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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998, or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from ______ to ________.
Commission file number: 0-20046
RESOUND CORPORATION
(Exact name of Registrant as specified in its charter)
California 77-0019588
(State or other jurisdiction of incorporation or (I.R.S. Employer
organization) Identification No.)
220 Saginaw Drive, Seaport Centre, Redwood City, California 94063
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 780-7800
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Preferred Share Purchase Rights
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Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant was approximately $53,116,000 as of February 26, 1999, based upon the
closing sale price on the Nasdaq National Market reported for such date. Shares
of common stock held by each officer and director and by each person who owns 5%
or more of the outstanding common stock have been excluded in that such persons
may be deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
There were 20,846,169 shares of the Registrant's common stock issued and
outstanding as of February 26, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from the definitive proxy
statement for the Annual Meeting of Shareholders to be held on May 28, 1999.
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INTRODUCTORY STATEMENT
Words such as "anticipates," "estimates," "expects," "believes" and the
like in this Annual Report on Form 10-K and in the Annual Report to Shareholders
identify forward-looking statements. These statements are subject to certain
risks and uncertainties that could cause the actual results to differ materially
from those projected. These risks and uncertainties are discussed below under
the captions "Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Factors That May Affect Future Operating
Results," and in the Company's reports filed with the Securities and Exchange
Commission. Copies of these reports are available from the Company upon request.
The Company assumes no obligation to update any forward-looking statements
contained herein.
Encore, ReSound and ReSource are registered trademarks of, and Advanced Program
Selection, APS, Avance, Cochlea Dynamics, Digital Cochlea Dynamics, P3, Premium,
ReSound Digital, Tradition and True Feedback Cancellation are trademarks of,
ReSound Corporation. CommPort is a registered trademark of Motorola, Inc.
("Motorola").
PART I
ITEM 1. BUSINESS
OVERVIEW
Founded in 1984, ReSound Corporation (together with its wholly-owned
subsidiaries, "ReSound" or the "Company") is a corporation organized under the
laws of the State of California. The Company is a hearing health care and human
communications company that designs, develops, manufactures and sells
technologically advanced hearing and communications devices. The Company's
products utilize proprietary sound processing technology originally developed by
AT&T Bell Laboratories and subsequently enhanced and refined by ReSound.
ReSound's Multiband Full Dynamic Range Compression ("MFDRC") sound processing
technology enables the Company's hearing devices to be individually programmed
to adjust the amplification of sound continuously in response to the acoustic
environment and a customer's residual range of hearing. The Company offers its
MFDRC sound processing technology in In-the-Ear ("ITE"), Behind-the-Ear ("BTE"),
In-the-Canal ("ITC"), and Completely-in-the-Canal ("CIC") versions of its
hearing healthcare products.
ReSound's MFDRC sound processing technology is also found in the
Company's newly introduced CommPort communications device, an integrated
microphone and speaker system developed jointly with Motorola to provide
firefighters, police officers and other public safety personnel with a
hands-free, comfortable and high performance personal interface with
communications equipment.
Since inception, the Company has sold approximately 1.2 million hearing
devices worldwide. ReSound currently distributes its hearing healthcare products
through more than 10,000 audiologists and hearing device retail locations in
over 35 countries. The Company also sells its hearing healthcare products to
retail chains and hearing device dispensers through wholly-owned subsidiaries in
Germany, the Netherlands, the United Kingdom, Ireland, France, Austria, Sweden,
Switzerland and Australia and has non-exclusive distribution agreements with
retail chains and single stores in Canada, Italy, Austria, Spain, Belgium, and
Denmark. The Company also operates a joint venture, ReSound Asia Ltd., which
operates a retail store in Hong Kong. The Company has exclusive distribution
agreements for Japan with Hoya Medical Corporation and for South Korea with
Kwang
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Woo International, Inc. The Company manufactures the CommPort device for
marketing and sale by Motorola.
In January 1998, ReSound Autac GmbH, a newly formed subsidiary of the
Company located in Zurich, Switzerland, acquired all of the assets and
liabilities of a former Swiss distributor for $401,000. In April 1998, ReSound -
Viennatone Ltd. (a U.K. company) acquired all of the assets and liabilities of
Apex Acoustics, Ltd. from the Ultratone Group, the largest hearing device retail
chain in the United Kingdom for $750,000. In September 1998, Viennatone AG
acquired the minority interest it did not already own in Viennatone BVG, its
subsidiary retail operation, and in November 1998, sold 100% of the shares of
Viennatone BVG to the Amplifon Group, a European hearing instruments retail
distribution company, headquartered in Italy. See also "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Acquisitions and
Strategic Alliances".
PRODUCTS
Core Sound Processing Technology
The Company's core sound processing technology is a proprietary sound
processing technology originally developed by AT&T Bell Laboratories and
subsequently enhanced and refined by ReSound. The Company's MFDRC sound
processing technology allows the Company's hearing devices to be individually
programmed to adjust the amplification of sound continuously in response to the
acoustic environment and the wearer's residual range of hearing. MFDRC sound
processing technology operates across the full dynamic range of speech,
separating incoming sounds into multiple frequency bands (two bands in the case
of the Company's analog products, and up to fourteen bands in the Company's
newly introduced ReSound Digital 5000 Series of products) and amplifying low and
high intensity sounds differently within each band. Low intensity, high
frequency consonant sounds that are critical to speech intelligibility can be
amplified more than sounds that are already loud, such as background noise.
Consequently, since most sounds are amplified to an appropriate loudness and
over-amplification is avoided, speech intelligibility and listening comfort may
be greatly improved for many persons with hearing impairment.
In 1996, ReSound introduced its "Cochlea Dynamics" sound processing
technology, an enhanced version of its patented MFDRC technology. While offering
equivalent or improved performance compared to the Company's earlier sound
processing technology, Cochlea Dynamics allowed for an integrated circuit that
is 40% smaller and consumes about 30% less power. Given these size and power
advantages, the Company's Cochlea Dynamics sound processing technology was
featured in the Company's first CIC device. Hearing devices incorporating this
advanced sound processing technology can be digitally programmed to fit a wide
range of hearing losses and configurations. Using automatic multiband full
dynamic range compression circuitry, the devices specifically address a common
psychoacoustic problem called "loudness recruitment" associated with
sensorineural hearing loss. Incoming sound is separated into low and high
frequency bands for independent processing, and maximum gain is applied to the
softest speech components while progressively lower gain is provided for higher
intensity sounds. Very weak high frequency sounds like consonants are therefore
amplified much more than intense speech sounds such as vowels. This leads to
better speech understanding for the hearing-impaired user of the Company's
hearing devices, since the signals are now audible, yet not uncomfortably loud.
The Company's latest MFDRC sound processing technology can be found in
its recently launched ReSound Digital 5000 Series of products. These products
use a powerful and flexible, software-based, digital signal processing platform
that supports powerful algorithms, including Digital Cochlea Dynamics sound
processing, Dual Microphone Technology, Adaptive True Feedback
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Cancellation and Multiband Noise Reduction. The Company believes that the
Digital Cochlea Dynamics sound processing software found in its new line of
digital products closely mimics the function of the human ear by dividing the
hearing spectrum into fourteen independent frequency bands and applying
multiband compression in each band. This makes for a very flexible system that
allows for compensation of a wide variety of hearing loss configurations.
The Company also markets and sells other products incorporating its own
sound processing technology. After the acquisition of the hearing healthcare
business activity of Minnesota Mining and Manufacturing Company in 1996, the
Company renamed the business Sonar Hearing Health Corporation ("SHH") and began
to market and sell the "Sonar" brand of products. SHH offers a full line of
programmable and non-programmable hearing instruments in both BTE and custom
models. SHH's non-programmable product line incorporates nonproprietary,
nonlinear sound processing into ITC and ITE custom hearing devices. SHH's
programmable product lines incorporate sound processing technology on
proprietary integrated circuits to separate incoming sounds into two frequency
bands and provide independent processing in the two bands. Thus, low intensity,
high frequency sounds can be processed differently than high level, low
frequency sound such as background noise.
In December 1994, the Company acquired Viennatone AG, a hearing
instrument manufacturer headquartered in Vienna, Austria. The Viennatone product
line consists of programmable and non-programmable products that span all
segments of the market, from BTE products to high power instruments with a large
number of options. While Viennatone's earlier product offerings incorporated
non-proprietary, linear sound processing technology, its newer product offerings
incorporate patented, non-linear sound processing technology designed to improve
performance in situations involving background noise and to avoid the need for
manual volume control. In 1995, Viennatone patented its adaptive zoom
technology. The concept uses two miniature microphones connected to a signal
processing circuit to selectively enhance sounds coming from the front
(typically desirable speech) over ambient sound (typically undesirable noise).
The zoom technology is designed to improve signal to noise ratio and help
hearing impaired users understand speech in difficult listening environments.
The experience derived from this development effort benefited the Company in the
development of its new ReSound Digital 5000 Series of products.
New Products Introduced in 1998
Hearing Healthcare
ReSound introduced three new product platforms in 1998. In October
1998, the Company launched the ReSound Digital 5000 family of products,
including three non-custom, BTE models, the BT5, BZ5 and BP5, and two custom ITE
models, the ED5 and EZ5. These devices are built on a software-based, digital
signal processing platform offering unique advantages to a dispenser and the end
user. The flexible architecture supports powerful algorithms including Digital
Cochlea Dynamics sound processing, Dual Microphone Technology, Adaptive True
Feedback Cancellation and Multiband Noise Reduction. The Company believes that
Digital Cochlea Dynamics sound processing technology most closely mimics the
function of the human ear by dividing the hearing spectrum into fourteen
independent frequency bands and applying multiband compression in each of the
bands. The multiple bands make the system very flexible and allow for
compensation of a wide variety of hearing loss configurations. The Dual
Microphone Technology improves signal-to-noise ratio and helps the user focus on
specific sounds in the presence of certain noisy backgrounds. Speech clarity is
optimized through the use of digitally matched microphones and programmable
directional patterns to meet individual listening requirements. Adaptive True
Feedback Cancellation eliminates feedback,
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the annoying whistle heard from hearing devices which do not fit snugly or when
an object is placed close to an operating unit. Unlike other methods currently
in use, the ReSound Digital 5000 device eliminates feedback without affecting
the gain or frequency response of the system. Multiband Noise Reduction
processing enhances speech clarity and the overall quality of sounds in quiet
and in noise. In addition, the BTE models feature a proprietary gold-plating
process which eliminates interference from digital cellular telephones.
A completely new software fitting and programming system, ReSource II,
was launched with the ReSound Digital 5000 Series of products. The ReSource II
fitting software comes in two configurations, a software module for use with the
NOAH industry standard platform, and a stand-alone version that can run on any
PC platform. ReSource II offers three sophistication levels for fitting and
fine-tuning. It also supports new fitting algorithms, digital loudness growth
measurements and a convenient interface with SoundPro, a software program that
allows hearing professionals to simulate a variety of sound environments and
speech passages for use during fitting.
In the fourth quarter of 1998, the Company launched the Avance hearing
enhancer into selected test markets in the United States and the United Kingdom.
The Avance hearing enhancer is targeted at the large, underserved, mild to
moderate hearing-impaired segment of the market that would rather tolerate
hearing impairment than go through the time and expense of being fitted with a
traditional hearing device. Its unique form factor makes it lightweight,
comfortable, easy to use and nearly invisible when worn. The product is designed
to be easy to fit and is very competitively priced when compared to traditional
hearing devices. In January 1999, hearing professionals in four additional
cities in the U.S. were trained to dispense the Avance hearing enhancer. In the
first half of 1999, other international markets including Germany, the
Netherlands, Italy, Hong Kong, Singapore and Australia will begin test marketing
the product.
Communications
The Company's joint development efforts with Motorola resulted in the
joint announcement of the introduction of the CommPort device in September 1998.
The CommPort is an integrated microphone and speaker system, designed to enhance
communications by providing firefighters, police officers and other public
safety personnel with a hands-free, comfortable and high performance personal
interface with two-way radios and other communications equipment. The Company
manufactures the CommPort device on an OEM basis for marketing and sale by
Motorola. The Company expects that its joint development effort with Motorola
will result in further technological developments that can be incorporated into
other products for marketing and sale into other segments of the communications
market and the hearing healthcare market.
Current ReSound Brand Products
In addition to the top-of-the-line ReSound Digital 5000 family of
products, the Company's product lines include the Premium Series line of
products, the midrange Encore Series line and the Tradition Series line. Each of
these lines of products incorporates the Company's proprietary MFDRC sound
processing technology.
The Premium Series line of products are multichannel, multiprogram
devices. They can support two or three listening programs with an optional
ultrasonic remote control and feature optional telecoil and direct audio input
capability. The Encore Series products come with a single listening program.
Both the Premium and Encore products are digitally programmable using the
ReSound fitting systems which comprise the P3 proprietary portable prescriptive
programmer and the
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ReSource fitting module for the industry standard platform, NOAH. In late 1995,
the Company introduced a new line of products called the Tradition Series. The
Tradition Series hearing instruments contain the proven Cochlea Dynamics sound
processing, and can be digitally programmed either in the factory or at the
point-of-sale using the Company's proprietary ReSource fitting software. The
Tradition Series products feature seven programs derived from a patient's
audiometric data using a proprietary clustering technique applied to a database
of successful ReSound fittings. The Tradition Series products are available in
BTE and ITE configurations.
Within each product line, there are different configurations. The
behind-the-ear or BTE version is a non-custom product worn over and behind the
ear. The device contains a microphone, sound processing electronics, a receiver
or speaker and an appropriate battery in a plastic case and a sound output tube
which attaches to a custom earmold. U.S. retail prices for the Company's
digitally programmable BTE devices typically range from $1,100 to $2,250 for a
single device. The BTE version is still very popular in Europe. The in-the-ear
or ITE version comprises a custom shell that matches the ear impression. The
shell contains a microphone, sound processing electronics and a receiver. The
shell fills the concha area of the patient's ear. U.S. retail prices for the
Company's ITE products typically range from $1,200 to $2,300 for a monaural
(single ear) fitting. The in-the-canal or ITC version is similar to the ITE, but
smaller; it fits in the ear canal. The completely-in-the-canal or CIC version is
the smallest custom configuration. This model fits completely in the ear canal
and is the most cosmetically appealing custom version. U.S. retail prices for
the Company's ITC and CIC products typically range from $1,800 to $2,800 per
unit. ITE, ITC and CIC configurations constitute the custom category, and these
products are very popular in the United States and in some parts of Asia and
Europe.
During 1997, several products were added to the Company's product
lines. The Premium Series BTE model, the BT4, was introduced in April 1997. This
device incorporates Cochlea Dynamics sound processing technology in a
custom-designed case available in a variety of colors. The innovative case
design allows dispensers to easily change the configuration of the device from
an adult to a pediatric version and from one case color to another. Telecoil and
direct audio input are standard features. The BT4 offers an integrated solution
for the pediatric population with moderate to severe hearing losses.
In the third quarter of 1997, the ITC model, the IE4, was launched. The
IE4 is the smallest Encore Series product from ReSound. It is fully programmable
and has a single listening program.
During the fourth quarter of 1997, ReSound introduced the CC4, a CIC,
Premium Series product. By reducing the size of one of the critical component
chips, the overall hybrid size was reduced by 50%. Therefore, the CC4 offers
advanced technology in a small and attractive package. The device, when worn,
sits completely in the patient's ear canal and is cosmetically very appealing.
The CC4 also has a smooth frequency response due to improved receiver
construction. The CC4 combines the benefits of deep microphone placement in the
ear canal and the smaller residual volume between the instrument and the eardrum
with improvements in circuit design to offer improved sound quality and 30% less
current drain than the standard hybrid. In certain key markets, the CC4 is built
using a new shell material for improved strength and durability.
Fitting Systems
The ReSource II fitting system now supports all programmable ReSound
brand products. Dispensers can use this software at the point-of-sale. The
ReSource II software is the successor to the
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ReSource software introduced in 1996 as a fitting module for the industry
standard software platform, NOAH. The new fitting software can be used with NOAH
or in a stand-alone version on any PC platform. The programming interface is the
industry standard HI-PRO. The Company's proprietary portable prescriptive
programmer, P3, is being discontinued but can still be used by dispensers to
program and fit the Company's digitally programmable products. However, the P3
cannot be used with the new ReSound Digital 5000 Series of products. As of March
1, 1999, there were approximately 12,970 NOAH users worldwide. For dispensers
who do not wish to program the devices at the point-of-sale, the Company offers
factory-programmed versions of Tradition Series products. Advanced Program
Selection technology (APS), featured in the Tradition products, does not require
special fitting tools at the point-of-sale, so it is easy to fit and fine tune
the devices. APS devices are well suited for certain markets including Eastern
Europe and parts of Asia.
Tactical Brand Products
During 1997, SHH introduced mini-canal configurations in all of its
major lines. In October 1997, the SHH sales force and marketing functions were
integrated into ReSound's existing U.S. organization. No new Sonar brand
products were introduced in 1998 as the Company transitions Sonar brand
customers to ReSound products.
Viennatone designs, manufactures and distributes linear and
nonproprietary compression circuit-based hearing devices for moderate and
moderate to severe hearing losses. During 1997, two new BTE products, the 130K
and 130DUO, were added to the successful 130 series. In October 1997, the
Contact Star, a high power bone conduction hearing device configured as an
eyeglass aid, and the Silent Star, a Tinnitus product, were announced at the
German Congress. The Contact Star replaced two existing products. The Silent
Star is designed as a therapeutic noise generator for Tinnitus therapy. The
Model 180, the first member of the 4Power family of Viennatone products was
introduced in 1998. The Model 180 is a high power, linear device with analog
feedback cancellation. Other models in the 4Power family are under development.
MANUFACTURING
The Company manufactures its hearing devices according to
specifications received from hearing healthcare professionals. In the case of an
ITE, ITC or CIC device, after receiving an impression of the patient's ear canal
and the programming requirements of the device, the Company manufactures the
custom earmold shell and assembles the electronic circuitry of the device. In
the case of a BTE device, the Company assembles the electronic circuitry into a
case the Company produces or purchases.
ReSound's manufacturing operations consist of coordination of
integrated circuit production, assembly and testing of electronic subsystems,
fabrication of custom earmolds, integration of the electronic sub systems into
the device shell, and final testing of the complete system. Electronic assembly
operations include the attachment of three integrated circuits onto a printed
circuit board along with other components by an outside vendor. A microphone and
speaker are wired and attached to this circuit board which is then attached to a
faceplate and tested. The faceplates are stored in inventory until, in the case
of an ITE, ITC or CIC, an impression of the patient's ear canal and audiological
information are received from a hearing device dispenser. The Company then
produces the custom ITE, ITC or CIC shell and assembles the product. In the case
of a BTE device, the Company either purchases a standard case from a supplier,
or makes use of an internally designed and manufactured case, and assembles the
electronic circuitry into the case. The Company subcontracts manufacture of its
proprietary P3 system and remote control used with its hearing
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devices. The Company's primary manufacturing facilities are in Redwood City,
California; Eagan, Minnesota; Cork, Ireland; Munster, Germany; Grafenschachen,
Austria; Vienna, Austria; and Oxford, United Kingdom. In addition, small custom
hearing device laboratories are located within the Company's subsidiaries in
France, Australia, Sweden and Switzerland.
The Company subcontracts for the manufacture of the P3 system from a
single supplier. The P3 system is purchased under a supply contract, while
other components are purchased pursuant to purchase orders on an as-needed
basis. With the acquisition of Sonar Design & Hortechnik GmbH in January 1994
(renamed ReSound Deutschland in 1996), the Company established an ITE
manufacturing capability in Germany. See also "Sales and Marketing".
The Company also subcontracts the manufacture of the CommPort device
and the Avance hearing enhancer. Each device is purchased pursuant to an
agreement with a turnkey manufacturer of the product.
Viennatone manufactures its hearing devices in Vienna and
Grafenschachen, Austria. SHH manufactures its custom hearing devices in Eagan,
Minnesota. Viennatone and SHH manufacture the custom hearing instruments in
accordance with specifications received from the respective hearing care
professional. In the case of an ITE device, after receiving an impression of the
patient's ear canal and the programming requirements of the device, the custom
earmold shell is manufactured and the electronic circuitry of the device is
assembled. In the case of a BTE device, a standard case is manufactured and the
electronic circuitry is assembled into the device. Viennatone and SHH
manufacturing operations consist of coordination of integrated circuit
production, assembly and testing of electronic subsystems, fabrication of custom
earmolds, integration of the electronic components into the device shell and
final testing of the complete system.
In the United States, the Company is subject to inspection on a routine
basis by the United States Food and Drug Administration ("FDA") and the states
of California and Minnesota to ensure compliance with the FDA's Quality System
Regulations ("QSR") and comparable state regulations that impose certain
procedural and documentation requirements upon the Company with respect to
manufacturing and quality assurance activities. Manufacturing sites outside of
the United States supplying the U.S. market are also subject to compliance with
the FDA's QSR regulations and inspections. Viennatone's, ReSound Deutschland's
and ReSound Redwood City, U.S.'s ISO 9001 and Cork, Ireland's ISO 9002
certifications will require periodic audits by a registrar to maintain the
certifications. See also "Government Regulation".
PRODUCT RETURNS, REPAIRS AND REMAKES
The Company believes that the hearing device industry in the United
States is characterized by a relatively high rate of product returns
(approximately 16 to 32 percent) and that these returns are due to a number of
factors. Many states have laws that require hearing device dispensers to allow
purchasers a minimum period of time for return of their hearing devices,
typically 30 days. In addition, the relatively poor performance of many existing
hearing devices may cause patients to return them. Further, patients may not be
able to judge the performance of a new hearing device at the dispenser's office.
Finally, the Company believes that many dispensers encourage potential
purchasers to try a variety of hearing devices on a trial basis, in part because
of the industry's liberal return policy.
ReSound allows its hearing devices sold in the U.S. and Canada to be
returned without charge for a period of 90 days after delivery to the dispenser.
In Europe and Asia, the Company sells
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primarily to chains of hearing device dispensers, and all returns from the end
user are the responsibility of these chains. In addition, in the U.S. and
Canada, ReSound currently offers warranties of one to two years to the end user
on the electronic components of its hearing devices and a 12-month warranty
against defects in the manufacture of the custom shell. The Company offers a
12-month warranty to the dispenser on the P3 system and other programming
systems in the U.S. Internationally, the Company offers a 12-month warranty to
the distributor on the components of its hearing devices.
The Company believes that its product returns are primarily the result
of the advanced sound processing of its products, which provides greater
amplification than other products and therefore requires a more precise fit of
the hearing device in order to reduce feedback. Other factors include the
relatively high price of the Company's products and the challenge of
appropriately training some of its dispensers, particularly in the area of
device programming. In addition, many repairs have been required on the
Company's ITE and ITC hearing devices due to blockage of the speaker by
accumulated ear wax. The natural production of ear wax in the ear canal can clog
hearing devices periodically. The Company has also experienced a high rate of
repair and remake requests related to imperfect fitting of the ITE and ITC
shell. The Company is attempting to reduce these occurrences by continuing to
improve its manufacturing processes, its fitting procedures and its fitting
systems software, by teaching hearing care professionals more effective
techniques for screening patients, and by offering a standard trial unit that
hearing care professionals may utilize to demonstrate the ReSound technology to
the patient.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for a discussion of the impact of warranty claims on the
Company's business.
SALES AND MARKETING
In the United States and Canada, hearing devices typically have been
sold by hearing device dispensers and audiologists. There are approximately
6,000 dispensers of hearing devices and approximately 6,000 dispensing
audiologists in the United States. ReSound's products are positioned primarily
as premium-priced, premium-performance devices. Because the Company's
programmable product lines are more technically advanced than many competitors'
conventional hearing products, the Company has targeted audiologists and
qualified hearing device specialists to distribute its products. The Company's
sales staff, consisting of fourteen people, seven of whom are audiologists,
supports over 5,500 audiologists and hearing device retail locations in the
United States. In addition, retail chains and buying groups are becoming an
increasingly important factor in the distribution of hearing devices in the
United States for the industry, including ReSound. The Company believes that it
is well positioned to meet these changes in the United States distribution
structure.
As part of its sales and marketing efforts, ReSound seeks to
differentiate itself to the hearing healthcare professional by offering a
comprehensive training program to its network of dispensers. The Company's
training program is designed to educate the hearing device dispenser about
ReSound's products and to train the hearing device dispenser in the proper
fitting of patients. In addition, the Company's sales and marketing force
provides ongoing support and service to audiologists and hearing device
dispensers.
ReSound employs several distribution channels to market and sell its
products internationally. The Company is a party to an exclusive distribution
agreement covering the Japanese market that expires in December 2002 with Hoya
Medical Corporation, a large Japanese company with retail outlets and
substantial experience in the contact and intraocular lens markets. During 1992,
the
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Company expanded distribution of its products into Germany, Belgium and Spain by
entering into non-exclusive distributor arrangements with leading retailers of
hearing devices in those countries. During 1993, an exclusive distributor
arrangement with France's leading hearing device retail chain was converted into
a non-exclusive distributor arrangement. In 1992, ReSound established a
subsidiary, ReSound GmbH Hortechnologie ("ReSound GmbH"), for marketing and
distribution of its current and future products, primarily in Germany, Austria
and Switzerland. ReSound GmbH has captured a significant share of Germany's BTE
hearing device market. On January 1, 1994, ReSound completed the acquisition of
all of the outstanding ownership interest in Sonar Design & Hortechnik GmbH
located in Munster, Germany. This entity was renamed ReSound Deutschland in
1996. Coupling ReSound Deutschland's significant ITE market share and expertise
in ITE design and manufacturing with ReSound's BTE devices has given ReSound a
complete line of high technology hearing devices in Germany. Through this
subsidiary, ReSound sells, services and manufactures custom hearing devices for
the German market.
In 1993, ReSound established a Dutch subsidiary, ReSound B.V., for
distribution of the Company's products in the Netherlands. In 1994, ReSound
established ReSound Asia Limited ("RSND Limited"), a British Virgin Islands
company which is a joint venture with a large Hong Kong group with diversified
business interests. Headquartered in Hong Kong, RSND Limited sells ReSound
products in Hong Kong through a Hong Kong based subsidiary. Viennatone sells to
distributors in numerous countries, to a major retail chain of stores in Europe
and to subsidiaries in the United Kingdom, France and Germany. In 1995, ReSound
established subsidiaries in Australia and Sweden. Sales of the Company's
products to Taiwan, Singapore and the People's Republic of China are currently
made through the Australian subsidiary. The Company also has branch operations
in Canada and New Zealand, and has converted its branch operation in Switzerland
into a subsidiary, ReSound Autac GmbH, in connection with its January 1998
acquisition of its Swiss distributor. International sales accounted for 51% of
the Company's total sales in 1998. See Note 11 of "Notes to Consolidated
Financial Statements".
The Company manufactures the new CommPort device on an OEM basis for
marketing and sale by Motorola.
THIRD-PARTY REIMBURSEMENT
In the United States, third-party reimbursement generally is not
available for the purchase of hearing devices. As a result, the price of a
hearing device may be a key factor in the patient's decision to purchase such a
device. Third-party reimbursement is generally provided in most European
countries and tends to be covered by either government or private funded health
insurance schemes. The levels of reimbursement vary from country to country and
have been reduced significantly in most European markets in recent years.
Typically in Germany today, patients will be reimbursed up to $500 for any one
hearing device which is around 40% lower than reimbursement levels of two years
ago. The reduction in reimbursement levels has had a negative effect on the
Company's revenues in those countries affected.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating Results" for a
discussion of the risks and uncertainties with respect to future changes in
government reimbursement levels.
10
<PAGE> 11
GOVERNMENT REGULATION
The development, production and marketing of the Company's current
hearing healthcare products and products planned for future introduction are
subject to regulation by numerous governmental authorities in the United States,
including the FDA, the California Department of Health Services and the State of
Minnesota, and in other countries. In the United States, all medical device
products are subject to rigorous FDA review. Hearing aids are classified by the
FDA as Class I medical devices with a restricted status.
The United States Federal Food, Drug, and Cosmetic Act (the "FDC Act")
and other federal statutes and regulations govern or influence the design,
testing, manufacture, labeling, sale, storage, record keeping, approval,
advertising and promotion of such products. Noncompliance with applicable
requirements can result in fines, recall or seizure of products, total or
partial suspension of production, refusal of the government to approve product
license applications or withdrawal of approvals, injunctions, civil fines and
criminal prosecution.
Historically, in order to obtain FDA permission to market a new medical
device, the Company had to submit proof of substantial equivalence in a 510(k)
pre-market notification submission or proof of safety and efficacy in a
Pre-Market Approval Application ("PMAA"). In many cases, such proof entailed
extensive clinical tests. The testing, preparation of necessary applications and
processing of those applications by the FDA were typically expensive,
time-consuming and of uncertain outcome. In November 1997, President Clinton
signed into law the "Food and Drug Administration Modernization Act of 1997," a
three-year effort which amends provisions of the FDC Act relating to every
product under the FDA's authority. As a result, as of February 19, 1998, all
air-conduction hearing aids became exempt from this substantial equivalence
process.
Clinical testing of devices under development requires compliance with
federal and state regulations involving Investigational Device Exemptions
("IDE"). These regulations govern many important aspects of the clinical
investigation of medical products, including obtaining informed consent from
clinical subjects, securing the approval of an Institutional Review Board for
the intended clinical protocol and maintaining required documentation relating
to the conduct of the investigational study. The FDA, at its discretion, may
also require additional post-marketing surveillance to monitor the performance
of products in the market. Marketing permission may be withdrawn if compliance
with regulatory requirements is not maintained or if significant problems occur
following initial marketing.
The Company also must register annually as a medical device
manufacturer with the FDA and be licensed by the Food and Drug Branch of the
California Department of Health Services and the State of Minnesota. The Company
is subject to inspection on a routine basis by both the FDA and the States of
California and Minnesota for compliance with the FDA's new Quality System
Regulation ("QSR"), effective July 1997, and medical device reporting ("MDR")
regulations and equivalent state regulations. These regulations impose certain
procedural and documentation requirements on the Company with respect to design,
manufacturing, labeling, advertising, safety and quality assurance activities.
The FDA actively enforces regulations prohibiting marketing of products
for non-indicated uses as well as products that violate design, safety and
performance claims and the other requirements mentioned above.
The new QSR and more stringent European ISO regulations increase the
Company's cost of
11
<PAGE> 12
regulatory compliance. The Company also is subject to numerous federal, state
and local laws relating to such matters as safe working conditions,
manufacturing practices, environmental protection, fire hazard control and
disposal of hazardous or potentially hazardous substances.
Sales of medical device products outside the United States are subject
to international regulatory requirements that vary widely from country to
country. The time required to obtain approvals required by other countries may
be significantly longer or shorter than that required for typical FDA approval.
International distribution, importation and manufacturing licensing may differ
substantially from even the new harmonized FDA regulations. Some countries have
historically required extensive product performance data, clinical evaluations
and physical device samples above and beyond the baseline FDA submission
requirements. Other countries, such as Japan, have standards similar to those of
the FDA. This disparity in the regulation of medical devices may result in more
rapid product approvals and sales in certain countries than in other countries.
In 1995, the European Union adopted the Medical Device Directive mandating the
CE Mark for all medical devices to be sold within the Union. The Company has
obtained the required certifications of quality and regulatory systems and is
now applying the CE Marking on its products within Europe. Viennatone, ReSound
Deutschland and the Redwood City, California facility have obtained and are
maintaining the ISO 9001 and EN 46001 quality system certifications. ReSound
Ireland has achieved and is maintaining ISO 9002 certification. Individual
country requirements regarding third party reimbursements, advertising,
professional training, language of labeling materials and other areas continue
to apply and may make certain markets more difficult to penetrate. Compliance
with proposed revisions to the European Medical Device Directive for
electromagnetic compatibility, device hazard and risk assessments and digital
cellular telephone interference immunity may result in significant regulatory
compliance costs for the Company in the future and may have a material adverse
effect upon the Company's business, financial condition and results of
operations.
Certain of the Company's products also may be subject to U.S. Federal
Communications Commission ("FCC") regulation, which establishes radio frequency
emission standards for certain electronic equipment. Products that fail to
comply with these regulations may not be sold in the United States until
appropriate modifications are made. Various countries in which the Company
markets its products, or in which the Company may do so in the future, also have
regulatory agencies or standards authorities that perform functions comparable
to the FCC, and the Company will need to comply with these requirements to the
extent that it markets covered products in such countries.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating Results" for a
discussion of the risks and uncertainties with respect to government regulation.
RESEARCH AND DEVELOPMENT
ReSound's research and development staff consisted of 74 people at
December 31, 1998. Its responsibilities include integrated circuit development,
software development, mechanical and electroacoustic engineering, clinical
research, FDA-related regulatory affairs, long-term product development, and
development and maintenance of ReSound's intellectual property. The Company also
retains consultants with special expertise to augment internal product
development.
ReSound's research and development is primarily focused on the
development of a new generation of hearing health care products based on digital
signal processing technology (DSP), on the development of the fitting systems
required for this new generation of devices, on the
12
<PAGE> 13
development of new products to address the needs of different segments of the
hearing health care market, on proprietary technology for hearing health care
and human communications products in conjunction with its alliance with
Motorola, and on the enhancement of its current hearing device products.
Some acoustic and magnetic clinical investigations are conducted at the
California Ear Institute at Stanford in Palo Alto, California which has an
affiliation with the faculty at the Stanford University School of Medicine. Dr.
Rodney Perkins, Chairman of the Company's Board of Directors, is the President
of the California Ear Institute at Stanford and a professor at the Stanford
University School of Medicine.
With the acquisition of SHH, the Company obtained a large portfolio of
patents and intellectual property for programmable and digital devices. SHH also
provides ReSound with technology related to manufacturing engineering of custom
shells and analog signal processing. The programmable and DSP patents obtained
from the SHH acquisition were made available to the industry through a
partnership ("HIMPP") formed in 1996, comprised of eight hearing device
manufacturers, including ReSound, at December 31, 1998.
The Company incurred research and development expenses of $16.4 million,
$16.9 million and $14.9 million in the years ended December 31, 1998, 1997, and
1996, respectively.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating Results" for a
discussion of the risks and uncertainties involved in new product development.
COMPETITION
The hearing device industry is fiercely competitive. Many of the
Company's competitors, including Siemens, Starkey, Oticon, Phonak, Philips,
Widex, Beltone and GN Danavox A/S, may have substantially greater financial,
manufacturing, marketing or technical resources than those of the Company. In
addition, the Company is aware that several of its competitors have programs for
the development of technologically advanced hearing devices. A number of
companies including Siemens, Oticon, Widex, Philips and Danavox have advanced
technology DSP hearing devices. Some of these competitors who launched high-end
digital products earlier than the Company, have also introduced fully digital,
midrange products in the last year. The Company has now launched its ReSound
Digital 5000 line of completely digital processing, high end products. These
software-based products have significantly more processing power than other
digital devices on the market. This allows for extensive customization to
address individual patient needs and also permits advancements derived from
future research to be implemented more rapidly for use by hearing professionals
and their patients. There can, however, be no assurance that the Company's
competitors will not develop products that may be lower priced or more effective
than the Company's products in overcoming the communication challenges imposed
by hearing loss, or that the Company's technologies and products may not be
rendered obsolete or noncompetitive by such developments. Principal competitive
factors in the market for the Company's hearing healthcare products include
price, product quality, reliability, technical support and service, marketing
and distribution channels.
The first communications product jointly developed by ReSound and
Motorola, the CommPort, was announced in September 1998. In this arena, Phonak
Communications, a subsidiary of Phonak A/G, already has one-way wireless
products for use with hearing devices and for non-hearing impaired applications.
Other competitors in the Company's core market may also be
13
<PAGE> 14
developing products based on wireless technologies for the hearing healthcare
market.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors That May Affect Future Operating Results" for a
discussion of the risks and uncertainties with respect to competition.
PATENTS, TRADE SECRETS AND LICENSES
The Company's policy is to protect its proprietary position by, among
other methods, filing United States and international patent applications to
protect technology, inventions and improvements that are important to the
development of its business and, in this regard, the Company owns and has filed
applications for a number of patents and patent applications in the United
States and elsewhere in the world. While the Company believes that its patents
and applications have value, it also believes that its competitive position
depends on its ability to develop new technology and to establish successful
relationships with strategic partners and outside suppliers.
The Company typically requires its employees, consultants and advisors
to execute a confidentiality agreement upon the commencement of an employment,
consulting or advisory relationship with the Company.
Certain patents used, or of potential use, by the Company in its
business are licensed from third parties. Most of these licenses are fully paid.
In addition, the Company has entered into agreements to license certain of its
own patents to third parties under various compensation arrangements.
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Factors that May Affect Future Operating Results" for a
discussion of the protection afforded by the Company's patents and other
intellectual property, patent infringement litigation, and other risks and
uncertainties in connection with the Company's intellectual property.
PRODUCT LIABILITY AND INSURANCE
Medical device companies are subject to an inherent risk of product
liability and other liability claims in the event that the use of their products
or a medical procedure associated with prescribing and fitting their products
results in personal injury claims. Any such claims could have an adverse effect
on the Company. The Company currently maintains liability insurance with
coverage of $20 million per occurrence and an annual aggregate maximum of $21
million. There can be no assurance that product liability or other claims will
not exceed such insurance coverage limits or that such insurance will continue
to be available on commercially acceptable terms, or at all.
EMPLOYEES
As of December 31, 1998, the Company had 1,041 employees, including 74
in research and development, 676 in manufacturing, 181 in sales and marketing,
and 110 in administration. The Company believes it maintains competitive
compensation, benefits, equity participation and work environment policies to
assist in attracting and retaining qualified personnel. Viennatone's employees
are compulsorily covered by a collective bargaining agreement with respect to
the electronics industry and are compulsorily members of the Austrian Chamber of
Workers. The Company believes that the success of its business will depend, in
part, on its ability to attract and retain qualified personnel. The Company
believes its relationship with its employees is good.
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<PAGE> 15
ADVISORY BOARDS
The Company has a Scientific Advisory Board and a Medical Advisory
Board comprised of leading scientists and physicians in the acoustic, auditory
and electrical engineering fields. Both Boards meet and consult with the
Company's management and technical staff on an as-needed basis. Some members of
the Boards may also receive compensation for consulting or clinical work
performed for the Company under consulting contracts. The aggregate compensation
paid by the Company under these consulting arrangements was approximately
$30,000 during 1998, excluding amounts paid to Dr. Richard Goode and Dr. Rodney
Perkins who are also members of the Company's Board of Directors. See
"Compensation of Directors" in the Company's Proxy Statement for the 1999 Annual
Meeting of Shareholders for information on amounts paid to Dr. Goode and Dr.
Perkins for consulting services and services as members of the Company's Board
of Directors.
The current members of the Scientific Advisory Board are:
Jont Allen, Ph.D., a member of the technical staff of AT&T Bell
Laboratories in the acoustics research department. Dr. Allen was involved in the
development of AT&T's internal hearing device venture, with particular emphasis
on the fitting system, and has experience in acoustics, cochlear modeling and
related electrical engineering fields. Dr. Allen holds a Ph.D. from the
University of Pennsylvania.
Harry Levitt, Ph.D., Distinguished Professor at City University of New
York for the Center of Research in Speech and Hearing Science. Dr. Levitt is one
of the world's leading scientists in the hearing aid field. He regularly
presents, often as an invited speaker, at the most important hearing aid
conferences. Dr. Levitt has over 200 publications in major audiology journals
and textbooks.
Brian Moore, Ph.D., Professor of Auditory Perception at Cambridge
University in England. Dr. Moore has performed extensive basic and applied
research in the fields of hearing, hearing impairment, hearing device design,
and signal processing, with long-term Program Grant support from the Medical
Research Council (U.K.). He has authored or edited more than eight books and has
published over 250 book chapters and research articles. Dr. Moore holds a Ph.D.
from Cambridge University.
Vincent Pluvinage, Ph.D., Chief Executive Officer of Preview Software.
Dr. Pluvinage was formerly employed by ReSound for 10 years in various
functions: Vice President for Research and Development, Vice President and later
President for International Operations, and Executive Vice President. Before
joining ReSound, from June 1985 to March 1987, Dr. Pluvinage worked at AT&T Bell
Laboratories, where he was in charge of digital processing hardware and clinical
research in connection with sound processing. He was a member of the internal
venture at AT&T Bell Laboratories that originally developed the technology that
is employed in ReSound's current products. Dr. Pluvinage holds a Ph.D. in
bioengineering from the University of Michigan and an engineering degree (summa
cum laude) in applied physics engineering from Universite Catholique de Louvain
in Belgium.
Edgar Villchur, President and Director of Research of the Foundation for
Hearing Aid Research. Mr. Villchur was the founder of Acoustics Research, a
manufacturer of stereophonic equipment, and has been a visiting scientist at the
Massachusetts Institute of Technology and the Albert Einstein School of
Medicine. Mr. Villchur has authored many books and papers on the reproduction of
sound and signal processing for the hearing impaired. Mr. Villchur holds an
M.S.Ed. from the City College of New York.
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<PAGE> 16
The current members of the Medical Advisory Board are:
Derald E. Brackmann, M.D., senior otologic surgeon at the House Ear
Institute in Los Angeles. Dr. Brackmann is past President of the Academy of
Otolaryngology-Head and Neck Surgery and past President of the American
Neurotologic Society. He has published extensively on clinical topics in
otologic surgery (ear surgery). Dr. Brackmann is Clinical Professor of
Otolaryngology at the University of Southern California School of Medicine. Dr.
Brackmann holds an M.D. from the University of Illinois School of Medicine.
Professor Doctor Ugo Fisch, Professor and Chairman of the Department of
Otolaryngology at the University Hospital in Zurich. Dr. Fisch is a leading
surgeon in the fields of otologic surgery and neurotologic surgery (surgery of
the neural components of the ear and related structures) and has over 30 years
of research and teaching experience. Dr. Fisch is an Honorary Fellow of the
Royal College of Surgeons of England. Dr. Fisch holds an M.D. from the
University of Zurich.
Bruce J. Gantz, M.D., Professor of Otolaryngology-Head and Neck Surgery
at the University of Iowa College of Medicine. Dr. Gantz has received extensive
funding from the National Institutes of Health for research on advanced hearing
devices and cochlear implants. Dr. Gantz holds an M.D. from the University of
Iowa.
