7 percent of net sales) during the first nine months of 1998 compared to
$39.4 million (40.9 percent of net sales) during the same period last year.
Net interest expense was $732,000 for the first nine months of 1998 compared to
$1.1 million for the first nine months of 1997. This decrease was attributable
to reduction of debt and increased interest income due to higher average cash
balances.
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Other income was $2.6 million for the first nine months of 1998 compared to
other expense of $371,000 for the first nine months of 1997. In the first nine
months of 1998, income resulted primarily from receipts of $2.3 million under a
patent license agreement. This agreement requires additional payments of
$750,000 to be made to the Company in the fourth quarter of 1998. The other
expense in the first nine months of 1997 resulted primarily from losses on
foreign exchange.
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,
and Holland.
The Company had a net loss of $15.5 million in the nine months ended September
26, 1998 compared to a net loss of $15.7 million in the nine months ended
September 30, 1997. Excluding the impact of special charges, the Company had net
income of $1.1 million in the first nine months of 1998 compared to a net loss
of $2.1 million in the first nine months of 1997. The increase in net income was
primarily the result of patent license income.
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended September 26, 1998, the Company used $4.4 million of
cash in operations compared to $2.5 million in cash generated from operations in
the nine months ended September 30, 1997. In addition to the $15.5 million net
loss for the nine-month period, cash used in operations for 1998 included an
increase in accounts receivable of $3.7 million primarily due to new customer
relationships in markets where customer repayment terms are longer than those
traditionally experienced by the Company. Other uses of cash in operations
include: (1) increases in other assets of $3.0 million due primarily to a
strengthening of certain European currencies vis-a-vis the U.S. dollar; and (2)
decreases in accrued liabilities and accounts payable of $2.0 million caused
primarily by spending and other charges in connection with the Company's
restructuring program. The above uses of cash in operations were partially
offset by non-cash charges of $11.8 million associated with the third quarter
restructuring charge, non-cash charges of $6.4 million relating to depreciation
and amortization, and improvements in inventory management of $1.4 million.
Net cash used in investing activities for the nine months ended September 26,
1998 of $2.2 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 nine months ended September 26, 1998 was
the payment of long-term debt of $3.4 million partially offset by proceeds of
$1.7 million from the issuance of common stock and additional funds from bank
loans of $1.4 million.
At September 26, 1998, the Company had available cash and cash equivalents of
$12.8 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, implementation of the Company's
restructuring program, and in connection with any future acquisitions.
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FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Competition, especially from new digital hearing device products, is expected to
continue to increase. The Company's ability to grow and maintain profitability
will depend upon its ability to develop, individually and jointly with current
or future strategic partners, or otherwise acquire and effectively market,
competitive DSP and other products. There can be no assurance that the Company
can develop and introduce these products in a timely manner, or that these
products will be able to compete effectively against current or new competing
products. The development or acquisition of new products is always subject to
technological risks and uncertainties which could cause termination of the
development of the product or termination of or delay in the introduction of the
product, or which could significantly decrease the originally anticipated level
of customer acceptance of the product. Also, there can be no assurance that a
new product can be manufactured on a cost-effective basis, that regulatory
approvals, where necessary, can be obtained, or that the expected level of
customer acceptance will be met. Also, there can be no assurance that the
Company will be able to continue its successful relationships with its current
strategic partners or establish successful relationships with new strategic
partners. In addition, announcements of new products may cause hearing care
professionals or hearing impaired persons to defer purchases of existing
products or return previously purchased products. The Company's failure to
introduce competitive products in a timely manner would have a material, adverse
impact on the Company's financial condition and results of operations.
The Company anticipates that it will continue to experience, at least for the
near term, lower average unit sales prices of its analog 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, any further weakness of
European currencies against the U.S. Dollar is 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.
On January 1, 1999, eleven of the fifteen member countries of the European Union
will establish fixed conversion rates between their existing sovereign
currencies and the Euro and adopt the Euro as their new common legal currency.
As of that date, the Euro will trade on currency exchanges and the legal
currencies will remain legal tender in the participating countries for a
transition period between January 1, 1999 and January 1, 2002. During the
transition period, non-cash transactions can be made in Euros, and parties can
elect to pay for goods and services and transact business using either the Euro
or legal currency. Between January 1, 2002 and July 1, 2002, the participating
countries will introduce Euro notes and coins and withdraw all legacy currencies
so that they will no longer be available. The Euro conversion may affect
cross-border competition by creating cross-border price transparency. The
Company is assessing its pricing/marketing strategy in order to insure that it
remains competitive in a broader European market. The Company is also assessing
its information technology systems to allow transactions to take place in both
the legacy currencies and
13
<PAGE> 14
the Euro, and to allow for the eventual elimination of the legacy currencies.
