<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 27, 1999 or
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _________ to _________
Commission file number 0-20046
RESOUND CORPORATION
(Exact name of Registrant as specified in its charter)
California 77-0019588
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
220 Saginaw Drive, Seaport Centre, Redwood City, California 94063
(Address of principal executive offices and zip code)
(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
April 30, 1999 was 20,927,169 shares.
This document consists of 20 pages of which this is page 1.
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PART I. FINANCIAL INFORMATION
<TABLE>
<S> <C> <C>
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets..............................3
Condensed Consolidated Statements of Operations....................4
Condensed Consolidated Statements of Cash Flows....................5
Notes to Condensed Consolidated Financial Statements...............6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Results of Operations.............................................12
Liquidity and Capital Resources.................................. 13
Factors That May Affect Future Operating Results..................14
Item 3. Quantitative and Qualitative Disclosures about Market Risks.......19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................19
Item 2. Changes in Securities and Use of Proceeds.........................19
Item 3. Defaults upon Senior Securities...................................19
Item 4. Submission of Matters to a Vote of Security Holders...............19
Item 5. Other Information.................................................19
Item 6. Exhibits and Reports on Form 8-K..................................19
SIGNATURES .............................................................................20
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
RESOUND CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
MARCH 27, DECEMBER 31,
1999 1998
------- -------
(UNAUDITED)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,323 $ 6,715
Accounts receivable, net 26,611 16,892
Inventories 15,813 16,199
Other receivables 876 2,313
Other current assets 878 1,452
------- -------
Total current assets 50,501 43,571
Property and equipment, net 9,955 10,734
Goodwill, net 11,200 12,263
Other assets 3,045 3,194
------- -------
$74,701 $69,762
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans $ 7,057 $ 4,646
Accounts payable 11,449 8,253
Accrued liabilities 18,536 18,548
Long-term debt, current portion 11,107 1,790
------- -------
Total current liabilities 48,149 33,237
Long-term liabilities:
Long-term debt, non-current portion 2,686 12,815
Employee benefits 2,708 2,891
Other accrued liabilities 125 125
------- -------
Total long-term liabilities 5,519 15,831
Shareholders' equity 21,033 20,694
------- -------
$74,701 $69,762
======= =======
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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RESOUND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 27, MARCH 28,
1999 1998
-------- --------
<S> <C> <C>
Net sales $ 34,230 $ 31,143
Cost of sales 16,271 14,457
-------- --------
Gross profit 17,959 16,686
Operating expenses
Research and development 3,388 3,975
Selling, general and administrative 12,158 12,148
-------- --------
Total operating expenses 15,546 16,123
-------- --------
Income from operations 2,413 563
Interest expense, net (234) (256)
Other income (expense), net (412) 848
-------- --------
Income before income taxes 1,767 1,155
Provision for income taxes 163 181
-------- --------
Net income $ 1,604 $ 974
======== ========
Basic and diluted net income per common share $ 0.08 $ 0.05
======== ========
Shares used in basic net income per common share
calculation 20,746 20,259
======== ========
Shares used in diluted net income per common share
calculation 20,918 20,744
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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RESOUND CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------
MARCH 27, MARCH 28,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,604 $ 974
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 1,667 1,695
Loss on disposal of property and equipment 5 --
Amortization of deferred compensation 51 --
Issuance of common stock for purchase of minority
shareholder's interest in Viennatone BVG 160 --
Changes in assets and liabilities:
Accounts receivable (10,771) 168
Inventories (233) 1,892
Other assets 1,965 (1,592)
Accounts payable 3,361 134
Accrued liabilities 368 (1,654)
-------- --------
Net cash provided by (used in) operating activities (1,823) 1,617
Cash flows from investing activities:
Acquisition of Autac GmbH -- (401)
Proceeds from patent license agreements -- 900
Additions of property and equipment (1,404) (1,247)
-------- --------
Net cash used in investing activities (1,404) (748)
Cash flows from financing activities:
Borrowings under bank loans 2,931 --
Payments on bank loans (199) --
Payments on long-term debt (488) (2,799)
Proceeds from issuance of common stock 218 615
-------- --------
Net cash provided by (used in) financing activities 2,462 (2,184)
-------- --------
Effect of exchange rate changes on cash 373 (548)
Net decrease in cash and cash equivalents (392) (1,863)
Cash and cash equivalents at the beginning of the period 6,715 19,853
-------- --------
Cash and cash equivalents at the end of the period $ 6,323 $ 17,990
======== ========
Supplemental schedule of non-cash investing activities:
Issuance of common stock for purchase of minority shareholder's
interest in Viennatone BVG $ 160 $ --
======== ========
</TABLE>
The accompanying notes are an integral part of the condensed consolidated
financial statements.
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RESOUND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the three-month period ended March 27, 1999 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1999. For further information, refer to the audited
consolidated financial statements for the year ended December 31, 1998 and
footnotes thereto included in the Company's 1998 Annual Report on Form 10-K.
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.
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 the Netherlands.
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RESOUND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Computation of Basic and Diluted Net Income per Common Share
In accordance with the disclosure requirements of Statement of Financial
Accounting Standards ("SFAS") No. 128, Earnings Per Share, a reconciliation of
the numerator and denominator of basic and diluted net income per common share
is provided as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------
MARCH 27, MARCH 28,
1999 1998
------- -------
<S> <C> <C>
Net income $ 1,604 $ 974
======= =======
Weighted average common shares - basic 20,746 20,259
Dilutive options 172 485
------- -------
Adjusted weighted average common shares - diluted 20,918 20,744
======= =======
Net income per common share - basic $ 0.08 $ 0.05
======= =======
Net income per common share - diluted $ 0.08 $ 0.05
======= =======
</TABLE>
Reporting Comprehensive Income (Loss)
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 130, Reporting Comprehensive Income, which establishes standards
for the reporting and display of income and its components (revenue, expenses,
gains and losses) in a full set of general-purpose financial statements. The
Company adopted SFAS No. 130 as of January 1, 1998.
During the three months ended March 27, 1999 and March 28, 1998, total
comprehensive income (loss) amounted to $(90,000) and $472,000, respectively.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value. Inventories at March 27, 1999 and December 31,
1998 consisted of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 27, DECEMBER 31,
1999 1998
------- -------
<S> <C> <C>
Raw materials $11,028 $10,260
Work in process 2,476 2,576
Finished products 2,309 3,363
------- -------
Total $15,813 $16,199
======= =======
</TABLE>
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RESOUND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other Receivables
At December 31, 1998, the Company carried a receivable in the amount of
$1,692,000 from Amplifon International NV, representing the final installment of
the sales price of the Viennatone retail business in Austria (Viennatone BVG) .
The final installment was received by the Company in March 1999.
Reclassifications
Certain amounts in the condensed consolidated financial statements have
been reclassified to conform with the current year's presentation. These
classifications and restatements did not impact previously reported total
assets, liabilities, shareholders' equity or net income.
New Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 is effective for all fiscal
quarters of fiscal years beginning after June 15, 1999. SFAS No. 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. Changes in the fair value of derivatives are recorded each period in
current earnings or other comprehensive income, depending on whether a
derivative is designed as part of a hedge transaction and, if it is, the type of
hedge transaction. The Company does not expect that the adoption of SFAS No. 133
will have a material impact on its consolidated financial statements.
NOTE 2. LINE OF CREDIT
In February 1999, the Company entered into a loan and security agreement
with a U.S. bank which provides a line of credit of up to $3 million, secured by
the Company's U.S. assets. Amounts borrowed under the agreement currently bear
interest at a rate equal to one and three-quarters (1.75) percentage points
above the banks prime rate. The agreement contains certain financial covenants
and is available until September 30, 1999. Outstanding borrowings under this
line were $2.0 million at March 27, 1999.
NOTE 3. SPECIAL CHARGES
1998 Strategic Restructuring Program
In the second half of 1998, the Company recorded special charges of
$17.6 million associated with the Company's 1998 strategic restructuring
program. This program is designed to realign the Company's organizational
structure, streamline internal processes, and consolidate facilities, primarily
in Europe, in order to achieve sustained profitability. The program will result
in a workforce reduction of up to 100 people worldwide in all functional areas.
Of the $17.6 million in special charges, approximately $10.1 million reflects
non-cash items for the write-down of goodwill and discontinued product lines.
The remaining charges of approximately $7.5 million reflect cash and non-cash
items pertaining primarily to employee severance and facility and business
consolidation activities.
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RESOUND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The special charges provided for costs associated with the write-down of
inventories to net realizable value, losses on supplier commitments, the
write-down of capital assets to fair value, the write-down of goodwill, employee
termination benefits and lease termination costs, and other exit costs, as
follows (in thousands):
<TABLE>
<CAPTION>
Spending/
Total 1998 Balance Charges Balance
Special Spending/ Dec. 31, 3 Months Ended March 27,
Charges Charges 1998 March 27, 1999 1999
------- ------- ------- -------------- ---------
<S> <C> <C> <C> <C> <C>
Employee termination benefits and
lease termination costs (recorded
as Restructuring and Other Charges) $ 4,038 $ 1,192 $ 2,846 $ 280 $ 2,566
Write-down of goodwill in ReSound
Autac and Viennatone (recorded as
Restructuring and Other Charges) 8,082 8,082 -- -- --
Write-down of inventories to net
realizable value and losses on
supplier commitments (recorded as
Cost of Sales) 1,832 1,456 376 275 101
Write-down of capital assets to fair
value (recorded as Selling, General
and Administrative) 1,344 567 777 364 413
Other exit costs (recorded as
Selling, General and Administrative
- $1,808, and Research and
Development -$520) 2,328 1,550 778 120 658
------- ------- ------- ------- -------
$17,624 $12,847 $ 4,777 $ 1,039 $ 3,738
======= ======= ======= ======= =======
</TABLE>
The activities contemplated in the 1998 strategic restructuring program
are expected to be substantially completed by December 31, 1999. Management
anticipates no material change in the estimated cost of such activities. During
the three months ended March 27, 1999, the Company made approximately $0.4
million of cash payments relating to the special charges.
1997 Strategic Restructuring Program
In the second half of 1997, the Company recorded special charges of
$18.0 million associated with the Company's 1997 strategic restructuring
program. This program was designed to streamline operations and control costs
through management restructuring, operations consolidations, and increased focus
on core activities and product lines.