William House, M.D., widely recognized as the founder of the field of
neurotologic surgery. Dr. House did his pioneering work in cochlear implants and
the development of advanced neurotologic surgical procedures at the House Ear
Institute in Los Angeles. He has over 35 years experience in research and
development of implantable hearing devices. Dr. House holds a D.D.S. from the
University of California at Berkeley and an M.D. from the University of Southern
California School of Medicine.
Richard L. Goode, M.D. and Rodney Perkins, M.D., members of the Board of
Directors, also serve on the Medical Advisory Board.
ITEM 2. PROPERTIES
The Company leases 47,553 square feet of office, research and
development and manufacturing space in Redwood City, California under a
non-cancelable operating lease and sublease through June 2000. Additionally, the
Company leases 6,575 square feet in Redwood City under a lease which expires in
December 2000. Sonar Hearing Health Corporation, in Eagan, Minnesota, leases
36,341 square feet under a noncancelable operating lease which expires in June
2001. ReSound GmbH Hortechnologie, leases approximately 3,000 square feet of
space in Munich, Germany under a lease that expires in March 1999, and the
Company's Dutch subsidiary, ReSound B.V., leases approximately 2,750 square feet
of space in Oosterhout. ReSound Deutschland leases approximately 11,500 square
feet in Munster, Germany. ReSound Ireland Limited leases a total of
approximately 16,800 square feet in Cork, Ireland. Viennatone's leased
headquarters building, located in Vienna, Austria, consists of approximately
37,700 square feet. Viennatone also has a leased manufacturing facility in
Grafenschachen, Austria, which consists of approximately 8,200 square feet.
Subsidiaries of the Company operating in France, the United Kingdom, Sweden,
Switzerland and Australia, in total lease approximately 27,400 square feet of
building space. The Company expects that it may require additional space in the
future and that such space will be available on acceptable terms if required.
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ITEM 3. LEGAL PROCEEDINGS
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
The Company's common stock is traded on the Nasdaq National Market
under the symbol RSND. The prices per share reflected in the table below
represent the range of low and high closing sale prices for the Company's common
stock as reported in the Nasdaq National Market for the quarters indicated.
<TABLE>
<CAPTION>
FISCAL 1997 HIGH LOW
----------- ---- ---
<S> <C> <C>
First Quarter ended March 31, 1997 8 3/8 5 7/8
Second Quarter ended June 30, 1997 7 3/4 3 3/4
Third Quarter ended September 30, 1997 6 4 3/8
Fourth Quarter ended December 31, 1997 6 15/16 5 1/8
FISCAL 1998 HIGH LOW
----------- ---- ---
First Quarter ended March 28, 1998 6 5/8 4 3/4
Second Quarter ended June 27, 1998 7 5
Third Quarter ended September 26, 1998 6 9/16 4
Fourth Quarter ended December 31, 1998 6 3 1/2
</TABLE>
There were 462 shareholders of record as of February 26, 1999.
The Company has never paid cash dividends on its capital stock. The
Company currently anticipates that it will retain all available funds for use in
the operation and expansion of its business, and does not anticipate paying any
cash dividends in the foreseeable future. Under the terms of the Company's line
of credit, obtained from a U.S. bank in February 1999, the Company's ability to
pay cash dividends is restricted.
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<PAGE> 19
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1997 1996(3) 1995 1994(4)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA
Net sales $ 123,442 $ 130,463 $ 125,646 $ 107,330 $ 62,253
Cost of sales 60,370(1) 62,592(2) 57,241 53,626 26,461
--------- --------- --------- --------- ---------
Gross profit 63,072 67,871 68,405 53,704 35,792
Operating expenses:
Research and development 16,360(1) 16,883(2) 14,898 11,181 8,862
Selling, general and administrative 58,388(1) 54,189(2) 50,899 45,606 21,403
Restructuring and other charges 12,138(1) 12,561(2) -- -- --
--------- --------- --------- --------- ---------
Total operating expenses 86,886 83,633 65,797 56,787 30,265
--------- --------- --------- --------- ---------
Income (loss) from operations (23,814) (15,762) 2,608 (3,083) 5,527
Interest income (expense), net (958) (1,222) (1,819) (1,860) 553
Other income (expense), net 3,407 (578) (359) (368) 496
Provision for litigation and related costs -- -- -- -- (19,230)
--------- --------- --------- --------- ---------
Income (loss) before income taxes (21,365) (17,562) 430 (5,311) (12,654)
Provision for income taxes 560 876 1,397 591 1,635
--------- --------- --------- --------- ---------
Net loss $ (21,925)(1) $ (18,438)(2) $ (967) $ (5,902) $ (14,289)
========= ========= ========= ========= =========
Net loss applicable to common shareholders $ (21,925) $ (18,676) $ (1,192) $ (5,902) $ (14,289)
========= ========= ========= ========= =========
Basic and diluted net loss per common share (5) $ (1.07) $ (0.96) $ (0.07) $ (0.38) $ (0.95)
========= ========= ========= ========= =========
Shares used in basic and diluted net loss per common
share calculation (5) 20,460 19,518 17,591 15,439 15,089
========= ========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------
(IN THOUSANDS)
CONSOLIDATED BALANCE SHEET DATA
1998 1997 1996 1995 1994
--------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Working capital $ 10,334 $ 19,883 $ 25,957 $ 9,324 $ 5,995
Total assets 69,762 89,775 114,752 83,370 95,116
Long-term liabilities, net of current portion 15,831 18,512 26,565 30,729 23,146
Accumulated deficit (79,803) (57,878) (39,202) (38,010) (32,108)
Shareholders' equity 20,694 37,019 57,596 18,221 21,169
</TABLE>
(1) Includes special charges of $17.6 million as follows: cost of sales -
$1.8 million; research and development - $0.5 million; selling, general
and administrative - $3.2 million; restructuring and other charges -
$12.1 million (of which $8.1 million is the result of a write-down of
goodwill).
(2) Includes special charges of $18 million as follows: cost of sales - $3.1
million; research and development - $0.1 million; selling, general and
administrative - $2.2 million; restructuring and other charges - $12.6
million (of which $10.3 million is the result of a write-down of
goodwill).
(3) Includes the operating results of Sonar Hearing Health Corporation,
subsequent to the purchase of certain assets of the hearing health
business activity of 3M in June 1996. See Note 2 of Notes to
Consolidated Financial Statements.
(4) Includes the operating results of Sonar Design & Hortechnik AG and
Viennatone AG from their purchase dates of January and December 1994,
respectively. See Note 2 of Notes to Consolidated Financial Statements.
(5) Amounts for all periods have been restated to reflect the requirements
of SFAS No. 128. See Note 1 of Notes to Consolidated Financial
Statements.
19
<PAGE> 20
UNAUDITED QUARTERLY CONSOLIDATED FINANCIAL DATA
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTH PERIOD ENDED
1998 MARCH 28, JUNE 27, SEPTEMBER 26, DECEMBER 31,
- ---- --------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Consolidated Statements of Operations Data:
Net sales $ 31,143 $ 33,884 $ 30,255 $ 28,160
Gross profit 16,686 18,897 13,750 13,739
Net income (loss) 974 683 (17,192)(1) (6,390)(2)
Basic and diluted net income (loss) per common
share $ .05 $ .03 $ (.84) $ (.31)
THREE MONTH PERIOD ENDED
1997 MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
- ---- --------- -------- ------------- ------------
Consolidated Statements of Operations Data:
Net sales $ 32,211 $ 32,230 $ 31,934 $ 34,088
Gross profit 17,100 17,499 15,710 17,562
Net loss (894) (1,499) (13,295)(3) (2,750)(4)
Basic and diluted net loss per common share $ (.05) $ (.08) $ (.69) $ (.14)
</TABLE>
(1) Includes special charges of $16.6 million as follows: cost of sales - $1.8
million; selling, general and administrative - $3.0 million; restructuring
and other charges - $11.8 million (of which $8.1 million is the result of a
write-down of goodwill).
(2) Includes special charges of $1.0 million as follows: research and
development - $0.5 million; selling, general and administrative - $0.2
million; restructuring and other charges - $0.3 million.
(3) Includes special charges of $13.6 million as follows: cost of sales - $1.8
million; selling, general and administrative - $0.6 million; restructuring
and other charges - $11.2 million (of which $10.3 million is the result of
a write-down of goodwill).
(4) Includes special charges of $4.4 million as follows: cost of sales - $1.3
million; research and development - $0.1 million; selling, general and
administrative - $1.6 million; restructuring and other charges - $1.4
million.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company was primarily engaged in research and development from its
inception in February 1984 through December 1989, when it commenced shipments of
its first In-the-Ear ("ITE") hearing devices and its Digital Hearing System
("DHS"), a hearing testing and programming system. Through December 31, 1998,
the Company has sold approximately 1.2 million hearing devices worldwide,
including over 294,000 in 1998, to more than 13,600 audiologists and hearing
device retail locations. In general, the Company's net sales have increased
primarily from higher volumes of product shipments and a broader product line
(due to both internal growth and acquisitions) rather than from increases in
product prices. Increases in the number of audiologists and hearing device
dispensers selling the Company's hearing instruments have contributed to the
higher volume of shipments.
In the last several years, the Company has established significant
operations outside the United States. In 1994, the Company expanded its business
by acquiring two existing hearing health care companies in Europe, establishing
a manufacturing facility in Ireland and entering into an Asian distribution
joint venture. In 1995, the Company formed wholly owned subsidiaries in
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<PAGE> 21
Australia and Sweden. In 1998, the Company formed a wholly owned subsidiary in
Switzerland, acquired an existing hearing healthcare company in the United
Kingdom, and sold the Viennatone retail business in Austria. The Company
currently derives 51% of its revenues from outside the United States.
ACQUISITIONS AND STRATEGIC ALLIANCES
In 1994, the Company completed two acquisitions. On January 1, 1994,
the Company acquired all the outstanding ownership interests in Sonar Design &
Hortechnik GmbH for approximately $3.5 million in cash and 100,000 shares of
ReSound Common Stock. In 1996, this company was renamed ReSound Deutschland.
ReSound Deutschland, located in Munster, Germany, is a manufacturer and
distributor of both Sonar branded and ReSound branded hearing devices.
On August 9, 1994, the Company entered into a joint venture agreement
establishing ReSound Asia Limited ("RSND Limited") with a large Hong Kong group
with diversified business interests. RSND Limited sells ReSound products in Hong
Kong through a Hong Kong based subsidiary. ReSound holds a 50% equity position
in the joint venture and provides technical and clinical expertise to the joint
venture.
In December 1994, a newly formed Austrian subsidiary of the Company
acquired 100% of the shares of Viennatone AG, an Austrian company, for
approximately $27.7 million, and the Company's German subsidiary acquired the
net assets of a related business for approximately $0.6 million, or a total of
approximately $28.3 million (Viennatone AG owned an 80% interest in its Austrian
distribution company, Viennatone BVG). Viennatone, based in Vienna, Austria,
designs, manufactures and distributes BTE, ITE and other hearing devices and
components worldwide. The acquisition of Viennatone provided the Company with
Viennatone's electroacoustic and electromechanical technologies; expanded
distribution of ReSound products through Viennatone's established subsidiaries
in the United Kingdom, France, and Germany, as well as a retail chain in Austria
consisting of 19 stores; and provided access to high quality hearing device
cases and components. In 1996, the Company purchased the remaining minority
interest in Viennatone Hannover for $1.9 million in cash. In 1997, the Company
sold Viennatone's mechanical switch business for $1.5 million at the closing and
potential future royalty income of up to a further $1.5 million. In September
1998, Viennatone AG purchased the remaining minority interest in Viennatone BVG
for $82,000 and 40,000 shares of the Company's common stock (which will be
issued in 1999). In November 1998, the Company sold Viennatone BVG to the
Amplifon Group, a European hearing instruments retail distribution company,
headquartered in Italy, for $3.3 million. As part of the transaction, Viennatone
AG and Amplifon have entered into a strategic partnership under which Amplifon
has agreed to market and sell ReSound and Viennatone hearing healthcare products
throughout its retail outlets in Europe.
In June 1996, the Company completed the purchase of certain assets of
the hearing health business activity of Minnesota Mining and Manufacturing
Company ("3M") for $25.4 million and established a subsidiary in the United
States, Sonar Hearing Health Corporation ("SHH"), to manage this activity on an
ongoing basis. International distribution of former 3M products is undertaken
through the Company's international subsidiaries. To finance this purchase and
provide working capital, the Company raised approximately $32.9 million (net
proceeds) through the private sale of 3,212,176 shares of common stock. Hearing
health constituted a small business activity in 3M's worldwide operations which
was neither a division nor subject to the maintenance of discrete accounting
records such that financial statements could be or are determinable. However,
the Company believes that this business activity generated revenues for 3M of
approximately $9.3
21
<PAGE> 22
million and $16.6 million for the six months ended June 30, 1996 and for the
year ended December 31, 1995, respectively. The total purchase price of $25.4
million included a cash payment of $24.9 million and $500,000 for related
acquisition expenses. Together with patents acquired from 3M valued at $7.5
million, patents valued at $2.5 million were separately acquired in July 1996 in
connection with the above acquisition. These patents were contributed to a
partnership comprised of eight hearing device manufacturers, including ReSound,
at December 31, 1998. In consideration, ReSound received cash payments from the
partnership members of $10.9 million (net) through December 31, 1998. Any future
amounts paid to the partnership will be divided equally among the partners. Cash
receipts from the sale of partnership interests has lowered the net purchase
price of the hearing health business activity of 3M to $14.5 million at December
31, 1998. In October 1998, the SHH sales force and marketing functions were
integrated into ReSound's existing U.S. organization. The newly integrated sales
force has actively encouraged the SHH customer base to convert to dispensing
ReSound devices. The SHH manufacturing facility will serve as a regional
manufacturing site supplying both the Sonar and ReSound devices. In Europe, SHH
has been integrated into ReSound's existing distribution structure.
In January 1998, ReSound Autac GmbH, a newly formed subsidiary of the
Company located in Zurich, Switzerland, acquired all of the assets and
liabilities of a former Swiss distributor for $401,000. The agreement contains a
clause which obligates the seller for a period of five years not to compete in
the area of manufacture or distribution of hearing devices. Additionally, an
employment agreement was negotiated with the seller through December 31, 2002.
In April 1998, ReSound-Viennatone Ltd. (a U.K. company) acquired all of
the assets and liabilities of Apex Acoustics, Ltd. from the Ultratone
Group, the largest hearing device retail chain in the United Kingdom, for
$750,000. Concurrent with the acquisition, the Company entered into a multi-year
supply agreement with Ultratone for customer hearing devices.
SALES
The Company recognizes revenue upon shipment of products. Net sales
consist of gross sales less discounts and allowances for estimated returns. In
general, the Company has a 90-day return policy for sales in the United States.
The Company believes that the hearing device industry in the U.S. is
characterized by a relatively high rate of returns due to a number of factors,
including liberal consumer trial periods required by law in many states.
However, the Company's return rates in the U.S. are within the range it believes
are experienced by other programmable hearing device manufacturers. In 1998,
1997 and 1996, the provision for estimated sales returns in the U.S., expressed
as a percentage of domestic sales, has been 27%, 26% and 27%, respectively. Due
to the need to provide a return policy competitive with industry practice in the
U.S. and because of the importance of the initial fitting process, the Company
expects sales returns will continue at a relatively high rate. In Europe and
Asia, returns are not material due in part to the much higher proportion of
standard BTE sales versus custom product sales than in the U.S. as well as
regional retail chain and dispenser practices.
COSTS AND EXPENSES
Cost of sales consists of manufacturing costs, royalty expenses,
quality assurance costs and accruals associated with warranty repairs and
product remakes. In 1998, cost of sales as a percentage of net sales increased
to 49% from 48% in 1997 primarily due to pricing pressures on the Company's
analog product lines.
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<PAGE> 23
The Company provides for estimated warranty costs at the time of sale
and adjusts these estimates based on subsequent experience. The period over
which warranty claims may be made in the U.S. is one to two years for electronic
components and 12 months for the custom shell used for ITE, ITC and CIC devices.
In 1998, 1997 and 1996, the approximate provisions for estimated warranty cost
(and as a percentage of net sales domestically) were $4.7 million (7.5%), $5.1
million (7.7%), and $4.4 million (7.6%), respectively. The period over which
warranty claims may be made in Europe and Asia is 12 months, and the amount of
these claims has not been material. The Company experiences a high rate of
warranty claims related to damage and blockage of the speaker caused by moisture
and accumulated ear wax. The Company expects such claims to continue to be
significant and expects warranty costs for the current hearing device product
line to continue to represent a significant component of cost of sales.
In the second half of 1997, the Company recorded special charges of
$18.0 million associated with the Company's strategic restructuring program.
This program was designed to streamline operations and control costs through
management restructuring, operations consolidations, and increased focus on core
activities and product lines.
The special charges provided for costs associated with employee
termination benefits for approximately 100 employees from all functional areas
in various subsidiary locations; lease termination costs; the write-down of
goodwill associated with the acquired hearing health business activity of 3M
(which was renamed Sonar Hearing Health, "SHH"); the incremental impairments in
the carrying value of certain product inventories; and losses on supplier
commitments arising directly from the decision to exit product lines.
As of December 31, 1998 and 1997, $0.8 million and $6.2 million,
respectively, remained of the 1997 restructuring accrual. The Company made cash
payments of approximately $2.2 million and $819,000 relating to the special
charges in 1998 and 1997, respectively. The remaining 1997 restructuring accrual
of $0.8 million will be substantially utilized by December 31, 1999.
In the second half of 1998, the Company recorded special charges of
$17.6 million associated with the Company's new strategic restructuring program.
This program is designed to realign the Company's organizational structure,
streamline internal processes, and consolidate facilities worldwide in order to
achieve sustainable profitability.
The special charges provided for costs associated with write-down of
inventories to net realizable value and losses on supplier commitments,
write-down of capital assets to fair value, write-down of goodwill, employee
termination benefits and lease termination costs, and other exit costs, as
follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Employee termination benefits and lease termination costs $4,038
Write-down of goodwill in ReSound Autac and Viennatone 8,082
Write-down of inventories to net realizable value and losses
on supplier commitments commitments 1,832
Write-down of capital assets to fair value 1,344
Other exit costs 2,328
-------
$17,624
=======
</TABLE>
23
<PAGE> 24
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
statements of operations data as a percentage of net sales:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net sales 100% 100% 100%
Cost of sales 49 48 46
---- ---- ----
Gross profit 51 52 54
Operating expenses:
Research and development 13 13 12
Selling, general and administrative 47 41 41
Restructuring and other charges 10 10 --
---- ---- ----
Total operating expenses 70 64 53
---- ---- ----
Income (loss) from operations (19) (12) 1
Interest expense, net (1) (1) (1)
Other income (expense), net 3 -- --
---- ---- ----
Income (loss) before income taxes (17) (13) --
Provision for income taxes 1 1 1
---- ---- ----
Net loss (18)% (14)% (1)%
==== ==== ====
</TABLE>
Years Ended December 31, 1998 and 1997
Net sales decreased by 5.4% to $123.4 million in 1998 compared to
$130.5 million in 1997. International sales accounted for 51% of the Company's
net sales in 1998 compared to 49% in 1997. International sales in 1998 were $62
million, down from $64 million in 1997. The shortfall in international revenue
resulted primarily from a delay in the shipment of a significant tender order at
the end of 1998, increased pricing pressures on analog devices, poor hearing
device market conditions in Germany and Austria together with management and
employee turnover at Viennatone, the Company's Austrian subsidiary, and weaker
European currencies compared to the U.S. dollar. Additionally, economic
uncertainty in Japan coupled with lower shipments to the Company's Japanese
distributor contributed to sales reductions in the Asia-Pacific region in 1998
when compared to 1997. The decrease in these regions sales was partly offset by
strong sales in Northern Europe, particularly Scandinavia. The shortfall in
revenue in North America in 1998 compared to 1997 was primarily attributable to
a more rapid than expected decrease in Sonar Hearing Health orders as the
Company completes conversion of Sonar customers to the ReSound product line, a
slower than expected ramp up in manufacturing for the new Digital 5000 products,
and continued pricing pressures on analog products. The Company believes the
issues contributing to the sales shortfall, particularly in the fourth quarter
of 1998, compared to the same period in 1997, are temporary and will be resolved
in 1999. Ramp up of production of the Digital 5000 is on track and the Company
expects to be able to meet customer demand for the products in the first quarter
of 1999. The total number of audiologists and hearing device retail locations
selling the Company's products increased in the U.S. from over 4,700 at the end
of 1997 to over 5,500 at the end of 1998. The number of acousticians and hearing
device dispensers selling the Company's products internationally was 4,464 at
the end of 1998, compared to 3,715 at the end of 1997.
Cost of sales decreased to $60.4 million in 1998 from $62.6 million in
1997. Gross profit decreased to $63.1 million in 1998 from $67.9 million in
1997, and as a percentage of net sales
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<PAGE> 25
decreased to 51% in 1998 from 52% in 1997. Excluding the impact of special
charges, gross profit in 1998 was 53% of net sales, compared to 54% of net sales
in 1997. Special charges to cost of sales of $1.8 million in 1998 compared with
$3.1 million in 1997 relate primarily to the write-off of inventory for
discontinued product lines. Gross profit was adversely affected by continued
pricing pressures on analog products and a slower than expected ramp up of
production for the Digital 5000.
Research and development ("R&D") expenses decreased by 3% to $16.4
million (13% of net sales) in 1998 from $16.9 million (13% of net sales) in
1997. Excluding the impact of special charges, R&D spending in 1998 was $15.9
million compared to $16.8 million in 1997. Spending was primarily attributable
to development of new products including new digital signal processing
platforms, the Avance - the Company's hearing enhancer product, and
communication products developed through the joint alliance with Motorola.
During 1997, the Company entered into a joint development agreement with
Motorola whereby Motorola has committed to provide joint development funds,
technology and other resources for this project through January 2000. During
1998 and 1997, Motorola paid $2.9 million and $2.0 million, respectively, to
ReSound as part of this alliance. The funds received by the Company have been
recorded as a reduction of the Company's R&D expenses. Total costs incurred by
the Company related to this agreement were $3.8 million and $1.3 million in 1998
and 1997, respectively. In September 1998, the Company and Motorola announced
the introduction of the CommPort system, an integrated microphone and receiver
two-way radio system for the public safety market.
Selling, general and administrative ("SG&A") expenses increased by 8%
to $58.4 million (47% of net sales) in 1998 from $54.2 million (41% of net
sales) in 1997. Excluding the impact of special charges, SG&A spending in 1998
was $55.2 million compared to $52.0 million in 1997. The increase in SG&A
expenses in 1998 was primarily attributable to the additional expenses resulting
from the acquisitions of Apex Acoustics in the United Kingdom and Autac in
Switzerland, and higher sales and marketing expenses related to introductions of
the new Digital 5000 and Avance product lines.
Restructuring charges of $12.1 million and $12.6 million were recorded
in 1998 and 1997, respectively. The restructuring charges resulted primarily
from the write-down of goodwill relating to the acquisitions of ReSound Autac
and Viennatone AG ($8.1 million), and the acquired hearing health business
activity of 3M ($10.3 million) in 1998 and 1997, respectively. The remaining
charges in both 1998 and 1997 resulted from lease termination costs and employee
termination benefits relative to work force reductions.
The Company expects expenses generally to continue at comparable
levels, excluding the special charges, but to fluctuate as a percentage of
sales. As discussed above, the Company is undertaking programs to increase
operational efficiency and effectiveness in order to reduce expenses, but no
assurance can be given that reductions will be obtained, especially when
measured on a percentage of sales basis which may vary substantially
quarter-to-quarter.
Net interest expense was $958,000 in 1998, compared to $1.2 million in
1997. This year-to-year decrease is primarily due to the Company's continued
repayment of debt in 1998, partially offset by lower interest income earned on
its average cash balances.
Net other income (expense) was $3.4 million (income) in 1998 compared
to $578,000 (expense) in 1997. The year-to-year change was primarily
attributable to receipts of $3.0 million under a patent license agreement in
1998, and favorable foreign currency exchange rates.
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<PAGE> 26
Income tax provisions were $560,000 in 1998 and $876,000 in 1997.
Income taxes primarily represent taxes on profits earned at the Company's
European subsidiaries in Ireland, Germany and the Netherlands. At December 31,
1998, the Company had U.S. federal and California net operating loss
carryforwards of approximately $37.3 million and $8.5 million, respectively. The
federal net operating loss carryforwards will expire at various dates beginning
in 2002 through 2018, if not utilized. The California net operating loss
carryforwards will expire at various dates beginning in 1999 through 2003, if
not utilized. Each international subsidiary is subject to income taxes in the
countries in which it operates. The income of these subsidiaries is not included
in the Company's U.S. federal and state income tax returns. The Company had
foreign net operating loss carryforwards of approximately $36.5 million at
December 31, 1998, which will expire at various dates beginning in 1999 through
2004, if not utilized.
The Company had a net loss of $21.9 million in 1998 compared to a net
loss of $18.7 million in 1997. Excluding the impact of special charges, the
Company had a net loss of $4.3 million in 1998 compared to a net loss of $0.7
million in 1997.
Years Ended December 31, 1997 and 1996
Net sales increased by 3.8% to $130.5 million in 1997 compared to
$125.6 million in 1996 due to new product introductions, continued strong sales
of the Encore product line, the inclusion of sales relating to products acquired
from 3M Hearing Health for a full year, and the increased sales of the Company's
ITE and ITC hearing devices. These increases were partially offset by
intensified competition in the programmable segment of the hearing device market
from digital signal processing product offerings, pricing pressures from
competitors' analog products, a product mix shift to more moderately priced
models, and decreased international sales. Further, the Viennatone subsidiary
experienced increased competition and pricing pressures which resulted in an
increase in price and unit volume erosion during 1997. The total number of
audiologists and hearing device retail locations selling the Company's products
increased in the U.S. from over 3,600 at the end of 1996 to over 4,700 at the
end of 1997. The number of acousticians and hearing device dispensers selling
the Company's products internationally was 3,715 at the end of 1997.
International sales for the twelve months ended December 31, 1997 were 10% lower
in comparison with 1996 due primarily to the adverse impact of foreign currency
exchange fluctuations. At constant foreign exchange rates, international sales
increased approximately 2%. International sales as a percentage of net sales in
1997 and 1996 were 49% and 56%, respectively. International sales were
unfavorably impacted by increased competition, slowing market conditions in key
European countries due in part to sluggish economies, and negative changes in
governmental reimbursement programs. Additionally, during the fourth quarter of
1997, the German hearing device market was negatively impacted by adverse
publicity surrounding hearing device dispensers and ear, nose and throat doctors
regarding the distribution of hearing devices. Sales of the Company's products
in the German market were correspondingly negatively impacted.
Cost of sales increased to $62.6 million in 1997 from $57.2 million in
1996. Gross profit decreased to $67.9 million in 1997 from $68.4 million in
1996, and as a percentage of net sales decreased to 52% in 1997 from 54% in
1996. The year-to-year decrease in gross profit was largely attributable to the
$3.1 million special charge for discontinued product lines, as part of a
comprehensive program to streamline operations. Additionally, average unit sales
prices declined due to increasing competition and product mix sales shifts,
particularly in the U.S., from the higher priced Premium Series product line to
the more moderately priced Encore Series product line. This impact was largely
offset by reductions in the cost of goods sold.
26
<PAGE> 27
R&D expenses increased by 13% to $16.9 million (13% of net sales) for
1997 from $14.9 million (12% of net sales) for 1996. The Company increased
spending during the twelve months ended December 31, 1997 relative to the prior
year for the continued development of new products being introduced throughout
1997 and for products planned for future years. In April 1997, the Company
introduced its Advanced ReSound Processing chip incorporating ReSound's Cochlea
Dynamics technology into a BTE and a CIC hearing device. In addition, expenses
were incurred for the development of a standard hardware platform for Digital
Signal Processing technology as part of an alliance with AudioLogic, Inc., and
GN Danavox A/S which was announced in April 1996 and finalized on September 30,
1996. Expenses were also incurred for the development of proprietary technology
relating to potential communications products and hearing devices in conjunction
with the alliance with Motorola. Such expenses were partially offset by $2.0
million of payments received from Motorola.
Restructuring charges of $12.6 million in 1997 resulted from the
write-down of goodwill associated with the acquired hearing health business
activity of 3M ($10.3 million), lease termination costs and employee termination
benefits relative to work force reductions.
SG&A expenses increased by 6% to $54.2 million (41% of net sales) in
1997 from $50.9 million (41% of net sales) in 1996. This year-to-year increase
in expenditures resulted mainly from the inclusion of a full year of SHH
expenses, and special charges of $2.2 million relating to a strategic program to
streamline operations and control costs.
Interest income was $269,000 in 1997, compared to $184,000 in 1996.
This year-to-year increase was primarily due to an increase in the average cash
and short-term investment balances resulting from the increase in cash
collections of accounts receivable and the reduction of inventory kept on hand.
Interest expense was $1.5 million in 1997, compared to $2.0 million in
1996. This decrease was primarily due to the Company paying down debt in 1997.
Other expense was $578,000 in 1997 compared to $359,000 in 1996. The
year-to-year increase was primarily attributable to realized losses on foreign
currency transactions of $984,000 which were partially offset by a $300,000 gain
on sale of Viennatone's switch business and a $431,000 reduction in the
liability for a minority shareholder's interest in a subsidiary of Viennatone.
The 1996 amount consisted primarily of realized losses on foreign currency
transactions.
Income tax provisions were $876,000 in 1997 and $1.4 million in 1996.
Income taxes primarily represent taxes on profits earned at the Company's
European subsidiaries in Ireland, Germany and the Netherlands. Each
international subsidiary is subject to income taxes in the countries in which it
operates. The income of these subsidiaries is not included in the Company's U.S.
federal and state income tax returns.
LIQUIDITY AND CAPITAL RESOURCES
Operating Activities
Net cash used in operations in 1998 was $10.4 million compared to $13.1
million in cash generated from operations in 1997. The additional $23.5 million
used in 1998 compared to 1997 related primarily from the following: (1) a $21.9
million net loss in 1998, compared to an $18.4
27
<PAGE> 28
million net loss in 1997; (2) an increase in inventory of $2.6 million primarily
due to a delay in the shipment of a significant tender order at the end of 1998
compared to a decrease in inventory of $6.6 million in 1997; (3) an increase in
other assets of $4.3 million due primarily to a strengthening of certain
European currencies against the U.S. dollar, $1.7 million in other receivables,
representing the final installment of the sales price for the Viennatone retail
business and $1.0 million of restricted cash on deposit with the Company's
primary bank (see "Financing Activities" below) and (4) decreases in accrued
liabilities and accounts payable of $6.2 million caused primarily by the timing
of expenditures in connection with the Company's 1997 strategic restructuring
program. The above uses of cash in operations were partially offset by non-cash
charges of $15.0 million associated with restructuring charges in the second
half of 1998, non-cash charges of $8.1 million relating to depreciation and
amortization, and a decrease in accounts receivable compared with December 31,
1997 of $1.3 million.
Investing Activities
Net cash used in investing activities in 1998 was $3.3 million compared
to $150,000 in cash provided by investing activities in 1997. The use of cash in
1998 resulted from additions of property and equipment of $8.0 million and cash
used in the acquisitions of ReSound Autac, Apex Acoustics and the remaining
minority interest in Viennatone BVG of $1.2 million. These amounts were
partially offset by positive changes in accumulated comprehensive income
(cumulative translation adjustment), by proceeds from the sale of Viennatone BVG
of $3.3 million and by $900,000 in patent fees received for licensing certain
technology acquired by the Company in 1996 and 1997. Net cash generated by
investing activities in 1997 resulted primarily from proceeds from the patent
club contributions and the sale of the Viennatone switch activity offset by
additions to property and equipment.
Financing Activities
Net cash provided by financing activities in 1998 was $0.5 million due
primarily to proceeds from issuance of common stock of $2.0 million and $0.5
million in new bank loans partially offset by payments on long-term debt of $2.0
million. Net cash used in financing activities in 1997 was $1.4 million due
primarily to payments on long-term debt of $2.0 million partially offset by
proceeds from issuance of common stock of $642,000.
At December 31, 1998, the Company had available cash and cash
equivalents of $6.7 million. In addition, included in other current assets at
December 31, 1998 is $500,000 of cash which was deposited with the Company's
primary bank as security for a letter of credit in connection with the purchase
of technology. The letter of credit and the cash hold on collateral were
released in March 1999. Further, other assets at December 31, 1998 included
restricted cash of $525,000 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 through
December 31, 1999, 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.
28
<PAGE> 29
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 (DSP). 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 would have a material, adverse impact on the Company's business,
financial condition and results of operations. See "Business - Competition" for
a discussion of the competitive environment.
During 1997 and 1998, the Company initiated strategic restructuring
programs. There can be no assurance that the Company will be able to implement
these programs in a timely manner, consolidate targeted operations successfully,
or otherwise achieve the cost reductions and other restructuring benefits
anticipated.
Due to weak economic conditions in certain countries in Europe (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 anticipated to have a negative impact on the Company's revenues. The Company
cannot predict whether or the extent to which further reimbursement reductions
will be implemented.
Similarly, it can be expected that the Company's sales results in
Europe 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,
negatively impacted the overall hearing health care market. Consumer demand for
hearing devices in the fourth quarter of 1997 in the German market was down
substantially from the fourth quarter of 1996, and sales of the Company's
products were correspondingly unfavorably impacted. This effect has continued in
1998. 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 statutes and regulations can result
in fines, suspensions, delays in marketing or loss of permission to market
products, seizures or recalls of
29
<PAGE> 30
products, operating restrictions, injunctions, civil fines and criminal
prosecution. Also, new regulatory requirements may significantly increase the
costs of compliance with these laws and regulations. See "Business - Government
Regulation" for a description of these laws and regulations.
The Company has been issued or has applied for a substantial number of
patents. No assurance can be given that pending patent applications will be
approved, that current or future patents will provide or continue to provide
competitive advantages for the Company's products, will not be challenged or
circumvented, or will afford the same degree of protection for future products
as they do for current products. Also, the Company may be contacted by parties
claiming that the Company's products infringe such parties' patent or other
proprietary rights. The Company may also find it necessary to institute
litigation to enforce patents issued to it, to protect trade secrets or know-how
owned by it or to determine the scope and validity of the patents or other
proprietary rights of others. Resolution of these claims generally involves
complex legal and factual questions and is highly uncertain. The cost of
prosecuting or defending these suits is high, and adverse determinations could
subject the Company to significant liabilities to third parties and require the
Company to seek licenses from other parties, prevent the Company from
manufacturing and selling its products, and/or require the Company to redesign
its products, all of which could have a materially adverse effect on the
Company's financial condition. Also, there can be no assurance that
confidentiality agreements between the Company and its employees or consultants
will not be breached, or that the Company will have adequate remedies for any
breach, or that it will otherwise be able to protect its trade secrets.
Furthermore, no assurance can be given that competitors will not independently
develop substantially equivalent proprietary technology or disclose such
technology, or that the Company can meaningfully protect its rights in such
unpatented proprietary technology. See "Business-Patents, Trade Secrets and
Licenses" for a discussion of the Company's patents and other intellectual
property.
During the last year, the Company experienced various changes in its
management and technical staff. Competition for employees with technical,
management and other skills is intense. The Company's failure to retain the
services of key personnel or to attract additional qualified employees could
materially and adversely affect the Company's business.
Certain key components used in the Company's products are currently
available only from single or limited sources. The Company's inability to obtain
sufficient sole source or limited source components or subassemblies as
required, or to develop alternative sources if and as required, would have a
material adverse effect on the Company's financial condition.
Other factors which could impact the Company's revenues and results of
operations include a significant reduction in product sales to certain
customers, economic downturns in certain markets, and the costs incurred to
expand distribution in Europe and Asia. In connection with the Company's
international sales, a number of risks are inherent in international
transactions. Fluctuations in the exchange rates between the U.S. dollar and
other currencies could increase the sales price of the Company's products in
international markets where the prices of the Company's products are denominated
in U.S. dollars or lead to currency exchange losses where the prices of the
Company's products are denominated in local currencies. International sales and
operations may also be limited or disrupted by the imposition of governmental
controls, regulation of medical devices, export license requirements, political
instability, trade restrictions, changes in tariffs, and difficulties in
staffing and managing international operations.
30
<PAGE> 31
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. Additionally, the Company is reviewing
whether certain existing contracts will need to be modified. The Company's
currency risk and risk management for operations in participating countries may
be reduced as the legacy currencies are converted to the Euro. The Company will
continue to evaluate issues involving the introduction of the Euro. Based on the
Company's assessment of current information, it is not expected that the Euro
conversion will have a material adverse effect on its business, 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 for the most part 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.
31
<PAGE> 32
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 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, by the end of April 1999, the Company will have completed an
assessment of the impact of the year 2000 on the vendors of critical components
and their products.
To date, the Company has incurred approximately $200,000 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 is considering a contingency plan of
establishing a reasonable safety stock of 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.
32
<PAGE> 33
The discussion of the Company's efforts and expectations relating to
year 2000 compliance are forward-looking statements. The Company's ability to
achieve year 2000 compliance both with respect to its internal operations and
its products, and the level of incremental costs associated therewith, could be
adversely impacted by, among other things, failure to identify all susceptible
systems or products, the availability and costs of upgrades to hardware
platforms and software products necessary to achieve year 2000 compliance, the
availability and costs of alternative hardware platforms and software products
that may be necessary to replace non year-2000 compliant products, the actions
of vendors with respect to components critical to the Company's products,
particularly sole-sourced components, and unanticipated problems identified in
the Company's ongoing assessment. Any of such factors could have a material
adverse effect on the Company's business, financial condition, and results of
operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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 29 and 30.
33
<PAGE> 34
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors 35
Consolidated Financial Statements:
Consolidated Balance Sheets 36
Consolidated Statements of Operations 37
Consolidated Statement of Shareholders' Equity 38
Consolidated Statements of Cash Flows 39
Notes to Consolidated Financial Statements 40
</TABLE>
34
<PAGE> 35
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
ReSound Corporation
We have audited the accompanying consolidated balance sheets of ReSound
Corporation as of December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. Our audits also included the
financial statement schedule listed in the Index at item 14(a)(2). These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ReSound Corporation at December 31, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedule, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
Ernst & Young LLP
Palo Alto, California
January 22, 1999
35
<PAGE> 36
RESOUND CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
--------------------------
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 6,715 $ 19,853
Accounts receivable, net of allowances for estimated
returns and doubtful accounts of $6,214 and $7,064
at December 31, 1998 and 1997, respectively 16,892 17,966
Inventories 16,199 14,183
Other receivables 2,313 432
Other current assets 1,452 1,693
-------- --------
Total current assets 43,571 54,127
Property and equipment, net 10,734 10,838
Goodwill, net of accumulated amortization
of $5,433 and $4,547 at December 31, 1998 and 1997,
respectively 12,263 20,217
Other assets 3,194 4,593
-------- --------
$ 69,762 $ 89,775
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank loans $ 4,646 $ 1,663
Accounts payable 8,253 8,735
Accrued liabilities 18,548 19,484
Long-term debt, current portion 1,790 4,362
-------- --------
Total current liabilities 33,237 34,244
Long-term liabilities:
Long-term debt, non-current portion 12,815 14,274
Employee benefits 2,891 3,738
Other accrued liabilities 125 500
-------- --------
Total long-term liabilities 15,831 18,512
Commitments and contingencies (Note 7)
Shareholders' equity:
Common stock, par value $0.01:
Authorized: 50,000,000 shares;
Issued and outstanding: 20,737,396 and 20,147,720
shares at December 31, 1998 and 1997, respectively 99,363 96,785
Deferred compensation (360) ---
Accumulated comprehensive income (loss) 1,494 (1,888)
Accumulated deficit (79,803) (57,878)
-------- --------
Total shareholders' equity 20,694 37,019
-------- --------
$ 69,762 $ 89,775
======== ========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
36
<PAGE> 37
RESOUND CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Net sales $ 123,442 $ 130,463 $ 125,646
Cost of sales 60,370 62,592 57,241
--------- --------- ---------
Gross profit 63,072 67,871 68,405
Operating expenses:
Research and development 16,360 16,883 14,898
Selling, general and administrative 58,388 54,189 50,899
Restructuring and other charges 12,138 12,561 --
--------- --------- ---------
Total operating expenses 86,886 83,633 65,797
--------- --------- ---------
Income (loss) from operations (23,814) (15,762) 2,608
Interest expense, net (958) (1,222) (1,819)
Other income (expense), net 3,407 (578) (359)
--------- --------- ---------
Income (loss) before income taxes (21,365) (17,562) 430
Provision for income taxes 560 876 1,397
--------- --------- ---------
Net loss $ (21,925) $ (18,438) $ (967)
Preferred dividends -- (238) (225)
--------- --------- ---------
Net loss applicable to common shareholders $ (21,925) $ (18,676) $ (1,192)
========= ========= =========
Basic and diluted net loss per common share $ (1.07) $ (0.96) $ (0.07)
========= ========= =========
Shares used in basic and diluted net loss per common
share calculation 20,460 19,518 17,591
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
37
<PAGE> 38
RESOUND CORPORATION
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated Total
Preferred Common Deferred Comprehensive Accumulated Shareholders'
Stock Stock Compensation Income (Loss) Deficit Equity
--------- -------- ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ -- $ 54,292 $ -- $ 1,939 $(38,010) $ 18,221
--------
Net loss -- -- -- -- (967) (967)
Change in cumulative translation
adjustment -- -- -- (1,046) -- (1,046)
--------
Comprehensive loss -- -- -- -- -- (2,013)
--------
Issuance of 54 shares of 6%
convertible redeemable
preferred stock 5,000 -- -- -- -- 5,000
Exercise of stock options for 225
shares of common stock -- 1,055 -- -- -- 1,055
Issuance of 71 shares of common
stock for employee stock
purchase plan -- 385 -- -- -- 385
Issuance of 3,212 shares of
common stock under private
placement (net proceeds) -- 32,900 -- -- -- 32,900
Issuance of 266 shares of common
stock upon conversion of
Company's promissory note and
related interest -- 2,048 -- -- -- 2,048
Accrued dividends on preferred stock 225 -- -- -- (225) --
-------- -------- -------- -------- -------- --------
Balances at December 31, 1996 5,225 90,680 -- 893 (39,202) 57,596
--------
Net loss -- -- -- -- (18,438) (18,438)
Change in cumulative translation
adjustment -- -- -- (2,781) -- (2,781)
--------
Comprehensive loss -- -- -- -- -- (21,219)
--------
Conversion of preferred stock and
accrued dividends of $463 into 600
shares of common stock (5,463) 5,463 -- -- -- --
Exercise of stock options for 44
shares of common stock -- 149 -- -- -- 149
Issuance of 88 shares of common stock
for employee stock purchase plan -- 493 -- -- -- 493
Accrued dividends on preferred stock 238 -- -- -- (238) --
-------- -------- -------- -------- -------- --------
Balances at December 31, 1997 -- 96,785 -- (1,888) (57,878) 37,019
--------
Net loss -- -- -- -- (21,925) (21,925)
Change in cumulative translation
adjustment -- -- -- 3,382 -- 3,382
--------
Comprehensive loss -- -- -- -- -- (18,543)
--------
Issuance of 100 shares of common stock
under restricted stock purchase
agreement -- 1 -- -- -- 1
Deferred compensation related
to restricted stock purchase agreement -- 543 (543) -- -- --
Amortization of deferred compensation -- -- 183 -- -- 183
Exercise of stock options for 390
shares of common stock -- 1,533 -- -- -- 1,533
Issuance of 100 shares of common
stock for employee stock purchase
plan -- 501 -- -- -- 501
-------- -------- -------- -------- -------- --------
Balances at December 31, 1998 $ -- $ 99,363 $ (360) $ 1,494 $(79,803) $ 20,694
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
38
<PAGE> 39
RESOUND CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(21,925) $(18,438) $ (967)
Adjustments to reconcile net loss to net cash provided by (used in) operating
activities:
Depreciation and amortization 8,051 7,915 6,066
Loss on disposal of property and equipment 61 82 --
Noncash portion of special charges 14,971 17,157 --
Amortization of deferred compensation 183 -- --
Gain on sale of Viennatone switch activity -- (300) --
Changes in assets and liabilities:
Accounts receivable 1,343 2,238 (982)
Inventories (2,555) 6,631 (1,732)
Other assets (4,255) (1,202) (3,435)
Accounts payable (846) 257 (1,711)
Accrued liabilities (5,388) (1,254) 1,663
Provision for litigation and related costs -- -- (492)
-------- -------- --------
Net cash provided by (used in) operating activities (10,360) 13,086 (1,590)
-------- -------- --------
Cash flows from investing activities:
Acquisition of Sonar Hearing Health -- -- (25,443)
Acquisition of Autac GmbH (401) -- --
Acquisition of Apex Acoustics, Ltd. (750) -- --
Purchase of minority shareholder's interest in Viennatone BVG (82) -- --
Purchase of minority shareholder's interest in a subsidiary of Viennatone -- -- (1,857)
Proceeds from sale of Viennatone switch activity -- 1,500 --
Proceeds from sale of Viennatone BVG 3,304 -- --
Proceeds from patent contributions to partnership (net) -- 3,600 7,300
Proceeds from patent license agreements 900 -- --
Change in cumulative translation adjustment 1,731 (465) 538
Additions of property and equipment (7,974) (4,485) (7,547)
-------- -------- --------
Net cash provided by (used in) investing activities (3,272) 150 (27,009)
-------- -------- --------
Cash flows from financing activities:
Loans payable 505 -- (3,630)
Payments on long-term debt (2,046) (2,005) (4,222)
Proceeds from issuance of preferred stock -- -- 5,000
Proceeds from issuance of common stock 2,035 642 34,340
-------- -------- --------
Net cash provided by (used in) financing activities 494 (1,363) 31,488
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (13,138) 11,873 2,889
Cash and cash equivalents at the beginning of the year 19,853 7,980 5,091
-------- -------- --------
Cash and cash equivalents at the end of the year $ 6,715 $ 19,853 $ 7,980
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 1,341 $ 1,815 $ 2,104
======== ======== ========
Income taxes $ 823 $ 1,436 $ 1,102
======== ======== ========
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock on conversion of promissory notes $ -- $ -- $ 2,048
Accrual of preferred stock dividend $ -- $ 238 $ 225
Conversion of preferred stock to common stock $ -- $ 5,463 $ --
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
39
<PAGE> 40
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
In 1998, the Company adopted the policy of closing its fiscal quarters
on the last Saturday falling within the calendar quarter, except that the fiscal
year ends at the calendar year end.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company's wholly owned subsidiaries. All significant intercompany accounts have
been eliminated.