Additionally, the Company is reviewing whether certain existing contracts will
need to be modified. The Company's currency risk and risk management for
operations in participating countries may be reduced as the legacy currencies
are converted to the Euro. The Company will continue to evaluate issues
involving the introduction of the Euro. Based on the Company's assessment of
current information, it is not expected that the Euro conversion will have a
material adverse effect on its business or financial condition.
The Company is in the process of assessing the impact that the arrival of the
year 2000 may have on its business and operations. This issue arises because
many of the computer systems and software products currently in use are coded to
accept only two digit entries in the date code field. When the year 2000
arrives, these date code fields will have to accept four digit entries to
distinguish between dates in the twentieth century from those in the
twenty-first. There is widespread concern that, given the extent to which
computers, software and integrated circuits have come to permeate every facet of
today's society, including in the world of commerce, the failure to distinguish
between dates beginning with "19" and those beginning with "20" may cause
widespread disruption to the conduct of business, in the United States and
throughout the world.
In response to these concerns, the Company launched a program to assess the
impact of the year 2000 on its products, operations and business and on the
products, operations and businesses of those third-party vendors and suppliers
with which the Company has material relationships.
In assessing the impact on operations, the Company is undertaking an inventory
of the various hardware platforms and software products used throughout the
Company. These include centralized software applications used by the Company to
manage its core operations, such as supply chain management, engineering,
customer service and accounting, desktop applications used by Company employees,
and infrastructure hardware such as mid-range platforms, desktop PCs, and plant
floor equipment.
The Company's inventory of centralized and desktop software applications is
complete. The Company is working to complete its inventory of infrastructure
hardware by December 1998.
The next step in the assessment process is to determine whether or not the
infrastructure hardware and various software applications used by the Company
are year 2000 compliant; that is, whether the arrival of the year 2000 will
cause the subject hardware or software to malfunction or cause a disruption to
the Company's operations.
The Company has determined that year 2000 issues exist with certain of the
desktop software applications in use throughout the Company. The Company intends
to implement solutions to these issues as they become available from the vendors
of such desktop applications. To the extent that solutions are not made
available by the vendors of such products, the Company will replace such
products with equivalent year 2000 compliant desktop applications. The Company
expects that by March 1999, it will have implemented vendor-provided solutions
to these issues or have begun a program to implement replacement applications.
14
<PAGE> 15
The Company has determined that its supply chain management, customer service,
and accounting software applications may have year 2000 issues. However, the
Company had previously intended to and is in the process of upgrading such
software applications, which upgrades are designed to resolve any year 2000
issues. The timing of and expense associated with such upgrades have not been
affected by the need to address year 2000 concerns.
The Company's assessment of the year 2000 readiness of its infrastructure
hardware and engineering software awaits completion of the inventory.
In addition to assessing the impact of the year 2000 on its internal operations,
the Company has also undertaken to assess the impact of the year 2000 on its
products. The Company is currently assessing the impact of the year 2000 on its
hearing devices and fitting systems software products and has initiated
communications with vendors of critical components to assess the year 2000
compliance of such components and such vendors' state of readiness for the year
2000. The Company is working to complete an assessment of the impact of the year
2000 on its hearing devices and fitting systems software products by the end of
January 1999. Additionally, by the end of January 1999, the Company anticipates
having completed an assessment of the impact of the year 2000 on the vendors of
critical components and their products.
To date the Company has incurred minimal incremental expenditures in assessing
the impact of the year 2000. Such amounts have been expensed as incurred. Until
completion of the inventory and assessments described above, estimates of the
total costs to the Company of addressing the year 2000 problem cannot be made.
However, the Company does not currently anticipate that such costs will be
material to the Company's business, results of operations or financial
condition.
As previously reported, the Company plans that, by March 1999, it will have
completed its year 2000 assessment and put in place any required hardware or
software modifications and replacements.
The Company believes that a significant risk it faces from the year 2000 is risk
that is outside of its control. Notwithstanding written assurances from the
Company's vendors regarding year 2000 compliance, there is no guarantee that the
year 2000 will not cause a disruption in supply of critical components. Given
the Company's reliance on suppliers of critical, sole-sourced components for its
hearing devices, the Company is relying on these suppliers to address the year
2000 issues in their own products and operations, and the failure of such
suppliers to adequately address these issues could have a material adverse
effect on the Company's business, financial condition and results of operations.