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RESOUND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
As of March 27, 1999 and December 31, 1998, $0.5 million and $0.8
million, respectively, remained of the 1997 restructuring accrual. During the
three months ended March 27, 1999, the Company made approximately $0.1 million
of cash payments relating to the special charges. The remaining 1997
restructuring accrual of $0.5 million will be substantially utilized by December
31, 1999.
NOTE 4. SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION
The Company adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, as of January 1, 1998. The Company has the
following reportable segments: North America, Europe, and Asia Pacific/Latin
America. The North America and Europe segments design, develop, manufacture, and
market hearing devices through audiologists, acousticians and other qualified
hearing device dispensers and distributors. The Asia Pacific/Latin America
segment primarily markets hearing devices through audiologists, acousticians and
other qualified hearing device dispensers and distributors.
The accounting policies of the segments are the same as those described
in Note 1, "Summary of Significant Accounting Policies". The Company evaluates
the performance of its sales and marketing segments (North America, Europe and
Asia Pacific/Latin America) and allocates resources to them based on earnings
from operations, which does not include nonrecurring gains and losses and
foreign exchange gains and losses. Additionally, the Company separately records
and analyzes R&D and Corporate operating expenses.
The Company attributes the operating results of intersegment sales and
transfers based upon the region in which the sale to a third party customer
occurs.
The Company's reportable segments are geographic locations. The
reportable segments are each managed separately due to their different economic
characteristics.
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RESOUND CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The table below presents information about reported segments for the
three months ended March 27, 1999 and March 28, 1998 (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED North Asia Pacific/ R&D/
MARCH 27, 1999 America Europe Latin America Corporate Totals
- -------------- ------- ------ ------------- --------- ------
<S> <C> <C> <C> <C> <C>
Net sales to external customers $16,048 $16,788 $1,394 $ --- $34,230
Operating income (loss) 6,018 3,034 368 (7,007) 2,413
Segment assets 23,070 49,776 1,855 --- 74,701
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED North Asia Pacific/ R&D/
MARCH 28, 1998 America Europe Latin America Corporate Totals
- -------------- ------- ------ ------------- --------- ------
<S> <C> <C> <C> <C> <C>
Net sales to external customers $16,261 $13,723 $1,159 $ --- $31,143
Operating income (loss) 4,879 863 206 (5,385) 563
Segment assets 29,054 57,908 598 --- 87,560
</TABLE>
NOTE 5. SUBSEQUENT EVENT
On May 7, 1999 the Company confirmed that it is in discussions with
another party concerning a possible business combination involving the two
companies at a price of $8.00 per share. The Company stated that it could
provide no assurance that a transaction will be consummated and that it does
not intend to comment further on any potential transaction until either a
definitive agreement is approved by both companies' Board of Directors or
discussions are terminated.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This Quarterly 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, 1998.
The following discussion should be read in conjunction with the
unaudited condensed 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, 1998.
RESULTS OF OPERATIONS
Three months ended March 27, 1999 and March 28, 1998
Net sales increased by 10% to $34.2 million in the quarter ended March
27, 1999, from $31.1 million in the quarter ended March 28, 1998. International
sales accounted for 53% of ReSound's net sales during the first quarter of 1999,
compared to 48% during the same quarter in 1998. International sales for the
first quarter were $18.2 million, an increase of 22% from the same period last
year. European sales in the first quarter of 1999 increased 22% to $16.8
million, compared to $13.7 million during the same quarter in 1998. The increase
in European sales resulted primarily from the shipment of a significant analog
product tender order and the ramp-up of production and sales of the new Digital
5000 Series product line in several key European markets. Sales in the
Asia-Pacific region were $1.4 million in the first quarter of 1999, an increase
of 20% compared to $1.2 million in the first quarter of 1998. This
quarter-to-quarter increase resulted primarily from higher sales in Australia,
New Zealand and South Korea. First quarter North America sales of $16.0 million
were down slightly from the same quarter one year ago. The shortfall in revenue
in North America in the first quarter of 1999 compared to the same period in
1998 was primarily attributable to a continued significant movement in the
market from analog to digital devices, including the Company's Digital 5000
Series product line, a continued decrease in Sonar Hearing Health orders as the
Company completes the conversion of Sonar customers to the ReSound product line
and continued pricing pressures on analog products. This shortfall was largely
offset by the successful roll-out of the Company's Digital 5000 Series product
line.
Gross profit was 52% of net sales in the first quarter of 1999, compared
to 54% of net sales for the same quarter of 1998. This quarter-to-quarter
decrease in gross profit resulted primarily from the shipment of the relatively
low margin analog product tender order, which depressed the margin by
approximately three percentage points, and the continued pricing pressures
experienced on analog products.
Research and development ("R&D") spending during the first quarter of
1999 was $3.4 million (10% of net sales) compared to $4.0 million (13% of net
sales) in the same quarter of 1998.
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Spending in the first quarter of 1999 was primarily attributable to the
continuing development of new Digital Signal Processing ("DSP") technology
platforms, the ReSound Avance - the Company's hearing enhancer product, and
communications products being developed in alliance with Motorola, Inc. The
higher level of R&D spending in the comparable period of 1998 was primarily due
to costs associated with the early stages of development of the Company's DSP
technology product platform and the ReSound hearing enhancer program.
Selling, general and administrative expenses ("SG&A") were $12.2 million
(36% of net sales) in the first quarter of 1999, compared to $12.1 million (39%
of net sales) in the first quarter of 1998. This quarter-to-quarter increase in
SG&A expenses in absolute dollars was primarily attributable to additional SG&A
expenses for Apex Acoustics, Ltd. (a U.K. company), which was acquired in April
1998, partly offset by savings achieved as a result of the Company's 1998
strategic restructuring program.
Net interest expense was $234,000 for the first quarter of 1999 compared
to $256,000 for the first quarter of 1998. This quarter-to-quarter decrease was
primarily due to the Company's continued repayment of debt, partially offset by
lower interest income earned on its average cash balances.
Net other income (expense) was $412,000 (expense) for the first quarter
of 1999, compared to $848,000 (income) in the corresponding quarter of 1998. The
other expense in the first quarter of 1999 resulted primarily from unfavorable
foreign currency exchange rates and from the issuance of common stock in
settlement of the purchase of a minority shareholder's interest in Viennatone
BVG. In the first quarter of 1998, income resulted primarily from receipt of
$750,000 under a patent license agreement.
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 the Netherlands.
Net income increased by 65% to $1.6 million in the quarter ended March
27, 1999, compared to $974,000 in the quarter ended March 28, 1998. The increase
in net income in the current quarter was primarily attributable to the ramp-up
of production and sales of the new Digital 5000 Series product line, the
shipment of the analog product tender order, savings achieved as a result of the
Company's 1998 strategic restructuring program and lower R&D expenses.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations in the three months ended March 27, 1999 was
$1.8 million compared to $1.6 million in cash generated from operations in the
three months ended March 28, 1998. The additional $3.4 million used in the first
quarter of 1999 compared to the same period in 1998 resulted primarily from the
following: (1) an increase in accounts receivable of $10.8 million primarily due
to a higher than normal level of shipments made in the last month of the
quarter, compared to a decrease in accounts receivable of $168,000 in the three
months ended March 28, 1998 and (2) an increase in inventory of $233,000
primarily due to the ramp-up of production of the Digital 5000 Series product
line in the first quarter of 1999, compared to a decrease in inventory of $1.9
million in the same period in 1998. The above uses of cash in operations in the
first quarter of 1999 were partially offset by: (1) non-cash charges of $1.7
million relating to depreciation and amortization; (2) a decrease in other
assets of $2.0 million due primarily to the receipt of $1.7 million representing
the final installment of the sales price of the Viennatone retail business in
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Austria (Viennatone BVG) and the release in March 1999 of $500,000 of restricted
cash which was deposited with the Company's primary bank as security for a
letter of credit in connection with the purchase of certain technology and (3)
increases in accounts payable and accrued liabilities of $3.7 million primarily
as a result of improved cash management.
Net cash used in investing activities in the three months ended March
27, 1999 was $1.4 million compared to $748,000 in the three months ended March
28, 1998. The use of cash in the first quarter of 1999 resulted from additions
of property and equipment. Usage of cash in the first quarter of 1998 resulted
from additions of property and equipment of $1.2 million and the acquisition of
Autac GmbH for $401,000, partially offset by $900,000 in patent fees received
for licensing certain technology.
Net cash provided by financing activities in the three months ended
March 27, 1999 was $2.5 million due primarily to borrowings of $2.9 million
under new bank loans and proceeds from issuance of common stock of $218,000
partially offset by payments on bank loans and long-term debt of $687,000. Net
cash used in financing activities in the three months ended March 28, 1998 was
$2.2 million due primarily to payments on long-term debt of $2.8 million
partially offset by proceeds from issuance of common stock of $615,000.
At March 27, 1999, the Company had available cash and cash equivalents
of $6.3 million. In addition, included in other assets at March 27, 1999 is
$525,000 in restricted cash which was deposited with the Company's primary bank.
These deposits related to the Company's Purchase Card program, which is secured
by an ongoing deposit of $125,000 and an additional $400,000 secures debt,
through February 2002, of an executive officer of the Company, related to the
purchase of a private residence in connection with the executive officer's
relocation. While the Company believes that available cash will be sufficient to
meet the Company's short-term operating and capital requirements for at least
the next twelve months, the Company may be required to raise additional capital
for its currently envisaged long-term needs and in connection with any future
strategic activities. In February 1999, the Company obtained a line of credit of
up to $3 million, secured by its U.S. assets, from a U.S. bank. Outstanding
borrowings under this line were $2.0 million at March 27, 1999.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
Competition and pricing pressures, especially from mid-priced new
digital products, are expected to increase. The Company's ability to grow and
achieve profitability will depend upon its ability to continue to develop or
otherwise acquire and effectively market competitive hearing health care
products based on digital signal processing technology. 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. In addition, announcements of
new products may cause hearing health 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 could have a material, adverse impact on the Company's
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<PAGE> 15
business, financial condition and results of operations. See Part 1 Item 1
"Business - Competition" of the Company's 1998 Annual Report on Form 10-K for a
discussion of the competitive environment.
During 1998, the Company initiated a strategic restructuring program.
There can be no assurance that the Company will be able to implement this
program in a timely manner, consolidate targeted operations successfully, or
otherwise achieve the cost reductions and other restructuring benefits
anticipated.