Except for the Company's European manufacturing subsidiary located in
Ireland, for which the U.S. dollar is the functional currency, the functional
currency for each international subsidiary generally is its respective local
currency. Accordingly, all assets and liabilities related to these subsidiaries
are translated at the current exchange rates at the end of each period. The
resulting translation adjustments are recorded directly to the cumulative
translation adjustment account included in shareholders' equity. Sales and
expenses are translated at average exchange rates in effect during the period.
Foreign currency transaction gains and losses are included in other income
(expense), net. The Company recorded a gain of $302,000, and losses of $984,000
and $175,000 in 1998, 1997 and 1996, respectively.
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.
Sales and Credit Risk
The Company sells its products to audiologists, acousticians, hearing
device chains and hearing device dispensers primarily in North America, Europe,
and the Asia-Pacific region. The Company performs ongoing credit evaluations of
its customers and generally does not require collateral. The Company maintains
reserves for potential credit losses, and such losses have been within
management's expectations.
Sales are recognized when products are shipped. Net sales consist of
product sales less discounts and estimated returns. Estimated U.S. returns are
provided for at time of shipment. Company policy allows for a 90-day return
period on U.S. sales. The provisions for expected returns, expressed as a
percentage of gross U.S. sales, were as follows: 27% (1998); 26% (1997) and 27%
(1996). Most returns are resolved or settled within several months of the
initial sale. In Europe and Asia, returns are not material.
40
<PAGE> 41
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The Company's sales to customers outside of the United States accounted
for approximately 51%, 49%, and 56% of net sales for the years ended December
31, 1998, 1997, and 1996, respectively. A number of risks are inherent in
international transactions. Fluctuations in the exchange rates between the U.S.
dollar and other currencies could increase the sales price of the Company's
products in international markets where the prices of the Company's products are
denominated in U.S. dollars or lead to currency exchange losses where the prices
of the Company's products are denominated in local currencies. International
sales and operations may also be limited or disrupted by the imposition of
governmental controls, regulation of medical devices, export license
requirements, political instability, trade restrictions, changes in tariffs and
difficulties in staffing and managing international operations.
Warranty Costs
The Company provides at the time of sale for the estimated cost of
remaking and repairing products under warranty. Such costs are included in Cost
of sales. In the U.S., the warranty period is one year for the custom hearing
device shell and one to two years for electronic components. Because of the
length of the warranty period, adjustments to the originally recorded
provisions, both increases and decreases, may be necessary from time to time. In
1998, 1997, and 1996, the approximate U.S. provisions for estimated warranty
costs (and as a percentage of U.S. net sales) were $4.7 million (7.5%), $5.1
million (7.7%), and $4.4 million (7.6%), respectively. The period over which
warranty claims may be made in Europe and Asia is one year. The amount of these
claims has not been material.
Research and Development Expenses
All research and development costs are expensed as incurred and consist
mainly of personnel costs, outside services, materials, supplies, and general
and administrative expenses.
The Company is engaged in research and development efforts to design
and develop technologies that are anticipated to result in human communications
and hearing health care products. During 1997, the Company entered into a joint
development agreement with Motorola whereby Motorola has committed to provide
joint development funds, technology and other resources for this project through
January 2000. During 1998 and 1997, Motorola paid $2.9 million and $2.0 million,
respectively to ReSound as part of this commitment. Such funds received by the
Company have been recorded as a reduction of the Company's research and
development expenses. Total costs incurred by the Company related to this
agreement were $3.8 million and $1.3 million in 1998 and 1997, respectively. The
Company is currently in discussions with Motorola concerning levels of payments
through the remaining period of the joint development agreement. In September
1998, the Company and Motorola announced the introduction of the CommPort
system, an integrated microphone and receiver two-way radio system for the
public safety market. The Company is not required to make any royalty payments
under the terms of this agreement. However, to the extent that the technology
being developed is using certain technology under a current sublicense
agreement, the Company is required to make royalty payments on sales of
developed products sold worldwide that may incorporate this technology.
41
<PAGE> 42
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Advertising Expenses
The Company accounts for advertising costs as expense in the period in
which the costs are incurred. Advertising expense for 1998, 1997, and 1996 was
approximately $6.6 million, $4.3 million, and $2.8 million, respectively.
Other Income (Expense), Net
In 1998, other income resulted primarily from receipts of $3.0 million
under a patent license agreement. This agreement requires no additional payments
to be made to the Company.
Income Taxes
The Company accounts for income taxes under the liability method. The
Company's net operating loss carryforwards have not been given benefit in the
financial statements.
Computation of Basic and Diluted Net Loss per Common Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share ("SFAS No. 128"). SFAS No. 128 replaced the calculation
of primary and fully diluted earnings per common share with basic and diluted
earnings per common share. Unlike primary earnings per common share, basic
earnings per common share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per common share is very similar to the
previously reported fully diluted earnings per common share. Net loss per common
share amounts for all periods have been restated to conform to the SFAS No. 128
requirement. Common equivalent shares from stock options, warrants and preferred
stock are excluded from the computation of diluted net loss per common share for
all periods presented as their effect is antidilutive.
Had the Company been in a net income position, diluted earnings per
common share would have included 633,000, 434,000, and 255,000 shares related to
outstanding stock options, warrants and preferred stock not included above for
the years ended December 31, 1998, 1997 and 1996, respectively.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of ninety days or less from the date of purchase to be cash
equivalents. Cash and cash equivalents include money market funds and various
deposit accounts.
Restricted Cash
Included in other current assets at December 31, 1998, is $500,000 of
cash which was deposited with the Company's primary bank as security for a
letter of credit in connection with the purchase of technology. The letter of
credit and the cash hold on collateral were released in March 1999.
42
<PAGE> 43
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Other assets at December 31, 1998 included restricted cash of $525,000
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.
Inventories
Inventories are stated at the lower of cost (determined on a first-in,
first-out basis) or market value. Inventories at December 31, 1998 and 1997
consist of the following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Raw materials $10,260 $ 9,191
Work in process 2,576 2,869
Finished goods 3,363 2,123
------- -------
Total $16,199 $14,183
======= =======
</TABLE>
Other Receivables
At December 31, 1998, the Company was owed $1,692,000 from Amplifon
International NV, representing the final installment of the sales price of the
Viennatone retail business in Austria. The final installment was received by the
Company in March 1999.
Property and Equipment
Property and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives of two to ten years.
Leasehold improvements are amortized over the shorter of their estimated useful
lives or the lease term. Maintenance and repairs are charged to operations as
incurred. Property and equipment at December 31, 1998 and 1997 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Land and building $ 3,576 $ 3,011
Machinery and equipment 31,245 25,637
Furniture, fixtures and improvements 8,246 10,271
-------- --------
43,067 38,919
Less accumulated depreciation and amortization (32,333) (28,081)
-------- --------
Total property and equipment, net $ 10,734 $ 10,838
======== ========
</TABLE>
Other Assets
Other long-term assets consist primarily of patents which are being
amortized over useful lives ranging from five to ten years.
43
<PAGE> 44
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Goodwill
Goodwill resulted from the unallocated excess purchase cost of
acquisitions recorded using the purchase method of accounting and is being
amortized over 20 years. Goodwill is reviewed for impairment whenever events or
circumstances indicate an impairment might exist, or at least annually. Goodwill
amortization, excluding write-offs related to the 1998 and 1997 strategic
restructuring programs, was approximately $1.2 million, $1.6 million and $1.8
million in 1998, 1997 and 1996, respectively.
Accrued Liabilities
Accrued liabilities at December 31, 1998 and 1997 consist of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Accrued compensation and payroll taxes $ 3,197 $ 4,077
Accrued warranty 4,639 5,869
Income taxes payable 708 484
Restructuring accrual 2,455 2,387
Other 7,549 6,667
------- -------
Total $18,548 $19,484
======= =======
</TABLE>
Fair Value of Financial Instruments
The Company has evaluated the estimated fair value of financial
instruments. The amounts reported for cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities approximate fair value due
to their short maturities. It was not practicable to estimate the fair value of
the Company's bank loans, short-term debt and long-term debt because of the lack
of a quoted market price and the inability to estimate fair value without
incurring excessive costs. The amounts recorded at December 31, 1998 represent
future minimum payments on debt obligations.
Reclassifications
Certain amounts in the consolidated financial statements have been
reclassified to conform with the current year presentation. These
classifications and restatements did not impact previously reported total
assets, liabilities, shareholders' equity or net loss.
Recent Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income, which establishes standards for 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 and has presented comprehensive loss for all periods presented
in the Statement of Shareholders' Equity.
44
<PAGE> 45
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 supersedes FASB SFAS No.
14, Financial Reporting for Segments of a Business Enterprise. SFAS No. 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas and major customers.
The adoption of SFAS No. 131, as of January 1, 1998, did not affect results of
operations or financial position, but did affect the disclosure of segment
information (see Note 11).
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 because the
Company does not currently hold any derivative instruments.
NOTE 2. ACQUISITIONS AND DISPOSITIONS
The Company acquired all the outstanding stock of two European-based
companies in 1994 and certain assets of Minnesota Mining and Manufacturing
Company's ("3M") hearing health business activity in 1996. In each instance, the
acquisitions were accounted for as purchase transactions. The acquired assets
and liabilities were recorded at their estimated fair values at the date of
acquisition, and the unallocated excess purchase price amounts (goodwill), after
impairment losses recorded in 1998 and 1997, are being amortized on a straight
line basis over 20 years. The operating results of each subsidiary have been
included in the consolidated statements of operations from the respective
acquisition dates.
ReSound Deutschland
On January 1, 1994, the Company's existing German subsidiary acquired
all the shares of Sonar Design & Hortechnik GmbH, a German company, for
approximately $3.5 million in cash and 100,000 shares of the Company's common
stock. In 1996, this company was renamed ReSound Deutschland. ReSound
Deutschland is a manufacturer and distributor of both Sonar branded and ReSound
branded hearing devices.
Viennatone
On December 9, 1994, a newly-formed Austrian subsidiary of the Company
acquired 100% of the shares of Viennatone AG ("Viennatone"), an Austrian
company, for approximately $27.7 million, and the Company's German subsidiary
acquired the net assets of a related business for approximately $0.6 million, or
a total of approximately $28.3 million (Viennatone AG owned an 80% interest in
its
45
<PAGE> 46
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Austrian distribution company, Viennatone BVG). To finance the acquisition, the
Austrian subsidiary borrowed approximately $17.3 million from an Austrian bank.
The balance of the purchase price was provided by available cash funds of the
Company and $6.85 million in loans against the Company's short-term investment
securities. Viennatone manufactures and markets hearing devices through various
subsidiaries of the Company. It uses both independent distributors and in
Austria, until its divestiture in November 1998, its own retail chain. In 1996,
the Company purchased the remaining minority interest in Viennatone Hannover for
$1.9 million in cash. In September 1998, Viennatone purchased the remaining
minority interest in Viennatone BVG for $82,000 and 40,000 shares of the
Company's common stock, which will be issued in 1999.
On November 28, 1998, the Company sold Viennatone BVG to Amplifon
International NV ("Amplifon"), a European hearing instruments retail
distribution company, headquartered in Italy. In the third quarter of 1998, the
Viennatone BVG net assets and associated goodwill were written down to their
expected realizable value as part of the Company's strategic restructuring
program. There was no net gain or loss on the sale. As part of this sale
transaction, Viennatone and Amplifon have entered into a strategic arrangement
under which Amplifon has agreed to market and sell ReSound and Viennatone
hearing healthcare products throughout its retail outlets in Europe. Amplifon
has committed to purchase a minimum unit volume at agreed prices beginning on
January 1, 1999 for a period of three years in markets outside of Austria and
for a period of five years in Austria. The agreement contains certain penalty
charges for units not purchased in the three year period in markets outside of
Austria.
Sonar Hearing Health Corporation
In June 1996, the Company completed the acquisition of certain assets
of the hearing health business activity of 3M and established a subsidiary,
Sonar Hearing Health Corporation ("SHH"), to manage this activity on an ongoing
basis. The acquisition was accounted for as a purchase and the operating results
of SHH have been included in the consolidated statements of operations since the
acquisition date. The total purchase price of approximately $25.4 million
consisted of a cash payment of $24.9 million and $500,000 for related
acquisition expenses. The allocation of the purchase price was as follows (in
thousands):
<TABLE>
<S> <C>
Net tangible assets acquired, principally receivables
and inventories $ 4,132
Patents 7,500
Goodwill 13,811
-------
Total purchase price $25,443
=======
</TABLE>
Hearing health constituted a small business activity in 3M's worldwide
operations which was neither a division nor subject to the maintenance of
discrete accounting records such that financial statements could be or are
determinable. However, the Company believes that this business activity
generated revenues for 3M of approximately $9.3 million (unaudited) and $16.6
million (unaudited) for the six months ended June 30, 1996, and for the year
ended December 31, 1995, respectively. The Company believes that profits, if
any, generated from the hearing health activity of 3M for the above-mentioned
periods were minimal, and it may not have been profitable as a historical
activity.
46
<PAGE> 47
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
In addition to the patents acquired from 3M valued at $7.5 million,
patents valued at $2.5 million were separately acquired by the Company in July
1996 in connection with the above acquisition. These patents were contributed to
a partnership formed in 1996 comprised of eight hearing device manufacturers
including ReSound. In consideration, ReSound received cash payments from the
partnership members of $10.9 million (net) through December 31, 1998 and has
rights to additional receipts as future licenses are sold. Any such future
amounts paid to the partnership will be divided equally among the partners and
recognized as license income.
As further discussed in Note 6, Special Charges, the goodwill remaining
from this acquisition was written off during 1997.
Viennatone - Switch Production
On December 23, 1997, the Company sold the net assets of its switch
production activity which was performed at the ReSound Viennatone Hortechnologie
AG subsidiary. The net gain on disposal of the discontinued activity was
recorded in other income (expense), net, and consists of the following (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Proceeds from sale $1,500
Costs:
Net book value of assets sold 200
Write-off of goodwill allocated to switch production 1,000
------
Net gain $ 300
======
</TABLE>
In connection with this transaction, the Company is also entitled to
receive a royalty on the sale of switches made by the acquirer to third parties
for a period of three years from the sale. The royalty will only be earned once
a minimum sales level has been achieved and such royalty will not exceed $1.5
million. This revenue will be recorded as received. No royalty revenue was
received in 1998. Additionally, the Company has committed to purchase a minimum
number of switches from the acquirer for the next three years. The minimum
purchase commitment is not in excess of the Company's projected needs for these
items.
Resound Autac
In January 1998, ReSound Autac GmbH, a newly formed subsidiary of the
Company located in Zurich, Switzerland, acquired all of the assets and
liabilities of a former Swiss distributor for $401,000. At the time of the
transaction, that distributor owed the Company $979,000 for previous financial
assistance. The agreement contains a clause which obligates the seller for a
period of five years not to compete in the area of manufacture or distribution
of hearing devices. Additionally, an employment agreement was negotiated with
the seller through December 31, 2002.
47
<PAGE> 48
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The allocation of the purchase price was as follows (in thousands):
<TABLE>
<S> <C>
Working capital acquired $ 507
Property and equipment, net 163
Goodwill 1,342
Bank loans (632)
Loan from ReSound (979)
-------
Total purchase price $ 401
=======
</TABLE>
As part of the Company's strategic restructuring program announced in
the third quarter of 1998, the goodwill associated with the purchase of ReSound
Autac GmbH was written off during the third quarter of 1998.
Apex Acoustics, Ltd.
In April 1998, Resound-Viennatone Ltd. (a U.K. company) acquired all of
the assets and liabilities of Apex Acoustics, Ltd. from the Ultratone Group, the
largest hearing device retail chain in the United Kingdom, for $750,000.
Concurrent with the acquisition, the Company entered into a multi-year supply
agreement with Ultratone for customer hearing devices.
The allocation of the purchase price was as follows (in thousands):
<TABLE>
<S> <C>
Working capital acquired $ 419
Property and equipment, net 135
Goodwill 321
Other liabilities (125)
-----
Total purchase price $ 750
=====
</TABLE>
NOTE 3. BANK LOANS
Bank loans consisted of the following at December 31, 1998 and 1997 (in
thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Bank loan to ReSound-Viennatone
Hortechnologie GmbH $3,754 $1,663
Bank loan to ReSound Deutschland
GmbH 184 --
Bank loan to ReSound Autac GmbH 708 --
------ ------
Total $4,646 $1,663
====== ======
</TABLE>
These loans bear interest at rates varying from 4.75% to 9.5%. The
ReSound-Viennatone bank loan from an Austrian bank is denominated in Austrian
Schillings and secured by eligible receivables.
48
<PAGE> 49
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The ReSound Deutschland bank loan from a German bank is denominated in German
Marks and secured by a Letter of Comfort from its German parent company. The
ReSound Autac bank loan from a Swiss bank is denominated in Swiss Francs and
secured by eligible receivables, assignment of intercompany loans and by a
Letter of Comfort from ReSound Corporation.
NOTE 4. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1998 and 1997
(in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
8% convertible promissory note to shareholder
due in February 2000 $ 10,000 $ 10,000
Bank Austria loan to ReSound Horgerate GmbH:
8.15% term loan, due in quarterly installments
over seven years beginning June 30, 1995 4,256 8,234
Bank loan to ReSound Deutschland GmbH:
6.5% term loan, due in semi-annual installments
over eight years beginning September 1995 336 383
Bank term loan to ReSound Pty. Ltd. 13 19
-------- --------
14,605 18,636
Less current portion (1,790) (4,362)
-------- --------
Non-current portion $ 12,815 $ 14,274
======== ========
</TABLE>
The 8% note is convertible into 1,000,000 shares of the Company's
common stock at $10.00 per share. The Bank Austria loan is denominated in
Austrian Schillings and secured by the capital stock of Viennatone.
The maturities of long-term debt are as follows (in thousands): 1999,
$1,790; 2000, $12,629; 2001, $75; 2002, $75 and 2003, $36.
NOTE 5. VIENNATONE ACCRUED EMPLOYEE BENEFITS
Viennatone's accrued employee benefits by category at December 31, 1998
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Pensions $ 149 $ 443
Termination indemnities 2,102 2,321
Employees' long service premium 373 507
------ ------
Total $2,624 $3,271
====== ======
</TABLE>
49
<PAGE> 50
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Pensions
Viennatone has an unfunded defined benefit pension plan under which a
number of senior management employees in Austria have pension entitlements.
Viennatone's liability under this pension plan is funded partially by
contributions to an insurance company and partially by fixed interest, long-term
marketable securities held by Viennatone in accordance with Austrian tax
requirements.
The status of the defined benefit plan at December 31, 1998 and 1997 is
as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accumulated benefit obligation (ABO) $149 $443
Projected benefit obligation (PBO) 149 443
Service cost -- --
Net periodic pension cost -- --
Interest 14 29
</TABLE>
The interest rate used was 7%.
The expected projected benefit obligation ("PBO") for 1999 has been
estimated as $149,000. Differences between expected and projected benefit
obligations are not material. The pension accrual recorded represents the
projected benefit obligation at December 31, 1998 and 1997. The weighted average
discount rate used to evaluate the increase in rate of compensation was 4.25%.
Termination Indemnities
Viennatone provides for termination benefits as earned in accordance
with Austrian law. Indemnities range from two to twelve months' salary based on
length of service. Employees are entitled to indemnities after three years of
employment or according to contract. Payments are made upon normal retirement or
other cause of termination, except voluntary departures or terminations for
cause. The amount accrued at year end represents the projected benefit
obligation. This calculation has been made under the assumption that the
majority of expected payments will be upon normal retirement. The liability is
also partially funded by fixed interest, long-term marketable securities held by
Viennatone in accordance with Austrian tax requirements.
The status of the accrual for termination indemnities at December 31,
1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Accumulated benefit obligation (ABO) $1,484 $1,640
Projected benefit obligation (PBO) 2,102 2,321
Service cost 164 182
Net periodic pension cost -- --
Interest 143 156
</TABLE>
50
<PAGE> 51
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The interest rate used was 7%.
The expected projected benefit obligation for 1999 has been estimated
as $2.1 million. Differences between expected and projected benefit obligations
are not material. The termination indemnities accrual has been recorded at the
amount of the PBO at December 31, 1998 and 1997.
Employees' Long Service Premium
According to the Viennatone work agreement, employees are entitled to a
premium after ten years of service. Such a premium is also paid out after 15,
25, 35 and 45 years of service. A calculation of the total liability as of the
balance sheet date is made on a discounted cash-flow basis, using an interest
rate of 7%. The liability was calculated at $373,000 and $507,000 at December
31, 1998 and 1997, respectively.
NOTE 6. 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 strategic restructuring program.
This program is designed to streamline operations and control costs through
management restructuring, operations consolidations, and increased focus on core
activities and product lines.
The special charges provided for costs associated with employee
termination benefits for approximately 100 employees from all functional areas
in various subsidiary locations; lease termination costs; the write-down of
goodwill associated with the acquired hearing health business activity of 3M
(which was renamed Sonar Hearing Health, "SHH"); the incremental impairments in
the carrying value of certain product inventories; and losses on supplier
commitments arising directly from the decision to exit product lines.
The $18.0 million in special charges was recorded as follows:
Employee termination benefits and lease termination costs (recorded as
Restructuring and other charges) -- $2.3 million; write-down of SHH goodwill
(recorded as Restructuring and other charges) -- $10.3 million; write-down of
inventories to net realizable value and losses on supplier commitments (recorded
as Cost of sales) -- $3.1 million; write-down of capital assets to fair value
(recorded as Selling, general and administrative -- $633,000 and Research and
development -- $123,000) and other exit costs (recorded as Selling, general and
administrative) -- $1.6 million.
As of December 31, 1998 and 1997, $0.8 million and $6.2 million,
respectively remained of the 1997 restructuring accrual. The Company made
approximately $2.2 million and $819,000 of cash payments relating to the special
charges in 1998 and 1997, respectively. The remaining 1997 restructuring accrual
of $0.8 million will be substantially utilized by December 31, 1999.
51
<PAGE> 52
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1998 Strategic Restructuring Program
In the second half of 1998, the Company recorded special charges of
$17.6 million associated with the Company's new strategic restructuring program.
This program is designed to realign the Company's organizational structure,
streamline internal processes, and consolidate facilities worldwide in order to
achieve sustained profitability. The program will result in a work force
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 consolidation activities.
The $17.6 million in special charges has been recorded as follows: Cost
of sales -- $1.8 million (for the write-down of inventories to net realizable
value and losses on supplier commitments); Research and development -- $0.5
million; Selling, general and administrative -- $3.2 million (for the write-down
of capital assets to fair value and other exit costs); Restructuring and other
charges -- $12.1 million (for the write-down of goodwill -- $8.1 million, and
employee termination benefits and lease termination costs -- $4.0 million).
In the second half of 1998, the Company utilized $12.8 million of the
1998 restructuring accrual. Of this $12.8 million, $8.1 million was utilized for
the write-down of goodwill in ReSound Autac GmbH and Viennatone; $2.7 million
for employee termination benefits and lease termination costs; $0.6 million for
the write-down of capital assets to fair value and $1.5 million for the
write-down of inventories to net realizable value.
The Company made approximately $2.7 million of cash payments relating
to the special charges in the second half of 1998. The remaining 1998
restructuring accrual of approximately $4.8 million at December 31, 1998 will be
substantially utilized by December 31, 1999.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its present facilities and certain equipment under
noncancelable operating lease agreements for periods of up to 20 years. Some of
the leases have renewal options ranging from two to three years and contain
provisions for maintenance, taxes or insurance. Rent expense was $2.9 million,
$2.3 million, and $1.7 million in 1998, 1997 and 1996, respectively.
At December 31, 1998, total future minimum lease payments are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1999 $1,954
2000 1,228
2001 425
2002 209
2003 206
Thereafter 715
------
Total minimum
payments required $4,737
======
</TABLE>
52
<PAGE> 53
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
401(k) Plan
Under the Company's retirement savings plan (the "401(k) Plan"), a U.S.
employee may defer and invest up to 19% of his or her annual compensation,
subject to an annual dollar limitation. The Company has elected to make matching
contributions in the amount of 25% of the employee's contributions, up to a
potential maximum of $2,250 per employee. All U.S. full-time employees who have
three months of service are eligible to participate in the 401(k) Plan. The
Company contributed $248,000, $222,700, and $138,000 to the 401(k) Plan in 1998,
1997 and 1996, respectively.
Litigation
From time to time, the Company has been contacted by various other
parties who have alleged that certain of the Company's products infringe or may
infringe patents that such parties claim to hold. Management believes the
Company has not infringed any such patents and does not believe such claims, if
pursued, will result in a material adverse effect on the financial position or
results of operations of the Company.
The Company is also subject to other legal proceedings and claims that
arise in the ordinary course of its business. While management currently
believes the amount of ultimate liability, if any, with respect to these actions
will not materially affect the financial position, results of operations, or
liquidity of the Company, the ultimate outcome of any litigation is uncertain.
Were an unfavorable outcome to occur, the impact could be material to the
Company.
NOTE 8. SHAREHOLDERS' EQUITY
Preferred Stock
Under the Company's Articles of Incorporation, the Company is
authorized to issue preferred stock. At December 31, 1998, 2,000,000 shares of
preferred stock were authorized.
In March 1996, the Company issued 54,055 shares of Series B Preferred
Stock for an aggregate purchase price of $5.0 million in a private placement to
an existing shareholder. The Series B Preferred Stock had a cumulative dividend
rate of six percent, payable in shares of the Company's common stock on the date
of any conversion. In October 1997, all of the outstanding preferred stock and
accumulated dividends of $463,000 were converted into 600,600 shares of common
stock of the Company.
At December 31, 1998 and 1997, no preferred stock was issued and
outstanding.
Common Stock
In June 1996, the Company raised approximately $32.9 million (net
proceeds) through the private sale of 3,212,176 shares of common stock. The
proceeds from this sale were used in connection with the purchase of certain
assets of the hearing health business activity of 3M and to provide working
capital. These proceeds reflect most of the proceeds shown as issuance of common
stock on the Company's consolidated statements of cash flows for the year ended
December 31, 1996.
53
<PAGE> 54
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Warrants
In conjunction with a convertible promissory note issued in November
1995 (subsequently repaid in June 1996), the Company issued two warrants, each
to purchase 38,897 shares of common stock at an exercise price of $7.7125 per
share. These warrants may be exercised at any time and expire on October 30,
2000. As of December 31, 1998, these warrants have not been exercised. The
values ascribed to these warrants are not material.
In conjunction with a guaranteed bank loan funded in October 1995 and
subsequently repaid in July 1996, the Company issued a warrant to purchase
49,230 shares of common stock to the bank at an exercise price of $8.13 per
share. This warrant may be exercised at any time and expires on October 29,
2000. In addition, the Company issued warrants to purchase an aggregate of
105,492 shares of common stock to the six directors who guaranteed the debt at
an exercise price of $8.13 per share. These warrants may be exercised at any
time and expire on December 1, 2000. As of December 31, 1998, these warrants
have not been exercised. The values ascribed to these warrants are not material.
1992 Employee Stock Purchase Plan
Under the 1992 Employee Stock Purchase Plan, substantially all
employees may purchase common stock through payroll deductions at a price equal
to 85% of its fair market value as of certain specified dates. Stock purchases
under this plan are limited to 10% of an employee's compensation, and in no
event may exceed $8,500 per year. As of December 31, 1997, a total of 400,000
shares of common stock were reserved for issuance to employees. At the Annual
Meeting of Shareholders of the Company on May 21, 1998, the shareholders voted
to authorize the amendment of the 1992 Employee Stock Purchase Plan to increase
the number of shares of common stock reserved for issuance thereunder by 200,000
shares to an aggregate of 600,000 shares. As of December 31, 1998, 347,390
shares had been issued under this plan, including 99,587 shares issued in 1998.
Fixed Stock Option Plans
1992 Directors' Stock Option Plan
Under the 1992 Directors' Stock Option Plan, the Company has reserved
300,000 shares of common stock for issuance to non-employee directors. Such
options may only be non-qualified stock options issued at not less than fair
market value, and all options granted must be exercised within five years from
the date of grant. Each eligible director is to be granted annually on December
31 an option to purchase 5,000 shares, exercisable after four years. Each new
director is to receive an initial option grant to purchase 20,000 shares, which
becomes exercisable in 25 percent increments annually beginning after one year.
1988 Stock Option Plan
Under the 1988 Stock Option Plan, the Company has reserved 4,000,000
shares of common stock for issuance. Options for shares of common stock were
granted to employees and consultants. Options were exercisable at such times and
under such conditions as determined by the Board of Directors. Options granted
generally vested at the rate of 1/48th of the number of shares subject to such
option at the end of each month for a period of 48 months from date of grant.
However, certain options granted to replenish existing options did not
54
<PAGE> 55
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
begin vesting for up to 36 months from the date of grant (when vesting
commenced, it was generally prorated on a monthly basis over periods up to 48
months). The Plan expired in April 1998, and of the remaining 831,998 shares
available for grant, 650,000 shares were transferred to the 1997 Stock Plan and
181,998 shares were cancelled.
1997 Stock Plan
Under the 1997 Stock Plan, which expires in 2007, a total of 650,000
shares have been reserved for issuance. Options for shares of common stock and
stock purchase rights may be granted to employees and consultants. Options are
exercisable at such times and under such conditions as determined by the Board
of Directors. Options granted generally vest at the rate of 1/48th of the number
of shares subject to such option at the end of each month for a period of 48
months from date of grant.
Other Option Grants
During 1998, the Company issued options to purchase an aggregate of
812,663 shares of its common stock to newly hired executive officers and options
to purchase 6,250 shares of its common stock to a consultant outside of any
shareholder approved equity incentive plan. These options did not constitute
Incentive Stock Options under Section 422 of the Internal Revenue Code of 1986,
as amended. Options are exercisable at such times and under such conditions as
determined by the Board of Directors. Options granted generally vest at the rate
of 1/48th of the number of shares subject to such option at the end of each
month for a period of 48 months from date of grant. The values ascribed to the
options granted to a consultant are not material.
Additional information relative to the Company's fixed stock option
plans is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------------------------- ----------------------------- ----------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
--------- ---------------- --------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding - beginning of
year 3,406,399 $4.71 3,600,867 $8.85 3,379,533 $8.50
Granted 1,394,323 $5.38 350,200 $4.54 931,650 $9.23
Exercised (390,089) $3.67 (44,553) $3.61 (225,358) $4.68
Canceled (476,867) $6.56 (500,115) $9.14 (484,958) $9.07
--------- --------- ---------
Outstanding - end of year 3,933,766 $4.83 3,406,399 $4.71 3,600,867 $8.85
--------- --------- ---------
Exercisable at end of year 1,815,462 1,546,296 1,534,494
Weighted-average fair value
of options granted during
the year $2.25 $4.54 $4.13
</TABLE>
55
<PAGE> 56
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
Outstanding and Exercisable By Price Range as of December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------------------------------------------
Number Weighted-Average Number
Range of Outstanding at Remaining Weighted-Average Exercisable at Weighted-Average
Exercise Prices December 31, 1998 Contractual Life Exercise Price December 31, 1998 Exercise Price
- ---------------- ----------------- ---------------- ---------------- ----------------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.30 - $ 0.40 6,696 1.5 $ 0.39 6,696 $ 0.39
$ 0.50 - $ 0.50 71,447 2.6 $ 0.50 71,447 $ 0.50
$ 4.19 - $ 6.25 3,503,873 3.1 $ 4.71 1,654,529 $ 4.56
$ 6.50 - $ 8.88 321,750 4.0 $ 6.69 52,790 $ 6.85
$ 9.88 - $11.00 30,000 0.9 $ 10.06 30,000 $ 10.06
- ---------------- ----------- ---- ------- ----------- -------
$ 0.30 - $11.00 3,933,766 3.1 $ 4.83 1,815,462 $ 4.54
</TABLE>
At December 31, 1998, options to purchase 1,815,462 shares of common
stock were exercisable at an average exercise price of $4.54 per share and
3,933,766 shares of common stock were reserved in the event options are
exercised.
In April 1997, the Board of Directors authorized the repricing of
options granted to employees and directors to purchase 2,626,877 shares of
common stock effective as of the close of business on April 25, 1997, to the
then fair market value of $4.4375 per share. Under the terms of the repricing,
the repriced options that were not vested at April 25, 1997 were subject to a
one-year extension of their vesting terms, and any repriced options that were
vested at April 25, 1997 were not exercisable during the one-year period
commencing April 25, 1997. The term of the repriced options was extended by one
year.
In April 1998, pursuant to a restricted stock purchase agreement,
100,000 shares of common stock were purchased by an executive officer of the
Company at $0.01 per share. Deferred compensation expense of $543,000,
representing the excess of the quoted market price of the Company's common stock
at grant date over the grant price was recorded related to this agreement. The
restricted stock purchase agreement contains provisions for the repurchase of
common stock by the Company in the event of termination of employment during the
three years following the date of the agreement. One hundred percent of the
shares will be released from the repurchase option on the third anniversary of
the vesting commencement date provided that the executive officer's employment
with the Company has not been terminated prior to such date.
Deferred compensation resulting from the issuance of common stock under
the restricted stock purchase agreement as of December 31, 1998 and 1997 is
$360,000 and $0, respectively. Deferred compensation is amortized over the
vesting period of three years, which resulted in compensation expense of
$183,000, $0 and $0 being recognized in the years ended December 31, 1998, 1997
and 1996, respectively.
Stock -Based Compensation
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
("SFAS 123"). Accordingly, no
56
<PAGE> 57
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
compensation cost has been recognized for the plans (including the Employee
Stock Purchase Plan). Had compensation cost for the plans been determined based
on the fair value at the grant date for awards in 1998, 1997 and 1996 consistent
with the provisions of SFAS 123, the Company's net loss and basic and diluted
net loss per common share for the years ended December 31, 1998, 1997 and 1996
would have been increased to the pro forma amounts indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net loss applicable to common
shareholders:
As reported $ (21,925) $ (18,676) $ (1,192)
Pro forma $ (22,246) $ (21,963) $ (2,990)
Basic and diluted net loss per common share:
As reported $ (1.07) $ (0.96) $ (0.07)
Pro forma $ (1.09) $ (1.13) $ (0.17)
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes multiple option-pricing model. The following weighted average
assumptions were used for grants in 1998, 1997 and 1996: risk-free interest
rates of 5.0 percent, 6.0 percent and 6.3 percent, respectively, expected
volatility of 0.61, 0.61 and 0.57, respectively, an expected option life of 0.8
years beyond each respective vesting period and dividend yield of zero. The
Black-Scholes model used by the Company to calculate option values for purposes
of this note, as well as other currently accepted option valuation models (as
called for in accordance with SFAS 123), were developed to estimate the fair
value of stock options that are freely tradable and fully transferable and that
have no vesting restrictions. These models also require highly subjective
assumptions, including future stock price volatility and expected time until
exercise, which greatly affect the calculated values. Accordingly, management
believes that this model does not necessarily provide a reliable measure of the
fair value of the Company's option awards.
NOTE 9. INCOME TAXES
The provision for income taxes for 1998, 1997 and 1996 consists of the
following (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Current:
State $ 8 $ 16 $ --
Foreign 552 860 1,769
------- ------- -------
Subtotal 560 876 1,769
Deferred:
Foreign -- -- (372)
------- ------- -------
Total provision: $ 560 $ 876 $ 1,397
======= ======= =======
</TABLE>
Foreign pre-tax income (loss) was $(15.7) million, $(7.0) million and
$5.0 million in 1998, 1997 and 1996, respectively.
57
<PAGE> 58
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The difference between the provision for taxes on income and the amount
computed by applying the federal statutory income tax rate to income before
provision for income taxes is presented below (in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Tax at federal statutory rate $(7,477) $(6,110) $ (151)
Unbenefited losses 8,852 7,971 3,307
Income taxed at higher/(lower) rates (815) (994) (1,840)
Other -- 9 81
------- ------- -------
Provision for income taxes $ 560 $ 876 $ 1,397
======= ======= =======
</TABLE>
At December 31, 1998, the Company had U.S. federal and California net
operating loss carryforwards of approximately $37.3 million and $8.5 million,
respectively. The federal net operating loss carryforwards will expire at
various dates beginning in 2002 through 2018, if not utilized. The California
net operating loss carryforwards will expire at various dates beginning in 1999
through 2003, if not utilized. The Company has foreign net operating loss
carryforwards of approximately $36.5 million at December 31, 1998, which will
expire at various dates beginning in 1999 through 2004, if not utilized.
Utilization of net operating losses may be subject to an annual
limitation due to ownership change limitations provided in the Internal Revenue
Code of 1986 and similar state provisions.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amount used for income tax purposes. Based upon the
Company's earnings history, a valuation allowance for deferred tax assets of
$34.9 million and $26.7 million at December 31, 1998 and 1997, respectively, is
required to reduce the Company's net deferred tax assets to the amount
realizable at present. Significant components of the Company's deferred tax
assets for federal and California income taxes as of December 31, 1998 and 1997
are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
U.S. net operating loss carryforwards $ 13,500 $ 13,500
Foreign net operating loss carryforwards 8,809 3,300
Tax credits (expiring 2000 - 2018) 3,600 2,300
Allowance for returns and doubtful accounts 2,200 2,100
Depreciation and amortization 2,500 2,600
Warranty accruals 1,900 1,800
Other 2,400 1,100
Less: valuation allowance (34,909) (26,700)
-------- --------
Net deferred tax assets $ -- $ --
======== ========
</TABLE>
The valuation allowance increased by $7.1 million in 1997.
58
<PAGE> 59
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
NOTE 10. RELATED PARTY TRANSACTIONS
Hoya Corporation
Hoya Corporation ("Hoya"), a shareholder of the Company, purchases from
the Company certain inventory for resale in Japan under an exclusive
distribution agreement entered into in June 1990. Sales to Hoya in 1998, 1997
and 1996 totaled $2.1 million, $3.4 million and $3.4 million, respectively.
Accounts receivable from Hoya at December 31, 1998 and 1997 were $122,000 and
$653,000, respectively.
California Ear Institute at Stanford
Dr. Rodney Perkins, the Chairman of the Company's Board of Directors
and a shareholder of the Company, is also the President of the California Ear
Institute ("CEI") at Stanford. Sales of the Company's products to CEI in 1998,
1997, and 1996 totaled $149,000, $119,000 and $192,000, respectively. Accounts
receivable from CEI were $30,200 and $30,000 at December 31, 1998 and 1997,
respectively.