The discussion of the Company's efforts and expectations relating to year 2000
compliance are forward-looking statements. The Company's ability to achieve year
2000 compliance both with respect to its internal operations and its products,
and the level of incremental costs associated therewith, could be adversely
impacted by, among other things, failure to identify all susceptible systems or
products, the availability and costs of upgrades to hardware platforms and
software products necessary to achieve year 2000 compliance, the availability
and costs of alternative hardware platforms and software products that may be
necessary to replace non year-2000 compliant products, the actions of vendors
with respect to components critical to the Company's products, particularly
sole-sourced components, and unanticipated problems identified in the Company's
ongoing assessment. Any of such factors could have a material adverse effect on
the Company's business, financial condition, and results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
During the third quarter, the Board of Directors approved the entering
into by the Company of new change of control agreements with executive
officers. These agreements would replace any change of control
agreements currently in place between the Company and executive
officers. The form of new change of control agreement is attached as
Exhibit 10.35.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.35: Amended and Restated Change of Control Agreement
Exhibit 27.01: 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/Laureen DeBuono
Laureen DeBuono
Executive Vice President, Chief Operating
Officer & Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: November 9, 1998
17
<PAGE> 18
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.35 Amended and Restated Change of Control Agreement
27.01 Financial Data Schedule
</TABLE>
18
<PAGE> 1
EXHIBIT 10.35
AMENDED AND RESTATED CHANGE OF CONTROL AGREEMENT
This Amended and Restated Change of Control Agreement, dated as of
______________, 1998 (the "Agreement"), is between ________________ (the
"Employee") and ReSound Corporation, a California corporation (the "Company")
and amends and restates that certain Change of Control Agreement made and
entered into effective as of ________________ by and between the Employee and
the Company.
RECITALS
A. Another company or other entity may from time to time consider
the possibility of acquiring the Company or a change of control of the Company
may otherwise occur, with or without the approval of the Company's Board of
Directors (the "Board"). The Company recognizes that such situations can be a
distraction to the Employee, a corporate officer of the Company, and can cause
the Employee to consider alternative employment opportunities. The Company has
determined that it is in the best interests of the Company and its shareholders
to assure that the Company will have the continued dedication and objectivity of
the Employee, notwithstanding the possibility, threat or occurrence of a Change
of Control (as defined below) of the Company.
B. The Company believes that it is in the best interests of the
Company and its shareholders to provide the Employee with an incentive to
continue his or her employment with the Company notwithstanding the possibility,
threat or occurrence of a Change of Control of the Company.
C. The Board believes that it is imperative to provide the Employee
with certain benefits upon a Change of Control and, under certain circumstances,
upon termination of the Employee's employment in connection with a Change of
Control, which benefits are intended to provide the Employee with financial
security and provide sufficient income and encouragement to the Employee to
remain with the Company notwithstanding the possibility of a Change of Control.
D. To accomplish the foregoing objectives, the Human Resources
Committee of the Board of Directors has directed the Company, upon execution of
this Agreement by the Employee, to agree to the terms provided in this
Agreement.
E. Certain capitalized terms used in the Agreement are defined in
Section 4 below.
In consideration of the mutual covenants contained in this
Agreement, and in consideration of the continuing employment of Employee by the
Company, the parties agree as follows:
1. At-Will Employment; Term. The Company and the Employee
acknowledge that the Employee's employment is and shall continue to be at-will,
as defined under applicable law, except as otherwise provided in a separate
written employment agreement between the Company
1
<PAGE> 2
and the Employee. If the Employee's status as a corporate officer of the Company
terminates for any reason, including any termination prior to a Change of
Control (other than in contemplation of a Change of Control), the Employee shall
not be entitled to any payments or benefits, other than as provided by this
Agreement, or as may otherwise be available in accordance with the terms of the
Company's then existing employee plans, agreements and policies in effect at the
time of termination. The terms of this Agreement shall terminate upon the
earlier of (i) the date on which Employee's status as a corporate officer of the
Company ceases, other than in contemplation of a Change of Control, (ii) the
date that all obligations of the parties hereunder have been satisfied, or (iii)
two (2) years after a Change of Control. A termination of the terms of this
Agreement pursuant to the preceding sentence shall be effective for all
purposes, except that such termination shall not affect the payment or provision
of compensation or benefits on account of a termination of employment occurring
prior to the termination of the terms of this Agreement.
2. Stock Options; Restricted Stock. In the event of a Change of
Control and termination of the Employee's employment with the Company as
provided in Section 3(a)(ii) below, any shares of restricted stock issued to the
Employee shall become fully vested and no longer subject to repurchase by the
Company, and each stock option granted for the Company's securities held by the
Employee shall become fully vested and immediately exercisable on the Employee's
termination date. Any such stock options shall thereafter remain exercisable in
accordance with the provisions of the option agreement and stock option plan
pursuant to which such stock option was granted.