Due to changing economic conditions in certain countries in Europe (in
particular, Germany, Austria and France) and elsewhere, some governments have
reduced and/or are under increasing pressure to reduce government reimbursement
levels available to consumers on the purchases of hearing devices. Recent
reductions in reimbursement levels have had a negative impact on the Company's
revenues in the affected markets. Any future reimbursement reductions can also
be expected to have a negative impact on the Company's revenues. The Company
cannot predict whether or the extent to which further reimbursement reductions
will be implemented.
Similarly, it can be expected that the Company's sales results in Europe
would be adversely impacted if there were a future recurrence of the
appreciation of the U.S. dollar versus European currencies that was experienced
in 1997.
A much publicized dispute in Germany between ear, nose and throat
professionals who prescribe hearing devices and acousticians who dispense them
began in late 1997 and has negatively impacted the overall hearing health care
market since that time. Reduced consumer demand for hearing devices was felt
throughout 1998 and has continued in the first quarter of 1999. The Company
cannot predict how long and the extent to which its sales in Germany will
continue to be negatively impacted by this dispute.
The Company is subject to regulation by the FDA and numerous other
federal, state, local and international laws and regulations involving, among
other matters, the development, production and marketing of its products, safe
working conditions, manufacturing practices, and environmental protection.
Failure to comply with applicable regulatory laws and regulations can result in
fines, suspensions, delays in marketing or loss of permission to market
products, seizures or recalls of products, operating restrictions, injunctions,
civil fines and criminal prosecution. Also, new regulatory requirements may
significantly increase the costs of compliance with these laws and regulations.
See Part 1 Item 1 "Business - Government Regulation" of the Company's 1998
Annual Report on Form 10-K for a description of these laws and regulations.
The Company has been issued or has applied for a substantial number of
patents. No assurance can be given that pending patent applications will be
approved, that current or future patents will provide or continue to provide
competitive advantages for the Company's products, will not be challenged or
circumvented, or will afford the same degree of protection for future products
as they do for current products. Also, the Company may be contacted by parties
claiming that the Company's products infringe such parties' patent or other
proprietary rights. The Company may also find it necessary to institute
litigation to enforce patents issued to it, to protect trade secrets or
know-how owned by it or to determine the scope and validity of the patents or
other proprietary rights of others. Resolution of these claims generally
involves complex legal and factual questions and is highly uncertain. The cost
of prosecuting or defending these suits is high, and adverse determinations
could subject the Company to significant liabilities to third parties and
require the
15
<PAGE> 16
Company to seek licenses from other parties, prevent the Company from
manufacturing and selling its products, and/or require the Company to redesign
its products, all of which could have a materially adverse effect on the
Company's financial condition. Also, there can be no assurance that
confidentiality agreements between the Company and its employees or consultants
will not be breached, or that the Company will have adequate remedies for any
breach, or that it will otherwise be able to protect its trade secrets.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary technology or disclose such
technology, or that the Company can meaningfully protect its rights in such
unpatented proprietary technology. See Part 1 Item 1 "Business - Patents, Trade
Secrets and Licenses" of the Company's 1998 Annual Report on Form 10-K for a
discussion of the Company's patents and other intellectual property.
During 1998, the Company experienced various changes in its management
and technical staff. Competition for employees with technical, management and
other skills is intense. The Company's failure to retain the services of key
personnel or to attract additional qualified employees could materially and
adversely affect the Company's business.
Certain key components used in the Company's products are currently
available only from single or limited sources. The Company's inability to obtain
sufficient sole source or limited source components or subassemblies as
required, or to develop alternative sources if and as required, would have a
material adverse effect on the Company's financial condition.
Other factors which could impact the Company's revenues and results of
operations include a significant reduction in product sales to certain
customers, economic downturns in certain markets, and the costs incurred to
expand distribution in Europe and Asia. In connection with the Company's
international sales, a number of risks are inherent in international
transactions. Fluctuations in the exchange rates between the U.S. dollar and
other currencies could increase the sales price of the Company's products in
international markets where the prices of the Company's products are denominated
in U.S. dollars or lead to currency exchange losses where the prices of the
Company's products are denominated in local currencies. International sales and
operations may also be limited or disrupted by the imposition of governmental
controls, regulation of medical devices, export license requirements, political
instability, trade restrictions, changes in tariffs, and difficulties in
staffing and managing international operations.
On January 1, 1999, eleven of the fifteen member countries of the
European Union established fixed conversion rates between their existing
sovereign currencies and the Euro, and adopted the Euro as their new common
legal currency. As of that date, the Euro is traded on currency exchanges and
the sovereign currencies 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 sovereign 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 has assessed its pricing/marketing strategy in order to insure that
it remains competitive in a broader European market. The Company has also
assessed its information technology systems to allow transactions to take place
in both the legacy currencies and the Euro, and to allow for the eventual
elimination of the legacy currencies. 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
16
<PAGE> 17
Company's assessment of current information, it is not expected that the Euro
conversion will have a material adverse effect on its business, financial
condition, or results of operations.
The market price of the Company's common stock may be subject to
significant fluctuations. These fluctuations may be due to factors specific to
the Company, such as quarterly fluctuations in the Company's financial results,
changes in analysts' estimates of future results, litigation and regulatory
developments, changes in investors' perceptions of the Company or the
announcement of new or enhanced products by the Company or its competitors. In
addition, such fluctuations may be due to or exacerbated by general conditions
in the medical device industry or conditions in the financial markets generally.
The Company has assessed 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 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 has completed 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 next step in the assessment process was 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 these 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
has commenced implementation and expects that by the end of the third quarter of
1999, it will have fully implemented vendor-provided solutions to these issues
or have completed its program to implement replacement applications.
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
17
<PAGE> 18
are designed to resolve any year 2000 issues. The Company expects all U.S.
locations, and its manufacturing locations outside the U.S., to be upgraded by
the end of the second quarter of 1999, and all other locations to be upgraded by
the end of the third quarter of 1999. The timing of and expense associated with
such upgrades have not been affected by the need to address year 2000 concerns.
The Company has implemented, where necessary, year 2000 compliant
solutions for its infrastructure hardware and engineering software.
In addition to assessing the impact of the year 2000 on its internal
operations, the Company has also assessed the impact of the year 2000 on its
products. The Company has assessed the impact of the year 2000 on its hearing
devices and fitting systems software products and has communicated 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 has determined
that its hearing devices are year 2000 compliant. The Company's fitting systems
software products have also been determined to be year 2000 compliant.
Additionally, the Company has completed an assessment of the impact of the year
2000 on the vendors of critical components and their products. Based on
responses from these vendors, it is not anticipated that such vendors will be
impacted by the year 2000 to an extent that would cause any significant
disruption to the Company's operations.
To date, the Company has incurred approximately $240,000 in addressing
the impact of the year 2000. Such amounts have been expensed as incurred. The
Company estimates that total costs of addressing the year 2000 problem will not
exceed $400,000.
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. To
address this issue, the Company has implemented a contingency plan of
establishing a reasonable safety stock of any critical, sole-sourced components
in amounts that will permit the Company to weather an interruption of supply.
Given the Company's reliance on suppliers of critical, sole-sourced components
for its 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.
18
<PAGE> 19
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The information required by this Item is included under the
section entitled "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That may Affect Future
Operating Results" on pages 15 and 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
On May 7, 1999 the Company confirmed that it is in discussions
with another party concerning a possible business combination
involving the two companies at a price of $8.00 per share. The
Company stated that it could provide no assurance that a transaction
will be consummated and that it does not intend to comment further
on any potential transaction until either a definitive agreement is
approved by both companies' Board of Directors or discussions are
terminated.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 10.46: Master Term Lease Agreement Between the
Registrant and IBM Ireland Limited dated March 26, 1999.
(b) Exhibit 27.01: Financial data schedule
(c) Reports on Form 8-K
None
19
<PAGE> 20
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/ Robert D. Luttrell
---------------------------------------
Robert D. Luttrell
Vice President, Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: May 10, 1999
20
<PAGE> 21
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- -----------
<S> <C>
Exhibit 10.46: Master Term Lease Agreement Between the Registrant and
IBM Ireland Limited dated March 26, 1999.
Exhibit 27.01: Financial data schedule
</TABLE>
21
<PAGE> 1
1
IBM IBM Ireland Limited Registered in Dublin: No. 16226 Registered Office: 2
Burlington Road, Dublin 4. (hereinafter "IBM")
Master Term Lease Agreement
Lessee's Name and Address: Lessor's Name and Address:
ReSound Corporation IBM Ireland Limited
c/o ReSound Ireland Sales Limited
Cork Business & Technology Park
Model Farm Road
Cork 2 Burlington Road Dublin 4 Ireland
(hereinafter "Lessee") (hereinafter "Lessor")
Lessee's No.: 132378
Agreement No.: MLA/0001 Date Prepared: 26 March 1999
This Agreement is made between the Lessor (which expression shall include its
successors and assigns) of the one part and the Lessee of the other part.
Whereas the Lessor and Lessee agree that this Agreement shall constitute the
general terms and conditions that will apply to any lease of Equipment as
hereinafter defined, and licence of relevant Programs granted by the Lessor to
the Lessee pursuant to a relevant Supplement.
Definitions
"Additions" means machines which are associated with IBM Equipment only.
"Agreed Rate" means 6 percent per annum over the Dublin InterBank Offer 30 day
Rate (DIBOR).
"Alteration" means any change to Equipment which deviates from IBM's physical,
mechanical or electrical machine design, whether or not additional devices or
parts are required.
"Business Day" means any day Monday to Friday inclusive except Bank and/or
public holidays.
"Estimated Shipment Date" shall mean the delivery date for Equipment, Programs,
Program Packages and or Software the subject of a lease.
"Equipment" means the machines, machine elements, media or medium upon which a
Program or Programs or Program Packages are fixed, field installable upgrades,
feature additions or accessories and other products specified in a Supplement.
Equipment shall not include the physical media or medium for Software which is
dealt with separately hereunder. Unless specifically stated "Equipment" shall
include non-IBM Equipment set out in an attachment to a relevant Supplement.
"IBM" means IBM Ireland Limited.
"IBM Group" means that part of the group of companies of which the Lessor is a
member which is incorporated in the Republic of Ireland.
"Initial Term" means the period beginning on the Date of installation and
continuing for the period as specified in the Supplement.
<PAGE> 2
"The Lease" means the terms and conditions of this Master Lease Agreement
together with the relevant Supplement(s) and any amendments, attachments or
Lessor Letters which refer thereto.
"Lease Commencement Date" shall be the same date as the Date of Installation.
"Lease Rate" means the rate (exclusive of VAT) per IRpound sterling1,000 of
Purchase Price for the relevant term of the Lease as specified in the
Supplement.