NOTE 11. 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 prior year
segment information has been restated to present the Company's 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 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 because they have different
economic characteristics.
59
<PAGE> 60
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
The table below presents information about reported segments for the
years ended December 31, 1998, 1997, and 1996 (in thousands):
<TABLE>
<CAPTION>
North Asia Pacific/ R&D/
1998 America Europe Latin America Corporate Totals
--------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales to external customers $ 63,471 $ 54,449 $ 5,522 $ -- $ 123,442
Operating income (loss) - excluding
restructure and other special
charges 17,398 1,860 1,087 (26,535) (6,190)
Restructure and other special
charges (3,062) (14,496) (66) -- (17,624)
Operating income (loss) - including
restructure and other special
charges 14,336 (12,636) 1,021 (26,535) (23,814)
Segment assets 20,716 47,286 1,760 -- 69,762
Expenditures for segment assets 4,459 3,349 166 -- 7,974
Long-lived assets 7,487 18,524 180 -- 26,191
</TABLE>
<TABLE>
<CAPTION>
North Asia Pacific/ R&D/
1997 America Europe Latin America Corporate Totals
--------- --------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net sales to external customers $ 68,981 $ 55,920 $ 5,562 $ -- $ 130,463
Operating income (loss) - excluding
restructure and other special
charges 17,187 4,279 1,174 (20,426) 2,214
Restructure and other special
charges (12,720) (2,747) (406) (2,103) (17,976)
Operating income (loss) - including
restructure and other special
charges 4,467 1,532 768 (22,529) (15,762)
Segment assets 33,448 56,197 130 -- 89,775
Expenditures for segment assets 2,419 1,994 72 -- 4,485
Long-lived assets 8,533 26,931 184 -- 35,648
</TABLE>
60
<PAGE> 61
RESOUND CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
North Asia Pacific/ R&D/
1996 America Europe Latin America Corporate Totals
-------- -------- ------------- -------- --------
<S> <C> <C> <C> <C> <C>
Net sales to external customers $ 57,136 $ 64,166 $ 4,378 $ (34) $125,646
Operating income (loss) - excluding
restructure and other special
charges 14,283 6,533 1,127 (19,335) 2,608
Restructure and other special
charges -- -- -- -- --
Operating income (loss) - including
restructure and other special
charges 14,283 6,533 1,127 (19,335) 2,608
Segment assets 41,518 72,423 811 -- 114,752
Expenditures for segment assets 3,526 3,986 35 -- 7,547
Long-lived assets 22,181 35,805 218 -- 58,204
</TABLE>
No one customer accounted for 10% or more of net sales in 1998, 1997 or
1996.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
61
<PAGE> 62
PART III
Certain information required by Part III is omitted from this report
because the Registrant will file a definitive proxy statement within 120 days
after the end of its fiscal year pursuant to Regulation 14A (the "Proxy
Statement") for its annual meeting of shareholders to be held May 28, 1999 and
the information included therein is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information with respect to directors of the Company and the Chairman of
the Company's Board of Directors is incorporated by reference from the
information under the caption "Election of Directors - Nominees" in the
Registrant's Proxy Statement.
The names of the Company's executive officers and certain information
about them as of March 26, 1999, are set forth below:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Russell D. Hays..................... 54 President, Chief Executive Officer and Director
Laureen De Buono.................... 41 Executive Vice President, Chief Operating Officer
John H. Giroux...................... 54 Senior Vice President and President, ReSound North America
Peter Nolan......................... 44 Senior Vice President, Worldwide Operations
David S. Thrower.................... 34 Senior Vice President, Global Marketing
Robert D. Luttrell.................. 39 Vice President, Chief Financial Officer
Edward Lopez........................ 39 Vice President, Business Development, General Counsel and
Secretary
Chaslav V. Pavlovic................. 50 Vice President, Research and Development
</TABLE>
Russell D. Hays joined ReSound as President and Chief Executive Officer,
and was elected to its Board of Directors, in February 1998. From 1995 to 1998,
Mr. Hays served as Executive Vice President and President of the Hospital
Business of Nellcor Puritan Bennett, a medical device company that develops and
markets products that diagnose, monitor and treat respiratory disorders. From
1992 to 1995, Mr. Hays served as President and Chief Executive Officer of
Enzytech, Inc., a company that develops and markets drug delivery technologies.
From 1985 to 1992, Mr. Hays held senior management positions with Baxter
Healthcare Corporation, most recently as Vice President and General Manager of
the Immunotherapy Division of Baxter Biotech, and before that in the areas of
strategic planning and business development, marketing and business development,
and technology assessment and development. Prior to this, he held various
positions with Stryker Corporation, Baxter Travenol Labs, Inc., Amerace
Corporation, Reynolds Products, Inc., and Schaub Engineering Company. Mr. Hays
holds an M.B.A. from the J.L. Kellogg Graduate School at Northwestern
University and a B.S. in Physics from Elmhurst College.
62
<PAGE> 63
Laureen DeBuono joined the Company in October 1998 as Executive Vice
President, Chief Operating Officer and Chief Financial Officer. With the
addition of Robert D. Luttrell as Vice President, Chief Financial Officer in
February 1999, Ms. DeBuono no longer serves as Chief Financial Officer. Before
joining the Company, Ms. DeBuono was Executive Vice President, Human Resources,
General Counsel and Secretary at Nellcor Puritan Bennett from 1994 to 1998 and
served as General Counsel and Secretary at Nellcor Puritan Bennett from April
1992 to June 1994. Prior to joining Nellcor Puritan Bennett, Ms. DeBuono was
Division and Corporate Counsel with the Clorox Company, a diversified consumer
products company, from 1987 to 1992 and Corporate Counsel with Varian
Associates, Inc., an electronics device company, from 1984 to 1987. Ms. DeBuono
holds a B.A from Duke University, a M.A. from Stanford University and a J.D.
from New York University.
John H. Giroux joined the Company in January 1991 as Vice President,
Marketing. He was elected Vice President, Sales and Marketing in December 1991
and in June 1993 was promoted to Senior Vice President, Sales and Marketing. In
January 1996, he was elected Senior Vice President of the Company and President
of ReSound U.S.A. Mr. Giroux has 27 years of experience in the marketing of
consumer health care products. Before joining the Company, Mr. Giroux was Vice
President of Marketing for Allergan Optical at Allergan, Inc., from February
1988 to June 1990. Prior to joining Allergan, Inc., Mr. Giroux was Vice
President at Ogilvy & Mather Worldwide, an advertising firm, from July 1984 to
February 1988. Prior to July 1984, Mr. Giroux was Vice President, Sales and
Marketing of the Consumer Products Division of G.D. Searle and Company, a
pharmaceutical company. Mr Giroux holds a B.A. in economics from Providence
College.
Peter Nolan joined the Company in June 1994 as General Manager of
ReSound Ireland Ltd. He was named Vice President of Manufacturing in December
1995 and was promoted to Senior Vice President of Worldwide Operations in
October 1998. Before joining the Company, Mr. Nolan was General Manager of Wang
Laboratories Ireland B.V., the European manufacturing and distribution
headquarters for Wang, from 1992 until June 1994 and held other senior
management positions with that company, which he joined in 1984. Mr. Nolan has
also held various manufacturing and engineering positions with Digital Equipment
International B.V., Atari Ltd., Varian Instruments Ltd., and Westinghouse
Electronics Ltd.. Mr. Nolan holds a Bachelor of Technology - Production
Engineering from the University of Limerick, Ireland.
David S. Thrower joined ReSound in July 1998 as Senior Vice President of
Global Marketing. In December 1998, Mr. Thrower's role was expanded to include
responsibility for ReSound Communications. Before joining ReSound, Mr. Thrower
served as Vice President of Quattro Consulting, Inc., a management consulting
firm exclusively focused on the medical device and technology industries, from
1993 to 1998. Prior to Quattro Consulting, Inc., Mr. Thrower was a consultant at
Bain & Company, from 1986 to 1990 and again from 1992 to 1993. Mr. Thrower holds
an MBA from Harvard Graduate School of Business Administration and a BS in
Mathematical and Computational Sciences from Stanford University.
Robert D. Luttrell joined ReSound in February 1999 as Vice President,
Chief Financial Officer. Before joining the Company, Mr. Luttrell served as
Corporate Controller for Nellcor Puritan Bennett from 1995 until January 1999,
and held other financial management positions since joining that company in
1990. From 1987 to 1990, Mr. Luttrell held various financial management
positions with Applied Biosystems, a supplier of life sciences analytical
instrumentation and consumables. Mr. Luttrell also held financial management
positions with Fairchild Semiconductor from 1985 to 1987 and worked on the audit
staff of Arthur Young and Company from 1983 through 1985. Mr. Luttrell holds a
B.S. degree in business from San Francisco State University and is a Certified
Public Accountant in California.
63
<PAGE> 64
Edward Lopez joined ReSound in June 1998 as Vice President, Business
Development and General Counsel. In December 1998, Mr. Lopez was elected to the
office of Secretary of the Company. Prior to joining ReSound, Mr. Lopez was
Corporate Counsel and Senior Corporate Counsel with Nellcor Puritan Bennett from
October 1993 to February 1998. From 1987 until joining Nellcor Puritan Bennett
in 1993, Mr. Lopez worked with Morrison & Foerster, an international law firm
headquartered in San Francisco, California, where he focused his practice on
general corporate, mergers and acquisition, securities and finance matters. Mr.
Lopez received a J.D. from the Harvard Law School in 1985 and an A.B. in
economics and political science from Columbia University in 1982. Mr. Lopez is a
member of the Corporate Law Departments Committee of the Business Law Section of
the State Bar of California.
Chaslav V. Pavlovic joined the Company in February 1994 as Vice
President of Research. In December 1996, he was promoted to Vice President for
Research and Development. Before joining the Company, Dr. Pavlovic was Associate
Professor of Audiology at the University of Iowa from December 1985 through
February 1993; Professor of Audiology at the University of Provence, France,
from March 1993 to June 1998; and a Coordinator of the European project EURAUD
(European Audiological Tests and Station); Chair, American National Standards
Institute S3-79 Writing Group (Calculation of the Articulation Index); USA
representative to the International Standards Organization ISO/TC 43/SC1;
Coordinator of the Overall Quality Assessment Subgroup, European Consortium for
Speech Assessment Methods (SAM, Project Esprit); Coordinator of participating
French laboratories on projects TIDE and OSCAR (pattern extraction hearing
aids); Member, American National Standards institute S12-8 Writing Group (rating
noise with respect to speech interference); Member of the Editorial Board,
Acoustics; Staff Editor, Journal D'Acoustique; Board of Directors, Journal
D'Acoustique; and Member, Technical Committee on Speech Communication,
Acoustical Society of America. Dr. Pavlovic has produced more than 50
publications and over 60 major international presentations. Dr. Pavlovic has a
Ph.D. in Audiology from Wichita State University, and an M.S. and B.S. in
Electrical Engineering from Salford University, England and the University of
Belgrade, Yugoslavia, respectively.
Information with respect to compliance with Section 16(a) of the
Securities Exchange Act of 1934 is incorporated by reference from the
information under the caption, "Section 16(a) Beneficial Ownership Reporting
Compliance," in the Registrant's Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the information under the captions
"Compensation of Executive Officers" and "Transactions with Management and
Others" in the Registrant's Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the information under the caption "Common
Stock Ownership of Certain Beneficial Owners and Management" in the Registrant's
Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the information under the captions
"Compensation of Executive Officers" and "Transactions with Management and
Others" in the Registrant's Proxy Statement.
64
<PAGE> 65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
(1) Consolidated Financial Statements and Report of Ernst &
Young LLP, Independent Auditors
Report of Ernst & Young LLP, Independent
Auditors. 35
Consolidated Balance Sheets at December 31,
1998 and 1997. 36
Consolidated Statements of Operations -
Years ended December 31, 1998, 1997 and 1996. 37
Consolidated Statement of Shareholders' Equity -
Three Years ended December 31, 1998. 38
Consolidated Statements of Cash Flows -
Years ended December 31, 1998, 1997 and 1996. 39
Notes to Consolidated Financial Statements. 40
(2) Financial Statement Schedules
The following financial statement schedule is included herein:
Schedule II - Valuation and Qualifying Accounts 70
All other schedules are omitted because they are not required
or the required information is included in the consolidated
financial statements or notes thereto.
(3) Exhibits (numbered in accordance with Item 601 of Regulation S-K)
</TABLE>
65
<PAGE> 66
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Registrant. (3)
3.2 Bylaws of Registrant, as amended. (14)
4.1 Certificate of Determination of Rights, Preferences and
Privileges of Series B Preferred Stock of ReSound Corporation.
(6)
10.1 1988 Stock Option Plan, as amended. (5.1)
10.2 1992 Directors' Stock Option Plan, as amended. (5)
10.3 Form of Directors' and Officers' Indemnification Agreement. (1)
10.4 Amendment Number Eight to and Restatement of Registration Rights
Agreement of ReSound Corporation dated as of August 21, 1992, as
amended October 19, 1992. (1)
10.5 Contract Consulting Agreement dated July 25, 1996 with Dr. Rodney
Perkins. (9)
10.6 Contract Consulting Agreement dated July 25, 1996 with Dr.
Richard L. Goode. (9)
10.7 Lease Agreement between the Registrant and Seaport Centre Phase
II dated June 15, 1988, as amended on August 31, 1988, March 21,
1991, November 27, 1991 and December 28, 1992. (1)
10.8 Fifth Amendment dated December 5, 1995 to Lease Agreement with
Seaport Centre Phase II (Exhibit 10.7). (6)
10.9 Sublease between the Registrant and Devices for Vascular
Intervention, Inc. dated as of December 29, 1995. (6)
10.10 Technical Information and Patent License Agreement with American
Telephone and Telegraph Company dated as of February 27, 1987, as
amended effective January 1, 1988. (1)
10.11 Custom IC Agreement with American Telephone and Telegraph Company
dated 1987, as supplemented on April 6, 1990, April 24, 1990,
July 15, 1992 and December 11, 1992, for the manufacture of
custom integrated circuits. (1)(2)
10.16 Loan Agreement between the Registrant, ReSound GmbH and Bank
Austria Aktiengesellschaft dated December 7, 1994. (4)
10.17 Note Purchase Agreement between the Registrant and Cagen Holdings
Limited dated as of February 21, 1995 and related Convertible
Promissory Note. (5)
10.18 Note Purchase Agreement between the Registrant and The Mingly
Corporation Limited dated as of February 21, 1995 and related
Convertible Promissory Note. (5)
10.19 Note Purchase Agreement between the Registrant and Charter
Ventures II, L.P. dated as of February 21, 1995 and related
Convertible Promissory Note. (5)
</TABLE>
66
<PAGE> 67
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.20 Loan and Security Agreement with Silicon Valley Bank dated
October 27, 1995, and related Registration Rights Agreement,
Patent Mortgage and Collateral Assignment Agreement and Warrant.
(6)
10.21 Note and Warrant Purchase Agreement between the Registrant and
Cagen Holdings Limited dated as of November 21, 1995 and related
Convertible Promissory Note and Warrant. (6)
10.22 Note and Warrant Purchase Agreement between the Registrant and
Charter Ventures II, L.P. dated as of November 21, 1995 and
related Convertible Promissory Note and Warrant. (6)
10.23 Form of Common Stock warrant dated December 1, 1995 issued to
certain directors of the Registrant. (6)
10.24 Purchase Agreement by and between the Registrant and Minnesota
Mining and Manufacturing Company dated June 28, 1996. (8)
10.25 Letter agreement with respect to Purchase of Series B Preferred
Stock dated March 8, 1996 between the Company and S-E-Banken
Lakemedelsfond. (7)
10.26 AudioLogic Hearing Systems, L.P. Amended and Restated Agreement
of Limited Partnership dated as of September 30, 1996. (7) (10)
10.27 Series C Convertible Preferred Stock and Common Stock Purchase
Agreement dated September 30, 1996. (7)
10.28 Development, Licensing and Distribution Agreement by and among
AudioLogic, Inc., GN Danavox A/S, ReSound Corporation and
AudioLogic Hearing Systems, L.P. dated September 30, 1996. (7)
(10)
10.29 Assignment Agreement between ReSound Corporation and K/S
HIMPP.25. (7)
10.30 Lease Agreement dated September 24, 1996 between the Registrant
and Don and Carole Tanklage dba Tanklage Properties. (9)
10.31 ReSound Corporation 1997 Stock Plan. (11)
10.32 Separation Agreement. (12)
10.33 Change of Control Agreement. (13)
10.34 Agreement in Contemplation of Separation. (15)
10.35 Amended and Restated Change of Control Agreement. (16)
10.36 1997 Stock Plan. (17)
10.37 1992 Employee Stock Purchase Plan. (18)
10.38 Loan and Security Agreement with Silicon Valley Bank dated
February 12, 1999. (14)
10.39 Consulting Agreement dated January 1, 1999 with Dr. Rodney
Perkins. (14)
</TABLE>
67
<PAGE> 68
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.40 Settlement Agreement and Release dated December 21, 1998 between
Registrant and Andreas Joder. (14)
10.41 Settlement Agreement and Release dated December 22, 1998 between
Registrant and Stephan Becker-Vogt. (14)
10.42 Consulting Agreement dated October 31, 1998 between Registrant
and Andreas B. Joder. (14)
10.43 Consultancy Agreement dated January 1, 1999 between Registrant
and Stephan Becker-Vogt. (14)
10.44 Notarial Deed dated November 28, 1998 between ReSound-Viennatone
Hortechnologie GmbH and Amplifon International N.V. (14)
10.45 Cooperation and Sales Agreement dated November 28, 1998 between
ReSound-Viennatone Hortechnologie GmbH and Amplifon International
N.V. (14)
21.1 Subsidiaries of Registrant. (14)
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 65).
(14)
24.1 Power of Attorney (see page 66). (14)
</TABLE>
(b) Reports on Form 8-K:
None
- --------------------
(1) Incorporated by reference to exhibits filed in response to Item
16(a), "Exhibits," of the Registrant's Registration Statement on
Form S-1 and Amendment No. 1, Amendment No. 2 and Amendment No. 3
thereto (File No. 33-46527), which became effective on March 4,
1993.
(2) Confidential treatment granted by order effective February 24,
1993.
(3) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits, Financial Statement Schedules and Reports on Form
8-K," of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
(4) Incorporated by reference to exhibits filed in response to Item
7, "Financial Statements, Pro Forma Financial Information and
Exhibits," of the Registrant's Report on Form 8-K dated December
9, 1994.
(5) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits, Financial Statement Schedules and Reports on Form
8-K," of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
(5.1) Incorporated by reference to exhibits filed in response to Item
8, "Exhibits," of the Registrant's Statement on Form S-8 (File
No. 333-09303), which became effective July 31, 1996.
(6) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits, Financial Statement Schedules and Reports on Form
8-K," of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
68
<PAGE> 69
(7) Incorporated by reference to exhibits filed in response to Item
6, "Exhibits, and Reports on Form 8-K," of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1996.
(8) Incorporated by reference to exhibits filed in response to Item
7, "Financial Statements and Exhibits" of Registrant's Report on
Form 8-K filed with the Securities and Exchange Commission on
July 15, 1996 (as amended and filed September 12, 1996).
(9) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits, Financial Statement Schedules and Reports on Form
8-K" of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
(10) Confidential treatment granted by order effective March 1997.
(11) Incorporated by reference to exhibits filed in response to Item
8, "Exhibits," of the Registrant's Registration Statement on Form
S-8 (File No. 333-46585), which became effective February 4,
1998.
(12) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits, Financial Statement Schedules and Reports on Form
8-K" of the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1997.
(13) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits and Reports on Form 8-K" of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997.
(14) Filed herewith
(15) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits and Reports on Form 8-K" of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended March
28, 1998.
(16) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits and Reports on Form 8-K" of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 26, 1998.
(17) Incorporated by reference to exhibits filed in response to Item
8, "Exhibits" of the Registrant's Statement on Form S-8 (File No.
333-46585), which became effective February 19, 1998.
(18) Incorporated by reference to exhibits filed in response to Item
8, "Exhibits of the Registrant's Statement on Form S-8 (File No.
333-57709), which became effective June 25, 1998.
69
<PAGE> 70
SCHEDULE II
RESOUND CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED AGAINST BALANCE AT
BEGINNING OF SALES OR TO RETURNS/ END OF
DESCRIPTION THE YEAR EXPENSE WRITE-OFFS THE YEAR
------------ --------------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowances for estimated
returns and doubtful accounts $ 4,123 $ 17,786 $ 15,390 $ 6,519
Reserves for warranty expenses 4,585 5,981 5,466 5,100
---------- ---------- ---------- ----------
$ 8,708 $ 23,767 $ 20,856 $ 11,619
========== ========== ========== ==========
Year ended December 31, 1997:
Allowances for estimated
returns and doubtful accounts $ 6,519 $ 20,730 $ 20,185 $ 7,064
Reserves for warranty expenses 5,100 6,625 5,856 5,869
---------- ---------- ---------- ----------
$ 11,619 $ 27,355 $ 26,041 $ 12,933
========== ========== ========== ==========
Year ended December 31, 1998:
Allowances for estimated
returns and doubtful accounts $ 7,064 $ 21,903 $ 22,753 $ 6,214
Reserves for warranty expenses 5,869 3,692 4,922 4,639
---------- ---------- ---------- ----------
$ 12,933 $ 25,595 $ 27,675 $ 10,853
========== ========== ========== ==========
</TABLE>
70
<PAGE> 71
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to incorporation by reference in the Registration Statements
(Form S-8 Nos. 333-09303, 33-61302, 333-46585, 333-48695, 333-57709 and
333-61297) pertaining to the 1988 Stock Option Plan, the 1992 Employee Stock
Purchase Plan, the 1992 Directors' Stock Option Plan, the 1997 Stock Plan and
the 1998 New Executive Stock Option Plan of ReSound Corporation of our report
dated January 22, 1999, with respect to the consolidated financial statements
and schedule of ReSound Corporation, included in this Annual Report (Form 10-K),
for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Palo Alto, California
March 26, 1999
71
<PAGE> 72
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized. RESOUND CORPORATION
Date: March 26, 1999 By: /s/ Russell D. Hays
----------------------------------
Russell D. Hays
President and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Rodney Perkins, Russell D. Hays and
Robert D. Luttrell, jointly and severally, his attorneys-in-fact, each with the
power of substitution, for him in any and all capacities, to sign any amendments
to this Report on Form 10-K, and to file the same, with exhibits thereto and
other documents in connection therewith with the Securities and Exchange
Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes may do or cause to be done
by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Rodney Perkins, M.D. Chairman of the Board of Directors March 26, 1999
- ----------------------------------------
(Rodney Perkins, M.D.)
/s/ Russell D. Hays President, Chief Executive Officer March 26, 1999
- ---------------------------------------- and Director (principal executive officer)
(Russell D. Hays)
/s/ Robert D. Luttrell Vice President, Chief Financial Officer March 26, 1999
- ---------------------------------------- (principal financial and accounting officer)
(Robert D. Luttrell)
/s/ Richard L. Goode, M.D. Director March 26, 1999
- ----------------------------------------
(Richard L. Goode, M.D.)
/s/ Michael P. Downey Director March 26, 1999
- ----------------------------------------
(Michael P. Downey)
/s/ Eugene Kleiner Director March 26, 1999
- ----------------------------------------
(Eugene Kleiner)
/s/ Philip S. Schlein Director March 26, 1999
- ----------------------------------------
(Philip S. Schlein)
/s/ Robert C. Wilson Director March 26, 1999
- ----------------------------------------
(Robert C. Wilson)
</TABLE>
72
<PAGE> 73
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Amended and Restated Articles of Incorporation of Registrant. (3)
3.2 Bylaws of Registrant, as amended. (14)
4.1 Certificate of Determination of Rights, Preferences and
Privileges of Series B Preferred Stock of ReSound Corporation.
(6)
10.1 1988 Stock Option Plan, as amended. (5.1)
10.2 1992 Directors' Stock Option Plan, as amended. (5)
10.3 Form of Directors' and Officers' Indemnification Agreement. (1)
10.4 Amendment Number Eight to and Restatement of Registration Rights
Agreement of ReSound Corporation dated as of August 21, 1992, as
amended October 19, 1992. (1)
10.5 Contract Consulting Agreement dated July 25, 1996 with Dr. Rodney
Perkins. (9)
10.6 Contract Consulting Agreement dated July 25, 1996 with Dr.
Richard L. Goode. (9)
10.7 Lease Agreement between the Registrant and Seaport Centre Phase
II dated June 15, 1988, as amended on August 31, 1988, March 21,
1991, November 27, 1991 and December 28, 1992. (1)
10.8 Fifth Amendment dated December 5, 1995 to Lease Agreement with
Seaport Centre Phase II (Exhibit 10.7). (6)
10.9 Sublease between the Registrant and Devices for Vascular
Intervention, Inc. dated as of December 29, 1995. (6)
10.10 Technical Information and Patent License Agreement with American
Telephone and Telegraph Company dated as of February 27, 1987, as
amended effective January 1, 1988. (1)
10.11 Custom IC Agreement with American Telephone and Telegraph Company
dated 1987, as supplemented on April 6, 1990, April 24, 1990,
July 15, 1992 and December 11, 1992, for the manufacture of
custom integrated circuits. (1)(2)
10.16 Loan Agreement between the Registrant, ReSound GmbH and Bank
Austria Aktiengesellschaft dated December 7, 1994. (4)
10.17 Note Purchase Agreement between the Registrant and Cagen Holdings
Limited dated as of February 21, 1995 and related Convertible
Promissory Note. (5)
10.18 Note Purchase Agreement between the Registrant and The Mingly
Corporation Limited dated as of February 21, 1995 and related
Convertible Promissory Note. (5)
10.19 Note Purchase Agreement between the Registrant and Charter
Ventures II, L.P. dated as of February 21, 1995 and related
Convertible Promissory Note. (5)
</TABLE>
<PAGE> 74
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.20 Loan and Security Agreement with Silicon Valley Bank dated
October 27, 1995, and related Registration Rights Agreement,
Patent Mortgage and Collateral Assignment Agreement and Warrant.
(6)
10.21 Note and Warrant Purchase Agreement between the Registrant and
Cagen Holdings Limited dated as of November 21, 1995 and related
Convertible Promissory Note and Warrant. (6)
10.22 Note and Warrant Purchase Agreement between the Registrant and
Charter Ventures II, L.P. dated as of November 21, 1995 and
related Convertible Promissory Note and Warrant. (6)
10.23 Form of Common Stock warrant dated December 1, 1995 issued to
certain directors of the Registrant. (6)
10.24 Purchase Agreement by and between the Registrant and Minnesota
Mining and Manufacturing Company dated June 28, 1996. (8)
10.25 Letter agreement with respect to Purchase of Series B Preferred
Stock dated March 8, 1996 between the Company and S-E-Banken
Lakemedelsfond. (7)
10.26 AudioLogic Hearing Systems, L.P. Amended and Restated Agreement
of Limited Partnership dated as of September 30, 1996. (7) (10)
10.27 Series C Convertible Preferred Stock and Common Stock Purchase
Agreement dated September 30, 1996. (7)
10.28 Development, Licensing and Distribution Agreement by and among
AudioLogic, Inc., GN Danavox A/S, ReSound Corporation and
AudioLogic Hearing Systems, L.P. dated September 30, 1996. (7)
(10)
10.29 Assignment Agreement between ReSound Corporation and K/S
HIMPP.25. (7)
10.30 Lease Agreement dated September 24, 1996 between the Registrant
and Don and Carole Tanklage dba Tanklage Properties. (9)
10.31 ReSound Corporation 1997 Stock Plan. (11)
10.32 Separation Agreement. (12)
10.33 Change of Control Agreement. (13)
10.34 Agreement in Contemplation of Separation. (15)
10.35 Amended and Restated Change of Control Agreement. (16)
10.36 1997 Stock Plan. (17)
10.37 1992 Employee Stock Purchase Plan. (18)
10.38 Loan and Security Agreement with Silicon Valley Bank dated
February 12, 1999. (14)
10.39 Consulting Agreement dated January 1, 1999 with Dr. Rodney
Perkins. (14)
</TABLE>
<PAGE> 75
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
10.40 Settlement Agreement and Release dated December 21, 1998 between
Registrant and Andreas Joder. (14)
10.41 Settlement Agreement and Release dated December 22, 1998 between
Registrant and Stephan Becker-Vogt. (14)
10.42 Consulting Agreement dated October 31, 1998 between Registrant
and Andreas B. Joder. (14)
10.43 Consultancy Agreement dated January 1, 1999 between Registrant
and Stephan Becker-Vogt. (14)
10.44 Notarial Deed dated November 28, 1998 between ReSound-Viennatone
Hortechnologie GmbH and Amplifon International N.V. (14)
10.45 Cooperation and Sales Agreement dated November 28, 1998 between
ReSound-Viennatone Hortechnologie GmbH and Amplifon International
N.V. (14)
21.1 Subsidiaries of Registrant. (14)
23.1 Consent of Ernst & Young LLP, Independent Auditors (see page 65).
(14)
24.1 Power of Attorney (see page 66). (14)
</TABLE>
(b) Reports on Form 8-K:
None
- --------------------
(1) Incorporated by reference to exhibits filed in response to Item
16(a), "Exhibits," of the Registrant's Registration Statement on
Form S-1 and Amendment No. 1, Amendment No. 2 and Amendment No. 3
thereto (File No. 33-46527), which became effective on March 4,
1993.
(2) Confidential treatment granted by order effective February 24,
1993.
(3) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits, Financial Statement Schedules and Reports on Form
8-K," of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
(4) Incorporated by reference to exhibits filed in response to Item
7, "Financial Statements, Pro Forma Financial Information and
Exhibits," of the Registrant's Report on Form 8-K dated December
9, 1994.
(5) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits, Financial Statement Schedules and Reports on Form
8-K," of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1994.
(5.1) Incorporated by reference to exhibits filed in response to Item
8, "Exhibits," of the Registrant's Statement on Form S-8 (File
No. 333-09303), which became effective July 31, 1996.
(6) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits, Financial Statement Schedules and Reports on Form
8-K," of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995.
<PAGE> 76
(7) Incorporated by reference to exhibits filed in response to Item
6, "Exhibits, and Reports on Form 8-K," of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1996.
(8) Incorporated by reference to exhibits filed in response to Item
7, "Financial Statements and Exhibits" of Registrant's Report on
Form 8-K filed with the Securities and Exchange Commission on
July 15, 1996 (as amended and filed September 12, 1996).
(9) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits, Financial Statement Schedules and Reports on Form
8-K" of the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1997.
(10) Confidential treatment granted by order effective March 1997.
(11) Incorporated by reference to exhibits filed in response to Item
8, "Exhibits," of the Registrant's Registration Statement on Form
S-8 (File No. 333-46585), which became effective February 4,
1998.
(12) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits, Financial Statement Schedules and Reports on Form
8-K" of the Registrant's Quarterly Report on Form 10-Q for the
fiscal quarter ended June 30, 1997.
(13) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits and Reports on Form 8-K" of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 30, 1997.
(14) Filed herewith
(15) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits and Reports on Form 8-K" of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended March
28, 1998.
(16) Incorporated by reference to exhibits filed in response to Item
14, "Exhibits and Reports on Form 8-K" of the Registrant's
Quarterly Report on Form 10-Q for the fiscal quarter ended
September 26, 1998.
(17) Incorporated by reference to exhibits filed in response to Item
8, "Exhibits" of the Registrant's Statement on Form S-8 (File No.
333-46585), which became effective February 19, 1998.
(18) Incorporated by reference to exhibits filed in response to Item
8, "Exhibits of the Registrant's Statement on Form S-8 (File No.
333-57709), which became effective June 25, 1998.
<PAGE> 1
EXHIBIT 3.2
AMENDED AND RESTATED BYLAWS
OF
RESOUND CORPORATION
<PAGE> 2
AMENDED AND RESTATED BYLAWS OF
RESOUND CORPORATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ARTICLE I -- CORPORATE OFFICES........................................................ 3
1.1 Principal Office......................................................... 3
1.2 Other Offices............................................................ 3
ARTICLE II -- MEETINGS OF SHAREHOLDERS................................................ 3
2.1 Place of Meetings........................................................ 3
2.2 Annual Meeting........................................................... 3
2.3 Special Meeting.......................................................... 3
2.4 Notice of Shareholders' Meetings......................................... 4
2.5 Manner of Giving Notice; Affidavit of Notice............................. 4
2.6 Quorum................................................................... 5
2.7 Adjourned Meeting; Notice................................................ 5
2.8 Voting................................................................... 6
2.9 Validation of Meetings; Waiver of Notice; Consent........................ 6
2.10 Shareholder Action by Written Consent Without a Meeting................. 7
2.11 Record Date for Shareholder Notice; Voting; Giving Consents............. 8
2.12 Proxies................................................................. 8
2.13 Inspectors of Election.................................................. 9
2.14 Advance Notice of Shareholder Nominees.................................. 9
2.15 Advance Notice of Shareholder Business.................................. 10
ARTICLE III -- DIRECTORS.............................................................. 11
3.1 Powers................................................................... 11
3.2 Number of Directors...................................................... 11
3.3 Election and Term of Office of Directors................................. 11
3.4 Resignation and Vacancies................................................ 12
3.5 Place of Meetings; Meetings by Telephone................................. 12
3.6 Regular Meetings......................................................... 13
3.7 Special Meetings; Notice................................................. 13
3.8 Quorum................................................................... 13
3.9 Waiver of Notice......................................................... 13
3.10 Adjournment............................................................. 14
3.11 Notice of Adjournment................................................... 14
3.12 Action Without Meeting.................................................. 14
3.13 Fees and Compensation of Directors...................................... 14
3.14 Approval of Loans to Officers........................................... 14
ARTICLE IV -- COMMITTEES.............................................................. 15
4.1 Committees of Directors.................................................. 15
</TABLE>
-i-
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
4.2 Meetings and Action of Committees........................................ 15
ARTICLE V -- OFFICERS................................................................ 16
5.1 Officers................................................................. 16
5.2 Election of Officers..................................................... 16
5.3 Subordinate Officers..................................................... 16
5.4 Removal and Resignation of Officers...................................... 16
5.5 Vacancies in Offices..................................................... 16
5.6 Chairman of the Board.................................................... 17
5.7 President................................................................ 17
5.8 Vice Presidents.......................................................... 17
5.9 Secretary................................................................ 17
5.10 Chief Financial Officer................................................. 18
ARTICLE VI -- INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS..... 18
6.1 Indemnification of Directors and Officers................................ 18
6.2 Indemnification of Others................................................ 18
6.3 Payment of Expenses in Advance........................................... 19
6.4 Indemnity Not Exclusive.................................................. 19
6.5 Insurance Indemnification................................................ 19
6.6 Conflicts................................................................ 19
ARTICLE VII -- RECORDS AND REPORTS.................................................... 20
7.1 Maintenance and Inspection of Share Register............................. 20
7.2 Maintenance and Inspection of Bylaws..................................... 20
7.3 Maintenance and Inspection of Other Corporate Records.................... 21
7.4 Inspection by Directors.................................................. 21
7.5 Annual Report to Shareholders; Waiver.................................... 21
7.6 Financial Statements..................................................... 21
7.7 Representation of Shares of Other Corporations........................... 22
ARTICLE VIII -- GENERAL MATTERS....................................................... 22
8.1 Record Date for Purposes Other Than Notice and Voting.................... 22
8.2 Checks; Drafts; Evidences of Indebtedness................................ 23
8.3 Corporate Contracts and Instruments: How Executed....................... 23
8.4 Certificates for Shares.................................................. 23
8.5 Lost Certificates........................................................ 23
8.6 Construction; Definitions................................................ 24
ARTICLE IX -- AMENDMENTS.............................................................. 24
9.1 Amendment by Shareholders................................................ 24
9.2 Amendment by Directors................................................... 24
</TABLE>
-ii-
<PAGE> 4
AMENDED AND RESTATED BYLAWS
OF
RESOUND CORPORATION
ARTICLE I
CORPORATE OFFICES
1.1 Principal Office
The board of directors shall fix the location of the principal executive
office of the corporation at any place within or outside the State of
California. If the principal executive office is located outside such state and
the corporation has one or more business offices in such state, then the board
of directors shall fix and designate a principal business office in the State of
California.
1.2 Other Offices
The board of directors may at any time establish branch or subordinate
offices at any place or places where the corporation is qualified to do
business.
ARTICLE II
MEETINGS OF SHAREHOLDERS
2.1 Place of Meetings
Meetings of shareholders shall be held at any place within or outside
the State of California designated by the board of directors. In the absence of
any such designation, shareholders' meetings shall be held at the principal
executive office of the corporation.
2.2 Annual Meeting
The annual meeting of shareholders shall be held each year on a date and
at a time designated by the board of directors. In the absence of such
designation, the annual meeting of shareholders shall be held on the 3rd
Wednesday of April in each year at 2:00 p.m. However, if such day falls on a
legal holiday, then the meeting shall be held at the same time and place on the
next succeeding full business day. At the meeting, directors shall be elected,
and any other proper business may be transacted.
2.3 Special Meeting
A special meeting of the shareholders may be called at any time by the
board of directors, or by the chairman of the board, or by the president, or by
one or more shareholders holding
<PAGE> 5
shares in the aggregate entitled to cast not less than ten percent (10%) of the
votes at that meeting.
If a special meeting is called by any person or persons other than the
board of directors or the president or the chairman of the board, then the
request shall be in writing, specifying the time of such meeting and the general
nature of the business proposed to be transacted, and shall be delivered
personally or sent by registered mail or by telegraphic or other facsimile
transmission to the chairman of the board, the president, any vice president or
the secretary of the corporation. The officer receiving the request shall cause
notice to be promptly given to the shareholders entitled to vote, in accordance
with the provisions of Sections 2.4 and 2.5 of these bylaws, that a meeting will
be held at the time requested by the person or persons calling the meeting, so
long as that time is not less than thirty-five (35) nor more than sixty (60)
days after the receipt of the request. If the notice is not given within twenty
(20) days after receipt of the request, then the person or persons requesting
the meeting may give the notice. Nothing contained in this paragraph of this
Section 2.3 shall be construed as limiting, fixing or affecting the time when a
meeting of shareholders called by action of the board of directors may be held.
2.4 Notice of Shareholders' Meetings
All notices of meetings of shareholders shall be sent or otherwise given
in accordance with Section 2.5 of these bylaws not less than ten (10) (or, if
sent by third-class mail pursuant to Section 2.5 of these bylaws, thirty (30))
nor more than sixty (60) days before the date of the meeting. The notice shall
specify the place, date, and hour of the meeting and (i) in the case of a
special meeting, the general nature of the business to be transacted (no
business other than that specified in the notice may be transacted) or (ii) in
the case of the annual meeting, those matters which the board of directors, at
the time of giving the notice, intends to present for action by the shareholders
(but subject to the provisions of the next paragraph of this Section 2.4 any
proper matter may be presented at the meeting for such action). The notice of
any meeting at which directors are to be elected shall include the name of any
nominee or nominees who, at the time of the notice, the board intends to present
for election.
If action is proposed to be taken at any meeting for approval of (i) a
contract or transaction in which a director has a direct or indirect financial
interest, pursuant to Section 310 of the Corporations Code of California (the
"Code"), (ii) an amendment of the articles of incorporation, pursuant to Section
902 of the Code, (iii) a reorganization of the corporation, pursuant to Section
1201 of the Code, (iv) a voluntary dissolution of the corporation, pursuant to
Section 1900 of the Code, or (v) a distribution in dissolution other than in
accordance with the rights of outstanding preferred shares, pursuant to Section
2007 of the Code, then the notice shall also state the general nature of that
proposal.
2.5 Manner of Giving Notice; Affidavit of Notice
Written notice of any meeting of shareholders shall be given either (i)
personally or (ii) by first-class mail or (iii) by third-class mail but only if
the corporation has outstanding shares held of record by five hundred (500) or
more persons (determined as provided in Section 605 of the Code) on the record
date for the shareholders' meeting, or (iv) by telegraphic or other written
<PAGE> 6
communication. Notices not personally delivered shall be sent charges prepaid
and shall be addressed to the shareholder at the address of that shareholder
appearing on the books of the corporation or given by the shareholder to the
corporation for the purpose of notice. If no such address appears on the
corporation's books or is given, notice shall be deemed to have been given if
sent to that shareholder by mail or telegraphic or other written communication
to the corporation's principal executive office, or if published at least once
in a newspaper of general circulation in the county where that office is
located. Notice shall be deemed to have been given at the time when delivered
personally or deposited in the mail or sent by telegram or other means of
written communication.
If any notice addressed to a shareholder at the address of that
shareholder appearing on the books of the corporation is returned to the
corporation by the United States Postal Service marked to indicate that the
United States Postal Service is unable to deliver the notice to the shareholder
at that address, then all future notices or reports shall be deemed to have been
duly given without further mailing if the same shall be available to the
shareholder on written demand of the shareholder at the principal executive
office of the corporation for a period of one (1) year from the date of the
giving of the notice.
An affidavit of the mailing or other means of giving any notice of any
shareholders' meeting, executed by the secretary, assistant secretary or any
transfer agent of the corporation giving the notice, shall be prima facie
evidence of the giving of such notice.
2.6 Quorum
The presence in person or by proxy of the holders of a majority of the
shares entitled to vote thereat constitutes a quorum for the transaction of
business at all meetings of shareholders. The shareholders present at a duly
called or held meeting at which a quorum is present may continue to do business
until adjournment, notwithstanding the withdrawal of enough shareholders to
leave less than a quorum, if any action taken (other than adjournment) is
approved by at least a majority of the shares required to constitute a quorum.
2.7 Adjourned Meeting; Notice
Any shareholders' meeting, annual or special, whether or not a quorum is
present, may be adjourned from time to time by the vote of the majority of the
shares represented at that meeting, either in person or by proxy. In the absence
of a quorum, no other business may be transacted at that meeting except as
provided in Section 2.6 of these bylaws.
When any meeting of shareholders, either annual or special, is adjourned
to another time or place, notice need not be given of the adjourned meeting if
the time and place are announced at the meeting at which the adjournment is
taken. However, if a new record date for the adjourned meeting is fixed or if
the adjournment is for more than forty-five (45) days from the date set for the
original meeting, then notice of the adjourned meeting shall be given. Notice of
any such adjourned meeting shall be given to each shareholder of record entitled
to vote at the adjourned meeting in accordance with the provisions of Sections
2.4 and 2.5 of these bylaws. At
<PAGE> 7
any adjourned meeting the corporation may transact any business which might have
been transacted at the original meeting.