3. Change of Control.
(a) Termination Following A Change of Control. Subject to Section
5 below, if the Employee's employment with the Company is terminated at any time
within two (2) years after or is terminated in contemplation of, a Change of
Control, then the Employee shall be entitled to receive severance benefits as
follows:
(i) Voluntary Resignation; For Cause Termination. If the
Employee voluntarily resigns from the Company (other than as a result of an
Involuntary Termination (as defined below)) or if the Company terminates the
Employee's employment for Cause (as defined below), then the Employee shall not
be entitled to receive severance payments under this Agreement other than the
payment of Accrued Compensation (as defined below). The Employee's benefits will
be terminated under the Company's then existing benefit plans and policies in
accordance with such plans and policies in effect on the date of termination or
as otherwise determined by the Board of Directors of the Company.
(ii) Involuntary Termination. If the Employee's employment is
terminated as a result of an Involuntary Termination, the Employee shall be
entitled to receive the following benefits: (A) Accrued Compensation plus an
amount equal to the Target Incentive Award (as defined below) multiplied by a
fraction the numerator of which is the number of days in the fiscal year through
the termination date and the denominator of which is 365, (B) a lump sum
severance payment equal to two (2) times the sum of the (x) annualized base
salary which the Employee was receiving at the time of such termination or, if
greater, at the highest rate in
2
<PAGE> 3
effect at any time during the ninety (90) day period prior to the Change of
Control or termination date (the "Base Salary") and (y) Employee's "Target
Incentive Award" as approved and as in effect for the fiscal year coinciding
with or preceding the Change of Control or termination date, whichever is
greater, which payments shall be paid within thirty (30) days of termination (or
such earlier date as is required by law); (C) continuation of all health, dental
and life insurance benefits (at the Company's expense except for any Employee
contribution to the extent provided prior to the Change in Control)
substantially identical to those to which the Employee was entitled in the
ninety (90) day period prior to the termination or Change of Control, or if more
favorable, to those being offered to similarly situated officers of the Company,
or a successor corporation, for twenty four (24) months; and (iv) outplacement
and career counseling services of Employee's choice for up to twenty four (24)
months with a total value not to exceed 25% of Employee's Base Salary. For
purposes of this Agreement, the term "Target Incentive Award" shall mean the
Employee's Base Salary in effect on the termination date or, if higher, at the
highest rate in effect at any time during the ninety (90) day period prior to
the Change of Control or termination date, multiplied by that percentage of such
base salary that is prescribed by the Company under its incentive compensation
plan (and any successor bonus plan, the "Incentive Plan") as the percentage of
such base salary payable to the Employee as a bonus if the Company pays bonuses
at one-hundred percent (100%) of its operating plan.
(b) Termination Apart from a Change of Control. In the event the
Employee's employment terminates for any reason, either prior to the occurrence
of a Change of Control or after the two year period following the effective date
of a Change of Control, then the Employee shall not be entitled to receive any
severance payments under this Agreement other than Accrued Compensation. The
Employee's benefits will be terminated under the terms of the Company's then
existing benefit plans and policies in accordance with such plans and policies
in effect on the date of termination or as otherwise determined by the Board of
Directors of the Company.
4. Definition of Terms. The following terms referred to in this
Agreement shall have the following meanings:
(a) Accrued Compensation. "Accrued Compensation" shall mean an
amount which shall include all amounts earned or accrued through the date of
Employee's termination of employment but not paid as of such date, including (i)
base salary, (ii) reimbursement for reasonable and necessary expenses incurred
by Employee on behalf of the Company during the period ending on the termination
date, (iii) vacation pay, and (iv) bonuses and incentive compensation.
(b) Cause. "Cause" shall mean a termination of employment based
on fraud, misappropriation, embezzlement or willful engagement by Employee in
misconduct which is demonstrably and materially injurious to the Company and its
subsidiaries taken as a whole (no act, or failure to act, on the part of
Employee shall be considered "willful" unless done, or omitted to be done, by
the Employee not in good faith and without a reasonable belief that the action
or omission was in the best interests of the Company and its subsidiaries);
provided, that, Employee shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to the Employee a Notice of
Termination (as defined below) and a copy of the resolution duly adopted by the
affirmative vote of not less than three-quarters of the members
3
<PAGE> 4
of the Board of Directors at a meeting of the Board called for and held for the
purpose (after reasonable notice to Employee and an opportunity for Employee,
together with Employee's counsel, to be heard before the Board), finding that,
in the good faith opinion of the Board, Employee was engaged in the conduct set
forth in the first sentence of this Section 4(b) and specifying the particulars
thereof in reasonable detail. "Notice of Termination" shall mean a written
notice of termination of Employee's employment from the Company, which notice
indicates that specific termination provision in this Section 4(b) relied upon
and which sets forth in reasonable detail the facts and circumstances claimed to
provide a basis for termination of Employee's employment under the provision so
indicated. In the event that there has been a change in the composition of the
Board of Directors such that fewer than a majority of the directors in service
prior to the Change of Control remain directors after the effective date of the
transaction, the determination shall be made by an arbitrator on a binding and
final basis in the County of San Mateo, California.