"Lessor Letter" means a letter from the Lessor to the Lessee in connection with
a Lease.
"License Agreement" means the agreement(s) in relation to the supply and/or
licensing of Software between the Lessee and the Supplier.
"Modifications" means field installable upgrades, feature additions, and
accessories to IBM Equipment only.
"Other Software" means software which the Lessor has agreed to lease hereunder
and which is not a Program or Programs or a Program Package or Packages and
which may include Lessee Software.
"Payment(s)" means the sums required to be paid by the Lessee, at such intervals
as set out in Clause 3 b of the Supplement, to the Lessor for Equipment,
Programs, Program Packages and Software the subject of the Lease.
"Program" means 1) instructions, statements or any data base in machine readable
form; and/or 2) any related materials, including documentation and listings, in
either machine readable or printed form; and 3) all copies thereof whether in
whole or in part and which the Lessor has agreed may be subject to this
Agreement. Programs are copyrighted materials.
"Program Packages" means packages containing programs subject to IBM Conditions
of Use.
"Programming" means programs (including related materials) which are supplied by
the Lessor without separate charge.
"Programming Services" means such services as IBM may make generally available
without separate charge in connection with Programming. The Lessor will
determine the availability and duration of the Programming Services.
"Payment Commencement Date" means the date on which the first payment become due
as specified in the Supplement.
"Purchase Price" means the total amount being financed under the Lease in
respect of the items included in it.
"Secondary Term" means the period beginning on the day following the expiry of
the Initial Term and continuing unless terminated in accordance with the Lease.
"Secondary Term Payment" means the Payments to be paid by the Lessee during the
Secondary Term.
"Software" means any software which IBM has agreed to lease under this
Agreement, but specifically excluding Programs and Program Packages but which
may include Lessee or Other Software.
"Supplement" means any and each document described as a supplement to the Master
Lease Agreement, whereunder a Lease of Equipment and Software (if indicated) is
granted, and, if indicated - a licence is granted for one or more Programs
and/or Program Packages fixed on Equipment and which identifies the Lease
options and the financial parameters of the Lease when it is signed by the
Lessee and accepted by the Lessor. Supplements may also incorporate additional
terms and conditions.
"Supplier" means any party or parties by or through whom non-IBM Equipment or
Software is supplied, manufactured, delivered, installed, maintained,
distributed or licensed.
"Tax" shall be construed so as to include any Republic of Ireland tax, levy,
import duty or other charges of a similar nature.
"VAT" means Republic of Ireland Value Added Tax.
Selection of Equipment and Software
<PAGE> 3
2.0 IBM Equipment
The reference to Equipment in this clause 2.0 shall exclude Non-IBM Equipment.
The Lessee agrees to accept Equipment, Programming, Programming Service and
warranty service under the terms and conditions of this Agreement. The Lessee
further agrees, with respect to Equipment and Programming, to accept
responsibility for 1) their selection to achieve the Lessee's intended results
2) their use 3) the results obtained therefrom.
2.1 Non-IBM Equipment and Software
The reference to Equipment in this clause shall exclude IBM Equipment. Lessee
accepts responsibility for and/or has relied solely on the Supplier and/or
Manufacturer of the Equipment and Software for its selection, suitability and
fitness for any purposes for which the Lessee requires the Equipment and
Software and that no reliance was placed on the Lessor.
Upon the Lessee signing the relevant Supplement, the Lessee warrants that such
Equipment and Software is complete, in good condition and working order and
accurately described in the invoice which relates thereto.
Equipment, Programs, Program Packages and Software fixed thereon, become subject
to this Agreement when the Lessor accepts the related Supplement according to
the then current procedures.
Shipment
The Lessor will determine and amend as necessary, the Estimated Shipment Date
for Equipment ordered and scheduled for future delivery, in accordance with the
then applicable shipment sequence. Prior to shipment, the Lessor will make a
reasonable attempt to accommodate a requested change of delivery date.
The Lessee shall designate the ship-to address in the Republic of Ireland no
later than three months prior to the Estimated Shipment Date, or by the date the
Supplement is accepted by the Lessor, whichever is later.
Rights in Equipment
4.0 Non-IBM Equipment - Media for Software
Upon execution of a Supplement to the Master Lease Agreement referring to the
Software, all rights and obligations of the Lessee in the License Agreement
shall automatically be assigned to the Lessor (including title to the Physical
Medium or Media). This assignment shall take effect upon the Lessee entering
into the Lease or the License Agreement whichever is the later.
The Lessee rights and obligations under the License Agreement (other than title
to the Physical Medium or Media) shall hereby be reassigned by the Lessor to the
Lessee upon the earlier of:
the payment by the Lessor of the Licence Fee to the Supplier in respect of the
Software.
the Lessor giving to the Lessee a written notice stating that such rights and
obligations are reassigned.
Where the Lessee owns the copyright to an item of Other Software, the Lessee
hereby assigns such copyright (as well as title to the Physical Medium) to the
Lessor. In such circumstances, the Lessor hereby grants to the Lessee an
irrevocable exclusive royalty free license to use the Software including the
right to sub-licence third parties (in this case no assignment as referred to in
the first paragraph of this clause 4.0 takes place).
For Other Software, the Lessee warrants that either the Supplier has consented
to both the assignment and reassignment contained in the first two paragraphs
hereof or the Lessee has the authority under the License Agreement to make those
assignments and the passing of title to the Physical Medium or Media (above) to
the Lessor is effective. Where the Lessee is in doubt in relation to the
provisions of this clause the Lessee should request alternative financing
arrangements.
4.1 Equipment
<PAGE> 4
Title to the Equipment shall remain in the Lessor. The Lessee shall have no
rights, title or interest therein except as set forth in the Lease.
Title in the Equipment or any part of it shall not pass to the Lessee as a
result of the Equipment being attached or affixed by any means to or resting by
its own weight on any land, buildings, structures erections or Equipment. The
Lessee shall keep the Equipment only in the countries specified in Schedule 3
hereof or other countries that may be agreed upon from time to time in writing
between the parties.
Replacements for or within the Equipment which are supplied by the Lessor under
any applicable warranty or maintenance service shall be the property of the
Lessor.
In relation to the Equipment, the lessee shall at all times comply with
applicable US Export Control Regulations.
The Lessee, at the Lessor's request shall immediately notify the Lessor in
writing of the location where the Equipment is kept.
The Lessee further undertakes:
if required to affix and maintain upon the Equipment such plates or other marks
indicating that the Equipment is the property of the Lessor as the Lessor shall
reasonably require, and to ensure that at all times such plates or other marks
are clearly and prominently displayed on the Equipment;
not to do or permit to be done any act or thing which might jeopardise the
rights of the Lessor in the Equipment and not to hold out in any way that the
Equipment is in the ownership of the Lessee;
to allow on reasonable notice, inspection of the Equipment by the Lessor or its
agent;
to execute all such documents and do every act or thing as the Lessor may
reasonably request for the purposes of establishing, protecting and maintaining
the right, title and interest of the Lessor in the Equipment;
to keep the Lessor immediately informed of any event which might affect the
rights of the Lessor or involve the Lessor in any proceedings, loss or
liability, including but not limited to those events specified in Section 19.d.
and h.
For the purposes of Republic of Ireland taxation and irrespective of the
accounting treatment to be adopted by the Lessee, the Lessee is not entitled to
claim capital allowances on the Equipment, Programs and Program Packages set out
in any relevant Supplement.
Lease Term
Subject to the terms of the Lease, the Lease Term comprises the Initial Term and
the Secondary Term unless sooner terminated in accordance with the Lease.
Environment, Safety, Specified Trade
6.0 Non-IBM Equipment.
This clause applies to Non-IBM Equipment only.
The Lessee shall provide a suitable installation environment with facilities as
prescribed by the Lessor or if not so prescribed by him as so prescribed by the
Manufacturer. In the latter case arrangements for installation will be the
responsibility of the Lessee and Lessor will have no responsibility for
installation under this Agreement nor for any installation performed by the
manufacturer.
6.1 IBM Equipment
This clause applies to IBM Equipment only.
The Lessee agrees to provide a suitable environment for the installation of the
Equipment as specified by the Lessor in the applicable IBM Installation Manual
and, except as otherwise specified by the Lessor, to furnish all labour required
for unpacking and placing each item of Equipment in the desired location.
<PAGE> 5
The Lessee agrees that the Equipment will be kept in an environment and used by
competent and qualified personnel in a manner which complies with any applicable
statute, regulation or order affecting the Equipment including but not limited
to the Safety in Industry Acts, 1955 and 1980 and any statutory amendment,
addition or replacement thereof.
Program and Program Package Terms and Conditions
In respect of Programs fixed on any Equipment the subject of a Lease, the Lessee
shall comply at all times with the Conditions of Use as set out in Schedule 1
hereto and in any relevant Supplement.
In respect of Program Packages the subject of a Lease, the Lessee shall comply
at all times with the Conditions of Use in respect thereof as set out in
Schedule 2 of this Agreement and in any relevant Supplement.
Changes to Agreement
The Lessor may, upon written notice, change the terms and conditions of this
Agreement. The changes will apply to all new Leases entered into on or after the
date of the change.
Changes to Supplement
Lease Rate
The Lease Rate for each item shall be the amount stated in the Supplement or
such other amount as may be notified in writing to the Lessee more than one
month before the Estimated Shipment Date.
For one month prior to the Estimated Shipment Date the applicable Lease Rate
will remain unaltered.
If delivery of any item has not taken place within fifteen days after the above
Estimated Shipment Date, the Lessor may by written notice alter the Lease Rate
for such item or withdraw it from the Lease.
Where the notice referred to in 9.a and 9.c above is of an increase in the Lease
Rate the Lessee may, within fifteen days of receipt of such notice, withdraw
from the Lease any item subject to the increase (where delivery has not taken
place) by giving written notice to the Lessor. Failure by the Lessee to give
timely notice of withdrawal shall constitute an acceptance by the Lessee of the
increased amount of the Lease Rate.
Payments
The Lessee shall make Payments to the Lessor at such intervals as set forth in
any applicable Supplement such Payments to be made by direct debit or by such
other means as the Lessor shall require.
The Lessor may change the Payments required to be paid under the Lease, if the
Lessor changes the Lease Rate in accordance with Clause 9 or if the Lessor
notifies the Lessee of a change pursuant to any other clause under this
Agreement or any relevant Supplement.
Payments shall not be subject to any abatement, reduction, set-off, defence or
counter-claim for any reason whatsoever.