2.8 Voting
The shareholders entitled to vote at any meeting of shareholders shall
be determined in accordance with the provisions of Section 2.11 of these bylaws,
subject to the provisions of Sections 702 through 704 of the Code (relating to
voting shares held by a fiduciary, in the name of a corporation or in joint
ownership).
The shareholders' vote may be by voice vote or by ballot; provided,
however, that any election for directors must be by ballot if demanded by any
shareholder at the meeting and before the voting has begun.
Except as provided in the last paragraph of this Section 2.8, or as may
be otherwise provided in the articles of incorporation, each outstanding share,
regardless of class, shall be entitled to one vote on each matter submitted to a
vote of the shareholders. Any shareholder entitled to vote on any matter may
vote part of the shares in favor of the proposal and refrain from voting the
remaining shares or, except when the matter is the election of directors, may
vote them against the proposal; but, if the shareholder fails to specify the
number of shares which the shareholder is voting affirmatively, it will be
conclusively presumed that the shareholder's approving vote is with respect to
all shares which the shareholder is entitled to vote.
If a quorum is present, the affirmative vote of the majority of the
shares represented and voting at a duly held meeting (which shares voting
affirmatively also constitute at least a majority of the required quorum) shall
be the act of the shareholders, unless the vote of a greater number or a vote by
classes is required by the Code or by the articles of incorporation.
At a shareholders' meeting at which directors are to be elected, a
shareholder shall be entitled to cumulate votes (i.e. cast for any candidate a
number of votes greater than the number of votes which such shareholder normally
is entitled to cast) if the candidates' names have been placed in nomination
prior to commencement of the voting and the shareholder has given notice prior
to commencement of the voting of the shareholder's intention to cumulate votes.
If any shareholder has given such a notice, then every shareholder entitled to
vote may cumulate votes for candidates in nomination either (i) by giving one
candidate a number of votes equal to the number of directors to be elected
multiplied by the number of votes to which that shareholder's shares are
normally entitled or (ii) by distributing the shareholder's votes on the same
principle among any or all of the candidates, as the shareholder thinks fit. The
candidates receiving the highest number of affirmative votes, up to the number
of directors to be elected, shall be elected; votes against any candidate and
votes withheld shall have no legal effect.
2.9 Validation of Meetings; Waiver of Notice; Consent
The transactions of any meeting of shareholders, either annual or
special, however called and noticed, and wherever held, shall be as valid as
though had at a meeting duly held after regular call and notice, if a quorum be
present either in person or by proxy, and if, either before
<PAGE> 8
or after the meeting, each person entitled to vote, who was not present in
person or by proxy, signs a written waiver of notice or a consent to the holding
of the meeting or an approval of the minutes thereof. The waiver of notice or
consent or approval need not specify either the business to be transacted or the
purpose of any annual or special meeting of shareholders, except that if action
is taken or proposed to be taken for approval of any of those matters specified
in the second paragraph of Section 2.4 of these bylaws, the waiver of notice or
consent or approval shall state the general nature of the proposal. All such
waivers, consents, and approvals shall be filed with the corporate records or
made a part of the minutes of the meeting.
Attendance by a person at a meeting shall also constitute a waiver of
notice of and presence at that meeting, except when the person objects at the
beginning of the meeting to the transaction of any business because the meeting
is not lawfully called or convened. Attendance at a meeting is not a waiver of
any right to object to the consideration of matters required by the Code to be
included in the notice of the meeting but not so included, if that objection is
expressly made at the meeting.
2.10 Shareholder Action by Written Consent Without a Meeting
Any action which may be taken at any annual or special meeting of
shareholders may be taken without a meeting and without prior notice, if a
consent in writing, setting forth the action so taken, is signed by the holders
of outstanding shares having not less than the minimum number of votes that
would be necessary to authorize or take that action at a meeting at which all
shares entitled to vote on that action were present and voted.
In the case of election of directors, such a consent shall be effective
only if signed by the holders of all outstanding shares entitled to vote for the
election of directors. However, a director may be elected at any time to fill
any vacancy on the board of directors, provided that it was not created by
removal of a director and that it has not been filled by the directors, by the
written consent of the holders of a majority of the outstanding shares entitled
to vote for the election of directors.
All such consents shall be maintained in the corporate records. Any
shareholder giving a written consent, or the shareholder's proxy holders, or a
transferee of the shares, or a personal representative of the shareholder, or
their respective proxy holders, may revoke the consent by a writing received by
the secretary of the corporation before written consents of the number of shares
required to authorize the proposed action have been filed with the secretary.
If the consents of all shareholders entitled to vote have not been
solicited in writing and if the unanimous written consent of all such
shareholders has not been received, then the secretary shall give prompt notice
of the corporate action approved by the shareholders without a meeting. Such
notice shall be given to those shareholders entitled to vote who have not
consented in writing and shall be given in the manner specified in Section 2.5
of these bylaws. In the case of approval of (i) a contract or transaction in
which a director has a direct or indirect financial interest, pursuant to
Section 310 of the Code, (ii) indemnification of a corporate "agent," pursuant
to Section 317 of the Code, (iii) a reorganization of the corporation, pursuant
to Section 1201 of the Code, and (iv) a distribution in dissolution other than
in accordance with the rights of
<PAGE> 9
outstanding preferred shares, pursuant to Section 2007 of the Code, the notice
shall be given at least ten (10) days before the consummation of any action
authorized by that approval.
2.11 Record Date for Shareholder Notice; Voting; Giving Consents
For purposes of determining the shareholders entitled to notice of any
meeting or to vote thereat or entitled to give consent to corporate action
without a meeting, the board of directors may fix, in advance, a record date,
which shall not be more than sixty (60) days nor less than ten (10) days before
the date of any such meeting nor more than sixty (60) days before any such
action without a meeting, and in such event only shareholders of record on the
date so fixed are entitled to notice and to vote or to give consents, as the
case may be, notwithstanding any transfer of any shares on the books of the
corporation after the record date, except as otherwise provided in the Code.
If the board of directors does not so fix a record date:
(a) the record date for determining shareholders entitled to
notice of or to vote at a meeting of shareholders shall be at the close of
business on the business day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the business day next preceding
the day on which the meeting is held; and
(b) the record date for determining shareholders entitled to give
consent to corporate action in writing without a meeting, (i) when no prior
action by the board has been taken, shall be the day on which the first written
consent is given, or (ii) when prior action by the board has been taken, shall
be at the close of business on the day on which the board adopts the resolution
relating to that action, or the sixtieth (60th) day before the date of such
other action, whichever is later.
The record date for any other purpose shall be as provided in
Article VIII of these bylaws.
2.12 Proxies
Every person entitled to vote for directors, or on any other matter,
shall have the right to do so either in person or by one or more agents
authorized by a written proxy signed by the person and filed with the secretary
of the corporation. A proxy shall be deemed signed if the shareholder's name is
placed on the proxy (whether by manual signature, typewriting, telegraphic
transmission or otherwise) by the shareholder or the shareholder's
attorney-in-fact. A validly executed proxy which does not state that it is
irrevocable shall continue in full force and effect unless (i) the person who
executed the proxy revokes it prior to the time of voting by delivering a
writing to the corporation stating that the proxy is revoked or by executing a
subsequent proxy and presenting it to the meeting or by voting in person at the
meeting, or (ii) written notice of the death or incapacity of the maker of that
proxy is received by the corporation before the vote pursuant to that proxy is
counted; provided, however, that no proxy shall be valid after the expiration of
eleven (11) months from the date of the proxy, unless otherwise provided in the
proxy. The dates contained on the forms of proxy presumptively
<PAGE> 10
determine the order of execution, regardless of the postmark dates on the
envelopes in which they are mailed. The revocability of a proxy that states on
its face that it is irrevocable shall be governed by the provisions of Sections
705(e) and 705(f) of the Code.
2.13 Inspectors of Election
Before any meeting of shareholders, the board of directors may appoint
an inspector or inspectors of election to act at the meeting or its adjournment.
If no inspector of election is so appointed, then the chairman of the meeting
may, and on the request of any shareholder or a shareholder's proxy shall,
appoint an inspector or inspectors of election to act at the meeting. The number
of inspectors shall be either one (1) or three (3). If inspectors are appointed
at a meeting pursuant to the request of one (1) or more shareholders or proxies,
then the holders of a majority of shares or their proxies present at the meeting
shall determine whether one (1) or three (3) inspectors are to be appointed. If
any person appointed as inspector fails to appear or fails or refuses to act,
then the chairman of the meeting may, and upon the request of any shareholder or
a shareholder's proxy shall, appoint a person to fill that vacancy.
Such inspectors shall:
(a) determine the number of shares outstanding and the voting
power of each, the number of shares represented at the meeting, the existence of
a quorum, and the authenticity, validity, and effect of proxies;
(b) receive votes, ballots or consents;
(c) hear and determine all challenges and questions in any way
arising in connection with the right to vote;
(d) count and tabulate all votes or consents;
(e) determine when the polls shall close;
(f) determine the result; and
(g) do any other acts that may be proper to conduct the election
or vote with fairness to all shareholders.
2.14 Advance Notice of Shareholder Nominees
Nominations of persons for election to the board of directors of the
corporation may be made at a meeting of shareholders by or at the direction of
the board of directors or by any shareholder of the corporation entitled to vote
in the election of the directors at the meeting who complies with the notice
procedures set forth in this Section. Such nominations, other than those made by
or at the direction of the board of directors, shall be made pursuant to timely
notice in writing to the Secretary of the corporation. To be timely, a
shareholder's notice shall be delivered to or mailed not less than twenty (20)
days nor more than sixty (60) days prior to the
<PAGE> 11
meeting; provided, however, that in the event that less than thirty (30) days
notice or prior public disclosure of the date of the meeting is given or made to
shareholders, notice by the shareholder, to be timely, must be so received not
later than the close of business on the tenth day following the day on which
such notice of the date of the meeting was mailed or such public disclosure was
made. Such shareholder's notice shall set forth (a) as to each person, if any,
whom the shareholder proposes to nominate for election or re-election as
director: (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the corporation which are beneficially owned by
such person, (iv) any other information relating to such person that is required
by law to be disclosed in solicitations of proxies for election of directors,
and (v) such person's written consent to being named as a nominee and to serving
as a director if elected; and (b) as to the shareholder giving the notice : (i)
the name and address, as they appear on the corporation's books of such
shareholder, (ii) the class and number of shares of this corporation which are
beneficially owned by such shareholder, and (iii) a description of all
arrangements or understandings between such shareholder and each nominee and any
other person or persons (naming such person or persons) relating to the
nomination. At the request of the board of directors any person nominated by the
Board for election as a director shall furnish to the Secretary of the
corporation that information required to be set forth in the shareholder's
notice of nomination which pertains to the nominee. No person shall be eligible
for election as a director of the corporation unless nominated in accordance
with the procedures set forth in this Section. The chairman of the meeting
shall, if the facts warrant, determine and declare at the meeting that a
nomination was not made in accordance with the procedures prescribed by these
bylaws, and if he should so determine, he shall so declare at the meeting and
the defective nomination shall be disregarded.
2.15 Advance Notice of Shareholder Business
At an annual meeting of the shareholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be properly
brought before an annual meeting, business must be: (a) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the board
of directors, (b) otherwise properly brought before the meeting by or at the
direction of the board of directors, or (c) otherwise properly brought before
the meeting by a shareholder. Business to be brought before an annual meeting by
a shareholder shall not be considered properly brought if the shareholder has
not given timely notice thereof in writing to the Secretary of the corporation.
To be timely, a shareholder's notice shall be delivered to or mailed not less
than twenty (20) days nor more than sixty (60) days prior to the meeting;
provided, however, that in the event less than thirty (30) days notice or prior
public disclosure of the date of the meeting is given or made to shareholders,
notice by the shareholder, to be timely, must be so received not later than the
close of business on the tenth day following the day on which such notice of the
date of the meeting was mailed or such public disclosure was made. Such
shareholder's notice shall set forth as to each matter the shareholder proposes
to bring before the annual meeting: (i) a brief description of the business
desired to be brought before the annual meeting and the reasons for conduction
of such business at the annual meeting, (ii) the name and address of the
shareholder proposing such business, (iii) the class and number of shares of the
corporation which are beneficially owned by the shareholder, (iv) any material
<PAGE> 12
interest of the shareholder in such business, and (v) any other information that
is required by law to be provided by the shareholder in his capacity as a
proponent of a shareholder proposal. Notwithstanding anything in these bylaws to
the contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this Section. The chairman of the
annual meeting shall, if the facts warrant, determine and declare at the meeting
that business was not properly brought before the meeting and in accordance with
the provisions of this Section, and, if he should so determine, he shall so
declare at the meeting that any such business not properly brought before the
meeting shall not be transacted.
ARTICLE III
DIRECTORS
3.1 Powers
Subject to the provisions of the Code and any limitations in the
articles of incorporation and these bylaws relating to action required to be
approved by the shareholders or by the outstanding shares, the business and
affairs of the corporation shall be managed and all corporate powers shall be
exercised by or under the direction of the board of directors.
3.2 Number of Directors
The number of directors of the corporation shall be not less than five
(5) nor more than nine (9). The exact number of directors shall be six (6) until
changed, within the limits specified above, by a bylaw amending this Section
3.2, duly adopted by the board of directors or by the shareholders. The
indefinite number of directors may be changed, or a definite number may be fixed
without provision for an indefinite number by a duly adopted amendment to the
articles of incorporation or by an amendment to this bylaw duly adopted by the
vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that an amendment reducing the fixed number
or the minimum number of directors to a number less than five (5) cannot be
adopted if the votes cast against its adoption at a meeting, or the shares not
consenting in the case of an action by written consent, are equal to more than
sixteen and two-thirds percent (16-2/3%) of the outstanding shares entitled to
vote thereon. No amendment may change the stated maximum number of authorized
directors to a number greater than two (2) times the stated minimum number of
directors minus one (1).
No reduction of the authorized number of directors shall have the effect
of removing any director before that director's term of office expires.
3.3 Election and Term of Office of Directors
Directors shall be elected at each annual meeting of shareholders to
hold office until the next annual meeting. Each director, including a director
elected to fill a vacancy, shall hold
<PAGE> 13
office until the expiration of the term for which elected and until a successor
has been elected and qualified.
3.4 Resignation and Vacancies
Any director may resign effective on giving written notice to the
chairman of the board, the president, the secretary or the board of directors,
unless the notice specifies a later time for that resignation to become
effective. If the resignation of a director is effective at a future time, the
board of directors may elect a successor to take office when the resignation
becomes effective.
Vacancies in the board of directors may be filled by a majority of the
remaining directors, even if less than a quorum, or by a sole remaining
director; however, a vacancy created by the removal of a director by the vote or
written consent of the shareholders or by court order may be filled only by the
affirmative vote of a majority of the shares represented and voting at a duly
held meeting at which a quorum is present (which shares voting affirmatively
also constitute a majority of the required quorum), or by the unanimous written
consent of all shares entitled to vote thereon. Each director so elected shall
hold office until the next annual meeting of the shareholders and until a
successor has been elected and qualified.
A vacancy or vacancies in the board of directors shall be deemed to
exist (i) in the event of the death, resignation or removal of any director,
(ii) if the board of directors by resolution declares vacant the office of a
director who has been declared of unsound mind by an order of court or convicted
of a felony, (iii) if the authorized number of directors is increased, or (iv)
if the shareholders fail, at any meeting of shareholders at which any director
or directors are elected, to elect the number of directors to be elected at that
meeting.
The shareholders may elect a director or directors at any time to fill
any vacancy or vacancies not filled by the directors, but any such election
other than to fill a vacancy created by removal, if by written consent, shall
require the consent of the holders of a majority of the outstanding shares
entitled to vote thereon.
3.5 Place of Meetings; Meetings by Telephone
Regular meetings of the board of directors may be held at any place
within or outside the State of California that has been designated from time to
time by resolution of the board. In the absence of such a designation, regular
meetings shall be held at the principal executive office of the corporation.
Special meetings of the board may be held at any place within or outside the
State of California that has been designated in the notice of the meeting or, if
not stated in the notice or if there is no notice, at the principal executive
office of the corporation.
Any meeting, regular or special, may be held by conference telephone or
similar communication equipment, so long as all directors participating in the
meeting can hear one another; and all such directors shall be deemed to be
present in person at the meeting.
<PAGE> 14
3.6 Regular Meetings
Regular meetings of the board of directors may be held without notice if
the times of such meetings are fixed by the board of directors.
3.7 Special Meetings; Notice
Special meetings of the board of directors for any purpose or purposes
may be called at any time by the chairman of the board, the president, any vice
president, the secretary or any two directors.
Notice of the time and place of special meetings shall be delivered
personally or by telephone to each director or sent by first-class mail or
telegram, charges prepaid, addressed to each director at that director's address
as it is shown on the records of the corporation. If the notice is mailed, it
shall be deposited in the United States mail at least four (4) days before the
time of the holding of the meeting. If the notice is delivered personally or by
telephone or telegram, it shall be delivered personally or by telephone or to
the telegraph company at least forty-eight (48) hours before the time of the
holding of the meeting. Any oral notice given personally or by telephone may be
communicated either to the director or to a person at the office of the director
who the person giving the notice has reason to believe will promptly communicate
it to the director. The notice need not specify the purpose or the place of the
meeting, if the meeting is to be held at the principal executive office of the
corporation.
3.8 Quorum
A majority of the authorized number of directors shall constitute a
quorum for the transaction of business, except to adjourn as provided in Section
3.10 of these bylaws. Every act or decision done or made by a majority of the
directors present at a duly held meeting at which a quorum is present shall be
regarded as the act of the board of directors, subject to the provisions of
Section 310 of the Code (as to approval of contracts or transactions in which a
director has a direct or indirect material financial interest), Section 311 of
the Code (as to appointment of committees), Section 317(e) of the Code (as to
indemnification of directors), the articles of incorporation, and other
applicable law.
A meeting at which a quorum is initially present may continue to
transact business notwithstanding the withdrawal of directors, if any action
taken is approved by at least a majority of the required quorum for that
meeting.
3.9 Waiver of Notice
Notice of a meeting need not be given to any director (i) who signs a
waiver of notice or a consent to holding the meeting or an approval of the
minutes thereof, whether before or after the meeting, or (ii) who attends the
meeting without protesting, prior thereto or at its commencement, the lack of
notice to such directors. All such waivers, consents, and approvals shall be
filed with the corporate records or made part of the minutes of the meeting. A
waiver of notice need not specify the purpose of any regular or special meeting
of the board of directors.
<PAGE> 15
3.10 Adjournment
A majority of the directors present, whether or not constituting a
quorum, may adjourn any meeting to another time and place.
3.11 Notice of Adjournment
Notice of the time and place of holding an adjourned meeting need not be
given unless the meeting is adjourned for more than twenty-four (24) hours. If
the meeting is adjourned for more than twenty-four (24) hours, then notice of
the time and place of the adjourned meeting shall be given before the adjourned
meeting takes place, in the manner specified in Section 3.7 of these bylaws, to
the directors who were not present at the time of the adjournment.
3.12 Action Without Meeting
Any action required or permitted to be taken by the board of directors
may be taken without a meeting, provided that all members of the board
individually or collectively consent in writing to that action. Such action by
written consent shall have the same force and effect as a unanimous vote of the
board of directors. Such written consent and any counterparts thereof shall be
filed with the minutes of the proceedings of the board.
3.13 Fees and Compensation of Directors
Directors and members of committees may receive such compensation, if
any, for their services and such reimbursement of expenses as may be fixed or
determined by resolution of the board of directors. This Section 3.13 shall not
be construed to preclude any director from serving the corporation in any other
capacity as an officer, agent, employee or otherwise and receiving compensation
for those services.
3.14 Approval of Loans to Officers
The corporation may, upon the approval of the board of directors alone,
make loans of money or property to, or guarantee the obligations of, any officer
of the corporation or its parent or subsidiary, whether or not a director, or
adopt an employee benefit plan or plans authorizing such loans or guaranties
provided that (i) the board of directors determines that such a loan or guaranty
or plan may reasonably be expected to benefit the corporation, (ii) the
corporation has outstanding shares held of record by 100 or more persons
(determined as provided in Section 605 of the Code) on the date of approval by
the board of directors, and (iii) the approval of the board of directors is by a
vote sufficient without counting the vote of any interested director or
directors.
<PAGE> 16
ARTICLE IV
COMMITTEES
4.1 Committees of Directors
The board of directors may, by resolution adopted by a majority of the
authorized number of directors, designate one (1) or more committees, each
consisting of two or more directors, to serve at the pleasure of the board. The
board may designate one (1) or more directors as alternate members of any
committee, who may replace any absent member at any meeting of the committee.
The appointment of members or alternate members of a committee requires the vote
of a majority of the authorized number of directors. Any committee, to the
extent provided in the resolution of the board, shall have all the authority of
the board, except with respect to:
(a) the approval of any action which, under the Code, also
requires shareholders' approval or approval of the outstanding shares;
(b) the filling of vacancies on the board of directors or in any
committee;
(c) the fixing of compensation of the directors for serving on
the board or any committee;
(d) the amendment or repeal of these bylaws or the adoption of
new bylaws;
(e) the amendment or repeal of any resolution of the board of
directors which by its express terms is not so amendable or repealable;
(f) a distribution to the shareholders of the corporation, except
at a rate or in a periodic amount or within a price range determined by the
board of directors; or
(g) the appointment of any other committees of the board of
directors or the members of such committees.
4.2 Meetings and Action of Committees
Meetings and actions of committees shall be governed by, and held and
taken in accordance with, the provisions of Article III of these bylaws, Section
3.5 (place of meetings), Section 3.6 (regular meetings), Section 3.7 (special
meetings and notice), Section 3.8 (quorum), Section 3.9 (waiver of notice),
Section 3.10 (adjournment), Section 3.11 (notice of adjournment), and Section
3.12 (action without meeting), with such changes in the context of those bylaws
as are necessary to substitute the committee and its members for the board of
directors and its members; provided, however, that the time of regular meetings
of committees may be determined either by resolution of the board of directors
or by resolution of the committee, that special meetings of committees may also
be called by resolution of the board of directors, and that notice of special
meetings of committees shall also be given to all alternate members, who shall
have the right to attend all meetings of the committee. The board of directors
may adopt rules for the government of any committee not inconsistent with the
provisions of these bylaws.
<PAGE> 17
ARTICLE V
OFFICERS
5.1 Officers
The officers of the corporation shall be a president, a secretary, and a
chief financial officer. The corporation may also have, at the discretion of the
board of directors, a chairman of the board, one or more vice presidents, one or
more assistant secretaries, one or more assistant treasurers, and such other
officers as may be appointed in accordance with the provisions of Section 5.3 of
these bylaws. Any number of offices may be held by the same person.
5.2 Election of Officers
The officers of the corporation, except such officers as may be
appointed in accordance with the provisions of Section 5.3 or Section 5.5 of
these bylaws, shall be chosen by the board, subject to the rights, if any, of an
officer under any contract of employment.
5.3 Subordinate Officers
The board of directors may appoint, or may empower the president to
appoint, such other officers as the business of the corporation may require,
each of whom shall hold office for such period, have such authority, and perform
such duties as are provided in these bylaws or as the board of directors may
from time to time determine.
5.4 Removal and Resignation of Officers
Subject to the rights, if any, of an officer under any contract of
employment, any officer may be removed, either with or without cause, by the
board of directors at any regular or special meeting of the board or, except in
case of an officer chosen by the board of directors, by any officer upon whom
such power of removal may be conferred by the board of directors.
Any officer may resign at any time by giving written notice to the
corporation. Any resignation shall take effect at the date of the receipt of
that notice or at any later time specified in that notice; and, unless otherwise
specified in that notice, the acceptance of the resignation shall not be
necessary to make it effective. Any resignation is without prejudice to the
rights, if any, of the corporation under any contract to which the officer is a
party.
5.5 Vacancies in Offices
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
these bylaws for regular appointments to that office.
<PAGE> 18
5.6 Chairman of the Board
The chairman of the board, if such an officer be elected, shall, if
present, preside at meetings of the board of directors and exercise and perform
such other powers and duties as may from time to time be assigned to him by the
board of directors or as may be prescribed by these bylaws. If there is no
president, then the chairman of the board shall also be the chief executive
officer of the corporation and shall have the powers and duties prescribed in
Section 5.7 of these bylaws.
5.7 President
Subject to such supervisory powers, if any, as may be given by the board
of directors to the chairman of the board, if there be such an officer, the
president shall be the chief executive officer of the corporation and shall,
subject to the control of the board of directors, have general supervision,
direction, and control of the business and the officers of the corporation. He
shall preside at all meetings of the shareholders and, in the absence or
non-existence of a chairman of the board, at all meetings of the board of
directors. He shall have the general powers and duties of management usually
vested in the office of president of a corporation, and shall have such other
powers and duties as may be prescribed by the board of directors or these
bylaws.
5.8 Vice Presidents
In the absence or disability of the president, the vice presidents, if
any, in order of their rank as fixed by the board of directors or, if not
ranked, a vice president designated by the board of directors, shall perform all
the duties of the president and when so acting shall have all the powers of, and
be subject to all the restrictions upon, the president. The vice presidents
shall have such other powers and perform such other duties as from time to time
may be prescribed for them respectively by the board of directors, these bylaws,
the president or the chairman of the board.
5.9 Secretary
The secretary shall keep or cause to be kept, at the principal executive
office of the corporation or such other place as the board of directors may
direct, a book of minutes of all meetings and actions of directors, committees
of directors and shareholders. The minutes shall show the time and place of each
meeting, whether regular or special (and, if special, how authorized and the
notice given), the names of those present at directors' meetings or committee
meetings, the number of shares present or represented at shareholders' meetings,
and the proceedings thereof.
The secretary shall keep, or cause to be kept, at the principal
executive office of the corporation or at the office of the corporation's
transfer agent or registrar, as determined by resolution of the board of
directors, a share register, or a duplicate share register, showing the names of
all shareholders and their addresses, the number and classes of shares held by
each, the number and date of certificates evidencing such shares, and the number
and date of cancellation of every certificate surrendered for cancellation.
<PAGE> 19
The secretary shall give, or cause to be given, notice of all meetings
of the shareholders and of the board of directors required to be given by law or
by these bylaws. He shall keep the seal of the corporation, if one be adopted,
in safe custody and shall have such other powers and perform such other duties
as may be prescribed by the board of directors or by these bylaws.
5.10 Chief Financial Officer
The chief financial officer shall keep and maintain, or cause to be kept
and maintained, adequate and correct books and records of accounts of the
properties and business transactions of the corporation, including accounts of
its assets, liabilities, receipts, disbursements, gains, losses, capital,
retained earnings, and shares. The books of account shall at all reasonable
times be open to inspection by any director.
The chief financial officer shall deposit all money and other valuables
in the name and to the credit of the corporation with such depositories as may
be designated by the board of directors. He shall disburse the funds of the
corporation as may be ordered by the board of directors, shall render to the
president and directors, whenever they request it, an account of all of his
transactions as chief financial officer and of the financial condition of the
corporation, and shall have such other powers and perform such other duties as
may be prescribed by the board of directors or these bylaws.
ARTICLE VI
INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS
6.1 Indemnification of Directors and Officers
The corporation shall, to the maximum extent and in the manner permitted
by the Code, indemnify each of its directors and officers against expenses (as
defined in Section 317(a) of the Code), judgments, fines, settlements, and other
amounts actually and reasonably incurred in connection with any proceeding (as
defined in Section 317(a) of the Code), arising by reason of the fact that such
person is or was an agent of the corporation. For purposes of this Article VI, a
"director" or "officer" of the corporation includes any person (i) who is or was
a director or officer of the corporation, (ii) who is or was serving at the
request of the corporation as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise, or (iii) who was a
director or officer of a corporation which was a predecessor corporation of the
corporation or of another enterprise at the request of such predecessor
corporation.
6.2 Indemnification of Others
The corporation shall have the power, to the extent and in the manner
permitted by the Code, to indemnify each of its employees and agents (other than
directors and officers) against expenses (as defined in Section 317(a) of the
Code), judgments, fines, settlements, and other amounts actually and reasonably
incurred in connection with any proceeding (as defined in Section 317(a) of the
Code) , arising by reason of the fact that such person is or was an agent of the
corporation. For purposes of this Article VI, an "employee" or "agent" of the
corporation
<PAGE> 20
(other than a director or officer) includes any person (i) who is or was an
employee or agent of the corporation, (ii) who is or was serving at the request
of the corporation as an employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, or (iii) who was an employee or agent
of a corporation which was a predecessor corporation of the corporation or of
another enterprise at the request of such predecessor corporation.
6.3 Payment of Expenses in Advance
Expenses incurred in defending any civil or criminal action or
proceeding for which indemnification is required pursuant to Section 6.1 or for
which indemnification is permitted pursuant to Section 6.2 following
authorization thereof by the board of directors shall be paid by the corporation
in advance of the final disposition of such action or proceeding upon receipt of
an undertaking by or on behalf of the indemnified party to repay such amount if
it shall ultimately be determined that the indemnified party is not entitled to
be indemnified as authorized in this Article VI.
6.4 Indemnity Not Exclusive
The indemnification provided by this Article VI shall not be deemed
exclusive of any other rights to which those seeking indemnification may be
entitled under any bylaw, agreement, vote of shareholders or disinterested
directors or otherwise, both as to action in an official capacity and as to
action in another capacity while holding such office, to the extent that such
additional rights to indemnification are authorized in the Articles of
Incorporation.
6.5 Insurance Indemnification
The corporation shall have the power to purchase and maintain insurance
on behalf of any person who is or was a director, officer, employee or agent of
the corporation against any liability asserted against or incurred by such
person in such capacity or arising out of such person's status as such, whether
or not the corporation would have the power to indemnify him against such
liability under the provisions of this Article VI.
6.6 Conflicts
No indemnification or advance shall be made under this Article VI,
except where such indemnification or advance is mandated by law or the order,
judgment or decree of any court of competent jurisdiction, in any circumstance
where it appears:
(1) That it would be inconsistent with a provision of the Articles of
Incorporation, these bylaws, a resolution of the shareholders or an agreement in
effect at the time of the accrual of the alleged cause of the action asserted in
the proceeding in which the expenses were incurred or other amounts were paid,
which prohibits or otherwise limits indemnification; or
(2) That it would be inconsistent with any condition expressly imposed
by a court in approving a settlement.
<PAGE> 21
ARTICLE VII
RECORDS AND REPORTS
7.1 Maintenance and Inspection of Share Register
The corporation shall keep either at its principal executive office or
at the office of its transfer agent or registrar (if either be appointed), as
determined by resolution of the board of directors, a record of its shareholders
listing the names and addresses of all shareholders and the number and class of
shares held by each shareholder.
A shareholder or shareholders of the corporation who holds at least five
percent (5%) in the aggregate of the outstanding voting shares of the
corporation or who holds at least one percent (1%) of such voting shares and has
filed a Schedule 14B with the Securities and Exchange Commission relating to the
election of directors, may (i) inspect and copy the records of shareholders'
names, addresses, and shareholdings during usual business hours on five (5)
days' prior written demand on the corporation, (ii) obtain from the transfer
agent of the corporation, on written demand and on the tender of such transfer
agent's usual charges for such list, a list of the names and addresses of the
shareholders who are entitled to vote for the election of directors, and their
shareholdings, as of the most recent record date for which that list has been
compiled or as of a date specified by the shareholder after the date of demand.
Such list shall be made available to any such shareholder by the transfer agent
on or before the later of five (5) days after the demand is received or five (5)
days after the date specified in the demand as the date as of which the list is
to be compiled.
The record of shareholders shall also be open to inspection on the
written demand of any shareholder or holder of a voting trust certificate, at
any time during usual business hours, for a purpose reasonably related to the
holder's interests as a shareholder or as the holder of a voting trust
certificate.
Any inspection and copying under this Section 7.1 may be made in person
or by an agent or attorney of the shareholder or holder of a voting trust
certificate making the demand.
7.2 Maintenance and Inspection of Bylaws
The corporation shall keep at its principal executive office or, if its
principal executive office is not in the State of California, at its principal
business office in California the original or a copy of these bylaws as amended
to date, which bylaws shall be open to inspection by the shareholders at all
reasonable times during office hours. If the principal executive office of the
corporation is outside the State of California and the corporation has no
principal business office in such state, then the secretary shall, upon the
written request of any shareholder, furnish to that shareholder a copy of these
bylaws as amended to date.
<PAGE> 22
7.3 Maintenance and Inspection of Other Corporate Records
The accounting books and records and the minutes of proceedings of the
shareholders, of the board of directors, and of any committee or committees of
the board of directors shall be kept at such place or places as are designated
by the board of directors or, in absence of such designation, at the principal
executive office of the corporation. The minutes shall be kept in written form,
and the accounting books and records shall be kept either in written form or in
any other form capable of being converted into written form.
The minutes and accounting books and records shall be open to inspection
upon the written demand of any shareholder or holder of a voting trust
certificate, at any reasonable time during usual business hours, for a purpose
reasonably related to the holder's interests as a shareholder or as the holder
of a voting trust certificate. The inspection may be made in person or by an
agent or attorney and shall include the right to copy and make extracts. Such
rights of inspection shall extend to the records of each subsidiary corporation
of the corporation.
7.4 Inspection by Directors
Every director shall have the absolute right at any reasonable time to
inspect all books, records, and documents of every kind as well as the physical
properties of the corporation and each of its subsidiary corporations. Such
inspection by a director may be made in person or by an agent or attorney. The
right of inspection includes the right to copy and make extracts of documents.
7.5 Annual Report to Shareholders; Waiver
The board of directors shall cause an annual report to be sent to the
shareholders not later than one hundred twenty (120) days after the close of the
fiscal year adopted by the corporation. Such report shall be sent at least
fifteen (15) days (or, if sent by third-class mail, thirty-five (35) days)
before the annual meeting of shareholders to be held during the next fiscal year
and in the manner specified in Section 2.5 of these bylaws for giving notice to
shareholders of the corporation.
The annual report shall contain (i) a balance sheet as of the end of the
fiscal year, (ii) an income statement, (iii) a statement of changes in financial
position for the fiscal year, and (iv) any report of independent accountants or,
if there is no such report, the certificate of an authorized officer of the
corporation that the statements were prepared without audit from the books and
records of the corporation.
The foregoing requirement of an annual report shall be waived so long as
the shares of the corporation are held by fewer than one hundred (100) holders
of record.
7.6 Financial Statements
If no annual report for the fiscal year has been sent to shareholders,
then the corporation shall, upon the written request of any shareholder made
more than one hundred twenty (120)
<PAGE> 23
days after the close of such fiscal year, deliver or mail to the person making
the request, within thirty (30) days thereafter, a copy of a balance sheet as of
the end of such fiscal year and an income statement and statement of changes in
financial position for such fiscal year.
If a shareholder or shareholders holding at least five percent (5%) of
the outstanding shares of any class of stock of the corporation makes a written
request to the corporation for an income statement of the corporation for the
three-month, six-month or nine-month period of the then current fiscal year
ended more than thirty (30) days before the date of the request, and for a
balance sheet of the corporation as of the end of that period, then the chief
financial officer shall cause that statement to be prepared, if not already
prepared, and shall deliver personally or mail that statement or statements to
the person making the request within thirty (30) days after the receipt of the
request. If the corporation has not sent to the shareholders its annual report
for the last fiscal year, the statements referred to in the first paragraph of
this Section 7.6 shall likewise be delivered or mailed to the shareholder or
shareholders within thirty (30) days after the request.
The quarterly income statements and balance sheets referred to in this
section shall be accompanied by the report, if any, of any independent
accountants engaged by the corporation or by the certificate of an authorized
officer of the corporation that the financial statements were prepared without
audit from the books and records of the corporation.
7.7 Representation of Shares of Other Corporations
The chairman of the board, the president, any vice president, the chief
financial officer, the secretary or assistant secretary of this corporation, or
any other person authorized by the board of directors or the president or a vice
president, is authorized to vote, represent, and exercise on behalf of this
corporation all rights incident to any and all shares of any other corporation
or corporations standing in the name of this corporation. The authority herein
granted may be exercised either by such person directly or by any other person
authorized to do so by proxy or power of attorney duly executed by such person
having the authority.
ARTICLE VIII
GENERAL MATTERS
8.1 Record Date for Purposes Other Than Notice and Voting
For purposes of determining the shareholders entitled to receive payment
of any dividend or other distribution or allotment of any rights or the
shareholders entitled to exercise any rights in respect of any other lawful
action (other than action by shareholders by written consent without a meeting),
the board of directors may fix, in advance, a record date, which shall not be
more than sixty (60) days before any such action. In that case, only
shareholders of record at the close of business on the date so fixed are
entitled to receive the dividend, distribution or allotment of rights, or to
exercise such rights, as the case may be, notwithstanding any transfer of any
shares on the books of the corporation after the record date so fixed, except as
otherwise provided in the Code.
<PAGE> 24
If the board of directors does not so fix a record date, then the record
date for determining shareholders for any such purpose shall be at the close of
business on the day on which the board adopts the applicable resolution or the
sixtieth (60th) day before the date of that action, whichever is later.
8.2 Checks; Drafts; Evidences of Indebtedness
From time to time, the board of directors shall determine by resolution
which person or persons may sign or endorse all checks, drafts, other orders for
payment of money, notes or other evidences of indebtedness that are issued in
the name of or payable to the corporation, and only the persons so authorized
shall sign or endorse those instruments.
8.3 Corporate Contracts and Instruments: How Executed
The board of directors, except as otherwise provided in these bylaws,
may authorize any officer or officers, or agent or agents, to enter into any
contract or execute any instrument in the name of and on behalf of the
corporation; such authority may be general or confined to specific instances.
Unless so authorized or ratified by the board of directors or within the agency
power of an officer, no officer, agent or employee shall have any power or
authority to bind the corporation by any contract or engagement or to pledge its
credit or to render it liable for any purpose or for any amount.
8.4 Certificates for Shares
A certificate or certificates for shares of the corporation shall be
issued to each shareholder when any of such shares are fully paid. The board of
directors may authorize the issuance of certificates for shares partly paid
provided that these certificates shall state the total amount of the
consideration to be paid for them and the amount actually paid. All certificates
shall be signed in the name of the corporation by the chairman of the board or
the vice chairman of the board or the president or a vice president and by the
chief financial officer or an assistant treasurer or the secretary or an
assistant secretary, certifying the number of shares and the class or series of
shares owned by the shareholder. Any or all of the signatures on the certificate
may be facsimile.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on a certificate ceases to be that officer,
transfer agent or registrar before that certificate is issued, it may be issued
by the corporation with the same effect as if that person were an officer,
transfer agent or registrar at the date of issue.
8.5 Lost Certificates
Except as provided in this Section 8.5, no new certificates for shares
shall be issued to replace a previously issued certificate unless the latter is
surrendered to the corporation and canceled at the same time. The board of
directors may, in case any share certificate or certificate for any other
security is lost, stolen or destroyed, authorize the issuance of replacement
certificates on such terms and conditions as the board may require; the board
may require
<PAGE> 25
indemnification of the corporation secured by a bond or other adequate security
sufficient to protect the corporation against any claim that may be made against
it, including any expense or liability, on account of the alleged loss, theft or
destruction of the certificate or the issuance of the replacement certificate.
8.6 Construction; Definitions
Unless the context requires otherwise, the general provisions, rules of
construction, and definitions in the Code shall govern the construction of these
bylaws. Without limiting the generality of this provision, the singular number
includes the plural, the plural number includes the singular, and the term
"person" includes both a corporation and a natural person.
ARTICLE IX
AMENDMENTS
9.1 Amendment by Shareholders
New bylaws may be adopted or these bylaws may be amended or repealed by
the vote or written consent of holders of a majority of the outstanding shares
entitled to vote; provided, however, that if the articles of incorporation of
the corporation set forth the number of authorized directors of the corporation,
then the authorized number of directors may be changed only by an amendment of
the articles of incorporation.
9.2 Amendment by Directors
Subject to the rights of the shareholders as provided in Section 9.1 of
these bylaws, bylaws, other than a bylaw or an amendment of a bylaw changing the
authorized number of directors (except to fix the authorized number of directors
pursuant to a bylaw providing for a variable number of directors), may be
adopted, amended or repealed by the board of directors.
Certificate by Secretary of Adoption by Incorporator
The undersigned hereby certifies that he is the duly elected, qualified,
and acting Secretary of Resound Corporation and that the foregoing Bylaws,
comprising twenty-three (23) pages, were adopted as the Bylaws of the
corporation on May 2, 1984, by the person appointed in the Articles of
Incorporation to act as the Incorporator of the corporation.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand and
affixed the corporate seal this 2nd day of May 1984.
-------------------------------
Craig W. Johnson, Secretary
<PAGE> 26
CERTIFICATE OF AMENDMENT OF BYLAWS
OF
RESOUND CORPORATION
The undersigned, being the duly acting and appointed Secretary of
ReSound Corporation, a California corporation, hereby certifies that the Bylaws
of this corporation were amended effective as of October 23, 1998 to amend the
second sentence of Article III, Section 3.2 to read in its entirety as follows:
"The exact number of directors shall be seven (7) until
changed, within the limits specified above, by a bylaw
amending this Section 3.2, duly adopted by the board of
directors or by the shareholders."
Dated: October 23, 1998 ________________________
Elias J. Blawie
Secretary
<PAGE> 1
EXHIBIT 10.38
RESOUND CORPORATION
LOAN AND SECURITY AGREEMENT
<PAGE> 2
This LOAN AND SECURITY AGREEMENT (the "Agreement") is entered into as of
February 12, 1999, by and between SILICON VALLEY BANK ("Bank") and ReSound
Corporation ("Borrower").
RECITALS
Borrower wishes to obtain credit from time to time from Bank, and Bank
desires to extend credit to Borrower. This Agreement sets forth the terms on
which Bank will advance credit to Borrower, and Borrower will repay the amounts
owing to Bank.
AGREEMENT
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 Definitions. As used in this Agreement, the following terms
shall have the following definitions:
"Accounts" means all presently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods (including, without
limitation, the licensing of software and other technology) or the rendering of
services by Borrower, whether or not earned by performance, and any and all
credit insurance, guaranties, and other security therefor, as well as all
merchandise returned to or reclaimed by Borrower and Borrower's Books relating
to any of the foregoing.
"Advance" or "Advances" means an Advance under the
Revolving Facility.