(c) Change of Control. "Change of Control" shall mean any of the
following events:
(i) An acquisition of any voting securities of the Company
(the "Voting Securities") by any "Person" (as the term is used for purposes of
Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the
"1934 Act")) immediately after which such Person has "Beneficial Ownership"
(within the meaning of Rule 13d-3 promulgated under the 1934 Act) of twenty five
percent (25%) or more of the combined voting power of the Company's then
outstanding Voting Securities (taking into account any Voting Securities
acquired pursuant to a Non-Control Acquisition (as hereinafter defined));
provided, however, that in determining whether a Change of Control has occurred,
Voting Securities which are acquired in a "Non-Control Acquisition" shall not
constitute an acquisition which could cause a Change of Control. A "Non-Control
Acquisition" shall mean an acquisition of Voting Securities (1) by an employee
benefit plan (or a trust forming a part thereof) maintained by (A) the Company
or (B) any corporation or other Person of which a majority of its voting power
or its equity securities or equity interest is owned directly or indirectly by
the Company (a "Subsidiary"), (2) by the Company or any Subsidiary; (3) by any
Person in connection with a "Non-Control Transaction" (as hereinafter defined);
or (4) by any Person directly from the Company, or by any Person in the open
market, of less than thirty five percent (35%) of the combined voting power of
the Company's then outstanding Voting Securities with the agreement of the
Company (which agreement shall be evidenced by a resolution adopted unanimously
by the Incumbent Board (as hereinafter defined)) and which, in the case of any
such acquisition, is accompanied by a "stand still agreement" restricting the
Person from acquiring additional shares of the Company's Voting Securities,
mutually agreed and entered into by any such acquiring Person and the Company.
(ii) Two or more members of the Board as of the date this
Agreement is approved by the Board (the "Incumbent Board") or its Committee
cease for any reason to be members of the Board; provided, however, that if the
appointment, election or nomination for election by the Company's shareholders,
of any new director is approved by the unanimous vote of the Incumbent Board,
such new director shall, for purposes of this Agreement, be considered a member
of the Incumbent Board; provided, further, however, that no individual shall be
4
<PAGE> 5
considered a member of the Incumbent Board if such individual initially assumed
office as a result of either an actual or threatened "Election Contest" (as
described in Rule 14a-11 promulgated under the 1934 Act) or other actual or
threatened solicitation of proxies or consents by or on behalf of a Person other
than the Board (a "Proxy Contest") including by reason of any agreement intended
to avoid or settle any Election Contest or Proxy Contest;
(iii) Approval by shareholders of the Company of:
(1) A merger, consolidation or reorganization involving
the Company, unless such merger, consolidation or reorganization satisfies the
conditions set forth below:
(A) the shareholders of the Company immediately
before such merger, consolidation or reorganization, own immediately following
such merger, consolidation or reorganization, directly or indirectly, at least
fifty-one percent (51%) of the combined voting power of the outstanding Voting
Securities of the corporation resulting from such merger or consolidation or
reorganization (the "Surviving Corporation") in substantially the same
proportion as their ownership of the Voting Securities immediately before such
merger, consolidation or reorganization; and
(B) no Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan (or any trust forming a
part thereof) maintained by the Company, the Surviving Corporation or any
Subsidiary, or any Person who, immediately prior to such merger, consolidation
or reorganization, had Beneficial Ownership of twenty five percent (25%) or more
of the then outstanding Voting Securities) has Beneficial Ownership of twenty
five percent (25%) or more of the combined voting power of the Surviving
Corporation's then outstanding Voting Securities, provided, however, that with
the agreement of the Company (which agreement shall be evidenced by a resolution
adopted unanimously by the Incumbent Board (as defined above)) accompanied by a
"stand still agreement" restricting the Person from acquiring additional shares
of the Company's Voting Securities, a Person may acquire beneficial ownership of
twenty five percent (25%) or more but less than thirty five percent (35%) of the
combined voting power of the Surviving Corporation.
A transaction described in subsections (A) and (B) above shall herein be
referred to as a "Non-Control Transaction";
(2) A complete liquidation or dissolution of the
Company; or
(3) An agreement for the sale or other disposition of
all or substantially all of the assets of the Company to any Person (other than
a transfer to a Subsidiary).
