-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Jz5NIjMzRu1kHobBrQ0jKCBZAHDq8Rc62isen5Zzkc8xPCS229qv1EkNoGxBcqp8 OeqTq5H2MKFQEfqZRsnTiA== 0000891618-98-003715.txt : 19980812 0000891618-98-003715.hdr.sgml : 19980812 ACCESSION NUMBER: 0000891618-98-003715 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980627 FILED AS OF DATE: 19980810 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: RESOUND CORP CENTRAL INDEX KEY: 0000846463 STANDARD INDUSTRIAL CLASSIFICATION: ORTHOPEDIC, PROSTHETIC & SURGICAL APPLIANCES & SUPPLIES [3842] IRS NUMBER: 770019588 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-20046 FILM NUMBER: 98681339 BUSINESS ADDRESS: STREET 1: 220 SAGINAW DR STREET 2: SEAPORT CENTRE CITY: REDWOOD CITY STATE: CA ZIP: 94063 BUSINESS PHONE: 8005824327 MAIL ADDRESS: STREET 1: 220 SAGINAW DRIVE STREET 2: SEAPORT CENTRE CITY: REDWOOD CITY STATE: CA ZIP: 94063 10-Q 1 FORM 10-Q FOR THE PERIOD ENDED JUNE 27, 1998 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended June 27, 1998 or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from ________ to _______ Commission file number 0-20046 RESOUND CORPORATION (Exact name of Registrant as specified in its charter) California 77-0019588 (State or Other Jurisdiction (I.R.S. Employer of Incorporation or Organization) Identification No.) 220 Saginaw Drive, Seaport Centre, Redwood City, California 94063 (Address, including zip code, of principal executive offices) (650) 780-7800 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of Registrant's Common Stock issued and outstanding as of August 5, 1998 was 20,601,528 shares. This document consists of 17 pages of which this is page 1. 1 2 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets.......................................................3 Consolidated Statements of Operations.............................................4 Consolidated Statements of Cash Flows.............................................5 Notes to Consolidated Financial Statements........................................6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations............................................................10 Liquidity and Capital Resources................................................. 13 Factors That May Affect Future Operating Results.................................13 Item 3. Quantitative and Qualitative Disclosures about Market Risk.......................15 PART II. OTHER INFORMATION Item 1. Legal Proceedings................................................................15 Item 2. Changes in Securities and Use of Proceeds........................................15 Item 3. Defaults upon Senior Securities..................................................15 Item 4. Submission of Matters to a Vote of Security Holders..............................15 Item 5. Other Information................................................................16 Item 6. Exhibits and Reports on Form 8-K.................................................16 SIGNATURES..................................................................................................17
2 3 PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements: RESOUND CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands) ASSETS
June 27, December 31, 1998 1997 --------- ----------- (Unaudited) (Note) Current assets: Cash and cash equivalents $14,751 $ 19,853 Accounts receivable, net 22,161 17,966 Inventories 14,156 14,183 Other current assets 2,506 2,125 ------- -------- Total current assets 53,574 54,127 Property and equipment, net 11,197 10,838 Goodwill 20,416 20,217 Other assets 3,380 4,593 ------- -------- $88,567 $89,775 ======= ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Bank loans $ 2,296 $ 1,663 Accounts payable 8,817 8,735 Accrued liabilities 18,029 19,484 Long-term debt, current portion 2,388 4,362 ------- --------- Total current liabilities 31,530 34,244 Long-term liabilities: Long-term debt, non-current portion 13,358 14,274 Employee benefits 3,806 3,738 Other accrued liabilities -- 500 -------- -------- Total long-term liabilities 17,164 18,512 Commitments and contingencies -- -- Shareholders' equity: Common stock 97,936 96,785 Accumulated deficit (56,221) (57,878) Cumulative translation adjustment (1,842) (1,888) ------- -------- Total shareholders' equity 39,873 37,019 ------- -------- $88,567 $89,775 ======= ========