"Affiliate" means, with respect to any Person, any Person
that owns or controls directly or indirectly such Person, any Person that
controls or is controlled by or is under common control with such Person, and
each of such Person's senior executive officers, directors, and partners.
"Bank Expenses" means all: reasonable costs or expenses
(including reasonable attorneys' fees and expenses) incurred in connection with
the preparation, negotiation, administration, and enforcement of the Loan
Documents; and Bank's reasonable attorneys' fees and expenses incurred in
amending, enforcing or defending the Loan Documents, whether or not suit is
brought.
"Borrower's Books" means all of Borrower's books and
records including: ledgers; records concerning Borrower's assets or liabilities,
the Collateral, business operations or financial condition; and all computer
programs, or tape files, and the equipment, containing such information.
"Borrowing Base" has the meaning set forth in Section 2.1
hereof.
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which banks in the State of California are authorized or
required to close.
"CHA Agreement" means that certain Note Purchase Agreement
by and between Borrower and Cagen Holdings Limited dated February 21, 1995.
"CHA Debt" means any debt incurred by Borrower related to
the purchase by Cagen Holdings Limited of 8% convertible promissory notes
pursuant to the CHA Agreement.
"Closing Date" means the date of this Agreement.
"Code" means the California Uniform Commercial Code.
1
<PAGE> 3
"Collateral" means the property described on Exhibit A
attached hereto.
"Committed Line" means Three Million Dollars ($3,000,000).
"Contingent Obligation" means, as applied to any Person,
any direct or indirect liability, contingent or otherwise, of that Person with
respect to (i) any indebtedness, lease, dividend, letter of credit or other
obligation of another, including, without limitation, any such obligation
directly or indirectly guaranteed, endorsed, co-made or discounted or sold with
recourse by that Person, or in respect of which that Person is otherwise
directly or indirectly liable; (ii) any obligations with respect to undrawn
letters of credit issued for the account of that Person; and (iii) all
obligations arising under any interest rate, currency or commodity swap
agreement, interest rate cap agreement, interest rate collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; provided, however,
that the term "Contingent Obligation" shall not include endorsements for
collection or deposit in the ordinary course of business. The amount of any
Contingent Obligation shall be deemed to be an amount equal to the stated or
determined amount of the primary obligation in respect of which such Contingent
Obligation is made or, if not stated or determinable, the maximum reasonably
anticipated liability in respect thereof as determined by such Person in good
faith; provided, however, that such amount shall not in any event exceed the
maximum amount of the obligations under the guarantee or other support
arrangement.
"Copyrights" means any and all copyrights, copyright
applications, copyright registrations and like protections in each work or
authorship and derivative work thereof, whether published or unpublished and
whether or not the same also constitutes a trade secret, now of hereafter
existing, created, acquired or held.
"Current Liabilities" means, as of any applicable date,
all amounts that should, in accordance with GAAP, be included as current
liabilities on the consolidated balance sheet of Borrower and its Subsidiaries,
as at such date, plus, to the extent not already included therein, all
outstanding Advances made under this Agreement, including all Indebtedness that
is payable upon demand or within one year from the date of determination thereof
unless such Indebtedness is renewable or extendible at the option of Borrower or
any Subsidiary to a date more than one year from the date of determination, but
excluding Subordinated Debt.
"Daily Balance" means the aggregate amount of the
outstanding Advances owed at the end of a given day.
"Eligible Accounts" means those Accounts that arise in the
ordinary course of Borrower's business that comply with all of Borrower's
representations and warranties to Bank set forth in Section 5.4; provided, that
standards of eligibility may be fixed and revised from time to time by Bank in
Bank's reasonable judgment and upon notification thereof to Borrower in
accordance with the provisions hereof. Unless otherwise agreed to by Bank,
Eligible Accounts shall not include the following:
(a) Accounts that the account debtor has failed to pay
within ninety (90) days of invoice date;
(b) Accounts with respect to an account debtor, fifty
percent (50%) of whose Accounts the account debtor has failed to pay within
ninety (90) days of invoice date;
(c) Accounts with respect to which the account debtor is
an officer, employee, or agent of Borrower;
(d) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the account debtor may be
conditional;
2
<PAGE> 4
(e) Accounts with respect to which the account debtor is
an Affiliate of Borrower;
(f) Accounts with respect to which the account debtor does
not have its principal place of business in the United States, except for
Eligible Foreign Accounts.
(g) Accounts with respect to which the account debtor is
the United States or any department, agency, or instrumentality of the United
States;
(h) Accounts with respect to which Borrower is liable to
the account debtor for goods sold or services rendered by the account debtor to
Borrower, but only to the extent of any amounts owing to the account debtor
against amounts owed to Borrower;
(i) Accounts with respect to an account debtor, including
Subsidiaries and Affiliates, whose total obligations to Borrower exceed
twenty-five percent (25%) of all Accounts, to the extent such obligations exceed
the aforementioned percentage, except as approved in writing by Bank;
(j) Accounts with respect to which the account debtor
disputes liability or makes any claim with respect thereto as to which Bank
believes, in its sole discretion, that there may be a basis for dispute (but
only to the extent of the amount subject to such dispute or claim), or is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business; and
(k) Accounts the collection of which Bank reasonably
determines to be doubtful.
"Eligible Foreign Accounts" means Accounts with respect to
which the account debtor does not have its principal place of business in the
United States and that are: (1) covered by credit insurance in form and amount,
and by an insurer satisfactory to Bank less the amount of any deductible(s)
which may be or become owing thereon; or (2) supported by one or more letters of
credit in favor of Bank as beneficiary, in an amount and of a tenor, and issued
by a financial institution, acceptable to Bank; or (3) that Bank approves on a
case-by-case basis.
"Equipment" means all present and future machinery,
equipment, tenant improvements, furniture, fixtures, vehicles, tools, parts and
attachments in which Borrower has any interest.
"ERISA" means the Employment Retirement Income Security
Act of 1974, as amended, and the regulations thereunder.
"Event of Default" has the meaning assigned in Article 8.
"GAAP" means generally accepted accounting principles as
in effect from time to time.
"Indebtedness" means (a) all indebtedness for borrowed
money or the deferred purchase price of property or services, including without
limitation reimbursement and other obligations with respect to surety bonds and
letters of credit, (b) all obligations evidenced by notes, bonds, debentures or
similar instruments, (c) all capital lease obligations and (d) all Contingent
Obligations.
"Insolvency Proceeding" means any proceeding commenced by
or against any person or entity under any provision of the United States
Bankruptcy Code, as amended, or under any other bankruptcy or insolvency law,
including assignments for the benefit of creditors, formal or informal
moratoria, compositions, extension generally with its creditors, or proceedings
seeking reorganization, arrangement, or other relief.
"Intellectual Property" means all of Borrower's right,
title and interest in the following:
(a) Copyrights, Trademarks, and Patents;
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<PAGE> 5
(b) Any and all trade secrets, and any and all
intellectual property rights in computer software and computer software products
now or hereafter existing, created, acquired or held;
(c) Any and all design rights which may be available to
Borrower now or hereafter existing, created, acquired or held;
(d) Any and all claims for damages by way of past, present
and future infringement of any of the rights included above, with the right, but
not the obligation, to sue for and collect such damages for said use or
infringement of the intellectual property rights identified above;
(e) All licenses or other rights to use any of the
Copyrights, Patents, or Trademarks, and all license fees and royalties arising
from such use to the extent permitted by such license or rights;
(f) All amendments, renewals and extensions of any of the
Copyrights, Trademarks or Patents; and
(g) All proceeds and products of the foregoing, including
without limitation all payments under insurance or any indemnity or warranty
payable in respect of any of the foregoing.
"Inventory" means all present and future inventory in
which Borrower has any interest, including merchandise, raw materials, parts,
supplies, packing and shipping materials, work in process and finished products
intended for sale or lease or to be furnished under a contract of service, of
every kind and description now or at any time hereafter owned by or in the
custody or possession, actual or constructive, of Borrower, including such
inventory as is temporarily out of its custody or possession or in transit and
including any returns upon any accounts or other proceeds, including insurance
proceeds, resulting from the sale or disposition of any of the foregoing and any
documents of title representing any of the above, and Borrower's Books relating
to any of the foregoing.
"Investment" means any beneficial ownership of (including
stock, partnership interest or other securities) any Person, or any loan,
advance or capital contribution to any Person.
"IRC" means the Internal Revenue Code of 1986, as amended,
and the regulations thereunder.
"Lien" means any mortgage, lien, deed of trust, charge,
pledge, security interest or other encumbrance.
"Loan Documents" means, collectively, this Agreement, any
note or notes executed by Borrower, and any other agreement entered into between
Borrower and Bank in connection with this Agreement, all as amended or extended
from time to time.
"Material Adverse Effect" means a material adverse effect
on (i) the business operations or condition (financial or otherwise) of Borrower
and its Subsidiaries taken as a whole or (ii) the ability of Borrower to repay
the Obligations or otherwise perform its obligations under the Loan Documents.
"Maturity Date" means December 31, 1999.
"Negotiable Collateral" means all of Borrower's present
and future letters of credit of which it is a beneficiary, notes, drafts,
instruments, securities, documents of title, and chattel paper, and Borrower's
Books relating to any of the foregoing.
"Obligations" means all debt, principal, interest, Bank
Expenses and other amounts owed to Bank by Borrower pursuant to this Agreement
or any other agreement, whether absolute or contingent, due or to become due,
now existing or hereafter arising, including any interest that accrues after the
commencement of an
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Insolvency Proceeding and including any debt, liability, or obligation owing
from Borrower to others that Bank may have obtained by assignment or otherwise.
"Patents" means all patents, patent applications and like protections including
without limitation improvements, divisions, continuations, renewals, reissues,
extensions and continuations-in-part of the same.
"Periodic Payments" means all installments or similar recurring payments that
Borrower may now or hereafter become obligated to pay to Bank pursuant to the
terms and provisions of any instrument, or agreement now or hereafter in
existence between Borrower and Bank.
"Permitted Indebtedness" means:
(a) Indebtedness of Borrower in favor of Bank arising
under this Agreement or any other Loan Document;
(b) Indebtedness existing on the Closing Date and
disclosed in the Schedule;
(c) Subordinated Debt;
(d) Indebtedness secured by Liens described in clause (c)
of the defined term "Permitted Liens," provided such Indebtedness does not
exceed the lower of the purchase price or the fair market value of the equipment
acquired or held with the proceeds of such Indebtedness; and
(e) Indebtedness to trade creditors incurred in the
ordinary course of business.
"Permitted Investment" means:
(a) Investments existing on the Closing Date disclosed in
the Schedule; and
(b) (i) marketable direct obligations issued or
unconditionally guaranteed by the United States of America or any agency or any
State thereof maturing within one (1) year from the date of acquisition thereof,
(ii) commercial paper maturing no more than one (1) year from the date of
creation thereof and currently having the highest rating obtainable from either
Standard & Poor's Corporation or Moody's Investors Service, Inc., and (iii)
certificates of deposit maturing no more than one (1) year from the date of
investment therein issued by Bank.
"Permitted Liens" means the following:
(a) Any Liens existing on the Closing Date and disclosed
in the Schedule or arising under this Agreement or the other Loan Documents;
(b) Liens for taxes, fees, assessments or other
governmental charges or levies, either not delinquent or being contested in good
faith by appropriate proceedings, provided the same have no priority over any of
Bank's security interests;
(c) Liens (i) upon or in any equipment acquired or held by
Borrower or any of its Subsidiaries to secure the purchase price of such
equipment or indebtedness incurred solely for the purpose of financing the
acquisition of such equipment, or (ii) existing on such equipment at the time of
its acquisition, provided that the Lien is confined solely to the property so
acquired and improvements thereon, and the proceeds of such equipment;
(d) Liens incurred in connection with the extension,
renewal or refinancing of the indebtedness secured by Liens of the type
described in clauses (a) through (c) above, provided that any extension,
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renewal or replacement Lien shall be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness being extended,
renewed or refinanced does not increase.
"Person" means any individual, sole proprietorship,
partnership, limited liability company, joint venture, trust, unincorporated
organization, association, corporation, institution, public benefit corporation,
firm, joint stock company, estate, entity or governmental agency.
"Prime Rate" means the variable rate of interest, per
annum, most recently announced by Bank, as its "prime rate," whether or not such
announced rate is the lowest rate available from Bank.
"Quick Assets" means, at any date as of which the amount
thereof shall be determined, the consolidated cash, cash-equivalents, accounts
receivable and investments with maturities not to exceed 90 days, of Borrower
determined in accordance with GAAP.
"Responsible Officer" means each of the Chief Executive
Officer, the Chief Financial Officer and the Controller of Borrower.
"Revolving Facility" means the facility under which
Borrower may request Bank to issue cash advances, as specified in Section 2.1
hereof.
"Schedule" means the schedule of exceptions attached
hereto.
"Subordinated Debt" means any debt incurred by Borrower
that is subordinated to the debt owing by Borrower to Bank on terms acceptable
to Bank (and identified as being such by Borrower and Bank).
"Subsidiary" means any corporation or partnership in which
(i) any general partnership interest, or (ii) more than 50% of the stock of
which by the terms thereof has ordinary voting power to elect the Board of
Directors, managers or trustees of the entity, shall, at the time as of which
any determination is being made, be owned by Borrower, either directly or
through an Affiliate.
"Tangible Net Worth" means at any date as of which the
amount thereof shall be determined, the financial statement net worth of
Borrower and its Subsidiaries minus intangible assets, plus Subordinated Debt
and CHA Debt, on a consolidated basis determined in accordance with GAAP.
"Total Liabilities" means at any date as of which the
amount thereof shall be determined, all obligations that should, in accordance
with GAAP be classified as liabilities on the consolidated balance sheet of
Borrower, including in any event all Indebtedness, but specifically excluding
Subordinated Debt and CHA Debt.
"Trademarks" means any trademark and servicemark rights,
whether registered or not, applications to register and registrations of the
same and like protections, and the entire goodwill of the business of Borrower
connected with and symbolized by such trademarks.
1.2 Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP and all calculations
made hereunder shall be made in accordance with GAAP. When used herein, the
terms "financial statements" shall include the notes and schedules thereto.
2. LOAN AND TERMS OF PAYMENT
2.1 Advances. Subject to and upon the terms and conditions of
this Agreement, Bank agrees to make Advances to Borrower in an aggregate amount
not to exceed the lesser of (i) the Committed Line or (ii) the Borrowing Base.
For purposes of this Agreement, "Borrowing Base" shall mean an amount equal to
fifty percent (50%) of Eligible Accounts. Borrower may request Advances from
Bank beginning with the Closing Date and continuing until September 30, 1999
(the "Availability Date"). Subject to the terms and conditions of this
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Agreement, amounts borrowed pursuant to this Section 2.1 may be repaid at any
time during the term of this Agreement, and reborrowed up until the Availability
Date. All accrued interest on the outstanding Advances shall be due and payable
monthly as set forth below. After the Availability Date, all outstanding
Advances shall be due and payable in three (3) equal monthly installments plus
all accrued and unpaid interest, beginning on October 31, 1999, and continuing
on the last day of each month thereafter until the Maturity Date. The Revolving
Facility shall terminate on the Maturity Date, at which time any outstanding
Advances under this Section 2.1, accrued but unpaid interest, and other amounts
due under this Agreement shall be immediately due and payable.
Notwithstanding the foregoing, if Borrower breaches any of the financial
covenants set forth in Section 6 of this Agreement or any negative covenant set
forth in Section 7 of this Agreement, Borrower shall immediately provide Bank
with written notice thereof, and either (i) pledge to Bank a certificate of
deposit at Bank in an amount equal to one hundred percent (100%) of the then
existing outstanding Obligations under this Agreement, provided that in the
event that Borrower cures such breach, Borrower's obligation to maintain such
certificate of deposit shall cease and Bank shall release its security interest
in such certificate of deposit, or (ii) pay all the outstanding Advances (which
may not be reborrowed, and no new Advances may be requested by Borrower) in
three (3) equal monthly installments plus all accrued and unpaid interest,
beginning on the first day of the month immediately following such breach, and
continuing on the first day of the next two months thereafter, and ending on the
first day of the third month following such breach on which date all outstanding
Obligations hereunder shall be due and payable, thereby accelerating the
Maturity Date.
Whenever Borrower desires an Advance, Borrower will notify Bank by
facsimile transmission or telephone no later than 3:00 p.m. California time, on
the Business Day that the Advance is to be made. Each such notification shall be
promptly confirmed by a Payment/Advance Form in substantially the form of
Exhibit B hereto. Bank is authorized to make Advances under this Agreement,
based upon instructions received from a Responsible Officer, or without
instructions if in Bank's discretion such Advances are necessary to meet
Obligations which have become due and remain unpaid. Bank shall be entitled to
rely on any telephonic notice given by a person who Bank reasonably believes to
be a Responsible Officer, and Borrower shall indemnify and hold Bank harmless
for any damages or loss suffered by Bank as a result of such reliance. Bank will
credit the amount of Advances made under this Section 2.1 to Borrower's deposit
account.
2.2 Overadvances. If, at any time or for any reason, the amount
of obligations owed by Borrower to Bank pursuant to Section 2.1 of this
Agreement is greater than the lesser of (i) the Committed Line or (ii) the
Borrowing Base, Borrower shall immediately pay to Bank, in cash, the amount of
such excess.
2.3 Interest Rates, Payments, and Calculations.
(a) Interest Rate. Except as set forth in Section 2.3(b),
any Advances shall bear interest, on the average Daily Balance, at a rate equal
to one and three-quarters (1.75) percentage points above the Prime Rate.
Notwithstanding the foregoing, if Borrower (i) achieves in two consecutive
fiscal quarters a net profit of at least One Dollar ($1.00) and (ii) as of the
last day of each month, achieves and maintains a ratio of Total Liabilities to
Tangible Net Worth, of no greater than 1.75 to 1.00, then the interest rate
shall be reduced to one and one-quarter (1.25) percentage points above the Prime
Rate.
(b) Default Rate. All Obligations shall bear interest,
from and after the occurrence of an Event of Default, at a rate equal to five
(5) percentage points above the interest rate applicable immediately prior to
the occurrence of the Event of Default.
(c) Payments. Interest hereunder shall be due and payable
on the first calendar day of each month during the term hereof. Bank shall, at
its option, charge such interest, all Bank Expenses, and all Periodic Payments
against any of Borrower's deposit accounts or against the Committed Line, in
which case those amounts shall thereafter accrue interest at the rate then
applicable hereunder. Any interest not paid when due shall be compounded by
becoming a part of the Obligations, and such interest shall thereafter accrue
interest at the rate then applicable hereunder.
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(d) Computation. In the event the Prime Rate is changed
from time to time hereafter, the applicable rate of interest hereunder shall be
increased or decreased effective as of 12:01 a.m. on the day the Prime Rate is
changed, by an amount equal to such change in the Prime Rate. All interest
chargeable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed.
2.4 Crediting Payments. Prior to the occurrence of an Event of
Default, Bank shall credit a wire transfer of funds, check or other item of
payment to such deposit account or Obligation as Borrower specifies. After the
occurrence of an Event of Default, the receipt by Bank of any wire transfer of
funds, check, or other item of payment shall be immediately applied to
conditionally reduce Obligations, but shall not be considered a payment on
account unless such payment is of immediately available federal funds or unless
and until such check or other item of payment is honored when presented for
payment. Notwithstanding anything to the contrary contained herein, any wire
transfer or payment received by Bank after 12:00 noon California time shall be
deemed to have been received by Bank as of the opening of business on the
immediately following Business Day. Whenever any payment to Bank under the Loan
Documents would otherwise be due (except by reason of acceleration) on a date
that is not a Business Day, such payment shall instead be due on the next
Business Day, and additional fees or interest, as the case may be, shall accrue
and be payable for the period of such extension.
2.5 Fees. Borrower shall pay to Bank the following:
(a) Facility Fee. A facility fee equal to Thirty Thousand
Dollars ($30,000), which shall be fully earned and nonrefundable and payable on
or prior to the Closing Date;
(b) Restructure Fees. Three restructure fees totaling
Thirteen Thousand Dollars ($13,000), which shall be fully earned and
nonrefundable;
(c) Financial Examination and Appraisal Fees. Bank's
customary fees and out-of-pocket expenses for Bank's audits of Borrower's
Accounts, and for each appraisal of Collateral and financial analysis and
examination of Borrower performed from time to time by Bank or its agents which
amount shall be paid upon demand;
(d) Bank Expenses. All Bank Expenses incurred through the
Closing Date, including reasonable attorneys' fees and expenses, which shall be
payable on the Closing Date.
2.6 Additional Costs. In case any change in any law, regulation,
treaty or official directive or the interpretation or application thereof by any
court or any governmental authority charged with the administration thereof or
the compliance with any guideline or request of any central bank or other
governmental authority (whether or not having the force of law), in each case
after the date of this Agreement:
(a) subjects Bank to any tax with respect to payments of
principal or interest or any other amounts payable hereunder by Borrower or
otherwise with respect to the transactions contemplated hereby (except for taxes
on the overall net income of Bank imposed by the United States of America or any
political subdivision thereof);
(b) imposes, modifies or deems applicable any deposit
insurance, reserve, special deposit or similar requirement against assets held
by, or deposits in or for the account of, or loans by, Bank; or
(c) imposes upon Bank any other condition with respect to
its performance under this Agreement,
and the result of any of the foregoing is to increase the cost to Bank, reduce
the income receivable by Bank or impose any expense upon Bank with respect to
any loans under this Agreement, Bank shall notify Borrower thereof. Borrower
agrees to pay to Bank the amount of such increase in cost, reduction in income
or additional expense as
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and when such cost, reduction or expense is incurred or determined, upon
presentation by Bank of a statement of the amount and setting forth Bank's
calculation thereof, all in reasonable detail, which statement shall be deemed
true and correct absent manifest error.
2.7 Term. This Agreement shall become effective on the Closing
Date and, subject to Section 12.7, shall continue in full force and effect for a
term ending on the Maturity Date. Notwithstanding the foregoing, as provided in
Section 9, Bank shall have the right to terminate its obligation to make
Advances under this Agreement immediately and without notice upon the occurrence
and during the continuance of an Event of Default. Notwithstanding termination
of this Agreement, Bank's Lien on the Collateral shall remain in effect for so
long as any Obligations are outstanding.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Advance. The obligation of
Bank to make the initial Advance is subject to the condition precedent that Bank
shall have received, in form and substance satisfactory to Bank, the following:
(a) this Agreement duly executed and delivered by
Borrower;
(b) a certificate of the Secretary of Borrower with
respect to incumbency and resolutions authorizing the execution and delivery of
this Agreement;
(c) financing statements (Forms UCC-1);
(d) a Year 2000 Survey;
(e) insurance certificate;
(f) payment of the fees and Bank Expenses then due as
specified in Section 2.5 hereof;
(g) an audit of the Accounts, the results of which shall
be satisfactory to Bank; and
(h) such other documents, and completion of such other
matters, as Bank may reasonably deem necessary or appropriate.
3.2 Conditions Precedent to all Advances. The obligation of Bank
to make each Advance, including the initial Advance, is further subject to the
following conditions:
(a) timely receipt by Bank of the Payment/Advance Form as
provided in Section 2.1; and
(b) the representations and warranties contained in
Section 5 shall be true and correct in all material respects on and as of the
date of such Payment/Advance Form and on the effective date of each Advance as
though made at and as of each such date, and no Event of Default shall have
occurred and be continuing, or would result from such Advance. The making of
each Advance shall be deemed to be a representation and warranty by Borrower on
the date of such Advance as to the accuracy of the facts referred to in this
Section 3.2(b).
4. CREATION OF SECURITY INTEREST
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4.1 Grant of Security Interest. Borrower grants and pledges to
Bank a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Except as set forth in the
Schedule, such security interest constitutes a valid, first priority security
interest in the presently existing Collateral, and will constitute a valid,
first priority security interest in Collateral acquired after the date hereof.
Notwithstanding the foregoing, if an Event of Default occurs under this
Agreement, "Collateral" shall mean the property described on Exhibit A-1
attached hereto. If an Event of Default occurs, Borrower shall register or cause
to be registered (to the extent not already registered) with the United States
Patent and Trademark Office or the United States Copyright Office, as
applicable, all of its Copyrights, Trademarks, and Patents. In addition,
Borrower shall register or cause to be registered with the United States Patent
and Trademark Office or the United States Copyright Office, as applicable, those
additional intellectual property rights developed or acquired by Borrower from
time to time in connection with any product prior to the sale or licensing of
such product to any third party. Borrower shall execute and deliver such
additional instruments and documents from time to time as Bank shall reasonably
request to perfect Bank's security interest in such additional intellectual
property rights.
4.2 Delivery of Additional Documentation Required. Borrower shall
from time to time execute and deliver to Bank, at the request of Bank, all
Negotiable Collateral, all financing statements and other documents that Bank
may reasonably request, in form satisfactory to Bank, to perfect and continue
perfected Bank's security interests in the Collateral and in order to fully
consummate all of the transactions contemplated under the Loan Documents.
4.3 Right to Inspect. Bank (through any of its officers,
employees, or agents) shall have the right, upon reasonable prior notice, from
time to time during Borrower's usual business hours, to inspect Borrower's Books
and to make copies thereof and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, condition of, or
any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
5.1 Due Organization and Qualification. Borrower and each
Subsidiary is a corporation duly existing and in good standing under the laws of
its state of incorporation and qualified and licensed to do business in, and is
in good standing in, any state in which the failure to so qualify would have a
Material Adverse Effect.
5.2 Due Authorization; No Conflict. The execution, delivery, and
performance of the Loan Documents are within Borrower's powers, have been duly
authorized, and are not in conflict with nor constitute a breach of any
provision contained in Borrower's Articles of Incorporation or Bylaws, nor will
they constitute an event of default under any material agreement to which
Borrower is a party or by which Borrower is bound. No Event of Default exists
and is continuing under any agreement to which Borrower is a party or by which
it is bound, which could have a Material Adverse Effect.
5.3 No Prior Encumbrances. Borrower has good and indefeasible
title to the Collateral, free and clear of Liens, except for Permitted Liens.
5.4 Bona Fide Eligible Accounts. The Eligible Accounts are bona
fide existing obligations. The property giving rise to such Eligible Accounts
has been delivered to the account debtor or to the account debtor's agent for
immediate shipment to and unconditional acceptance by the account debtor.
Borrower has not received notice of actual or imminent Insolvency Proceeding of
any account debtor that is included in any Borrowing Base Certificate as an
Eligible Account.
5.5 Merchantable Inventory. All Inventory is in all material
respects of good and marketable quality, free from all material defects.
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5.6 Name; Location of Chief Executive Office. Except as disclosed
in the Schedule, Borrower has not done business under any name other than that
specified on the signature page hereof. The principal executive office of
Borrower is located at the address indicated in Section 10 hereof.
5.7 Litigation. Except as set forth in the Schedule, there are no
actions or proceedings pending by or against Borrower or any Subsidiary before
any court or administrative agency in which an adverse decision could have a
Material Adverse Effect or a material adverse effect on Borrower's interest or
Bank's security interest in the Collateral. Borrower does not have knowledge of
any such pending or threatened actions or proceedings.
5.8 No Material Adverse Change in Financial Statements. All
consolidated financial statements related to Borrower and any Subsidiary that
have been delivered by Borrower to Bank fairly present in all material respects
Borrower's consolidated financial condition as of the date thereof and
Borrower's consolidated results of operations for the period then ended. There
has not been a material adverse change in the consolidated financial condition
of Borrower since the date of the most recent of such financial statements
submitted to Bank.
5.9 Solvency. Borrower is solvent and able to pay its debts
(including trade debts) as they mature.
5.10 Regulatory Compliance. Borrower and each Subsidiary has met
the minimum funding requirements of ERISA with respect to any employee benefit
plans subject to ERISA. No event has occurred resulting from Borrower's failure
to comply with ERISA that is reasonably likely to result in Borrower's incurring
any liability that could have a Material Adverse Effect. Borrower is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940. Borrower is not engaged
principally, or as one of the important activities, in the business of extending
credit for the purpose of purchasing or carrying margin stock (within the
meaning of Regulations T and U of the Board of Governors of the Federal Reserve
System). To the best of its knowledge, Borrower has complied in all material
respects with all the provisions of the Federal Fair Labor Standards Act.
Borrower has not violated any statutes, laws, ordinances or rules applicable to
it, violation of which could have a Material Adverse Effect.
5.11 Environmental Condition. None of Borrower's or any
Subsidiary's properties or assets has ever been used by Borrower or any
Subsidiary or, to the best of Borrower's knowledge, by previous owners or
operators, in the disposal of, or to produce, store, handle, treat, release, or
transport, any hazardous waste or hazardous substance other than in accordance
with applicable law; to the best of Borrower's knowledge, none of Borrower's
properties or assets has ever been designated or identified in any manner
pursuant to any environmental protection statute as a hazardous waste or
hazardous substance disposal site, or a candidate for closure pursuant to any
environmental protection statute; no lien arising under any environmental
protection statute has attached to any revenues or to any real or personal
property owned by Borrower or any Subsidiary; and neither Borrower nor any
Subsidiary has received a summons, citation, notice, or directive from the
Environmental Protection Agency or any other federal, state or other
governmental agency concerning any action or omission by Borrower or any
Subsidiary resulting in the releasing, or otherwise disposing of hazardous waste
or hazardous substances into the environment.
5.12 Taxes. Borrower and each Subsidiary has filed or caused to
be filed all tax returns required to be filed, and has paid, or has made
adequate provision for the payment of, all taxes reflected therein, or has
notified Bank in writing of a dispute.
5.13 Subsidiaries. Borrower does not own any stock, partnership
interest or other equity securities of any Person, except for Permitted
Investments.
5.14 Government Consents. Borrower and each material Subsidiary
has obtained all material consents, approvals and authorizations of, made all
material declarations or filings with, and given all material notices to, all
governmental authorities that are necessary for the continued operation of
Borrower's business as currently conducted.
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5.15 Full Disclosure. No representation, warranty or other
statement made by Borrower in any certificate or written statement furnished to
Bank contains any untrue statement of a material fact or omits to state a
material fact necessary in order to make the statements contained in such
certificates or statements not misleading.
6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that, until payment in full of all
outstanding Obligations, and for so long as Bank may have any commitment to make
an Advance hereunder, Borrower shall do all of the following:
6.1 Good Standing. Borrower shall maintain its and each of its
Subsidiaries' corporate existence and good standing in its jurisdiction of
incorporation and maintain qualification in each jurisdiction in which the
failure to so qualify could have a Material Adverse Effect. Borrower shall
maintain, and shall cause each of its Subsidiaries to maintain, to the extent
consistent with prudent management of Borrower's business, in force all
licenses, approvals and agreements, the loss of which could have a Material
Adverse Effect.
6.2 Government Compliance. Borrower shall meet, and shall cause
each Subsidiary to meet, the minimum funding requirements of ERISA with respect
to any employee benefit plans maintained by Borrower and each such subsidiary
and subject to ERISA. Borrower shall comply, and shall cause each Subsidiary to
comply, with all statutes, laws, ordinances and government rules and regulations
to which it is subject, noncompliance with which could have a Material Adverse
Effect or a material adverse effect on the Collateral or the priority of Bank's
Lien on the Collateral.
6.3 Financial Statements, Reports, Certificates. Borrower shall
deliver to Bank: (a) as soon as available, but in any event within thirty (30)
days after the end of each month, a company prepared consolidated balance sheet
and income statement covering Borrower's consolidated operations during such
period, certified by a Responsible Officer; (b) as soon as available, but in any
event within ninety (90) days after the end of Borrower's fiscal year, audited
consolidated financial statements of Borrower prepared in accordance with GAAP,
consistently applied, together with an unqualified opinion on such financial
statements of an independent certified public accounting firm reasonably
acceptable to Bank; (c) within five (5) days upon becoming available, copies of
all statements, reports and notices sent or made available generally by Borrower
to its security holders or to any holders of Subordinated Debt and within five
(5) days of filing all reports on Form 10-K and 10-Q filed with the Securities
and Exchange Commission; (d) promptly upon receipt of notice thereof, a report
of any legal actions pending or threatened against Borrower or any Subsidiary
that could result in damages or costs to Borrower or any Subsidiary of One
Hundred Thousand Dollars ($100,000) or more; and (e) such budgets, sales
projections, operating plans or other financial information as Bank may
reasonably request from time to time.
Within fifteen (15) days after the last day of each month, Borrower
shall deliver to Bank a Borrowing Base Certificate signed by a Responsible
Officer in substantially the form of Exhibit C hereto, together with aged
listings of accounts receivable and accounts payable.
Borrower shall deliver to Bank with the monthly financial statements a
Compliance Certificate signed by a Responsible Officer in substantially the form
of Exhibit D hereto.
Bank shall have a right from time to time hereafter to audit Borrower's
Accounts at Borrower's expense, including an audit to be performed prior to the
first Advance made by Bank to Borrower hereunder, provided that such audits will
be conducted no more often than every six (6) months unless an Event of Default
has occurred and is continuing.
6.4 Inventory; Returns. Borrower shall keep all Inventory in good
and marketable condition, free from all material defects. Returns and
allowances, if any, as between Borrower and its account debtors shall be on the
same basis and in accordance with the usual customary practices of Borrower, as
they exist at the time of the execution and delivery of this Agreement. Borrower
shall promptly notify Bank of all returns and recoveries and of
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all disputes and claims, where the return, recovery, dispute or claim involves
more than One Hundred Fifty Thousand Dollars ($150,000).
6.5 Taxes. Borrower shall make, and shall cause each Subsidiary
to make, due and timely payment or deposit of all material federal, state, and
local taxes, assessments, or contributions required of it by law, and will
execute and deliver to Bank, on demand, appropriate certificates attesting to
the payment or deposit thereof; and Borrower will make, and will cause each
Subsidiary to make, timely payment or deposit of all material tax payments and
withholding taxes required of it by applicable laws, including, but not limited
to, those laws concerning F.I.C.A., F.U.T.A., state disability, and local,
state, and federal income taxes, and will, upon request, furnish Bank with proof
satisfactory to Bank indicating that Borrower or a Subsidiary has made such
payments or deposits; provided that Borrower or a Subsidiary need not make any
payment if the amount or validity of such payment is contested in good faith by
appropriate proceedings and is reserved against (to the extent required by GAAP)
by Borrower.
6.6 Insurance.
(a) Borrower, at its expense, shall keep the Collateral
insured against loss or damage by fire, theft, explosion, sprinklers, and all
other hazards and risks, and in such amounts, as ordinarily insured against by
other owners in similar businesses conducted in the locations where Borrower's
business is conducted on the date hereof. Borrower shall also maintain insurance
relating to Borrower's ownership and use of the Collateral in amounts and of a
type that are customary to businesses similar to Borrower's.
(b) All such policies of insurance shall be in such form,
with such companies, and in such amounts as reasonably satisfactory to Bank. All
such policies of property insurance shall contain a lender's loss payable
endorsement, in a form satisfactory to Bank, showing Bank as an additional loss
payee thereof and all liability insurance policies shall show the Bank as an
additional insured, and shall specify that the insurer must give at least twenty
(20) days notice to Bank before canceling its policy for any reason. Upon Bank's
request, Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All proceeds
payable under any such policy shall, at the option of Bank, be payable to Bank
to be applied on account of the Obligations.
6.7 Principal Depository. Borrower shall initiate moving its
principal depository and operating accounts to Bank by February 28, 1999. As of
June 30, 1999, this transfer shall have been completed. From that time and
continuing until the Maturity Date, Borrower shall maintain its principal
depository and operating accounts with Bank. However, if Borrower has not
completed this transfer by June 30, 1999, Borrower will establish a bonus money
market account at Bank with a minimum balance of Three Million Dollars
($3,000,000). This account can be closed at such time as Borrower completes the
transfer of its principal depository and operating accounts to Bank.
6.8 Quick Ratio. Borrower shall maintain, as of the last Saturday
of each month through May 29, 1999, a ratio of Quick Assets to Current
Liabilities of at least 0.55 to 1.0. Thereafter, Borrower shall maintain, as of
the last Saturday of each month through November 27, 1999, a ratio of Quick
Assets to Current Liabilities of at least 0.60 to 1.0. Thereafter, Borrower
shall maintain, as of the last Saturday of each month, a ratio of Quick Assets
to Current Liabilities of at least 0.70 to 1.0.
6.9 Tangible Net Worth. As of the last Saturday of each month
through May 29, 1999, Borrower shall maintain a Tangible Net Worth of not less
than Sixteen Million Dollars ($16,000,000). Thereafter, as of the last Saturday
of each month through August 28, 1999, Borrower shall maintain a Tangible Net
Worth of not less than Nineteen Million Dollars ($19,000,000). Thereafter, as of
the last Saturday of each month through November 27, 1999, Borrower shall
maintain a Tangible Net Worth of not less than Twenty-Two Million Dollars
($22,000,000). Thereafter, as of the last Saturday of each month, Borrower shall
maintain a Tangible Net Worth of not less than Twenty-Five Million Dollars
($25,000,000).
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6.10 Total Liabilities/Tangible Net Worth. As of the last
Saturday of each month through May 29, 1999, Borrower shall maintain a ratio of
Total Liabilities to Tangible Net Worth, of no greater than 2.60 to 1.0.
Thereafter, as of the last Saturday of each month through August 28, 1999,
Borrower shall maintain a ratio of Total Liabilities to Tangible Net Worth, of
no greater than 2.25 to 1.0. Thereafter, as of the last Saturday of each month
through November 27, 1999, Borrower shall maintain a ratio of Total Liabilities
to Tangible Net Worth, of no greater than 2.0 to 1.0. Thereafter, as of the last
Saturday of each month, Borrower shall maintain, on a monthly basis, a ratio of
Total Liabilities to Tangible Net Worth, of no greater than 1.75 to 1.0.
6.11 Profitability. Borrower shall show a net profit of at least
One Dollar ($1.00) for the fiscal quarter ending on March 27, 1999. Borrower
shall show a net profit of at least One Million Dollars ($1,000,000) for each of
the fiscal quarters ending on June 26, 1999 and September 25, 1999. Borrower
shall show a net profit of at least Two Million Dollars ($2,000,000) for each
quarter thereafter.
6.12 Further Assurances. At any time and from time to time
Borrower shall execute and deliver such further instruments and take such
further action as may reasonably be requested by Bank to effect the purposes of
this Agreement.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until payment in full of the outstanding
Obligations or for so long as Bank may have any commitment to make any Advances,
Borrower will not do any of the following:
7.1 Dispositions. Except as previously disclosed in the Schedule
and approved by Bank, convey, sell, lease, transfer or otherwise dispose of
(collectively, a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, including Intellectual Property, other
than: (i) Transfers of Inventory in the ordinary course of business; (ii)
Transfers of non-exclusive licenses and similar arrangements for the use of the
property of Borrower or its Subsidiaries; and (iii) Transfers of worn-out or
obsolete Equipment.
7.2 Change in Business. Engage in any business, or permit any of
its Subsidiaries to engage in any business, other than the businesses currently
engaged in by Borrower and any business substantially similar or related thereto
(or incidental thereto), or suffer a material change in Borrower's ownership.
Borrower will not, without thirty (30) days prior written notification to Bank,
relocate its chief executive office.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any
of its Subsidiaries to merge or consolidate, with or into any other business
organization, or acquire, or permit any of its Subsidiaries to acquire, all or
substantially all of the capital stock or property of another Person, except
that Subsidiaries may merge or consolidate with each other or into Borrower.
7.4 Indebtedness. Create, incur, assume or be or remain liable
with respect to any Indebtedness, or permit any Subsidiary so to do, other than
Permitted Indebtedness.
7.5 Encumbrances. Create, incur, assume or suffer to exist any
Lien with respect to any of its property, or assign or otherwise convey any
right to receive income, including the sale of any Accounts, or permit any of
its Subsidiaries so to do, except for Permitted Liens.
7.6 Distributions. Pay any dividends or make any other
distribution or payment on account of or in redemption, retirement or purchase
of any capital stock.
7.7 Investments. Directly or indirectly acquire or own, or make
any Investment in or to any Person, or permit any of its Subsidiaries so to do,
other than Permitted Investments.
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7.8 Transactions with Affiliates. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of Borrower
except for transactions that are in the ordinary course of Borrower's business,
upon fair and reasonable terms that are no less favorable to Borrower than would
be obtained in an arm's length transaction with a nonaffiliated Person.
7.9 Subordinated Debt. Make any payment in respect of any
Subordinated Debt, or permit any of its Subsidiaries to make any such payment,
except in compliance with the terms of such Subordinated Debt, or amend any
provision contained in any documentation relating to the Subordinated Debt
without Bank's prior written consent. Notwithstanding the foregoing, Borrower
may pay regularly scheduled interest payments under the CHA Debt, but in no
event shall Borrower make any principal payments under the CHA Debt until
Borrower has fully repaid all Obligations incurred in connection with this
Agreement.
7.10 Inventory. Store the Inventory with a bailee, warehouseman,
or similar party unless Bank has received a pledge of the warehouse receipt
covering such Inventory. Except for Inventory sold in the ordinary course of
business and except for such other locations as Bank may approve in writing,
Borrower shall keep the Inventory only at the location set forth in Section 10
hereof and such other locations of which Borrower gives Bank prior written
notice and as to which Borrower signs and files a financing statement where
needed to perfect Bank's security interest.
7.11 Compliance. Become an "investment company" controlled by an
"investment company," within the meaning of the Investment Company Act of 1940,
or become principally engaged in, or undertake as one of its important
activities, the business of extending credit for the purpose of purchasing or
carrying margin stock, or use the proceeds of any Advance for such purpose. Fail
to meet the minimum funding requirements of ERISA, permit a Reportable Event or
Prohibited Transaction, as defined in ERISA, to occur, fail to comply with the
Federal Fair Labor Standards Act or violate any law or regulation, which
violation could have a Material Adverse Effect or a material adverse effect on
the Collateral or the priority of Bank's Lien on the Collateral, or permit any
of its Subsidiaries to do any of the foregoing.