Notwithstanding the foregoing, a Change of Control shall not be deemed
to occur solely because any Person (the "Subject Person") acquired Beneficial
Ownership of more than the permitted amount of the outstanding Voting Securities
as a result of the acquisition of Voting Securities by the Company which, by
reducing the number of Voting Securities outstanding,
5
<PAGE> 6
increases the proportional number of shares Beneficially Owned by the Subject
Person; provided, however, that, if a Change of Control would occur (but for the
operation of this sentence) as a result of the acquisition of Voting Securities
by the Company, and after such share acquisition by the Company the Subject
Person becomes the Beneficial Owner of any additional Voting Securities which
increases the percentage of the then outstanding Voting Securities Beneficially
Owned by the Subject Person, then a Change of Control shall occur.
(d) Involuntary Termination. "Involuntary Termination" shall
include any (1) any termination by the Company other than for Cause and (2) the
Employee's voluntary termination, upon 30 days prior written notice to the
Company, which voluntary termination follows or relates to:
(i) a change in Employee's status, title, position or
responsibilities (including reporting responsibilities) which, in Employee's
reasonable judgment, represents an adverse change from Employee's status, title,
position or responsibilities as in effect at any time within ninety (90) days
preceding the date of a Change of Control or at any time thereafter; the
assignment to Employee of any duties or responsibilities which, in Employee's
reasonable judgment, are inconsistent with Employee's status, title, position or
responsibilities as in effect at any time within ninety (90) days preceding the
date of a Change of Control or at any time thereafter; or any removal of
Employee from or failure to reappoint or reelect Employee to any of such offices
or positions, except in connection with the termination of Employee's employment
for disability, Cause, as a result of Employee's death or by Employee other than
for Involuntary Termination;
(ii) any reduction of the Employee's base compensation or any
failure to pay Employee any compensation or benefits to which Employee is
entitled within five (5) days of the date due;
(iii) the Company requiring Employee to be based at any place
outside of a sixty (60)-mile radius from Employee's principal business office as
of the date of this Agreement;
(iv) the failure by the Company to (A) continue in effect
(without reduction in benefit level and/or reward opportunities) any material
compensation or employee benefit plan in which Employee was participating at any
time within ninety (90) days preceding the date of a Change of Control or at any
time thereafter, unless such plan is replaced with a plan that provides
substantially equivalent compensation or benefits to Employee, or (B) provide
Employee with compensation and benefits, in the aggregate, at least equal (in
terms of benefit levels and/or reward opportunities) to those provided for under
each other employee benefit plan, program and practice in which Employee was
participating at any time within ninety (90) days preceding the date of a Change
of Control or at any time thereafter;
(v) the insolvency of or the filing of a petition for
bankruptcy by the Company;
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<PAGE> 7
(vi) the filing of a petition for bankruptcy against the
Company by any third party, which petition is not dismissed within sixty (60)
days;
(vii) any material breach by the Company of any provision of
this Agreement;
(viii) any purported termination of Employee's employment for
Cause by the Company which does not comply with the terms of Section 4(b); or
(ix) the failure of the Company to obtain an agreement in
reasonable and customary form, from any successors and assigns to assume and
agree to perform this Agreement, as contemplated in Section 6 hereof.
5. Limitation on Payments. In the event that the severance and other
benefits provided for in this Agreement to the Employee (i) constitute
"parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and (ii) but for this Section, would be
subject to the excise tax imposed by Section 4999 of the Code, then the
Employee's benefits under Sections 2 and 3(a)(ii) shall be payable either:
(a) in full, or
(b) as to such lesser amount (but not below zero) which would
result in no portion of such severance benefits being subject to excise tax
under Section 4999 of the Code or any interest or penalties with respect to such
excise tax (such excise tax together with any such interest and penalties are
hereafter collectively, referred to as the "Excise Tax"), whichever of the
foregoing amounts, taking into account the applicable federal, state and local
income and employment taxes and the Excise Tax, results in the receipt by the
Employee on an after-tax basis of the greatest amount of severance benefits
under Sections 2 and 3(a)(ii), notwithstanding that all or some portion of such
severance benefits may be subject to the Excise Tax. Unless the Employee shall
have given prior written notice specifying a different order to the Company to
effectuate the reduction in severance benefits provided for in this Section
5(b), the Company shall reduce or eliminate the severance benefits under
Sections 2 and 3(a)(ii) by (i) first reducing or eliminating those payments or
benefits which are not payable in cash and (ii) then reducing or eliminating
cash payments or benefits, in each case in reverse order beginning with payments
or benefits which are to be paid or provided the furthest in time from the
Determination (as hereinafter defined). To the extent permitted by law, any
notice given by the Employee pursuant to the preceding sentence shall take
precedence over the provisions of any other plan, arrangement or agreement
governing the Employee's rights and entitlements to any such payments or
benefits. Unless the Company and the Employee otherwise agree in writing, any
determination (the "Determination") required under this Section 5 shall be made
in writing by the Company's independent public accountants (the "Accountants"),
whose Determination shall be conclusive and binding upon the Employee and the
Company for all purposes subject to the application of Section 5(c), below. For
purposes of making the calculations required by this Section 5, the Accountants
may make reasonable assumptions and approximations concerning applicable taxes
and may rely on reasonable, good faith interpretations concerning the
application of Section 280G and 4999 of the Code. The Company and the Employee
shall
7
<PAGE> 8
furnish to the Accountants such information and documents as the Accountants may
reasonably request in order to make a Determination under this Section 5. The
Company shall bear all costs the Accountants may reasonably incur in connection
with any calculations contemplated by this Section 5.