Time shall be of the essence in relation to all Payments
If the Lessee is late in making any Payment, the Lessee shall pay the Lessor on
demand interest at the Agreed Rate in addition to the Payments due, until the
date of payment. Such payment shall be in addition to any other remedy exercised
by the Lessor in accordance with Section 20 (Remedies).
Any supplementary charges for rigging, drayage and hire of lifting or moving
Equipment will be paid by the Lessee.
The Lessee shall also pay VAT at the rate notified by IBM on each Payment.
Adjustments to Payments
This clause shall not apply to Equipment which is non-IBM Equipment.
<PAGE> 6
Payments will have been calculated on the basis of the assumptions set out below
and in the relevant Supplement:
Capital allowances for the Equipment, Programs and Program Packages thereto
affixed shall be obtained by the Lessor for the accounting period(s) of the
Lessor in which expenditure is incurred in acquiring the Equipment, Programs and
Program Packages thereto affixed;
There will be no withdrawal or adjustment of relief under Section 40(8) of the
Finance Act 1984; There shall be no change in the law or practice relating to
the taxation of companies, or group of companies in the Republic of Ireland
affecting the Lessor or a member of the IBM Group to whom the Lessor has
assigned it rights under the Master Term Lease Agreement;
No new tax is applied to the Lessor in respect of the Equipment and any Program
or Programs or Program Packages thereto affixed;
any rebate of Payments will be allowable as a deductible trading expense of the
Lessor.
In the event that any one or more of the assumptions in a) above is incorrect or
becomes incorrect (otherwise than as a result of any voluntary act or change or
omission on the part of the Lessor or a member of the IBM Group), the Lessor
shall have the right to make such adjustments to the Payments (up or down) as
necessary to place the Lessor in the same financial position as if the
assumptions had remained valid. In case of dispute the certificate may be
adjudicated by a reputable firm of chartered accountants appointed by the Lessor
and its decision shall be binding on the parties.
Lease Options
During a Lease, the Lessee will have a number of options in regard to the
Equipment, Programs, Program Packages and Software which will vary with the type
of Lease. The options applicable to each type of Lease will be set out in the
appropriate Supplement.
Return of Equipment
13.1
Clause 13.b. below does not apply to Non-IBM Equipment
When Equipment is required to be returned for any reason under the Lease, the
Lessee shall promptly return such Equipment at its own expense to the Lessor at
such place in the Republic of Ireland as may be designated by the Lessor
provided that upon any termination by the Lessor, its servants or agents may
retake possession of the Equipment (whether or not fixed to the premises) and
for this purpose shall be entitled at any reasonable time freely to enter into
and upon any premises occupied by or under the control of the Lessee. The Lessee
shall indemnify the Lessor, its servants or agents, against any and all
consequences of the Lessor entering upon such premises to retake possession of
the Equipment unless such consequences are occasioned by the negligence of the
Lessor, its servants or agents.
The Equipment shall be complete, shall not contain any Alterations and shall be
in such condition, fair wear and tear accepted, that on return it will qualify
for IBM's maintenance agreement service. The Lessee shall pay any costs and
expenses incurred by the Lessor to place the Equipment in such condition that it
meets these requirements. Such costs and expenses shall include repair or
reconditioning, the replacement of missing parts and inspection. Any parts
removed shall become the property of the Lessor. Any Modifications installed by
the Lessee at the Lessee's expense which are not removed before return shall
become the property of the Lessor.
13.2
Upon return, the Lessee shall have no right or interest in the Equipment, and
the Lessor may dispose of the Equipment as it deems appropriate.
<PAGE> 7
Leases for Modifications and Additions
The Lessor will arrange for leasing of Modifications and Additions ordered from
IBM under terms and conditions and Payments then generally in effect. Without
prejudice to the generality of the foregoing where the Lease includes a
Modification or Modifications and or Additions, then the following conditions
shall apply:
The Lessee must select the same end-of-term option for both the Base Lease
(being the Lease in relation to the Equipment upon which the Modification(s)
and/or Additions are to be installed) and the Lease for Modifications and/or
Additions.
If the Lease for Modifications and/or Additions is terminated for any reason,
then the Base Lease shall be terminated concurrently. If the Base Lease is
terminated for any reason then the lease for Modifications and/or Additions
shall be terminated concurrently.
If required by the Lessor, the Lessee shall be required to extend the Base Lease
for such period and on such terms as the Lessor requires.
Changes to Orders and Alterations
This clause shall not apply to non-IBM Equipment Changes to Orders
Subject to agreement by the Lessor, changes in the configuration of on-order
Equipment may be made prior to the date of shipment from the place of
manufacture. However such changes may affect the shipment schedule.
Alterations
The Lessee may alter or add to the Equipment only upon obtaining the written
permission of the Lessor which shall not be unreasonably withheld and subject to
any Alterations or Add Ons being removed and the Equipment being restored to its
normal unaltered condition at the Lessee's expense before its return to the
Lessor; provided always that the Lessee shall not be entitled to alter or add to
Equipment consisting of a medium or media upon which a Program or Programs are
fixed under any circumstances.
Maintenance
The Lessee shall at all times keep the Equipment in a suitable environment as
specified by IBM and in good condition and working order, fair wear and tear
accepted, at the Lessee's expense after expiry of any warranty.
Loss, Damage and Insurance
In the event of any loss or damage to the Equipment, the Lessee shall promptly
so notify the Lessor and shall pay for the replacement thereof, or the costs of
restoring the Equipment to good working order, or allow the Lessor to carry out
such work at the Lessee's expense.
Unless otherwise agreed, the Lessee will comprehensively insure the Equipment
for the full replacement value thereof, or the cost of termination hereunder if
greater, with a reputable insurance company against all insurable risks
including loss or damage from whatever cause and third party liabilities from
and including the date of installation until the Equipment is either returned to
or repossessed by the Lessor.
Unless otherwise agreed the Lessee will pay to the Lessor any sums recovered
under insurance of the Equipment and the Lessor may set such sum against any
amounts owed to the Lessor under the lease and shall refund any excess to the
Lessee.
Exclusions from Liability
18.0 Non-IBM Equipment and Software
<PAGE> 8
The reference to Equipment in this clause 18.0 shall be deemed to refer to
Non-IBM Equipment only.
The Lessor has no liability in connection with the manufacture supply, delivery
(including where the Supplier fails or is late to deliver the Equipment and
Software or it is not in a condition acceptable to the Customer upon delivery),
installation, use, servicing, warranty and provision of warranty service and
maintenance of Non-IBM Equipment or Software.
The Lessor shall not be obliged to provide the Lessee with any replacement for
such Equipment or Software nor be liable in respect of any period during which
such Equipment or Software is unusable, unserviceable, lost or damaged.
No third party (including the Supplier, Manufacturer or other person providing
any service in relation to the Equipment or Software) has the authority to bind
the Lessor whether or not any representation was made by that person to the
contrary.
Lessee accepts responsibility for and/or has relied solely on the Supplier
and/or Manufacturer of the Equipment and Software for its selection, suitability
and fitness for any purpose for which the Lessee requires the Software and
Equipment and that no reliance was placed on the Lessor.
18.1 IBM Equipment
Other than provided in clause 24 hereof, all conditions and warranties in
respect of the Equipment (express or implied, statutory or otherwise) including
but without prejudice to the generality of the foregoing, all warranties implied
by the Sale of Goods Act, 1893 and/or the Sale of Goods and Supply of Services
Act 1980 are hereby excluded.
18.2 Equipment
The Lessor shall have no liability whatsoever for consequential loss, loss of
profit or for loss or damage of any kind, howsoever caused arising out of or in
connection with the Lease of Equipment by the Lessor to the Lessee. Termination
of the Lease
The Lessor has the right to terminate the Lease without notice and
without prejudice to any other right or remedy in any of the following
circumstances:
the Lessee fails to make any Payment within seven days of the due date;
the Lessee is in breach of any other term of the Lease including specifically
any condition or terms set out in the Schedule 1 or 2 hereof, which breach is
not cured within 30 days of of Lessee receiving written notice thereof;
any of the Lessee's representations or statements made at any time proves to
have been incorrect in any material respect when made;
the Lessee has a receiving order made against it, becomes or is declared
insolvent, or bankrupt, or calls a meeting with or makes any arrangement with or
composition with its creditors, or is wound up or has a Receiver appointed over
any or all of its undertakings or assets, or is deemed by virtue of Section 214
of the Companies Act 1963 to be unable to pay its debts, or has any distress,
execution or sequestration levied or enforced against any of its assets or
undertakings or otherwise ceases or threatens to cease to carry on its business;
the Lessee is in breach of any term of a lease of a Modification and/or
Addition; the Lessee is in breach of any of the terms of any other Lease of
Equipment other than Modifications and or Additions, which breach materially
prejudices the Lessor's interest under the Lease;
if the Lessor in his sole judgement reasonably believes that the Lessee will
cease to carry on its business;
if in respect of the Lessee an application is presented to a Court for the
appointment of an Examiner under the Companies (Amendment) Act 1990.
For the purposes of Clause 20 the foregoing paragraphs a. to h. shall be
described as default events.
<PAGE> 9
Remedies
If a default event has arisen, the Lessor may take any one or more of the
following remedies:
Terminate the Lease.
Terminate the Lease or Leases of any Modifications and/or Additions.
Terminate any Lease coming within the provisions of Clause 19.e above.
Recover any Payments required to be paid under Clause 21 hereof.
Recover possession of the Equipment, and sell or otherwise dispose of the
Equipment for its own account.
Pursue any remedy otherwise available at law.
Pursue any remedy available to it in the Lease.
Payments on Termination
Upon termination of the Lease the Lessee shall pay the Lessor:
Payments and other sums due or in arrears under this Lease together with
interest at the Agreed Rate from the due date until the date of actual payment,
together with:
Payments in respect of the unexpired portion (if any) of the Initial Term
discounted at the Discount Rate.
Any costs and expenses incurred by the Lessor in tracing, repossessing or
recovering the Equipment and any Modification and/or Additions or in collecting
Payments, together with interest at the Agreed Rate from the date of termination
until payment (as well after as before judgement).
The provisions of this Clause shall not be construed so as to prevent the Lessor
from claiming damages from the Lessee in respect of any breach of the Lessee's
obligations under the Lease.