8. EVENTS OF DEFAULT
Any one or more of the following events shall constitute an Event
of Default by Borrower under this Agreement:
8.1 Payment Default. If Borrower fails to pay the principal of,
or any interest on, any Advances when due and payable; or fails to pay any
portion of any other Obligations not constituting such principal or interest,
including without limitation Bank Expenses, within thirty (30) days of receipt
by Borrower of an invoice for such other Obligations;
8.2 Covenant Default. If Borrower fails to perform any obligation
under Sections 6.7, 6.8, 6.9, 6.10, 6.11 or 6.12 or violates any of the
covenants contained in Article 7 of this Agreement, or fails or neglects to
perform, keep, or observe any other material term, provision, condition,
covenant, or agreement contained in this Agreement, in any of the Loan
Documents, or in any other present or future agreement between Borrower and Bank
and as to any default under such other term, provision, condition, covenant or
agreement that can be cured, has failed to cure such default within ten (10)
days after Borrower receives notice thereof or any officer of Borrower becomes
aware thereof; provided, however, that if the default cannot by its nature be
cured within the ten (10) day period or cannot after diligent attempts by
Borrower be cured within such ten (10) day period, and such default is likely to
be cured within a reasonable time, then Borrower shall have an additional
reasonable period (which shall not in any case exceed thirty (30) days) to
attempt to cure such default, and within such reasonable time period the failure
to have cured such default shall not be deemed an Event of Default (provided
that no Advances will be required to be made during such cure period);
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8.3 Material Adverse Change. If there occurs a material adverse
change in Borrower's business or financial condition, or if there is a material
impairment of the prospect of repayment of any portion of the Obligations or a
material impairment of the value or priority of Bank's security interests in the
Collateral;
8.4 Attachment. If any material portion of Borrower's assets is
attached, seized, subjected to a writ or distress warrant, or is levied upon, or
comes into the possession of any trustee, receiver or person acting in a similar
capacity and such attachment, seizure, writ or distress warrant or levy has not
been removed, discharged or rescinded within ten (10) days, or if Borrower is
enjoined, restrained, or in any way prevented by court order from continuing to
conduct all or any material part of its business affairs, or if a judgment or
other claim becomes a lien or encumbrance upon any material portion of
Borrower's assets, or if a notice of lien, levy, or assessment is filed of
record with respect to any of Borrower's assets by the United States Government,
or any department, agency, or instrumentality thereof, or by any state, county,
municipal, or governmental agency, and the same is not paid within ten (10) days
after Borrower receives notice thereof, provided that none of the foregoing
shall constitute an Event of Default where such action or event is stayed or an
adequate bond has been posted pending a good faith contest by Borrower (provided
that no Advances will be required to be made during such cure period);
8.5 Insolvency. If Borrower becomes insolvent, or if an
Insolvency Proceeding is commenced by Borrower, or if an Insolvency Proceeding
is commenced against Borrower and is not dismissed or stayed within ten (10)
days (provided that no Advances will be made prior to the dismissal of such
Insolvency Proceeding);
8.6 Other Agreements. If there is a default in any agreement to
which Borrower is a party with a third party or parties resulting in a right by
such third party or parties, whether or not exercised, to accelerate the
maturity of any Indebtedness in an amount in excess of One Hundred Fifty
Thousand Dollars ($150,000) or that could have a Material Adverse Effect, or if
there is a default under the CHA Agreement;
8.7 Subordinated Debt. If Borrower makes any payment on account
of Subordinated Debt, except to the extent such payment is allowed under any
subordination agreement entered into with Bank;
8.8 Judgments. If a judgment or judgments for the payment of
money in an amount, individually or in the aggregate, of at least One Hundred
Fifty Thousand Dollars ($150,000) shall be rendered against Borrower and shall
remain unsatisfied and unstayed for a period of ten (10) days (provided that no
Advances will be made prior to the satisfaction or stay of such judgment); or
8.9 Misrepresentations. If any material misrepresentation or
material misstatement exists now or hereafter in any warranty or representation
set forth herein or in any certificate delivered to Bank by any Responsible
Officer pursuant to this Agreement or to induce Bank to enter into this
Agreement or any other Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. Upon the occurrence and during the
continuance of an Event of Default, Bank may, at its election, without notice of
its election and without demand, do any one or more of the following, all of
which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable (provided that upon the occurrence of an Event of Default described in
Section 8.5 all Obligations shall become immediately due and payable without any
action by Bank);
(b) Cease advancing money or extending credit to or for
the benefit of Borrower under this Agreement or under any other agreement
between Borrower and Bank;
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(c) Demand that Borrower (i) deposit cash with Bank in an
amount equal to the amount of any Letters of Credit remaining undrawn, as
collateral security for the repayment of any future drawings under such Letters
of Credit, and Borrower shall forthwith deposit and pay such amounts, and (ii)
pay in advance all Letters of Credit fees scheduled to be paid or payable over
the remaining term of the Letters of Credit;
(d) Settle or adjust disputes and claims directly with
account debtors for amounts, upon terms and in whatever order that Bank
reasonably considers advisable;
(e) Without notice to or demand upon Borrower, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires, and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, to take and maintain possession of the Collateral, or any
part of it, and to pay, purchase, contest, or compromise any encumbrance,
charge, or lien which in Bank's determination appears to be prior or superior to
its security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants Bank a
license to enter into possession of such premises and to occupy the same,
without charge, for up to one hundred twenty (120) days in order to exercise any
of Bank's rights or remedies provided herein, at law, in equity, or otherwise;
(f) Without notice to Borrower set off and apply to the
Obligations any and all (i) balances and deposits of Borrower held by Bank, or
(ii) indebtedness at any time owing to or for the credit or the account of
Borrower held by Bank;
(g) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Bank is hereby granted a license or other right,
solely pursuant to the provisions of this Section 9.1, to use, without charge,
Borrower's labels, patents, copyrights, rights of use of any name, trade
secrets, trade names, trademarks, service marks, and advertising matter, or any
property of a similar nature, as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section 9.1, Borrower's
rights under all licenses and all franchise agreements shall inure to Bank's
benefit;
(h) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as Bank
determines is commercially reasonable;
(i) Bank may credit bid and purchase at any public sale;
and
(j) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower.
9.2 Power of Attorney. Effective only upon the occurrence and
during the continuance of an Event of Default, Borrower hereby irrevocably
appoints Bank (and any of Bank's designated officers, or employees) as
Borrower's true and lawful attorney to: (a) send requests for verification of
Accounts or notify account debtors of Bank's security interest in the Accounts;
(b) endorse Borrower's name on any checks or other forms of payment or security
that may come into Bank's possession; (c) sign Borrower's name on any invoice or
bill of lading relating to any Account, drafts against account debtors,
schedules and assignments of Accounts, verifications of Accounts, and notices to
account debtors; (d) make, settle, and adjust all claims under and decisions
with respect to Borrower's policies of insurance; and (e) settle and adjust
disputes and claims respecting the accounts directly with account debtors, for
amounts and upon terms which Bank determines to be reasonable; provided Bank may
exercise such power of attorney to sign the name of Borrower on any of the
documents described in Section 4.2 regardless of whether an Event of Default has
occurred. The appointment of Bank as Borrower's attorney in fact, and each and
every one of Bank's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been fully repaid and performed
and Bank's obligation to provide advances hereunder is terminated.
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9.3 Accounts Collection. At any time from the date of this
Agreement, Bank may notify any Person owing funds to Borrower of Bank's security
interest in such funds and verify the amount of such Account. Borrower shall
collect all amounts owing to Borrower for Bank, receive in trust all payments as
Bank's trustee, and immediately deliver such payments to Bank in their original
form as received from the account debtor, with proper endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amounts or
furnish any required proof of payment due to third persons or entities, as
required under the terms of this Agreement, then Bank may do any or all of the
following: (a) make payment of the same or any part thereof; (b) set up such
reserves under the Revolving Facility as Bank deems necessary to protect Bank
from the exposure created by such failure; or (c) obtain and maintain insurance
policies of the type discussed in Section 6.6 of this Agreement, and take any
action with respect to such policies as Bank deems prudent. Any amounts so paid
or deposited by Bank shall constitute Bank Expenses, shall be immediately due
and payable, and shall bear interest at the then applicable rate hereinabove
provided, and shall be secured by the Collateral. Any payments made by Bank
shall not constitute an agreement by Bank to make similar payments in the future
or a waiver by Bank of any Event of Default under this Agreement.
9.5 Bank's Liability for Collateral. So long as Bank complies
with reasonable banking practices, Bank shall not in any way or manner be liable
or responsible for: (a) the safekeeping of the Collateral; (b) any loss or
damage thereto occurring or arising in any manner or fashion from any cause; (c)
any diminution in the value thereof; or (d) any act or default of any carrier,
warehouseman, bailee, forwarding agency, or other person whomsoever. All risk of
loss, damage or destruction of the Collateral shall be borne by Borrower.
9.6 Remedies Cumulative. Bank's rights and remedies under this
Agreement, the Loan Documents, and all other agreements shall be cumulative.
Bank shall have all other rights and remedies not inconsistent herewith as
provided under the Code, by law, or in equity. No exercise by Bank of one right
or remedy shall be deemed an election, and no waiver by Bank of any Event of
Default on Borrower's part shall be deemed a continuing waiver. No delay by Bank
shall constitute a waiver, election, or acquiescence by it. No waiver by Bank
shall be effective unless made in a written document signed on behalf of Bank
and then shall be effective only in the specific instance and for the specific
purpose for which it was given.
9.7 Demand; Protest. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment, notice
of any default, nonpayment at maturity, release, compromise, settlement,
extension, or renewal of accounts, documents, instruments, chattel paper, and
guarantees at any time held by Bank on which Borrower may in any way be liable.
10. NOTICES
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other agreement entered
into in connection herewith shall be in writing and (except for financial
statements and other informational documents which may be sent by first-class
mail, postage prepaid) shall be personally delivered or sent by a recognized
overnight delivery service, certified mail, postage prepaid, return receipt
requested, or by telefacsimile to Borrower or to Bank, as the case may be, at
its addresses set forth below:
If to Borrower: ReSound Corporation
220 Saginaw Drive
Redwood City, CA 94063
Attn: Laureen DeBuono or Chief Financial Officer
Copy to: General Counsel
FAX: (415) 367-0675
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If to Bank: Silicon Valley Bank
3003 Tasman Drive
Santa Clara, CA 95054-1191
Attn: Cliff White
FAX: (408) 654-1045
The parties hereto may change the address at which they are to receive
notices hereunder, by notice in writing in the foregoing manner given to the
other.
11. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER
This Agreement shall be governed by, and construed in accordance
with, the internal laws of the State of California, without regard to principles
of conflicts of law. Each of Borrower and Bank hereby submits to the exclusive
jurisdiction of the state and Federal courts located in the County of Santa
Clara, State of California. BORROWER AND BANK EACH HEREBY WAIVE THEIR RESPECTIVE
RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT
OF ANY OF THE LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN,
INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER
COMMON LAW OR STATUTORY CLAIMS. EACH PARTY RECOGNIZES AND AGREES THAT THE
FOREGOING WAIVER CONSTITUTES A MATERIAL INDUCEMENT FOR IT TO ENTER INTO THIS
AGREEMENT. EACH PARTY REPRESENTS AND WARRANTS THAT IT HAS REVIEWED THIS WAIVER
WITH ITS LEGAL COUNSEL AND THAT IT KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY
TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement shall bind and inure
to the benefit of the respective successors and permitted assigns of each of the
parties; provided, however, that neither this Agreement nor any rights hereunder
may be assigned by Borrower without Bank's prior written consent, which consent
may be granted or withheld in Bank's sole discretion. Bank shall have the right
without the consent of or notice to Borrower to sell, transfer, negotiate, or
grant participation in all or any part of, or any interest in, Bank's
obligations, rights and benefits hereunder.
12.2 Indemnification. Borrower shall defend, indemnify and hold
harmless Bank and its officers, employees, and agents against: (a) all
obligations, demands, claims, and liabilities claimed or asserted by any other
party in connection with the transactions contemplated by this Agreement; and
(b) all losses or Bank Expenses in any way suffered, incurred, or paid by Bank
as a result of or in any way arising out of, following, or consequential to
transactions between Bank and Borrower whether under this Agreement, or
otherwise (including without limitation reasonable attorneys fees and expenses),
except for losses caused by Bank's gross negligence or willful misconduct.
12.3 Time of Essence. Time is of the essence for the performance
of all obligations set forth in this Agreement.
12.4 Severability of Provisions. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the purpose
of determining the legal enforceability of any specific provision.
12.5 Amendments in Writing, Integration. This Agreement cannot be
amended or terminated orally. All prior agreements, understandings,
representations, warranties, and negotiations between the parties hereto with
respect to the subject matter of this Agreement, if any, are merged into this
Agreement and the Loan Documents.
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12.6 Counterparts. This Agreement may be executed in any number
of counterparts and by different parties on separate counterparts, each of
which, when executed and delivered, shall be deemed to be an original, and all
of which, when taken together, shall constitute but one and the same Agreement.
12.7 Survival. All covenants, representations and warranties made
in this Agreement shall continue in full force and effect so long as any
Obligations remain outstanding. The obligations of Borrower to indemnify Bank
with respect to the expenses, damages, losses, costs and liabilities described
in Section 12.2 shall survive until all applicable statute of limitations
periods with respect to actions that may be brought against Bank have run.
12.8 Confidentiality. In handling any confidential information
Bank shall exercise the same degree of care that it exercises with respect to
its own proprietary information of the same types to maintain the
confidentiality of any non-public information thereby received or received
pursuant to this Agreement except that disclosure of such information may be
made (i) to the subsidiaries or affiliates of Bank in connection with their
present or prospective business relations with Borrower, (ii) to prospective
transferees or purchasers of any interest in the Loans, provided that they have
entered into a comparable confidentiality agreement in favor of Borrower and
have delivered a copy to Borrower, (iii) as required by law, regulations, rule
or order, subpoena, judicial order or similar order and (iv) as may be required
in connection with the examination, audit or similar investigation of Bank.
Confidential information hereunder shall not include information that either:
(a) is in the public domain or in the knowledge or possession of Bank when
disclosed to Bank, or becomes part of the public domain after disclosure to Bank
through no fault of Bank; or (b) is disclosed to Bank by a third party, provided
Bank does not have actual knowledge that such third party is prohibited from
disclosing such information.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the date first above written.
RESOUND CORPORATION
By: /s/Christopher H. Pascoe
-------------------------------------------
Title: Vice President, Corporate Controller
----------------------------------------
SILICON VALLEY BANK
By: Cliff White
-------------------------------------------
Title: Senior Vice President
----------------------------------------
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EXHIBIT A
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter acquired,
including, without limitation, all machinery, fixtures, vehicles (including
motor vehicles and trailers), and any interest in any of the foregoing, and all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing, wherever located;
(b) All inventory, now owned or hereafter acquired, including,
without limitation, all merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products including such
inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned or
hereafter acquired, including, without limitation, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications, leases,
license agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts, contract
rights, royalties, license rights and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods, the licensing of technology
or the rendering of services by Borrower, whether or not earned by performance,
and any and all credit insurance, guaranties, and other security therefor, as
well as all merchandise returned to or reclaimed by Borrower and Borrower's
Books relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities, letters of
credit, certificates of deposit, instruments and chattel paper now owned or
hereafter acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications, copyright
registrations and like protections in each work of authorship and derivative
work thereof, whether published or unpublished, now owned or hereafter acquired;
all trade secret rights, including all rights to unpatented inventions,
know-how, operating manuals, license rights and agreements and confidential
information, now owned or hereafter acquired; all mask work or similar rights
available for the protection of semiconductor chips, now owned or hereafter
acquired; all claims for damages by way of any past, present and future
infringement of any of the foregoing; and
(g) Any and all claims, rights and interests in any of the above
and all substitutions for, additions and accessions to and proceeds thereof.
Notwithstanding the foregoing, the Collateral shall not be deemed to include any
copyright rights, copyright applications, copyright registrations and like
protections in each work of authorship and derivative work thereof, whether
published or unpublished, now owned or hereafter acquired; any patents,
trademarks, servicemarks and applications therefor, any trade secret rights,
including any rights to unpatented inventions, know-how, operating manuals,
license rights and agreements and confidential information, now owned or
hereafter acquired; or any claims for damages by way of any past, present and
future infringement of any of the foregoing (the "Intellectual Property") except
that the Collateral shall include the proceeds of, and all rights to payment
arising under the Intellectual Property.
<PAGE> 23
EXHIBIT A-1
The Collateral shall consist of all right, title and interest of
Borrower in and to the following:
(a) All goods and equipment now owned or hereafter
acquired, including, without limitation, all machinery, fixtures, vehicles
(including motor vehicles and trailers), and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions, and improvements to any of the foregoing, wherever
located;
(b) All inventory, now owned or hereafter acquired,
including, without limitation, all merchandise, raw materials, parts, supplies,
packing and shipping materials, work in process and finished products including
such inventory as is temporarily out of Borrower's custody or possession or in
transit and including any returns upon any accounts or other proceeds, including
insurance proceeds, resulting from the sale or disposition of any of the
foregoing and any documents of title representing any of the above, and
Borrower's Books relating to any of the foregoing;
(c) All contract rights and general intangibles now owned
or hereafter acquired, including, without limitation, goodwill, trademarks,
servicemarks, trade styles, trade names, patents, patent applications, leases,
license agreements, franchise agreements, blueprints, drawings, purchase orders,
customer lists, route lists, infringements, claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, design rights, income tax
refunds, payments of insurance and rights to payment of any kind;
(d) All now existing and hereafter arising accounts,
contract rights, royalties, license rights and all other forms of obligations
owing to Borrower arising out of the sale or lease of goods, the licensing of
technology or the rendering of services by Borrower, whether or not earned by
performance, and any and all credit insurance, guaranties, and other security
therefor, as well as all merchandise returned to or reclaimed by Borrower and
Borrower's Books relating to any of the foregoing;
(e) All documents, cash, deposit accounts, securities,
letters of credit, certificates of deposit, instruments and chattel paper now
owned or hereafter acquired and Borrower's Books relating to the foregoing;
(f) All copyright rights, copyright applications,
copyright registrations and like protections in each work of authorship and
derivative work thereof, whether published or unpublished, now owned or
hereafter acquired; all trade secret rights, including all rights to unpatented
inventions, know-how, operating manuals, license rights and agreements and
confidential information, now owned or hereafter acquired; all mask work or
similar rights available for the protection of semiconductor chips, now owned or
hereafter acquired; all claims for damages by way of any past, present and
future infringement of any of the foregoing; and
Any and all claims, rights and interests in any of the above and all
substitutions for, additions and accessions to and proceeds thereof.
<PAGE> 24
EXHIBIT B
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT SERVICE DIVISION DATE:
---------------------------
FAX#: (408) 432-3249 TIME:
---------------------------
FROM:
---------------------------------------------------------------------------
CLIENT NAME (BORROWER)
REQUESTED BY:
-------------------------------------------------------------------
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:
-----------------------------------------------------------
PHONE NUMBER:
-------------------------------------------------------------------
FROM ACCOUNT # TO ACCOUNT #
------------------------------- ---------------------
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
PRINCIPAL INCREASE (ADVANCE) $
-----------------------------------
PRINCIPAL PAYMENT (ONLY) $
-----------------------------------
INTEREST PAYMENT (ONLY) $
-----------------------------------
PRINCIPAL AND INTEREST (PAYMENT) $
-----------------------------------
OTHER INSTRUCTIONS:
-------------------------------------------------------------
- --------------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Loan
Agreement are true, correct and complete in all material respects as of the date
of the telephone request for and Advance confirmed by this Borrowing
Certificate; provided, however, that those representations and warranties
expressly referring to another date shall be true, correct and complete in all
material respects as of such date.
BANK USE ONLY
TELEPHONE REQUEST:
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
- -------------------------------------- ------------------------------
Authorized Requester Phone #
- -------------------------------------- ------------------------------
Received By (Bank) Phone #
-------------------------------
Authorized Signature (Bank)
<PAGE> 25
EXHIBIT C
BORROWING BASE CERTIFICATE
- --------------------------------------------------------------------------------
Borrower: ReSound Corporation
Commitment Amount: $3,000,000
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ACCOUNTS RECEIVABLE
1. Accounts Receivable
Book Value as of $
-------- ----------
2. Additions (please explain on reverse) $
----------
3. TOTAL ACCOUNTS RECEIVABLE $
----------
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $
----------
5. Balance of 50% over 90 day accounts $
----------
6. Concentration Limits $
----------
7. Foreign Accounts $
8. Governmental Accounts $
9. Contra Accounts $
----------
10. Promotion or Demo Accounts $
----------
11. Intercompany/Employee Accounts $
----------
12. Other (please explain on reverse) $
----------
13. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $
----------
14. Eligible Accounts (#3 minus #13) $
----------
15. LOAN VALUE OF ACCOUNTS (50% of #14) $
----------
CASH ADDITION
16. N/A N/A
BALANCES
17. Maximum Loan Amount $3,000,000
18. Total Funds Available [Lesser of #17 or (#15 plus #16)] $
----------
19. Present balance owing on Line of Credit $
----------
20. Outstanding under Sublimits ( ) $
----------
21. RESERVE POSITION (#18 minus #19 and #20) $
----------
</TABLE>
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
COMMENTS:
BANK USE ONLY
RESOUND CORPORATION Rec'd By:
----------------
Auth. Signer
Date:
By: ---------------
-------------------------------
Authorized Signer Verified:
-----------
Date:
-----------
<PAGE> 26
COMMENTS REGARDING EXCEPTIONS:
SEE ATTACHED. BANK USE ONLY
Sincerely, RECEIVED BY:
----------------------------
- ------------------------------- AUTHORIZED SIGNER
SIGNATURE
DATE:
- ------------------------------- -----------------------------------
TITLE
COMPLIANCE STATUS: YES NO
- -------------------------------
DATE
<PAGE> 27
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: RESOUND CORPORATION
The undersigned authorized officer of ReSound Corporation hereby
certifies that in accordance with the terms and conditions of the Loan and
Security Agreement between Borrower and Bank (the "Agreement"), (i) Borrower is
in complete compliance for the period ending ______________ with all required
covenants except as noted below and (ii) all representations and warranties of
Borrower stated in the Agreement are true and correct in all material respects
as of the date hereof. Attached herewith are the required documents supporting
the above certification. The Officer further certifies that these are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) and are
consistently applied from one period to the next except as explained in an
accompanying letter or footnotes.
PLEASE INDICATE COMPLIANCE STATUS BY CIRCLING YES/NO UNDER
"COMPLIES" COLUMN.
<TABLE>
<CAPTION>
REPORTING COVENANT REQUIRED COMPLIES
------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements Monthly within 30 days Yes No
Annual (CPA Audited) FYE within 90 days Yes No
A/R & A/P Agings Monthly within 15 days Yes No
A/R Audit Initial and Semi-Annual Yes No
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL COVENANT REQUIRED ACTUAL COMPLIES
------------------ -------- ------ --------
<S> <C> <C> <C> <C>
Maintain:
Minimum Quick Ratio (Monthly) (1) _____:1.0 Yes No
Tangible Net Worth (Monthly) (2) (3) $________ Yes No
Total Liabilities/Tangible Net Worth (4) _____:1.0 Yes No
(Monthly) (5)
Profitability: Quarterly (6) $________ Yes No
</TABLE>
(1) Borrower shall maintain, as of the last Saturday of each month through
5/29/99, a ratio of Quick Assets to Current Liabilities of at least 0.55 to 1.0.
Thereafter, Borrower shall maintain, as of the last Saturday of each month
through 11/27/99, a ratio of Quick Assets to Current Liabilities of at least
0.60 to 1.0. Thereafter, Borrower shall maintain, as of the last Saturday of
each month, a ratio of Quick Assets to Current Liabilities of at least 0.70 to
1.0.
(2) plus CHA Debt
(3) As of the last Saturday of each month through 5/29/99, Borrower shall
maintain a Tangible Net Worth of not less than $16,000,000. Thereafter, as of
the last Saturday of each month through 8/28/99, Borrower shall maintain a
Tangible Net Worth of not less than $19,000,000. Thereafter, as of the last
Saturday of each month through 11/27/99, Borrower shall maintain a Tangible Net
Worth of not less than $22,000,000. Thereafter, as of the last Saturday of each
month, Borrower shall maintain a Tangible Net Worth of not less than
$25,000,000.
(4) As of the last Saturday of each month through 5/29/99, Borrower shall
maintain a ratio of Total Liabilities to Tangible Net Worth, of no greater than
2.60 to 1.0. Thereafter, as of the last Saturday of each month through 8/28/99,
Borrower shall maintain a ratio of Total Liabilities to Tangible Net Worth, of
no greater than 2.25 to 1.0. Thereafter, as of the last Saturday of each month
through 11/27/99, Borrower shall maintain a ratio of Total Liabilities to
Tangible Net Worth, of no greater than 2.0 to 1.0. Thereafter, as of the last
Saturday of each month, Borrower shall maintain, on a monthly basis, a ratio of
Total Liabilities to Tangible Net Worth, of no greater than 1.75 to 1.0.
(5) TL excluding CHA Debt/TNW plus CHA Debt.
(6) Borrower shall show a net profit of at least $1.00 for the fiscal quarter
ending on 3/27/99. Borrower shall show a net profit of at least $1,000,000 for
each of the fiscal quarters ending on 6/26/99 and 9/25/99. Borrower shall show a
net profit of at least $2,000,000 for each quarter thereafter.
<PAGE> 28
DISBURSEMENT REQUEST AND AUTHORIZATION
- --------------------------------------------------------------------------------
Borrower: ReSound Corporation Bank: Silicon Valley Bank
- --------------------------------------------------------------------------------
LOAN TYPE. This is a Variable Rate, Revolving Line of Credit of a principal
amount up to $3,000,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Short Term Working
Capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
<TABLE>
<CAPTION>
Revolving Line
--------------
<S> <C>
Amount paid to Borrower directly: $______
Undisbursed Funds $______
Principal $3,000,000
</TABLE>
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
<TABLE>
<S> <C>
Prepaid Finance Charges Paid in Cash: $______
$30,000 Loan Fee
$1,671.18 Accounts Receivables Audit
$13,000 Restructure Fees
Other Charges Paid in Cash: $______
$______UCC Search Fees
$______UCC Filing Fees
$______Patent Filing Fees
$______Trademark Filing Fees
$______Copyright Filing Fees
$6,086 Outside Counsel Fees and Expenses (Estimate)
Total Charges Paid in Cash $______
</TABLE>
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from
Borrower's account numbered the amount of any loan payment. If the funds in the
account are insufficient to cover any payment, Bank shall not be obligated to
advance funds to cover the payment. At any time and for any reason, Borrower or
Bank may voluntarily terminate Automatic Payments.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF FEBRUARY 12, 1999.
BORROWER:
ReSound Corporation
- -------------------------------
Authorized Officer
<PAGE> 29
AGREEMENT TO PROVIDE INSURANCE
- --------------------------------------------------------------------------------
GRANTOR: ReSound Corporation BANK: Silicon Valley Bank
- --------------------------------------------------------------------------------
INSURANCE REQUIREMENTS. ReSound Corporation ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or the
providing of other financial accommodations to Grantor by Bank. These
requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation that
coverage will not be canceled or diminished without
a minimum of twenty (20) days' prior written notice
to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Bank. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of February 12, 1999, or earlier. Grantor acknowledges and agrees
that if Grantor fails to provide any required insurance or fails to continue
such insurance in force, Bank may do so at Grantor's expense as provided in the
Loan and Security Agreement. The cost of such insurance, at the option of Bank,
shall be payable on demand or shall be added to the indebtedness as provided in
the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO PURCHASES ANY SUCH
INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION AGAINST PHYSICAL DAMAGE
TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN; HOWEVER, GRANTOR'S EQUITY IN
THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE INSURANCE MAY NOT PROVIDE
ANY PUBLIC LIABILITY OR PROPERTY DAMAGE INDEMNIFICATION AND MAY NOT MEET THE
REQUIREMENTS OF ANY FINANCIAL RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT TO
PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED FEBRUARY 12,
1999.
GRANTOR:
RESOUND CORPORATION
x
-------------------------------
Authorized Officer
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE: PHONE:
------------------------------- -------------------------------
AGENT'S NAME:
-------------------------------------------------------------
INSURANCE COMPANY:
--------------------------------------------------------
<PAGE> 30
POLICY NUMBER:
------------------------------------------------------------
EFFECTIVE DATES:
----------------------------------------------------------
COMMENTS:
-----------------------------------------------------------------
<PAGE> 31
CORPORATE RESOLUTIONS TO BORROW
- --------------------------------------------------------------------------------
BORROWER: ReSound Corporation
- --------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of ReSound
Corporation (the "Corporation"), HEREBY CERTIFY that the Corporation is
organized and existing under and by virtue of the laws of the State of
California.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the Corporation
(or by other duly authorized corporate action in lieu of a meeting), duly called
and held, at which a quorum was present and voting, the following resolutions
were adopted.
BE IT RESOLVED, that ANY ONE (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
<TABLE>
<CAPTION>
NAMES POSITIONS ACTUAL SIGNATURES
----- --------- -----------------
<S> <C> <C>
-------------- ------------------ ----------------------
-------------- ------------------ ----------------------
-------------- ------------------ ----------------------
-------------- ------------------ ----------------------
</TABLE>
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
BORROW MONEY. To borrow sums of money from Silicon Valley Bank ("Bank")
in an amount not to exceed Three Million Dollars ($3,000,000), under the terms
and conditions set forth in that certain Loan and Security Agreement dated
February 12, 1999, by and between Bank and Corporation (the "Loan Agreement").
EXECUTE NOTES. To execute and deliver to Bank the promissory note or
notes of the Corporation, on Lender's forms, at such rates of interest and on
such terms as set forth in the Loan Agreement, evidencing the sums of money so
borrowed of the Corporation to Bank.
GRANT SECURITY. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
NEGOTIATE ITEMS. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
FURTHER ACTS. In the case of lines of credit, to designate additional or
alternate individuals as being authorized to request advances thereunder, and in
all cases, to do and perform such other acts and things, to pay any and all fees
and costs, and to execute and deliver such other documents and agreements as
they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
30
<PAGE> 32
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that the Resolutions are in full force and effect and have not been modified
or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on _______________,
19___ and attest that the signatures set opposite the names listed above are
their genuine signatures.
CERTIFIED TO AND ATTESTED BY:
X
-------------------------------
<PAGE> 1
EXHIBIT 10.39
RESOUND CORPORATION
CONTRACT CONSULTING AGREEMENT
This Agreement, commencing as of January 1, 1999, between Rodney
Perkins, M.D. and ReSound Corporation, a California corporation, respectively
referred to hereinafter as "Consultant" and "Company", is for the purpose of
expressing the mutual obligations of Consultant and Company as follows:
1. Consultant agrees to perform the duties set forth in Section 2 below for
a period commencing January 1, 1999 and terminating no later than
December 31, 1999, and will be compensated for said services at the rate
of $4,000.00 per month by Company.
2. Consultant's duties:
o Product development relating to non-implantable acoustic hearing
devices (as defined in Section 6 below); and
o Marketing and financial consulting relating to non-implantable
acoustic hearing devices
3. Timing of payment will be within thirty (30) days from time of
submission of an invoice unless otherwise agreed upon, but in no case
will exceed forty-five (45) days after termination of this Agreement.
4. Either the Company or the Consultant may terminate this Agreement at any
time by giving of written notice of such intention to terminate to the
other party. The expiration or termination of this Agreement shall not
terminate the obligation of the Consultant specified hereinafter.
5. Consultant agrees not to disclose, publish or reveal to any other party
whatsoever any trade secrets, techniques, inventions, discoveries,
technology or processes which relate to the practices and businesses of
the Company (collectively, the "Information") and to treat all such
Information as secret and confidential, both during the duration of this
Agreement and after its termination. Consultant further agrees not to
make use of, either directly or indirectly, any of the Information which
Consultant receives from the Company other than with the specific prior
written authorization of an authorized officer of the Company.
6. a) All concepts, designs, design analyses, inventions, improvements,
trade secrets and other proprietary information created in whole or in
part by Consultant during the term of this Agreement which relate solely
to non-implantable acoustic hearing devices shall be the sole property
of the Company. Consultant agrees to promptly and fully disclose in
writing all such concepts, designs, design analyses, inventions,
improvements, trade secrets and other
<PAGE> 2
proprietary property relating solely to non-implantable acoustic hearing
devices to the Company and to execute patent applications relating to
such inventions and assignments of the entire interest therein to the
Company as requested, whether or not within the term of this Agreement.
b) All concepts, designs, design analyses, inventions, improvements,
trade secrets and other proprietary information created in whole or in
part by Consultant during the term of this Agreement which relate to
implantable acoustic hearing devices shall, as between the parties
hereto, remain the sole property of the Consultant.
7. All notes and records and copies there of made or maintained by
Consultant relating to this performance of this Agreement are the
property of Company and will be delivered to Company upon termination of
this Agreement.
8. Consultant agrees to indemnify Company against any losses or expenses
sustained by Company, including reasonable attorney's fees, by reason of
the breach of Consultant of any term of this Agreement.
9. Nothing contained in this Agreement shall be construed to constitute a
partnership, joint venture, agency or employment relationship between
the Company and Consultant, it being understood that Consultant shall at
all times remain an independent contractor, and that the Company shall
in no event be liable for the debts, liabilities or other obligations of
the Consultant. Consultant shall have no authority to bind or otherwise
obligate the Company to any contract or agreement and Consultant agrees
that he will not represent to third parties that he has the authority to
do so.
10. The rights and obligations of the parties under this Agreement shall be
binding upon, and insure to the benefit of, their respective successors
and assigns:
RESOUND CORPORATION CONSULTANT
/s/ Russell D. Hays /s/ Dr. Rodney Perkins
- ------------------------------------- -------------------------------
President and Chief Executive Officer
<PAGE> 1
EXHIBIT 10.40
SETTLEMENT AGREEMENT AND RELEASE
This Settlement Agreement and Mutual Release (the "Agreement") is
entered into this 21st day of December, 1998 by and between ReSound Corporation
(the "Company"), and Andreas B. Joder (the "Employee").
WHEREAS, the Company and Employee have mutually agreed to terminate the
employment relationship; and
WHEREAS, in consideration of the payments to Employee set forth in
paragraph 2 below and for other consideration the sufficiency and receipt of
which is hereby acknowledged and agreed to by Employee, Employee has agreed to
release the Company from any claims arising from or related to the employment
relationship;
NOW; THEREFORE, the parties agree as follows:
1. Termination. The Company and Employee acknowledge and agree that
Employee's employment with the Company terminated effective October 31, 1998
(the "Termination Date"). Beginning on and as of the Termination Date through
April 30, 1999, Employee shall, upon request, provide transition consulting
services to the Company, as an independent contractor, all in accordance with
the terms of the Consulting Agreement attached hereto as Exhibit B (the
"Consulting Agreement").
2. Consideration. In consideration of the release of claims set forth in
paragraph 6 below and other obligations under this Agreement, the Company agrees
to pay Employee severance pay in the total amount of $100,000.00 (less
applicable tax withholding) (the "Termination Payment") and to pay any
government mandated Company benefit contributions based on the Termination
Payment. This amount represents four (4) months of pay in lieu of notice plus
additional two (2) months of pay for the total of six (6) months of severance
pay. With the tax advice of Ernst & Young and in a manner acceptable to both
Employee and Company, this payment may be paid so that the portion attributable
to 1999 earnings would accounted for in the Employee's 1999 tax year. If the
Company achieves the targets specified by the Board of Directors with respect to
incentive compensation for the position of Sr. Vice President Operations for the
Company's fiscal year 1998, Employee will be paid a pro rata share of such
incentive compensation for fiscal year 1998, based on the portion of the 1998
fiscal year Employee was employed as Sr. Vice President Operations (January 1,
1998 through October 31, 1998), such payment to be made following the end of the
1998 fiscal year, when other incentive compensation payments (if any) are made
to eligible employees of Company.
<PAGE> 2
3. Benefits.
(a) No additional vacation or other paid time off shall accrue
following the Termination Date.
(b) Per Company policy, the Company shall continue to pay the
health and welfare benefit insurance premiums customarily paid by the Company on
Employee's behalf during Employee's employment with the Company until the
earlier of (i) the date the Employee becomes covered under another employer's
health insurance plan, or (ii) April 30, 1999.
(c) The Company agrees to provide up to $7,500 of outplacement
services with a provider of Employee's choice. Employee may have the services
provider invoice the Company for outplacement services used up to six months
following the Termination Date. Upon request, the Company will advise Employee
of several providers of outplacement services. The foregoing $7,500 of
outplacement services will include the reimbursement of up to $2,000 of
out-of-pocket expenses for job search activities. Except as specifically
provided in the foregoing sentence, no cash payments in lieu of outplacement
services will be made to Employee.
(d) The Company agrees that Employee shall have access to his
office in Switzerland and may make customary use of the furniture and office
equipment therein through December 31, 1998, at which time Employee's access to
such office will be denied. Until December 4, 1998, the Company may accept a bid
by the Employee for the market value of the furniture and equipment in the
office. After that date, the Company will dispose of the items as it chooses.
(e) Employee may access Employee's Company provided apartment at
Indian Creek in Redwood Shores through November 5, 1998 after which Employee
will no longer have access to the apartment. By that time the Employee must have
vacated the apartment. The Company will pay for one round trip airfare from
Switzerland to San Francisco for Employee to make arrangements for the move of
Employee's personal belongs from the apartment. Any belongings remaining in the
apartment after November 5, 1998, will be disposed of by the Company in whatever
means decided upon by the Company in its sole discretion.
(f) Employee's use of Employee's Company provided automobile
until February 28, 1999, at which time, subject to the following sentence,
Employee shall return such automobile to the Company. No later than January 15,
1999, Employee shall inform the Company of whether or not Employee intends to
assume the lease payments on his Company provided automobile beginning March 1,
1999.
4. Vesting of Stock Options. Vesting of Employee's options to purchase
shares of Common Stock granted to Employee under the Company's Stock Option
Plans
2
<PAGE> 3
shall cease on April 30, 1999, the termination date of the Consulting Agreement.
Any options that are vested as of such date shall then terminate in accordance
with their terms.
5. No Other Payments Due. Employee acknowledges and agrees that Employee
has received all salary, accrued vacation, commissions, bonuses, compensation,
shares of stock or options therefor or other such sums due to Employee. In light
of the payment by the Company of all wages due, or to become due to Employee,
the Parties further acknowledge and agree that California Labor Code Section
206.5 is not applicable to the Parties hereto. That section provides in
pertinent part as follows:
No employer shall require the execution of any release of any
claim or right on account of wages due, or to become due, or made
as an advance on wages to be earned, unless payment of such wages
has been made.
6. Release. Except as to claims arising from the Company's performance
or non-performance under this Agreement, Employee hereby and forever releases
and discharges Company and each of its past and present directors, shareholders,
agents, employees, attorneys, successors and assigns ("Releasees") from any and
all claims, causes of action, obligations, and liabilities of any nature
whatsoever, known or unknown, that Employee ever had, now has or may hereafter
claim to have against any of the Releasees relating to Employee's employment or
nonemployment by Company, to the termination of Employee's employment, to any
status, term or condition of such employment, or any physical or mental harm or
distress from such employment or from conditions of such employment, including
without limitation:
(i) any and all claims under federal anti-discrimination
laws (including, but not limited to Title VII of the
Civil Rights Act of 1964 and the Americans With
Disabilities Act)
(ii) any and all claims under California statutory or
decisional law pertaining to wrongful discharge,
discrimination, or breach of public policy (including
but not limited to the California Fair Employment and
Housing Act);
(iii) any and all claims for employment benefits, including
without limitation, wages, severance payments, fringe
benefits, bonuses, or disability payments, except for
rights accrued through the date of termination of
Employee's employment,
(iv) any and all claims of age discrimination under the Age
Discrimination in Employment Act; and
(v) any and all claims relating to Employee's right to
purchase, or actual purchase of shares of stock of the
Company other than pursuant to
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<PAGE> 4
the specific terms of the document granting Employee the
right to purchase shares of stock of the Company.
7. Waiver. Employee each expressly waive all rights under section 1542
of the Civil Code of California which provides:
A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor.
Employee understands and agrees that Employee may not know or suspect the
existence of some claims covered by the terms of this Agreement, the nature of
which they have not yet discovered. Future claims covered by the terms of this
release shall be limited to acts or events which have occurred on or prior to
the final date of execution of this Agreement. It is expressly understood and
agreed that the possibility that such unknown claims exist was explicitly taken
into account by Employee and by the Company in determining the amount of
consideration to be paid or accepted for the giving of this Agreement.
8. Covenant Not To Sue. Employee covenants and agrees that Employee will
never, individually or with any person or in any way, commence, aid in any way,
except as required by due legal process, prosecute or cause or permit to be
commenced or prosecuted against any Releasee, any action or other proceeding
based upon any claim which is released by this Agreement. This Agreement shall
be deemed breached and a cause of action shall be deemed to have accrued
immediately upon the commencement or prosecution of any action or proceeding
contrary to this Agreement.
In the event of any breach of this Paragraph 8, the aggrieved Releasee shall be
entitled to recover from Employee not only the amount of any judgment which may
be awarded against such Releasee, but also all such other damages, costs and
expenses, taxable or otherwise, in preparing the defense of or defending
against, or seeking or obtaining an abatement of or injunction against any
action or proceeding brought in violation of this Paragraph 8, and in
prosecuting any claim, counterclaim or cross-claim based on this Agreement.
9. No Assignment; Authority. Employee represents and warrants that no
other person had or has or claims any interest in the claims referred to in
Section 6 above; that Employee has the sole right and exclusive authority to
execute this Agreement; that Employee has the sole right to receive the
consideration paid therefor; and that Employee has not sold, assigned,
transferred, conveyed or otherwise disposed of any claim or demand released by
this Agreement. The Company represents and warrants that the undersigned has the
authority to act on behalf of the Company and to bind the Company to this
Agreement.
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<PAGE> 5
10. Confidentiality. The parties agree to use their best efforts to
maintain in confidence the existence of this Agreement, the contents and terms
of this Agreement, and the consideration for this Agreement, except for
disclosures required by law or necessary to effectuate the terms of this
Agreement. Notwithstanding the foregoing, Employee shall be permitted to discuss
the provisions of this Agreement in confidence with Employee's attorneys,
accountants, tax advisors and spouse or significant other.
11. Nondisclosure of Confidential and Proprietary Information;
Nonsolicitation. Employee shall continue to maintain the confidentiality of all
confidential and propriety information of the Company as provided by the
separate confidentiality agreement previously entered into between the Company
and the Employee, a copy of which is attached hereto as Exhibit A. Employee
agrees that at all times hereafter, Employee shall not intentionally divulge,
furnish or make available to any party any of the trade secrets, patents, patent
applications, price decisions or determinations, inventions, customers,
proprietary information or other intellectual property rights of the Company,
until after such time as such information has become publicly known otherwise
than by act or collusion of Employee. Employee further agrees that Employee will
return all the Company's property and confidential and proprietary information
in Employee's possession to the Company within five business days from the date
of this Agreement. In addition, Employee agrees that Employee will not solicit,
either directly or indirectly, any employee, consultant, agent or advisor of the
Company for a period of one year from the Effective Date of the Agreement.