(c) As a result of the uncertainty in the application of Sections
4999 and 280G of the Code, it is possible that the severance benefits under
Sections 2 and 3(a)(ii) to be made to, or provided for the benefit of, the
Employee will be either greater (an "Excess Payment") or less (an
"Underpayment") than the amounts provided for by the limitations contained in
this Section 5.
(i) If it is established, pursuant to a final determination
of a court or an Internal Revenue Service (the "IRS") proceeding which has been
finally and conclusively resolved, that an Excess Payment has been made, such
Excess Payment shall be deemed for all purposes to be a loan to the Employee
made on the date the Employee received the Excess Payment, which loan the
Employee must repay to the Company together with interest at the applicable
federal rate under Code Section 7872(f)(2); provided, that no loan shall be
deemed to have been made and no amount will be payable by the Employee to the
Company unless, and only to the extent that, the deemed loan and payment would
either reduce the amount on which the Employee is subject to the Excise Tax or
generate a refund of tax, penalties or interest imposed under the Excise Tax.
(ii) In the event that it is determined (A) by the
Accountants, the Company (which shall include the position taken by the Company,
or together with its consolidated group, on its federal income tax return) or
the IRS or (B) pursuant to a determination by a court, that an Underpayment has
occurred, the Company shall pay an amount equal to the Underpayment to the
Employee within ten (10) days after such determination or resolution, together
with interest on such amount at the applicable federal rate under Code Section
7872(f)(2) from the date such amount would have been paid to the Employee until
the date of payment.
6. Successors. Any successor to the Company (whether direct or indirect
and whether by purchase, lease, merger, consolidation, liquidation or otherwise)
to all or substantially all of the Company's business and/or assets shall assume
the obligations under this Agreement and agree expressly to perform the
obligations under this Agreement in the same manner and to the same extent as
the Company would be required to perform such obligations in the absence of a
succession. The terms of this Agreement and all of the Employee's rights
hereunder shall inure to the benefit of, and be enforceable by, the Employee's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees.
7. Notice. Notices and all other communications contemplated by this
Agreement shall be in writing and shall be deemed to have been duly given when
personally delivered or when mailed by international air courier or by U.S.
registered or certified mail, return receipt requested and postage prepaid.
Mailed notices to the Employee shall be addressed to the Employee at the home
address that the Employee most recently communicated to the Company in writing.
In the case of the Company, mailed notices shall be addressed to its corporate
8
<PAGE> 9
headquarters, and all notices shall be directed to the attention of its
President, with a copy to Elias J. Blawie, Venture Law Group, a Professional
Corporation, 2800 Sand Hill Road, Menlo Park, CA 94025.
8. Miscellaneous Provisions.
(a) No Duty to Mitigate. The Employee shall not be required to
mitigate the amount of any payment contemplated by this Agreement (whether by
seeking new employment or in any other manner), nor, except as otherwise
provided in this Agreement, shall any such payment be reduced by any earnings
that the Employee may receive from any other source.
(b) Waiver. No provision of this Agreement shall be modified,
waived or discharged unless the modification, waiver or discharge is agreed to
in writing and signed by the Employee and by an authorized officer of the
Company (other than the Employee). No waiver by either party of any breach of,
or of compliance with, any condition or provision of this Agreement by the other
party shall be considered a waiver of any other condition or provision or of the
same condition or provision at another time.
(c) Whole Agreement. No agreements, representations or
understandings (whether oral or written and whether express or implied) which
are not expressly set forth in this Agreement have been made or entered into by
either party with respect to the subject matter hereof. This Agreement
supersedes any agreement of the same title and concerning similar subject matter
dated prior to the date of this Agreement, and by execution of this Agreement
both parties agree that any such predecessor agreement shall be deemed null and
void.
(d) Choice of Law. The validity, interpretation, construction and
performance of this Agreement shall be governed by the laws of the State of
California without reference to conflict of laws provisions.