Recovery of Equipment
If the Lessor shall have recovered possession of all or part of the Equipment,
the Lessor may use its reasonable endeavours to sell or otherwise dispose of
such Equipment. The Lessor shall not be liable to the Lessee either in respect
of any failure or delay whatsoever in recovering possession or selling all or
part of the Equipment or for any bona fide failure to sell at the best price
reasonably obtainable.
General Indemnity
The Lessee shall indemnify the Lessor against any breach by the Lessee of the
terms, conditions and undertakings contained in the Lease, or any costs or
charges incurred by the Lessor in enforcing the same or in protecting the
Lessor's rights and interests in the Lease, the Equipment and any Programs and
Program Packages affixed thereto. The Lessee shall also indemnify the Lessor
against all proceedings, costs, claims, damages and expenses arising from the
breach, non-performance or non-observance by the Lessee of the provisions and
each of them, of the Licence Agreement.
Warranty
This clause does not apply to Non-IBM Equipment.
Equipment - Warranty
Lessor warrants that on the Date of Installation Equipment will be in good
working order and will conform to Lessor's official published specifications.
Equipment or parts supplied under these terms and conditions either will be
newly manufactured or will have been reassembled or reconditioned from
serviceable new and used parts, and will have been thoroughly inspected, tested
and will conform to its official published specifications.
Equipment - Warranty Service
NOTE: The Lessee's attention is drawn to the exclusions from warranty
set out below.
<PAGE> 10
The published warranty period will commence on the business day following the
date of receipt by the Lessee.
Service for machines (during and after warranty)
The Lessor provides certain types of repair and exchange service either at the
Lessee's location or at a service centre. The Lessor may repair the failing
Equipment or exchange it at the Lessor's discretion.
For the equipment under this Master Term Lease Agreement, service requires that
the Lessee delivers the failing Equipment to the Lessor. The Lessee Agrees to
ship Equipment suitably packaged (prepaid unless specified otherwise) to a
location designated by the Lessor. After Equipment has been repaired or
exchanged, the Lessor will return it to the Lessee at the Lessor's expense
unless specified otherwise. The Lessor is responsible for loss of, or damage to,
the Equipment while it is in the Lessor's possession. Except where otherwise
specified in a statement of work, the Lessee is responsible for all risks of
loss or damage to, and any necessary insurance of, all Equipment, associated
items and/or equipment, during the period in which they are in transit to and
from the Lessor, except for damage caused by the Lessor's negligence or that of
the Lessor's employees, agents or subcontractors.
The Lessee agrees to:
Have the Lessor service Equipment and
Where applicable, before the Lessor provides Service:
Follow the problem determination, problem analysis, and service request
procedures that are provided; and
Secure all programs, data, and funds contained in Equipment.
Where Service involves the exchange of Equipment or parts, both the item we
replace and the replacements remain our property. The Lessee represents that all
removed items are genuine and unaltered. If this is not the case, the Lessor may
reject such items and/or adjust the price of the applicable Product or Service
to reflect the consequent difference in the price or value received by the
Lessor, provided that the Lessor does so within a reasonable time of becoming
aware of the status of the item. The replacement may not be new, but will be in
good working order and at least functionally equivalent to the item replaced.
The replacement assumes the warranty or maintenance Service status of the
replaced item. Before the Lessor exchanges Equipment or parts, the Lessee agrees
to remove all features, parts, options, alterations, and attachments not under
the Lessor's service. The Lessee also agrees to ensure that the item is free of
any Legal obligations or restrictions that prevent its exchange.
Any feature, conversion, or upgrade the Lessor services must be installed on a
machine which is 1) for certain Equipment, the designated, serial-numbered item
of Equipment and 2) at an engineering-change level compatible with the feature,
conversion, or upgrade.
Repair and exchange services do not cover:
Accessories, supply items, and certain parts, such as batteries, frames, and
covers;
Equipment damaged by misuse, accident, modification, unsuitable physical or
operating environment, or improper maintenance by the Lessee; Equipment with
removed or altered Equipment or parts identification labels; failures caused by
a product for which the Lessor is not responsible; or service of Equipment
alterations.
The Lessor manages and installs engineering changes that apply to
IBM Equipment and may also perform preventative maintenance.
Programming - Warranty
Lessor warrants that Programming designated by Lessor for use with Equipment and
for which Programming Services are available will conform to Lessor's official
published specifications when shipped to the Lessee and properly used on the
designated Equipment. Thereafter Lessor will provide Programming Services.
Programming for which no Programming Services are available is distributed on an
"as is" basis without warranty.
Lessor does not accept responsibility for the correction of all Programming
errors;
or for ensuring that functions contained in Programming will (1) operate in the
combinations which may be selected for use by the Lessee; or (2) meet the
Lessee's requirements.
Non-IBM Equipment Distributed by Lessor - Warranty.
This applies to Non-IBM Equipment Distributed by Lessor unless Lessor specifies
in the Supplement that only the equipment manufacturer's warranty is to apply;
in any such case: the right to the manufacturer's warranty and warranty service,
if any is provided by the manufacturer, is hereby assigned to the Lessee; and
the manufacturer's warranty is in lieu of all other warranties or conditions,
express or implied, including the implied conditions of merchantability and
fitness for a particular purpose, except those undertakings implied under
Section 12 to 15 of the Sale of Goods Act, 1893 ( as amended ) and Section 39 of
the Sale of Goods and the Supply of Services Act, 1980.
Program Packages - Warranty
Program Packages subject to IBM's Conditions of Use - Lessor warrants an
unaltered IBM Program Package for three months from the Date of Installation
("Warranty Period"). For the purposes of this paragraph g. 1)., an IBM Program
Package comprises the diskette(s), the program(s) contained on the diskette(s)
and any accompanying documentation. Lessor warrants that the diskette(s) on
which the program is furnished will be free from defects in materials or
workmanship under normal use during the Warranty Period and that the program
will conform to the documentation.
Programs contained on the diskette(s) cannot be tested in every possible
combination and operating environment and therefore Lessor does not warrant that
the functions contained in the program will meet the Lessee's requirements, or
that the operations of the program will be uninterrupted or that the Program
Package is error-free.
During the Warranty Period, any Program Package not meeting the respective
warranty specified above and which is returned promptly will be replaced. If a
replacement Package is not available which meets Lessor's warranty, Lessor will
credit any charge invoiced in respect of such Package.
NOTE: Program Package Service Outside Warranty - For those IBM Program Packages
for which Lessor provides service until a service end date as specified in the
announcement of the program or in a Service Statement shipped with the program
Lessor will, until the service end date, attempt to correct such programs as do
not conform to their program specifications or, if there are none, to the
documentation in the Program Package, when the program is properly used on the
Equipment for which it is designed. Service will be provided only to support
centres in Lessees' organisations and to IBM Authorised Dealers.
Travel Charges
There will be no charge for travel expense associated with Lessor warranty
service or Programming Services, except that actual travel time and expenses
will be charged if the Products are installed in a place where Lessor regularly
has no personnel trained for the servicing of such Products or Programming. Such
places will be specified at the Lessee's request.
Lessor will inform the Lessee if in Lessor's opinion the provision of warranty
service, parts or Programming Services would involve a safety hazard. Lessor
shall not be responsible for failure to provide warranty service in these
circumstances.
Exclusions from Warranty Service
<PAGE> 11
Any warranty services above do not include services required under the following
circumstances:-
repair of damage, increase in service time or replacement of parts caused by:-
failure continually to provide a suitable installation environment as prescribed
by Lessor including adequate space, electrical power, air conditioning and
humidity control;
use of the Products for purposes other than for which designed;
the use of supplies resulting in abnormal wear, damage to a Product or
repetitive service calls;
service, including model conversions or feature additions or removals, performed
by non-Lessor personnel (except where acting as Lessor's agent or
subcontractor); or
accident, disaster (including but not limited to fire, flood, vandalism,
burglary, water, wind, lightning, war, act of violence), neglect or misuse,
non-Lessor parts, attachments, alterations, non-Lessor machines or Lessor
Products which are neither owned by Lessor nor under an Lessor warranty or an
Lessor maintenance contract, or
furnishing supplies or accessories, painting or refinishing Products, inspecting
altered Products, and such service which is impractical to render because of
alterations in or attachments to Products.
Such services may be available under Lessor's then currently applicable hourly
services rate, minimum charges, parts and material prices unless such services
are separately covered by another written agreement between the Lessee and
Lessor, or are not offered by Lessor.
Other Products and Services
25.1 Non-IBM Equipment
For designated non-IBM equipment, the Lessor will provide, upon request and at
IBM's charges and terms then generally in effect, maintenance service and
maintenance parts as long as they are generally available. For other non-IBM
equipment, the Lessee is responsible for arranging for maintenance service and
maintenance parts.
For the avoidance of doubt, the Lessor shall have no responsibility for warranty
or the provision of warranty service on Non-IBM Equipment. In respect of Non-IBM
Equipment, all conditions and warranties, express or implied, statutory or
otherwise including without prejudice to the generality of the foregoing, all
warranties implied by the Sale of Goods Act 1893 and/or the Sale of Goods and
Supply of Services Act 1908 are hereby excluded, in respect of Non-IBM Equipment
shall be the responsibility of the Supplier.
25.2 IBM Equipment
Following the Warranty Period, the Lessor will provide, upon request and at
Lessor's charges and terms then generally in effect, maintenance service and
maintenance parts for the Equipment and Programming Services for Programs as
long as such services and parts are generally available and services described
in Section 24.h, if available. Unless such services and parts are provided under
another agreement between the Lessee and IBM, they shall be subject to the
applicable terms and conditions of this Agreement.
In addition to the Equipment, Programming and services provided under this
Agreement, the Lessor offers other products and services at separate charges
under the applicable agreements.
Engineering Changes
This clause does not apply to Non-IBM Equipment.
During the Warranty Period, all engineering changes determined by the Lessor
will be controlled and installed by the Lessor on the Equipment. The Lessee may,
however, by providing notice subject to written confirmation by the Lessor,
<PAGE> 12
elect to have only mandatory changes, as determined by the Lessor, installed on
the Equipment.
After the Warranty Period, the Lessor will furnish, upon request, and at the
Lessor's prices then generally in effect, such engineering changes as the Lessor
shall have available for sale and which may be suitable for use on or in
connection with the Equipment. The Lessor makes no representation that
engineering changes announced in the future will be suitable for use on or with
the Equipment.
No Waiver
No neglect, delay or indulgence by the Lessor in enforcing the Lease shall
prejudice the rights of the Lessor or be construed as a waiver. The waiver by
the Lessor of any right or remedies under the Lease in respect of a default
shall not constitute waiver of, or consent to, any other default.