Note: The balance sheet at December 31, 1997 has been derived from audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. See notes to consolidated financial statements. 3 4 RESOUND CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands except per share data) (Unaudited)
Three months ended Six months ended ------------------- --------------------- June 27, June 30, June 27, June 30, 1998 1997 1998 1997 -------- -------- -------- -------- Net sales $33,884 $32,230 $65,027 $64,442 Cost of sales 14,987 14,731 29,444 29,842 ------ ------ ------ ------ Gross profit 18,897 17,499 35,583 34,600 Operating expenses Research and development 4,472 3,882 8,447 8,199 Selling, general and administrative 13,967 14,441 26,115 26,999 ------ ------ ------ ------ Total operating expenses 18,439 18,323 34,562 35,198 ------ ------ ------ ------ Income (loss) from operations 458 (824) 1,021 (598) Interest expense, net (251) (384) (507) (782) Other income (expense), net 673 83 1,520 (335) ------ ------ ------ ------ Income (loss) before income taxes 880 (1,125) 2,034 (1,715) Provision for income taxes (1) 197 374 378 680 ------ ------ ------ ------ Net income (loss) $ 683 $(1,499) $ 1,656 $(2,395) ======== ======== ======= ======== Net income (loss) applicable to common shareholders $ 683 $(1,574) $ 1,656 $(2,545) ======== ======== ======= ======== Basic and diluted net income (loss) per share $ 0.03 $ (0.08) $ 0.08 $ (0.13) ========= ======== ======== ========= Shares used in basic net income (loss) per share calculation 20,379 19,429 20,103 19,409 ====== ====== ====== ====== Shares used in diluted net income (loss) per share calculation 21,429 19,429 20,982 19,409 ====== ====== ====== ======
(1) Consists principally of state and foreign income taxes. See notes to consolidated financial statements. 4 5 RESOUND CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Increase (decrease) in cash and cash equivalents (in thousands) (Unaudited)
Six months ended --------------------- June 27, June 30, 1998 1997 -------- -------- Cash flows from operating activities: Net income (loss) $ 1,656 $ (2,395) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 3,640 3,774 Changes in assets and liabilities: Accounts receivable (3,625) 1,369 Inventories 1,540 1,561 Other assets (1,095) 1,847 Accounts payable (282) (1,767) Accrued liabilities (2,736) (1,245) ------- ------- Net cash provided by (used in) operating activities (902) 3,144 Cash flows from investing activities: Acquisition of ReSound Autac (401) -- Acquisition of Apex Acoustics, Ltd. (750) -- Patent license fees 900 -- Change in translation adjustment 750 (335) Additions of property and equipment (3,051) (1,218) ------- ------- Net cash used in investing activities (2,552) (1,553) Cash flows from financing activities: Borrowings (payments) on long-term debt, net (2,799) 1,782 Bank loans -- (651) Issuance of common stock 1,151 245 ------- ------- Net cash provided by (used in) financing activities (1,648) 1,376 ------- ------- Net increase (decrease) in cash and cash equivalents (5,102) 2,967 Cash and cash equivalents at the beginning of the period 19,853 7,980 ------- ------- Cash and cash equivalents at the end of the period $14,751 $10,947 ======= ======= Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 594 $ 842 Income taxes $ 507 $ 667 Supplemental schedule of non-cash investing and financing activities: Accrual of preferred stock dividend -- $ 150
See notes to consolidated financial statements. 5 6 ReSound Corporation Notes to Consolidated Financial Statements NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three-month and six-month periods ended June 27, 1998 are not necessarily indicative of the results that may be expected for the year ending December 31, 1998. For further information, refer to the audited consolidated financial statements for the year ended December 31, 1997 and footnotes thereto included in the Company's 1997 Annual Report on Form 10-K. In 1998, the Company adopted the policy of closing its fiscal quarters on the last Saturday falling within the calendar quarter, except that the fiscal year will end at the calendar year end. Earnings Per Share In 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings per Share ("SFAS No. 128"). SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants, and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. Earnings per share amounts for all periods have been restated to conform to the SFAS No. 128 requirement. The following table sets forth the computation of basic and diluted net income (loss) per share (in thousands, except per share data):