(e) Severability. If any term or provision of this Agreement or
the application thereof to any circumstance shall, in any jurisdiction and to
any extent, be invalid or unenforceable, such term or provision shall be
ineffective as to such jurisdiction to the extent of such invalidity or
unenforceability without invalidating or rendering unenforceable the remaining
terms and provisions of this Agreement or the application of such terms and
provisions to circumstances other than those as to which it is held invalid or
unenforceable, and a suitable and equitable term or provision shall be
substituted therefor to carry out, insofar as may be valid and enforceable, the
intent and purpose of the invalid or unenforceable term or provision.
(f) Arbitration. Any dispute or controversy arising under or in
connection with this Agreement may be settled at the option of either party by
binding arbitration in the County of San Mateo, California, in accordance with
the rules of the American Arbitration Association then in effect. Judgment may
be entered on the arbitrator's award in any court having jurisdiction. Punitive
damages shall not be awarded.
(g) Legal Fees and Expenses. The Company shall pay all legal fees
and related expenses (including the costs of experts, evidence and counsel)
incurred by Employee as
9
<PAGE> 10
they become due as a result of (i) Employee's termination of employment
(including all such fees and expenses, if any, incurred in contesting or
disputing any such termination of employment), (ii) Employee's seeking to obtain
or enforce any right or benefit provided by this Agreement or by any other plan
or arrangement maintained by the Company under which the Employee is or may be
entitled to receive benefits, and (iii) Employee's hearing before the Board as
contemplated in Section 4(d)(i) of this Agreement; provided, however, that the
circumstances set forth in clauses (i) and (ii) occurred in contemplation of or
after a Change of Control. Notwithstanding the foregoing, in the event of a
termination of employment alleged by the Company to be for Cause, which for
Cause termination is upheld by the final, unappealed judgment or award of any
court or arbitrator, then Employee hereby undertakes, upon the Company's demand,
to repay promptly any amounts paid to Employee pursuant to clause (i) in the
foregoing sentence.
(h) No Assignment of Benefits. The rights of any person to
payments or benefits under this Agreement shall not be made subject to any
option or assignment, and any action in violation of this subsection (h) shall
be void.
(i) Employment Taxes. All payments made pursuant to this
Agreement will be subject to withholding of applicable income and employment
taxes.
(j) Assignment by Company. The Company may assign its rights
under this Agreement to an affiliate, and an affiliate may assign its rights
under this Agreement to another affiliate of the Company or to the Company;
provided, however, that no assignment shall be made if the net worth of the
assignee is less than the net worth of the Company at the time of assignment. In
the case of any such assignment, the term "Company" when used in a section of
this Agreement shall mean the corporation that actually employs the Employee.
(k) Counterparts. This Agreement may be executed in counterparts,
each of which shall be deemed an original, but all of which together will
constitute one and the same instrument.
(l) Non-Exclusivity of Rights. Nothing in this Agreement shall
prevent or limit Employee's continuing or future participation in any benefit,
bonus, incentive or other plan or program provided by the Company (except for
any severance or termination policies, plans, programs or practices) and for
which Employee may qualify, nor shall anything herein limit or reduce such
rights as Employee may have under any other agreements with the Company (except
for any severance or termination agreement). Amounts which are vested benefits
or which Employee is otherwise entitled to receive under any plan or program of
the Company shall be payable in accordance with such plan or program, except as
explicitly modified by this Agreement.
[SIGNATURE PAGE FOLLOWS]
10
<PAGE> 11
IN WITNESS WHEREOF, each of the parties has executed this Agreement,
in the case of the Company by its duly authorized officer, as of the day and
year first above written.
RESOUND CORPORATION "EMPLOYEE"
By:
------------------------------- ------------------------------------
Title: Name:
---------------------------- -------------------------------
Title:
------------------------------
11
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER
26, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-26-1998
<CASH> 12,800
<SECURITIES> 0
<RECEIVABLES> 22,225
<ALLOWANCES> 0
<INVENTORY> 14,263
<CURRENT-ASSETS> 52,120
<PP&E> 11,226
<DEPRECIATION> 0
<TOTAL-ASSETS> 80,017
<CURRENT-LIABILITIES> 37,681
<BONDS> 0
0
0
<COMMON> 98,449
<OTHER-SE> (72,679)
<TOTAL-LIABILITY-AND-EQUITY> 80,017
<SALES> 95,282
<TOTAL-REVENUES> 95,282
<CGS> 45,949
<TOTAL-COSTS> 45,949
<OTHER-EXPENSES> 66,160
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (732)
<INCOME-PRETAX> (14,978)
<INCOME-TAX> 558
<INCOME-CONTINUING> (15,536)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,536)
<EPS-PRIMARY> (0.76)
<EPS-DILUTED> (0.76)
</TABLE>