Sublease and Relocation of Equipment
Without the Lessor's prior written consent, the Lessee shall not sublet the
Equipment. No relocation shall relieve the Lessee of its obligations under the
Lease. The Lessee shall not assign, transfer or otherwise dispose of the Lease,
the Equipment or any interest therein, or create or suffer any levy, lien or
encumbrances other than those created by the Lessor.
Assignment by Lessor
The Lessor may assign its interest in the Lease within the IBM Group without
notice to the Lessee. The Lessee will be given written notice of assignment
outside the IBM Group and the Lessee shall promptly acknowledge receipt in
writing. The Lessee shall not assert against any such assignee any set-off,
defence or counter-claim that the Lessee may have against the Lessor or any
other person.
Notices
Any demand, notice or other communication shall be sufficiently served if
delivered by hand, sent by facsimile or sent by pre-paid registered post. Any
such demand, notice or other communication shall be deemed to have been received
as follows:
in the case of hand delivery, the day following delivery
in the case of facsimile transmission the day following faxing
in the case of pre-paid registered post, forty eight hours after the time of
posting.
General
The Lessee shall keep the Lessor immediately informed of any event which might
affect the rights of the Lessor or involve the Lessor in any proceedings, loss
or liability, including but not limited to those events specified in Section 19
(Termination of the Lease) above.
The Lessee shall give the Lessor relevant information which the Lessor may
reasonably request with regard to the Equipment, Programs and Program Packages
fixed thereon, and the performance of its obligations including information
needed by the Lessor for submission to the Revenue Commissioners and reasonable
financial and other information which the Lessor may request for financial
evaluation purposes.
If any provision of this Agreement shall be held to be invalid, illegal or
unenforceable, the validity of the remaining provisions shall not in any way be
affected or impaired thereby.
The Lessee hereby confirms that is has all the requisite corporate power and
authority to enter into this Agreement and that all corporate acts required to
be taken to authorise the execution, delivery and performance of the
<PAGE> 13
obligations contained in this Agreement and contemplated by it have been duly
and properly executed and that it is under no obligation or restriction whether
by law or otherwise which would render this Agreement or any of its provisions
invalid, illegal or unenforceable.
The Lessee agrees that this Agreement and any dispute arising therefrom shall be
governed by the laws of the Republic of Ireland and the parties hereby submit to
the jurisdiction of the Courts of the Republic of Ireland. The Lessee hereby
appoints ReSound Ireland Limited, Cork Business & Technology Park, Model Farm
Road, Co. Cork, Ireland, to be its attorney for the purpose of accepting service
on its behalf of any summons notice, order, judgement or other legal process or
any other notice demand or other document with respect to this Agreement or any
matter arising under it and such appointment shall be irrevocable and service of
any such document on such attorney as aforesaid shall be deemed to be a good
service.
The clause headings of this Agreement are for convenience of reference only and
shall not affect the construction and/or interpretation of this Agreement.
In witness whereof the parties have hereto caused this Agreement to be executed
on their behalf, the day and year first herein written.
Accepted for and on behalf of Lessee: Accepted for and on behalf of Lessor:
Authorised Signatory Authorised Signatory
Name Name
Title Title
Date of Signature Date of Signature
<PAGE> 14
L941104 1 Form No.: IRF 01(01/98)
IBM IBM Ireland Limited Registered in Dublin: No. 16226 Registered Office: 2
Burlington Road, Dublin 4. (hereinafter "IBM")
Master Lease Supplement
Single Term Finance Lease
Lessee Name and Address: Lessee No.:
ReSound Corporation 132378
c/o ReSound Ireland Sales Limited
Cork Business & Technology Park
Model Farm Road
Cork Master Lease Agmt. No.:
(hereinafter "Lessee") MLA/0001
Supplement No.: Date Prepared:
'2.0 26 March 1999
This Supplement is made between IBM Ireland Limited having its registered office
at 2 Burlington Road in the city of Dublin (hereinafter called the Lessor and
which expression shall include its successors and assigns of the one part) and
the Lessee of the other part.
From the Lease Commencement Date for the Programs, Program Packages Software and
Equipment specified in the attachment, the Lessor hereby grants to the Lessee a
lease of the Equipment, and Software and a licence of the Programs and Program
Packages on the terms of the referenced Master Lease Agreement ("MLA") above and
on the terms of this Supplement as hereinafter set out and any other Supplement
or Lessor letter making reference to the Lease.
The Lessee agrees as follows
to make Payments to the Lessor by direct debit, or such other means as the
Lessor shall require, such that the Lessor receives value for such Payments on
the date payment is due.
that the Discount Rate where specified in the MLA and in this Supplement shall
be deemed to refer to a rate of 3%.
that the location where specified in the MLA shall be deemed to refer to the
Republic of Ireland.
The Lessee further agrees that
the Term shall be 3 Years 0 Months
the Payments which the Lessee shall be obliged to pay shall be:
IR 32,029.44 Punts payable at Quarterly intervals. The first Payment must be
paid on the Payment Commencement Date or such other date as the Lessor may agree
in writing. Subsequent Payments must be paid on the same day of the relevant
month at the intervals specified above until such stage as a total of 12 in
number of Payments have been paid to the Lessor. Thereafter the Lessee shall pay
such further Payments to the Lessor as provided hereunder or as notified to the
Lessee in accordance with this Supplement.
the Lease Rate (excluding VAT) shall be:
IR 87.80 Punts per IR 1000 Punts per quarter.
<PAGE> 15
the Payment Commencement Date shall be:
1 May 1999
This takes into account a holiday period of:
0 Months
the Lease and Licence Commencement Date shall be:
1 May 1999
the Percentage of Net Sale to Lessee shall be:
99% (described in clause 4b. below)
the Percentage of Net Sale to Lessor shall be:
1%
Options at Expiry of Term
The Lessee may, at the expiry of the Term, select one of the following options,
by so notifying the Lessor in writing at least three months before the
expiration of the Term. The options are as follows: To return the Equipment to
the Lessor in accordance with clause 13 of the MLA
OR
with the exception of Equipment which is the medium for Programs, Program
Packages or Software, act as Lessor's agent for the purposes of selling the
Equipment on terms and conditions to be advised by the Lessor to a purchaser
approved by the Lessor (Purchaser must be other than the Lessee or party related
thereto) and the Lessee will be entitled to a share of the net proceeds of the
sale by way of rebate of Payments.
Failure by the Lessee to exercise any of the options listed above will result in
the Term being extended and with the Lessee being liable to continue to make the
Payments required to be paid during the Term at clause 3b above and at the times
therein specified, provided however that the Lessee may terminate the Lease
during this extended term, on serving the Lessor with three months notice in
writing, whereupon the provisions of clause 13 of the Lease will apply.
Non Cancellation Lease
The Lease may not be cancelled or terminated except in accordance with the
provisions hereof. The Lessee's obligation to pay all Payments and any other
amounts required to be paid by Lessee under the Lease shall be absolute and
unconditional and shall not be subject to any abatement, reduction, set-off,
defence, counter-claim, interruption, deferment or recoupment for any reason
whatsoever.
However, the Lessee may subject to its having complied with the terms of the
Lease, exercise an "Early Conversion Option" after the second anniversary of the
commencement of the Term, subject to one month's written notice to the Lessor.
In such event the Lessee shall pay all Payments in respect of the unexpired
portion of the Term, discounted at the Discount Rate specified in clause 2b
above. The Lessee may then exercise the option specified in clause 4b above.
Lease Refunds
The Lease Rate, and the Payments to be made during the Term are based on the
assumption that IBM Equipment, Programs, and Program Packages are installed
within 60 days of the Estimated Shipment Date referenced herein. Subject to
clause 9c of the Master Lease Agreement if any IBM Equipment, Programs, or
Program Packages are not installed within this period, due to Lessor's inability
to deliver, then Lessor may issue an appropriate Lease refund for the
undelivered item where Payment or Payments have been made in respect thereof.
Price/Rate Protection
The Lease Rates described herein are valid for 30 days or until the date of
execution of this Supplement by both parties, whichever first occurs.
<PAGE> 16
The Purchase Price and any calculations drawn thereon viz all Payments described
herein are valid at date of issue of this Supplement only and are subject to
change until this Supplement is executed by both parties.
Once the Supplement is executed by both parties, the Lease Rates herein become
subject to change in accordance with the provisions of the Lease.
The Lessee agrees that export of Equipment, Programs and Program Packages from
the Republic of Ireland may require Irish and US licences and export contrary to
Irish or US regulations is prohibited by law. The following statement applies to
certain Equipment, Programs and Program Packages subject to this Agreement -
Such Equipment, Programs and Program Packages were authorised for export to the
Republic of Ireland under a special Distribution Licence procedure on the
condition that they may not be re-exported without prior approval from the US
authorities. It is the responsibility of the Lessee to obtain all necessary
export licences.
For the avoidance of doubt nothing in this Supplement or the Master Lease
Agreement shall entitle the Lessee to sell as Lessor's Agent any Programs,
Program Packages or Software the subject of a Lease.
The Lessee agrees that this Supplement together with the MLA and any Supplements
and letters of the Lessor referring thereto is the complete and exclusive
statement of the Agreement between the parties which supersedes all proposals or
prior agreements oral or written and all other communications between the
parties concerning the Equipment and any Programs fixed thereon.
The clause headings are for ease of reference only and shall not affect the
interpretation or construction of this Supplement or the Lease as a whole.
The Lessee hereby confirms that it has all the requisite power and authority to
enter into this Supplement and that all corporate acts required to be taken to
authorise the execution, delivery and performance of the obligations contained
in this Supplement and contemplated by it have been duly and properly executed
and that it is under no obligation or restriction whether by law or otherwise
which would render this Supplement or any of its provisions invalid, illegal or
unenforceable.
The Lessee agrees that this Supplement and any dispute arising therefrom shall
be governed by the laws of the Republic of Ireland and the parties hereby submit
to the jurisdiction of the Courts of the Republic of Ireland. The Lessee hereby
appoints ReSound Ireland Limited, Cork Business & Technology Park, Model Farm
Road, Co. Cork, Ireland, to be its attorney for the purpose of accepting service
on its behalf of any summons notice, order, judgement or other legal process or
any other notice demand or other document with respect to this Supplement or any
matter arising under it and such appointment shall be irrevocable and service of
any such document on such attorney as aforesaid shall be deemed to be a good
service.