12. Breach of this Agreement. Employee acknowledges that upon breach of
the confidential and proprietary information provisions contained in Section 11
of this Agreement, the Company would sustain irreparable harm from such breach,
and, therefore, Employee agrees that in addition to any remedies which the
Company may have under this Agreement or otherwise, the Company shall be
entitled to obtain equitable relief, including specific performance and
injunctions, restraining Employee from committing or continuing any such
violation of this Agreement. Employee acknowledges and agrees that upon
Employee's material or intentional breach of any of the provisions of this
Agreement (including Section 10) in addition to any other remedies the Company
may have under this Agreement or otherwise, the Company's obligations to provide
benefits to Employee as described in Sections 2, 3 and 4 of this Agreement shall
immediately terminate (subject to Employee's rights to exercise any then
exercisable options as provided in Section 4 and Employee's right to elect
coverage at Employee's expense under COBRA as provided in Section 3(b)).
13. Non-Disparagement. Each party agrees to refrain from any
disparagement, criticism, defamation, slander of the other, or tortious
interference with the contracts and relationships of the other.
14. No Representations. Each party represents that it has carefully read
and understands the scope and effect of the provisions of this Agreement.
Neither party has
5
<PAGE> 6
relied upon any representations or statements made by the other party which are
not specifically set forth in this Agreement.
15. Costs. The Parties shall each bear their own costs, attorneys' fees
and other fees incurred in connection with this Agreement.
16. Severability. If any provision hereof becomes or is declared by a
court of competent jurisdiction to be illegal, unenforceable or void, this
Agreement shall continue in full force and effect without said provision.
17. Entire Agreement. This Agreement represents the entire agreement and
understanding between the Company and Employee concerning Employee's separation
from the Company and supersedes and replaces any and all prior agreements and
understandings concerning Employee's relationship with the Company and
Employee's compensation by the Company.
18. No Oral Modification. This Agreement may only be amended in writing
signed by Employee and a duly authorized officer of the Company.
19. Governing Law. This Agreement shall be governed by the laws of the
State of California.
20. Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
21. Voluntary Execution of the Agreement. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
the parties hereto, with the full intent of releasing all claims. The parties
acknowledge that:
(a) They have read this Agreement;
(b) They have had full opportunity to consult with legal counsel
of their own choice or that they have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement
and of the releases it contains; and
(d) They are fully aware of the legal and binding effect of this
Agreement.
22. Time to Consider/Revoke. Employee acknowledges that Employee is
aware that under the Older Workers' Benefit Protection Act Employee has
twenty-one (21) days in which to decide whether to enter into this Agreement.
Employee agrees that Employee was allowed twenty-one (21) days or such lesser
time as Employee felt was
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<PAGE> 7
adequate to consider this Agreement. Employee acknowledges that Employee is
aware that under the Older Workers' Benefit Protection Act Employee has seven
(7) days after the execution of this Agreement in which to revoke it. Employee
further acknowledges and agrees that, in the event Employee timely exercises the
right of revocation, Employee will have no rights under this Agreement. Employee
further acknowledges and agrees that if Employee fails to notify Company of an
intention to revoke this Agreement within seven (7) days of its execution, this
Agreement will be forever in full force and effect. Any notice of revocation
made by the Employee must be sent to Tom Johnson, Director of Human Resources;
ReSound Corporation; 220 Saginaw Drive; Seaport Centre; Redwood City, CA 94063.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
respective dates set forth below.
RESOUND CORPORATION
By: /s/ Edward Lopez
-------------------------------------
Vice President, Business
Title: Development and General Counsel
----------------------------------
Dated:
EMPLOYEE:
/s/ A. Joder
----------------------------------------
Andreas B. Joder
Dated: December 22, 1998
7
<PAGE> 1
EXHIBIT 10.41
SETTLEMENT AGREEMENT AND RELEASE
This Settlement Agreement and Release (the "Agreement") is entered into
this 22st day of December 1998 by and between ReSound GmbH Hortechnologie (the
"Company"), and Stephan Becker-Vogt (the "Employee").
WHEREAS, the Company and Employee have mutually agreed to terminate the
employment relationship; and
WHEREAS, in consideration of the payments to Employee set forth in
paragraph 2 below and for other consideration the sufficiency of which is hereby
acknowledged and agreed to by Employee, Employee has agreed to release the
Company from any claims arising from or related to the employment relationship;
NOW, THEREFORE, the parties agree as follows:
1. Termination. The Company and Employee acknowledge and agree that
Employee's existing employment contract with the Company will terminate
effective December 31, 1998 (the "Termination Date"), upon initiative of the
Company.
2. Consideration. As compensation for the loss of employment, Employee
shall receive compensation in the amount of DM720,000, gross according to
Sections 9,10 Termination Protection Act in connection with Section 3 para. 9
Income Tax Act. This amount shall be paid no later than December 31, 1998.
On or before December 31, 1998, Employee shall immediately return to the
Company all business documents, item and goods, the company car, mobile phone,
etc. which are still in Employee's possession. He shall return these items at
the domicile of the Company and shall have no right of retention.
3. Discharge of Future Liabilities. The appointment of Employee as
Managing Director of the Company is hereby revoked with immediate effect.
Employee is further discharged from any liability arising after the Termination
Date and accruing to Employee as a former Managing Director of the Company.
4. No Other Payments Due. Employee acknowledges and agrees that, upon
payment of the Termination Payment, Employee will have received all sums due to
Employee.
<PAGE> 2
5. Release. Except as to claims arising from the Company's performance
or non-performance under this Agreement, Employee hereby and forever releases
and discharges Company and each of its past and present directors, shareholders,
agents, employees, attorneys, successors and assigns ("Releasees") from any and
all claims, causes of action, obligations, and liabilities of any nature
whatsoever, known or unknown, that Employee ever had, now has or may hereafter
claim to have against any of the Releasees relating to Employee's employment or
nonemployment by Company, to the termination of Employee's employment, to any
status, term or condition of such employment, or any physical or mental harm or
distress from such employment or from conditions of such employment
6. Covenant Not To Sue. Employee covenants and agrees that Employee will
never, individually or with any person or in any way, commence, aid in any way,
except as required by due legal process, prosecute or cause or permit to be
commenced or prosecuted against any Releasee, any action or other proceeding
based upon any claim which is released by this Agreement. This Agreement shall
be deemed breached and a cause of action shall be deemed to have accrued
immediately upon the commencement or prosecution of any action or proceeding
contrary to this Agreement. In the event of any breach of this Paragraph 6, the
aggrieved Releasee shall be entitled to recover from Employee not only the
amount of any judgment which may be awarded against such Releasee, but also all
such other damages, costs and expenses, taxable or otherwise, in preparing the
defense of or defending against, or seeking or obtaining an abatement of or
injunction against any action or proceeding brought in violation of this
Paragraph 6, and in prosecuting any claim, counterclaim or cross-claim based on
this Agreement.
7. No Assignment; Authority. Employee represents and warrants that no
other person had or has or claims any interest in the claims referred to in
Section 5 above; that Employee has the sole right and exclusive authority to
execute this Agreement; that Employee has the sole right to receive the
consideration paid therefor; and that Employee has not sold, assigned,
transferred, conveyed or otherwise disposed of any claim or demand released by
this Agreement. The Company represents and warrants that the undersigned has the
authority to act on behalf of the Company and to bind the Company to this
Agreement.
8. Confidentiality. The parties agree to use their best efforts to
maintain in confidence the existence of this Agreement, the contents and terms
of this Agreement, and the consideration for this Agreement, except for
disclosures required by law or necessary to effectuate the terms of this
Agreement. Notwithstanding the foregoing, Employee shall be permitted to discuss
the provisions of this Agreement in confidence with Employee's attorneys,
accountants, tax advisors and spouse.
9. Nondisclosure of Confidential and Propriety Information. Employee
shall continue to maintain the confidentiality of all confidential and propriety
information of the Company as required by the separate confidentiality agreement
previously entered into between the Company and the Employee, a copy of which is
attached hereto as
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<PAGE> 3
Exhibit A. Employee agrees that at all times hereafter, Employee shall not
intentionally divulge, furnish or make available to any party any of the trade
secrets, patents, patent applications, price decisions or determinations,
inventions, customers, proprietary information or other intellectual property
rights of the Company, until after such time as such information has become
publicly known otherwise than by act or collusion of Employee. Employee further
agrees that Employee will return all the Company's property and confidential and
proprietary information in Employee's possession to the Company within five
business days from the date of this Agreement. In addition, Employee agrees that
Employee will not solicit, either directly or indirectly, any employee,
consultant, agent or advisor of the Company for a period of one year from the
effective date of the Agreement.
10. Breach of this Agreement. Employee acknowledges and agrees that
Employee's breach of the confidentiality agreement between Employee and the
Company, a copy of which is attached hereto as Exhibit A and referenced in
Section 9 of this Agreement, the Company would sustain irreparable harm from
such breach, and, therefore, Employee agrees that in addition to any other
remedies which the Company may have under this Agreement or otherwise, the
Company shall be entitled to obtain equitable relief, including specific
performance and injunctions, restraining Employee from committing or continuing
any such violation of this Agreement.
11. Non-Disparagement. Each party agrees to refrain from (and the
Company shall take reasonable efforts to cause its executive officers to refrain
from) any disparagement, criticism, defamation, slander of the other, or
tortious interference with the contracts and relationships of the other party
(and in the case of the Company, its officers and directors). The Company agrees
to provide Employee a reasonable opportunity to review and comment on any press
release to be issued by the Company that references Employee's separation from
the Company.
12. No Representations. Each party represents that it has carefully read
and understands the scope and effect of the provisions of this Agreement.
Neither party has relied upon any representations or statements made by the
other party which are not specifically set forth in this Agreement.
13. Costs. The Parties shall each bear their own costs, attorneys' fees
and other fees incurred in connection with this Agreement.
14. Severability. Given that the agreements of the Company contained
herein are expressly made in consideration of Employee's obligations hereunder,
in the event that any provision hereof becomes or is declared by a court of
competent jurisdiction to be illegal, unenforceable or void, this Agreement
shall continue in full force and effect without said provision, unless either
party declares this Agreement to be null and void in its entirety within thirty
(30) days of any such judicial determination, in which event the parties hereto
shall be returned as much as possible to their respective positions, monetarily,
legally and otherwise, existing immediately prior to their entering into this
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<PAGE> 4
Agreement. In furtherance and not limitation of the foregoing, the parties
acknowledge and agree that, in the event this Agreement is declared null and
void as provided in the foregoing sentence, Employee shall reimburse the Company
the Termination Payment and any other payments made by the Company to or on
behalf of Employee.
15. Entire Agreement. This Agreement (including Exhibits) represents the
entire agreement and understanding between the Company and Employee concerning
Employee's separation from the Company and supersedes and replaces any and all
prior agreements and understandings concerning Employee's relationship with the
Company and Employee's compensation by the Company.
16. No Oral Modification. This Agreement may only be amended in writing
signed by Employee and a duly authorized officer of the Company.
17. Governing Law. This Agreement shall be governed by the laws of
Germany.
18. Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
19. Voluntary Execution of the Agreement. This Agreement is executed
voluntarily and without any duress or undue influence on the part or behalf of
the parties hereto, with the full intent of releasing all claims. The parties
acknowledge that:
(a) They have read this Agreement;
(b) They have had full opportunity to consult with legal counsel
of their own choice or that they have voluntarily declined to seek such counsel;
(c) They understand the terms and consequences of this Agreement
and of the releases it contains; and
(d) They are fully aware of the legal and binding effect of this
Agreement.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
respective dates set forth below.
RESOUND CORPORATION
By: /s/ Edward Lopez
---------------------------------------
Vice President, Business Development
Title: and General Counsel
------------------------------------
Dated: December 22, 1998
EMPLOYEE:
/s/ Stephan Becker-Vogt
------------------------------------------
Dated:
Enclosures
5
<PAGE> 1
EXHIBIT 10.42
Purchase Requisition #________
CONSULTING AGREEMENT
This Agreement is made as of October 31, 1998, by and between Andreas B.
Joder, an individual ("Consultant") and ReSound Corporation, a California
corporation, located at 220 Saginaw Drive, Redwood City, California 94063
("ReSound").
1. Engagement of Consultant; Consulting Tasks. ReSound hereby engages
Consultant, and Consultant hereby agrees, to provide ReSound with transition
consulting services regarding manufacturing operations and vendor
relationships/management (the "consulting tasks").
ReSound understands that the manner and means used by Consultant to
accomplish the consulting tasks is in the sole discretion and control of
Consultant. However, Consultant will utilize the highest degree of skill and
expertise in order to professionally accomplish the consulting tasks in a timely
fashion.
2. Term. Consultant commenced or shall commence work under this
Agreement on October 31, 1998. This Agreement shall remain effective until April
30, 1999, unless terminated earlier under Section 12.
3. Time Commitment. Except where the nature of the consulting tasks
requires that they be performed at specific times, Consultant is free to choose
the specific times at which work will be performed. However, Consultant shall
devote sufficient time to the consulting tasks to complete them within the time
frames agreed by Consultant and ReSound.
4. Compensation. ReSound shall pay Consultant fees in the amount of
$125.00 per hour for work performed in accordance with Section 3. Consultant
shall submit invoices to ReSound for such fees, making reference to the purchase
order number assigned by ReSound to this Agreement, and such fees shall be paid
in accordance with ReSound's normal payment procedures.
5. Travel. Upon reasonable request by ReSound, Consultant shall travel
to appropriate locations to perform the consulting tasks (where the nature of
such tasks so requires) or to discuss the consulting tasks. Travel time shall
count as time spent on the consulting tasks.
6. Expenses. ReSound shall reimburse Consultant for expenses incurred in
performing the consulting tasks (including reasonable costs of travel outside
Consultant's geographic area, but not including any general office or overhead
expenses) provided that Consultant provides ReSound with an itemized expense
report and receipts for all expenses. Air travel shall be coach class only.
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<PAGE> 2
7. No Conflicts. Consultant represents and warrants that: (a) Consultant
is not bound by, and will not enter into, any oral or written agreement with
another party that unreasonably conflicts with Consultant's obligations under
this Agreement and (b) Consultant's agreements and performance under this
Agreement do not require consent or approval of any person that has not already
been obtained.
During the term of this Agreement, Consultant agrees not to perform any services
for any person or entity that competes with ReSound because such services could
create a conflict with Consultant's services under this Agreement. ReSound
recognizes, however, that Consultant may have other clients during the term of
this Agreement; subject to the limitations of this Section, Consultant is free
to perform services for such other clients of its choosing.
8. Confidentiality of Confidential Information. Consultant acknowledges
and agrees that the terms of the confidentiality agreement already entered into
between Consultant and ReSound and dated April 12, 1996, a copy of which is
attached hereto as Exhibit A, shall apply to Consultant's performance of the
consulting tasks under this Agreement.
9. Consultant Not to Disclose Confidential Information of Consultant or
Others. Consultant shall not disclose any information to ReSound which it
believes to be confidential or proprietary to itself or a third party (including
present or former clients or employers).
10. Time, Materials and Facilities. Consultant represents and warrants
that Consultant will: (a) perform his or her obligations hereunder solely on
Consultant's own time and solely with supplies and equipment provided by ReSound
or Consultant (but not by any third party); and (b) perform work only at
ReSound's facilities or at Consultant's facilities (but not at any third party
facilities unless ReSound consents to the use of such facilities). Unless the
nature of the consulting tasks requires that they be performed at a specific
location, Consultant may choose which of the foregoing locations will be used to
perform the work.
11. Research Records. If the consulting tasks involve work that could
lead to the development for ReSound of any products, inventions, technology,
software or other proprietary material, then Consultant shall maintain such
records, research notes, data and other materials as may be necessary and in
sufficient detail to reflect properly all work done and results achieved in
performing this Agreement. All such material becomes ReSound's property when
produced.
12. Termination. This Agreement may be terminated by either party on
thirty (30) days' written notice to the other in the event of breach and
regardless of whether or not the consulting tasks have yet been completed. On
termination, or earlier on ReSound's request, Consultant shall deliver to
ReSound any supplies or equipment provided by ReSound for use in performing the
consulting tasks, all materials produced under Section 11, and all physical
property and documents or other media (including copies) that contain ReSound
confidential and proprietary information.
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<PAGE> 3
13. Independent Contractor; No Employee Benefits. Consultant shall at
all times act as an independent contractor and not as an employee of ReSound.
Accordingly, Consultant understands that ReSound will not pay or withhold from
payments to Consultant under this Agreement any F.I.C.A. (social security),
state unemployment or disability insurance premiums, state or federal income
taxes, or other taxes and that Consultant is responsible for paying his or her
own federal self-employment tax (in lieu of F.I.C.A.), state and federal income
taxes (including estimated tax payments) and other applicable taxes. Consultant
also understands that under the terms hereof he or she will receive no employee
benefits of any kind including, for example, vacation or health insurance.
14. Injunctive Relief. Consultant recognizes that if Consultant breaches
or threatens to breach any provision of Sections 7 or 8 or the provisions of
Section 12 relating to return of materials to ReSound, then ReSound shall be
entitled to an injunction restraining Consultant from such breach in addition to
pursuing any other remedy available to it.
16. Miscellaneous. Neither party has any authority to bind the other in
any way. Except as expressly provided herein, this Agreement shall not be
amended except by written agreement between the parties. No oral waiver,
amendment or modification shall be effective under any circumstances. If any
term, covenant or condition of this Agreement shall for any reason be held
unenforceable by a court of competent jurisdiction, the rest of this Agreement
shall remain in full force and shall in no way be affected or impaired. The
representations and warranties herein shall survive termination or expiration of
this Agreement. This Agreement shall be governed and construed under California
law, excluding choice of law rules.
17. Taxpayer Identification Number. The information in this Section is
provided in lieu of IRS Form W-9. Consultant's taxpayer identification number
is:
(a) Social Security Number: __ __ __ - __ __ - __ __ __ __
(For individuals or sole proprietorships).
OR
(b) Employer I.D. Number: __ __ - __ __ __ __ __ __ __
(For all other entities).
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date set forth above.
RESOUND CORPORATION CONSULTANT
By: /s/ Edward Lopez ** By: /s/ A. Joder
------------------------------- -------------------------------
(Signature) (Signature)
Edward Lopez
Vice President, Business
Development and General Counsel Andreas B. Joder
- ---------------------------------- -------------------------------
(Print name and title) (Print name and title)
** ReSound President, Vice-President.
4
<PAGE> 1
EXHIBIT 10.43
Purchase Requisition #________
CONSULTANCY AGREEMENT
This Agreement is made as of January 1, 1999, by and between Stephan
Becker-Vogt, an individual ("Consultant") and ReSound Corporation, a California
corporation, located at 220 Saginaw Drive, Redwood City, California 94063
("ReSound").
1. Engagement of Consultant; Consulting Tasks. ReSound hereby engages
Consultant, and Consultant hereby agrees, to advise ReSound on the following
("consulting tasks"): advising on strategic opportunities and alternatives
worldwide.
ReSound understands that the manner and means used by Consultant to
accomplish the consulting tasks is in the sole discretion and control of
Consultant. However, Consultant will utilize the highest degree of skill and
expertise in order to professionally accomplish the consulting tasks in a timely
fashion.
2. Term. Consultant shall commence work under this Agreement on January
1, 1999. This Agreement shall remain effective until December 31, 1999, unless
terminated earlier under Section 12.
3. Time Commitment. Except where the nature of the consulting tasks
requires that they be performed at specific times, Consultant is free to choose
the specific times at which work will be performed. However, Consultant shall
devote sufficient time to the consulting tasks to complete them within the time
frames agreed by Consultant and ReSound.
4. Compensation. For all work performed in accordance with Section 3,
ReSound shall pay Consultant a fixed fee of DM10,500 per month in advance,
payable no later than the 10th day of the month.
5. Travel. Upon reasonable request by ReSound, Consultant shall travel
to appropriate locations to perform the consulting tasks (where the nature of
such tasks so requires) or to discuss the consulting tasks. Travel time shall
not count as time spent on the consulting tasks.
6. Expenses. ReSound shall reimburse Consultant for expenses incurred in
performing the consulting tasks (including reasonable costs of travel outside
Consultant's geographic area, but not including any general office or overhead
expenses) provided that Consultant provides ReSound with an itemized expense
report and receipts for all expenses. All air travel, domestic or international,
shall be coach class.
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<PAGE> 2
7. No Conflicts. Consultant represents and warrants that: (a) Consultant
is not bound by, and will not enter into, any oral or written agreement with
another party that unreasonably conflicts with Consultant's obligations under
this Agreement and (b) Consultant's agreements and performance under this
Agreement do not require consent or approval of any person that has not already
been obtained.
During the term of this Agreement, Consultant agrees not to perform any services
for any person or entity that competes with ReSound because such services could
create a conflict with Consultant's services under this Agreement. ReSound
recognizes, however, that Consultant may have other clients during the term of
this Agreement; subject to the limitations of this Section, Consultant is free
to perform services for such other clients of its choosing.
8. Confidentiality of Confidential Information. Consultant acknowledges
and agrees that the terms of the confidentiality agreement already entered into
between Consultant and ReSound, a copy of which is attached hereto as Exhibit A,
shall apply to Consultant's performance of the consulting tasks under this
Agreement.
9. Consultant Not to Disclose Confidential Information of Consultant or
Others. Consultant shall not disclose any information to ReSound which it
believes to be confidential or proprietary to itself or a third party (including
present or former clients or employers).
10. Time, Materials and Facilities. Consultant represents and warrants
that Consultant will: (a) perform his or her obligations hereunder solely on
Consultant's own time and solely with supplies and equipment provided by ReSound
or Consultant (but not by any third party); and (b) perform work only at
ReSound's facilities or at Consultant's facilities (but not at any third party
facilities unless ReSound consents to the use of such facilities). Unless the
nature of the consulting tasks requires that they be performed at a specific
location, Consultant may choose which of the foregoing locations will be used to
perform the work.
11. Research Records. If the consulting tasks involve work that could
lead to the development for ReSound of any products, inventions, technology,
software or other proprietary material, then Consultant shall maintain such
records, research notes, data and other materials as may be necessary and in
sufficient detail to reflect properly all work done and results achieved in
performing this Agreement. All such material becomes ReSound's property when
produced.
12. Termination. This Agreement may be terminated by either party on
thirty (30) days' written notice to the other in the event of breach of this
Agreement and regardless of whether or not the consulting tasks have yet been
completed. On termination, or earlier on ReSound's request, Consultant shall
deliver to ReSound any supplies or equipment provided by ReSound for use in
performing the consulting tasks, all materials produced under Section 11, and
all physical property and documents or other media (including copies) that
contain ReSound confidential and proprietary information.
13. Independent Contractor; No Employee Benefits. Consultant shall at
all times act as an independent contractor and not as an employee of ReSound.
Accordingly, Consultant
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<PAGE> 3
understands that ReSound will not pay or withhold from payments to Consultant
under this Agreement any F.I.C.A. (social security), state unemployment or
disability insurance premiums, state or federal income taxes, or other taxes and
that Consultant is responsible for paying his or her own federal self-employment
tax (in lieu of F.I.C.A.), state and federal income taxes (including estimated
tax payments) and other applicable taxes. Consultant also understands that under
the terms hereof he or she will receive no employee benefits of any kind
including, for example, vacation or health insurance.
14. Injunctive Relief. Consultant recognizes that if Consultant breaches
or threatens to breach any provision of Sections 7 or 8 or the provisions of
Section 12 relating to return of materials to ReSound, then ReSound shall be
entitled to an injunction restraining Consultant from such breach in addition to
pursuing any other remedy available to it.
16. Vesting of Stock Options. Vesting of Employee's options to purchase
shares of Common Stock granted to Employee under the Company's Stock Option Plan
shall continue vesting until the end of the Consulting Period. Any options that
are vested as of December 31, 1999 shall thereafter terminate in accordance with
the stock option grant agreement and stock option plan pursuant to which they
were issued.
17. Miscellaneous. Neither party has any authority to bind the other in
any way. Except as expressly provided herein, this Agreement shall not be
amended except by written agreement between the parties. No oral waiver,
amendment or modification shall be effective under any circumstances. If any
term, covenant or condition of this Agreement shall for any reason be held
unenforceable by a court of competent jurisdiction, the rest of this Agreement
shall remain in full force and shall in no way be affected or impaired. The
representations and warranties herein shall survive termination or expiration of
this Agreement. This Agreement shall be governed and construed under the laws of
Germany.
3
<PAGE> 4
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed as of the date set forth above.
RESOUND CORPORATION CONSULTANT
By: /s/ Edward Lopez ** By: /s/ Stephan Becker-Vogt
------------------------------- ---------------------------------
(Signature) (Signature)
Edward Lopez
Vice President, Business Development
And General Counsel Stephan Becker-Vogt
- ---------------------------------- ---------------------------------
(Print name and title) (Print name and title)
** ReSound President, Vice-President.
4
<PAGE> 1
EXHIBIT 10.44
File No.:
of November 28, 1998
N O T A R I A L D E E D
Ahead of me, DOCTOR GERRIT BRACHVOGEL, notary public, having its office in
Munich and its office premises in D-80335 Munchen, Elisenstrasse 3, have
appeared this very day:
1. for RESOUND-VIENNATONE HORTECHNOLOGIE GMBH with its seat in Vienna and
having its registered office at A-1164 Vienna, Frobelgasse 26 - 32,
Mr. HEINZ RUCH, born August 12 (twelfth), 1963 (one thousand
nine hundred and sixty three), resident and having its address
for delivery of documents in 1130 Vienna, Trauttmannsdorffgasse
19/10,
identified with passport No. 7790264, issued by the State Office
of Canton Zurich on August 12 (twelfth), 1991 (one thousand nine
hundred ninety one),
as director with sole representative authority and acting for said
party;
2. for AMPLIFON INTERNATIONAL N.V. with its seat in Amsterdam and having
its registered office at NL-1082 LD Amsterdam, A.J. Ernstraat 595 H,
Mr. ALESSANDRO AGOSTINO CHIONO, born January 29 (twenty nine),
1956 (one thousand nine hundred fifty six), resident and having
its address for delivery of documents in I-20142 Mailand, Via
Boffalora 105,
identified with passport No. 539431 A, issued by the Passport
Authority of Turin (Questura di Torino) on October 20
(twentieth), 1993 (one thousand nine hundred ninety three),
- --------------------------------------------------------------------------------
VERSION 27.11.1998
<PAGE> 2
-2-
by Special Power of Attorney of November 26 (twenty six), 1998 (one
thousand nine hundred ninety eight) and acting for said party,
have concluded the following
- --------------------------------------------------------------------------------
VERSION 27.11.1998
<PAGE> 3
-3-
A S S I G N I N G - A G R E E M E N T:
FIRST: ReSound-Viennatone Hortechnologie GmbH - hereinafter referred to as
"ReSound" - has full ownership of all Shares in "Viennatone Horgerate"
Bundeslander-Vertriebsgesellschaft m.b.H. having its seat in Vienna and being
registered in the firm register with the Vienna Commercial Court under FN 36884
t - hereinafter referred to as "the Company" -, corresponding to a fully and
cash paid-in nominal share in the amount of ATS 6,000.000,-- (Austrian Shillings
six millions) and representing hundred per cent of the nominal capital of the
Company. This Share shall form the object of this Agreement and shall
hereinafter be referred to as "the Share".
SECOND: ReSound sells, transfers and assigns the share to Amplifon International
NV with its seat in Amsterdam - hereinafter referred to as "Amplifon". Amplifon
acquires and takes into possession the Share and is forthwith full owner of all
Shares in the Company corresponding to a fully and cash paid-in nominal share in
the amount of ATS 6,000.000,-- (Austrian Shilling six millions) and representing
the whole nominal capital.
THIRD: As compensation and assignment-price ReSound receives an amount of DM
5,660.000,-- (German Marks five millions six hundred sixty thousand), whereof
Amplifon shall pay an instalment of DM 2,830.000,-- (German Marks two millions
eight hundred thirty thousand) simultaneously when signing this Agreement and a
further instalment of DM 2,830.000,-- (German Marks two millions eight hundred
thirty thousand) - which may be subject to a price adjustment according to
section four of this Agreement - within three months upon effectiveness of this
Agreement. The first instalment shall be paid by handing over a bank-guaranteed
cheque reciprocal and simultaneously when signing this Agreement. The further
instalment may be paid either by handing over another such cheque or by
wire-transfer to a bank account to be notified by ReSound. For the purpose of
securing payment of the second instalment of the purchase price Amplifon
delivers to ReSound upon signing of this Agreement an abstract and irrevocable
Bank Guarantee issued by a first rate banking institute in the amount of DM
2,830.000,-- (German
- --------------------------------------------------------------------------------
VERSION 27.11.1998
<PAGE> 4
-4-
Marks two millions eight hundred thirty thousand) with a term not ending before
April 10 (tenth), 1999 (one thousand nine hundred ninety nine).
FOURTH: The amount actually to be paid is determined according to the provisions
set forth in the "Letter of Intent" of October 7 (seventh), 1998 (one thousand
nine hundred ninety eight) (Articles R1, R2 and O5).
FIFTH: ReSound and Amplifon declare to waive any formal requirement of the
Articles of Association of the Company for the transfer of Shares in order to
make this Agreement legally valid the day of its conclusion. The assignment of
the share shall have legal effect the day of November 28 (twenty eight), 1998
(one thousand nine hundred ninety eight).
SIXTH: This Agreement shall be governed by Austrian law.
SEVENTH: All disputes arising out or in connection with this Agreement shall be
finally settled under the Rules of Arbitration of the International Chamber of
Commerce by three arbitrators appointed in accordance with said Rules. The place
of arbitration shall be Vienna; the language to be used in the arbitral
proceeding shall be English.
EIGHTH: The following Agreements shall form an integral part of this Notarial
Deed: The Agreement on Representations and Warranties of November 28 (twenty
eight), 1998 (one thousand nine hundred ninety eight) (Enclosure ./1), the
Letter of Intent of October 7 (seventh), 1998 (one thousand nine hundred ninety
eight) (Enclosure ./2), the Cooperation and Sales Agreement of November 28
(twenty eight), 1998 (one thousand nine hundred ninety eight) (Enclosure ./3)
and the Service Agreement of November 28 (twenty eight), 1998 (one thousand nine
hundred ninety eight) (Enclosure ./4).
NINTH: The costs of the notary public for establishing of this notarial deed,
the stock exchange transfer tax and the real estate transfer tax incurred by the
share transfer shall be borne by Amplifon.
- --------------------------------------------------------------------------------
VERSION 27.11.1998
<PAGE> 5
-5-
TENTH: Counterparts of this Notarial Deed may be issued to the parties upon
request of each of them in any number at the costs of the party requesting.
ELEVENTH: With respect to the further contents of this Agreement, in particular
the Warranties undertaken by ReSound-Viennatone and the transfer of the right to
participate in the profits, reference is made to the Enclosures which form an
integral part to this Agreement.
IN WITNESS WHEREOF this Notarial Deed was established, read to the parties,
approved and signed.
Munich, this November 28 (twenty eight), 1998 (one thousand nine hundred ninety
eight)
ReSound-Viennatone
Hortechnologie GmbH
/s/ Heinz Ruch
-------------------------------
Amplifon International N.V.
/s/ Alessandro Chiono
-------------------------------
- --------------------------------------------------------------------------------
VERSION 27.11.1998
<PAGE> 1
EXHIBIT 10.45
1ST COUNTERPART
C O O P E R A T I O N A N D S A L E S
A G R E E M E N T
entered into by and between
RESOUND-VIENNATONE HORTECHNOLOGIE GMBH
A-1164 Vienna, Frobelgasse 26 - 32
- hereinafter referred to as "ReSound-Viennatone" or the "Seller" -
and
1. AMPLIFON INTERNATIONAL N.V.
NL-1082 LD Amsterdam, A.J. Ernstraat 595H, "De Gelder", 7th Floor,
2 AMPLIFON S.P.A.
I-20141 Milano, Via Ripamonti, 133
- hereinafter jointly referred to as the "Buyers" -
(Buyers and Seller being collectively referred to as the "Parties")
- --------------------------------------------------------------------------------
VERSION 27.11.1998
<PAGE> 2
-2-
PREAMBLE
WHEREAS Amplifon International N.V. has acquired the Austrian Retail
business of ReSound-Viennatone, ReSound-Viennatone and the Buyers hereby agree
to cooperate in marketing and sales of Hearing Instruments and accessories of
both, ReSound and Viennatone products.
SECTION 1
PRODUCTS - TERM
(1) This Sales Agreement relates to Hearing Instruments, Accessories and
related collaterals of products of the brands ReSound and Viennatone
(hereinafter referred to as the "Products") to be sold by the Buyers Retail
Network.
(2) This Agreement is entered into for a period of 3 years with regard
to markets excluding Austria and for a period of 5 years with regard to the
Austrian market.
SECTION 2
MINIMUM PURCHASE
I. MARKETS OUTSIDE OF AUSTRIA
(1) The Buyers undertakes to purchase from the Seller for a period of 3
years the following unit volume of ReSound - Viennatone Hearing Instruments at
agreed prices (set out in Enclosure ./1) beginning on January 1, 1999:
<TABLE>
<S> <C>
1st year 11.000 units
2nd year 13.500 units
3rd year 15.500 units
TOTAL 40.000 units
</TABLE>
- --------------------------------------------------------------------------------
VERSION 27.11.1998
<PAGE> 3
-3-
(2) The anticipated product mix is defined in Enclosure ./2.
(3) For each unit not purchased by the Buyers in the 3 years period, the
Buyers have to pay a penalty to the Seller equal to DM 60,-- per unit not
purchased. Any additional damages whatsoever shall be expressly excluded.
(4) The parties will verify every 12 months the number of units
purchased by the Buyers. Deviations from the agreed purchase plan will be
computed by both parties at the end of each year.
(5) The Buyers accept - at their discretion - to pay the penalty over
the subsequent year either as extra hearing aids purchase price or as 12 equal
monthly instalments.
(6) At the end of the last period a final adjustment will be computed
based on the total sales commitment of the Buyers of 40.000 units of Hearing
Instruments for the 3-years-period and liquidated as per the yearly ones.
II. AUSTRIAN MARKET
(7) The Buyers undertake to purchase for their Austrian Retail Operation
at least the following percentage of total units to be sold in the Austrian
market by the Austrian Retail Operation of the Buyers:
1st year as of January 99: 80 %
2nd year as of January 99: 70 %
3rd year as of January 99: 60 %
4th year as of January 99: 50 %
5th year as of January 99: 50 %.
- --------------------------------------------------------------------------------
VERSION 27.11.1998
<PAGE> 4
-4-
(8) The prices for the products to be purchased from ReSound-Viennatone
are defined in Enclosure ./1.
(9) Any orders of group companies of the Buyers, which are operating in
single markets in Austria as well as outside of Austria, shall be considered to
be effected by the Buyers.
SECTION 3
TECHNICAL AND COMPETITIVE STANDARD - WARRANTY
(1) With regard to product technology, quality, ease of repair,
performance and software of the Hearing Instruments the Seller warrants that the
products delivered are new, unused when delivered, free from defects in
materials and workmanship during the warranty period of 13 months from the date
of delivery and competitive in the applicable product group.
(2) Absence of errors and malfunctions in software is not warranted per
se. However, the Seller undertakes to remedy errors and malfunctions discovered
in software during a period of 90 days from the date the software is used by the
Seller for the first time.
(3) This warranty shall not cover defects caused by inappropriate
handling by third parties, in particular the end customers.
(4) Defective parts shall either be repaired free of charge, or, where
necessary, exchanged for non-defective parts, free of charges as
ReSound-Viennatone so chooses, taking account of the specific defect in each
individual case.
SECTION 4
EFFECTIVE DATE - DURATION
This Sales Agreement becomes effective on January 1, 1999 and shall end
without any prior notice required,
- --------------------------------------------------------------------------------
VERSION 27.11.1998
<PAGE> 5
-5-
* after 3 years with regard to markets outside of Austria, and
* after 5 years concerning products to be purchased for Retail
Operation by "Viennatone Horgerate"
Bundeslander-Vertriebsgesellschaft m.b.H. in the Austrian
market.
SECTION 5
LITIGATION
The parties hereby agree that for any dispute arising out of the sole
performance of this Agreement and up to ATS 1,000.000,-- the courts of Vienna
competent for the first district shall have exclusive jurisdiction. Any other
dispute (for example regarding the validity, the existence of the present
Agreement or its relationship with other Agreements) shall be finally settled
under the Rules of Arbitration of the International Chamber of Commerce by three
arbitrators appointed in accordance with said Rules. The place of arbitration
shall be Vienna, Austria. The language to be used in the arbitral proceeding
shall be English.
SECTION 6
FINAL PROVISIONS
(1) Neither party shall assign or transfer to any third party this
Agreement, without the prior written consent of the other party. Such consent
shall not be unreasonably withheld in case of assignment to an affiliate of the
assigning party, on the condition that the assigning party shall remain fully
responsible towards the other party for the proper fulfilment of this Agreement.
(2) Each party shall pay its own costs including legal and accountants'
fees, in connection with the negotiation and preparation of this Agreement and
the consummation of all the transactions contemplated hereby and thereby.
- --------------------------------------------------------------------------------
VERSION 27.11.1998
<PAGE> 6
-6-
(3) The Enclosures attached hereto constitute an integrated part of the
Agreement.
(4) This Agreement is executed in 2 counterparts, each of which shall be
deemed an original but all of which shall constitute one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement in Munich on
November 28, 1998.
On behalf of On behalf of
ReSound-Viennatone Hortechnologie GmbH Amplifon International N.V.
/s/ Heinz Ruch /s/ Alessandro Agostino Chiono
- ------------------------------- -----------------------------------
(Heinz Ruch) (Alessandro Agostino Chiono)
by Special Power of Attorney
a copy of which is herewith enclosed
as Enclosure ./3
On behalf of
Amplifon S.p.A.
/s/ Alessandro Baldissera Pacchetti
-----------------------------------
(Alessandro Baldissera Pacchetti)
- --------------------------------------------------------------------------------
VERSION 27.11.1998
<PAGE> 7
-7-
List of Enclosures:
- - Enclosure ./1: Purchases Prices for Amplifon
- - Enclosure ./2: ReSound-Viennatone Products
(Unit Sales p.a. per Product Group)
- - Enclosure ./3: Copy of Special Power of Attorney
- --------------------------------------------------------------------------------
VERSION 27.11.1998
<PAGE> 1
EXHIBIT 21.1
RESOUND CORPORATION
SUBSIDIARIES
RESOUND CORPORATION
220 Saginaw Drive
Seaport Centre
Redwood City, CA 94063
USA
Tel: +650.780.7800
Fax: +650.367.0675
SONAR HEARING HEALTH CORPORATION
3140 Neil Armstrong Boulevard
Eagan, MN 55121
Tel: 800-921-2130
RESOUND PTY LTD.
Level 2, Suite 201
56 Berry Street
North Sydney NSW 2060
Australia
Tel: +61.2.9954.6071
Fax: +61.2.9959.5901
RESOUND ASIA LIMITED
Room 905, Beverly House
93-107 Lockhart Road
Wangchai, Hong Kong
Tel: +852.2866.9762
Fax: +852.2529.1906
RESOUND-VIENNATONE HORTECHNOLOGIE GMBH
Frobelgasse 28
A-1160 Vienna, Austria
Tel: +43.1.491.20.0
Fax: +43.1.491.20.20
Page 1
<PAGE> 2
RESOUND CORPORATION
SUBSIDIARIES (CONTINUED)
RESOUND-VIENNATONE SARL
La Defense Plus
41, Boulevard des Bouvets
F-92000 Nanterre, France
Tel: +33.1.46.98.98.98
Fax: +33.1.46.98.89.89
RESOUND-VIENNATONE HORTECHNOLOGIE AG & CO. OHG
Vahrenwalder Str. 219A
D-30165 Hannover, Germany
Tel: +49.511.63.47.17
Fax: +49.511.81.25.12
RESOUND DEUTSCHLAND GMBH
RESOUND GMBH HORTECHNOLOGIE
Dieckstrasse 57
D-48145 Munster, Germany
Tel: +49.251.928080
Fax: +49.251.9280844
RESOUND AUTAC GMBH
Industriestrasse 5
CH-5242 Birr-Lupfig
Switzerland
Tel: +41-56-4646868
Fax: +41-56-4646850
RESOUND IRELAND LTD.
Cork Business & Technology Park
Model Farm Road
Cork, Ireland
Tel: +353.21.344.411
Fax: +353.21.345.394
Page 2
<PAGE> 3
RESOUND CORPORATION
SUBSIDIARIES (CONTINUED)
RESOUND BV
Esdoornlaan 25
4902 TN Oosterhout,
The Netherlands
Tel: +31.1624.24770
Fax: +31.1624.24904
RESOUND AB
Gullbergs Strandgata 6
S-41104 Gothenburg,
Sweden
Tel: +46.31.800.150
Fax: +46.31.800.175
RESOUND-VIENNATONE LTD.
1 Weston Business Park
Weston-on-the-Green
Oxon, United Kingdom
Tel: +44.1869.343500
Fax: +44.1869.343466
Page 3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1998
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,715
<SECURITIES> 0
<RECEIVABLES> 23,106
<ALLOWANCES> (6,214)
<INVENTORY> 16,199
<CURRENT-ASSETS> 43,571
<PP&E> 43,067
<DEPRECIATION> (32,333)
<TOTAL-ASSETS> 69,762
<CURRENT-LIABILITIES> 33,237
<BONDS> 0
0
0
<COMMON> 99,363
<OTHER-SE> (78,669)
<TOTAL-LIABILITY-AND-EQUITY> 69,762
<SALES> 123,442
<TOTAL-REVENUES> 123,442
<CGS> 60,370
<TOTAL-COSTS> 60,370
<OTHER-EXPENSES> 86,886
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (958)
<INCOME-PRETAX> (21,365)
<INCOME-TAX> 560
<INCOME-CONTINUING> (21,925)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,925)
<EPS-PRIMARY> (1.07)
<EPS-DILUTED> (1.07)
</TABLE>