Accepted for and on behalf of Lessee: Accepted for and on behalf of Lessor:
Authorised Signatory Authorised Signatory
Name Name
Title Title
Date of Signature Date of Signature
<PAGE> 17
Direct Debiting Mandate
Part A.
300662
To
The Manager:
IBM Customer No.:
Bank:
Branch:
After Signature, Please Return this Form to:
Address:
IBM Ireland Limited, 2 Burlington Road, Dublin 4.
I / We authorise you until further notice in writing to charge to my/our account
with you unspecified amounts which may be debited thereto at the instance of IBM
Ireland Limited.
Name of Account to be debited:
Authorised Signature:
Bank Account No: Date:
Instructions cannot be accepted to charge Direct Debits to a Deposit or Savings
Account.
Part B.
To: IBM
IBM Customer No.:
Ireland Limited, 2 Burlington Road, Dublin 4.
<PAGE> 18
FOR BANK USE ONLY
Name of Account to be Debited: Branch Title:
(Maximum 18 Characters) Sorting Code No.:
Account No.:
Direct Debits in respect of our customer's Mandate under the reference number
quoted should be made out as above.
For (Bank)
Manager:
Date:
After completion, the lower part of this form should be detached by the Bank
Branch and returned to IBM Ireland Limited.
<PAGE> 19
L941104 1 Form No.: IRF 01(01/98)
IBM IBM Ireland Limited Registered in Dublin: No. 16226 Registered Office: 2
Burlington Road, Dublin 4. (hereinafter "IBM")
Master Lease Supplement
Single Term Finance Lease
Lessee Name and Address: Lessee No.:
ReSound Corporation 132378
c/o ReSound Ireland Sales Limited
Cork Business & Technology Park
Model Farm Road
Cork Master Lease Agmt. No.:
(hereinafter "Lessee") MLA/0001
Supplement No.: Date Prepared:
'1.0 26 March 1999
This Supplement is made between IBM Ireland Limited having its registered office
at 2 Burlington Road in the city of Dublin (hereinafter called the Lessor and
which expression shall include its successors and assigns of the one part) and
the Lessee of the other part.
From the Lease Commencement Date for the Programs, Program Packages Software and
Equipment specified in the attachment, the Lessor hereby grants to the Lessee a
lease of the Equipment, and Software and a licence of the Programs and Program
Packages on the terms of the referenced Master Lease Agreement ("MLA") above and
on the terms of this Supplement as hereinafter set out and any other Supplement
or Lessor letter making reference to the Lease.
The Lessee agrees as follows
to make Payments to the Lessor by direct debit, or such other means as the
Lessor shall require, such that the Lessor receives value for such Payments on
the date payment is due.
that the Discount Rate where specified in the MLA and in this Supplement shall
be deemed to refer to a rate of 3%.
that the location where specified in the MLA shall be deemed to refer to the
Republic of Ireland.
The Lessee further agrees that
the Term shall be 3 Years 0 Months
the Payments which the Lessee shall be obliged to pay shall be:
IR 27,393.60 Punts payable at Quarterly intervals. The first Payment must be
paid on the Payment Commencement Date or such other date as the Lessor may agree
in writing. Subsequent Payments must be paid on the same day of the relevant
month at the intervals specified above until such stage as a total of 12 in
number of Payments have been paid to the Lessor. Thereafter the Lessee shall pay
such further Payments to the Lessor as provided hereunder or as notified to the
Lessee in accordance with this Supplement.
the Lease Rate (excluding VAT) shall be:
IR 87.80 Punts per IR 1000 Punts per quarter.
<PAGE> 20
the Payment Commencement Date shall be:
1 May 1999
This takes into account a holiday period of:
0 Months
the Lease and Licence Commencement Date shall be:
1 May 1999
the Percentage of Net Sale to Lessee shall be:
99% (described in clause 4b. below)
the Percentage of Net Sale to Lessor shall be:
1%
Options at Expiry of Term
The Lessee may, at the expiry of the Term, select one of the following options,
by so notifying the Lessor in writing at least three months before the
expiration of the Term. The options are as follows:
To return the Equipment to the Lessor in accordance with clause 13 of the MLA
OR
with the exception of Equipment which is the medium for Programs, Program
Packages or Software, act as Lessor's agent for the purposes of selling the
Equipment on terms and conditions to be advised by the Lessor to a purchaser
approved by the Lessor (Purchaser must be other than the Lessee or party related
thereto) and the Lessee will be entitled to a share of the net proceeds of the
sale by way of rebate of Payments.
Failure by the Lessee to exercise any of the options listed above will result in
the Term being extended and with the Lessee being liable to continue to make the
Payments required to be paid during the Term at clause 3b above and at the times
therein specified, provided however that the Lessee may terminate the Lease
during this extended term, on serving the Lessor with three months notice in
writing, whereupon the provisions of clause 13 of the Lease will apply.
Non Cancellation Lease
The Lease may not be cancelled or terminated except in accordance with the
provisions hereof. The Lessee's obligation to pay all Payments and any other
amounts required to be paid by Lessee under the Lease shall be absolute and
unconditional and shall not be subject to any abatement, reduction, set-off,
defence, counter-claim, interruption, deferment or recoupment for any reason
whatsoever.
However, the Lessee may subject to its having complied with the terms of the
Lease, exercise an "Early Conversion Option" after the second anniversary of the
commencement of the Term, subject to one month's written notice to the Lessor.
In such event the Lessee shall pay all Payments in respect of the unexpired
portion of the Term, discounted at the Discount Rate specified in clause 2b
above. The Lessee may then exercise the option specified in clause 4b above.
Lease Refunds
The Lease Rate, and the Payments to be made during the Term are based on the
assumption that IBM Equipment, Programs, and Program Packages are installed
within 60 days of the Estimated Shipment Date referenced herein. Subject to
clause 9c of the Master Lease Agreement if any IBM Equipment, Programs, or
Program Packages are not installed within this period, due to Lessor's inability
to deliver, then Lessor may issue an appropriate Lease refund for the
undelivered item where Payment or Payments have been made in respect thereof.
Price/Rate Protection
The Lease Rates described herein are valid for 30 days or until the date of
execution of this Supplement by both parties, whichever first occurs.
<PAGE> 21
The Purchase Price and any calculations drawn thereon viz all Payments described
herein are valid at date of issue of this Supplement only and are subject to
change until this Supplement is executed by both parties.
Once the Supplement is executed by both parties, the Lease Rates herein become
subject to change in accordance with the provisions of the Lease.
The Lessee agrees that export of Equipment, Programs and Program Packages from
the Republic of Ireland may require Irish and US licences and export contrary to
Irish or US regulations is prohibited by law. The following statement applies to
certain Equipment, Programs and Program Packages subject to this Agreement -
Such Equipment, Programs and Program Packages were authorised for export to the
Republic of Ireland under a special Distribution Licence procedure on the
condition that they may not be re-exported without prior approval from the US
authorities. It is the responsibility of the Lessee to obtain all necessary
export licences.
For the avoidance of doubt nothing in this Supplement or the Master Lease
Agreement shall entitle the Lessee to sell as Lessor's Agent any Programs,
Program Packages or Software the subject of a Lease.
The Lessee agrees that this Supplement together with the MLA and any Supplements
and letters of the Lessor referring thereto is the complete and exclusive
statement of the Agreement between the parties which supersedes all proposals or
prior agreements oral or written and all other communications between the
parties concerning the Equipment and any Programs fixed thereon.
The clause headings are for ease of reference only and shall not affect the
interpretation or construction of this Supplement or the Lease as a whole.
The Lessee hereby confirms that it has all the requisite power and authority to
enter into this Supplement and that all corporate acts required to be taken to
authorise the execution, delivery and performance of the obligations contained
in this Supplement and contemplated by it have been duly and properly executed
and that it is under no obligation or restriction whether by law or otherwise
which would render this Supplement or any of its provisions invalid, illegal or
unenforceable.
The Lessee agrees that this Supplement and any dispute arising therefrom shall
be governed by the laws of the Republic of Ireland and the parties hereby submit
to the jurisdiction of the Courts of the Republic of Ireland. The Lessee hereby
appoints ReSound Ireland Limited, Cork Business & Technology Park, Model Farm
Road, Co. Cork, Ireland, to be its attorney for the purpose of accepting service
on its behalf of any summons notice, order, judgement or other legal process or
any other notice demand or other document with respect to this Supplement or any
matter arising under it and such appointment shall be irrevocable and service of
any such document on such attorney as aforesaid shall be deemed to be a good
service.
Accepted for and on behalf of Lessee: Accepted for and on behalf of Lessor:
Authorised Signatory Authorised Signatory
Name Name
Title Title
Date of Signature Date of Signature
<PAGE> 22
Direct Debiting Mandate
Part A.
300662
To
The Manager:
IBM Customer No.:
Bank:
Branch:
After Signature, Please Return this Form to:
Address:
IBM Ireland Limited, 2 Burlington Road, Dublin 4.
I / We authorise you until further notice in writing to charge to my/our account
with you unspecified amounts which may be debited thereto at the instance of IBM
Ireland Limited.
Name of Account to be debited:
Authorised Signature:
Bank Account No: Date:
Instructions cannot be accepted to charge Direct Debits to a Deposit or Savings
Account.
Part B.
To: IBM
IBM Customer No.:
Ireland Limited, 2 Burlington Road, Dublin 4.
<PAGE> 23
FOR BANK USE ONLY
Name of Account to be Debited: Branch Title:
(Maximum 18 Characters) Sorting Code No.:
Account No.:
Direct Debits in respect of our customer's Mandate under the reference number
quoted should be made out as above.
For (Bank)
Manager:
Date:
After completion, the lower part of this form should be detached by the Bank
Branch and returned to IBM Ireland Limited.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
MARCH 27, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-27-1999
<CASH> 6,323
<SECURITIES> 0
<RECEIVABLES> 26,611
<ALLOWANCES> 0
<INVENTORY> 15,813
<CURRENT-ASSETS> 50,501
<PP&E> 9,955
<DEPRECIATION> 0
<TOTAL-ASSETS> 74,701
<CURRENT-LIABILITIES> 48,149
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 74,701
<SALES> 34,230
<TOTAL-REVENUES> 34,230
<CGS> 16,271
<TOTAL-COSTS> 16,271
<OTHER-EXPENSES> 15,546
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (234)
<INCOME-PRETAX> 1,767
<INCOME-TAX> 163
<INCOME-CONTINUING> 1,604
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,604
<EPS-PRIMARY> 0.08
<EPS-DILUTED> 0.08
</TABLE>