Three months ended Six months ended ------------------------- --------------------- June 27, June 30, June 27, June 30, 1998 1997 1998 1997 ---- ---- ---- ---- Net income (loss) $ 683 $ (1,499) $ 1,656 $ (2,395) Preferred dividends -- (75) -- (150) --------- ---------- --------- --------- Net income (loss) applicable to common shareholders $ 683 $ (1,574) $ 1,656 $ (2,545) ========= ========== ========= ========= Weighted average common shares - basic 20,380 19,429 20,324 19,409 Dilutive options 1,050 -- 879 -- --------- ---------- --------- --------- Adjusted weighted average common shares - diluted 21,430 19,429 21,203 19,409 ========= ========== ========= ========= Earnings per share - basic: Net income (loss) per common share $ 0.03 $ (0.08) $ 0.08 $ (0.13) ========== ========== ========= ========= Earnings per share - diluted: Net income (loss) per common share $ 0.03 $ (0.08) $ 0.08 $ (0.13) ========== ========== ========= =========
6 7 Had the Company been in a net income position for the three months and six months ended June 30, 1997, diluted earnings per share for those periods would have included 513,000 shares and 471,000 shares, respectively, related to outstanding options not included above. New Accounting Pronouncements As of January 1, 1998, the Company adopted Statement of Financial Accounting Standard No. 130, Reporting Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of this Statement had no impact on the Company's net income or shareholders' equity. SFAS No. 130 requires unrealized gains or losses on the Company's available-for-sale securities and foreign currency translation adjustments, which prior to adoption were reported separately in shareholders' equity, to be included in other comprehensive income. Prior year financial statements have been reclassified to conform to the requirements of SFAS No. 130. During the second quarters of 1998 and 1997, total comprehensive income (loss) amounted to $1,231,000 and $(1,101,000), respectively. During the first six months of 1998 and 1997, total comprehensive income (loss) amounted to $1,702,000 and $(5,196,000), respectively. In June 1997, the Financial Accounting Standards Board issued Statement No. 131, Disclosures About Segments of An Enterprise and Related Information ("SFAS No. 131"). SFAS No. 131 will require the Company to use the "management approach" in disclosing segment information in its December 31, 1998 financial statements. The adoption of SFAS No. 131 will not have an impact on the Company's results of operations, cash flows, or financial position. Reclassifications Certain reclassifications have been made to prior year's amounts in order to conform to the current year's presentation. NOTE B - INVENTORIES Inventories are stated at the lower of cost (first-in, first-out) or market. The components of inventory consist of the following (in thousands):
June 27, December 31, 1998 1997 -------- ------------ Raw materials $ 8,219 $ 9,191 Work in process 2,142 2,869 Finished products 3,795 2,123 ------- ------- $14,156 $14,183 ======= =======
7 8 NOTE C - ACCOUNTING FOR INCOME TAXES Income taxes have been provided for on a year-to-date basis and represent taxes on profits earned at the Company's European subsidiaries in Ireland, Germany, Switzerland, and Holland. NOTE D - RESOUND AUTAC ACQUISITION In January 1998, ReSound Autac GmbH, a newly formed subsidiary of the Company located in Zurich, Switzerland, acquired all of the assets and liabilities of a former Swiss distributor for $401,000. At the time of the transaction, that distributor owed the Company $979,000 for previous financial assistance. The agreement contains a clause which obligates the seller for a period of five years not to compete in the area of manufacture or distribution of hearing devices. Additionally, an employment agreement was negotiated with the seller through December 31, 2002. The allocation of the purchase price was as follows (in thousands): Working capital acquired $ 507 Property and equipment, net 163 Goodwill 1,342 Bank loans (632) Loan from ReSound (979) ------- Total purchase price $ 401 =======
NOTE E - APEX ACOUSTICS, LTD. ACQUISITION In April 1998, ReSound-Viennatone Ltd. acquired all of the assets and liabilities of Apex Acoustics, Ltd. from the Ultratone Group for $750,000. Concurrent with the acquisition, the Company entered into a multi-year supply agreement with Ultratone for custom hearing devices. The allocation of the purchase price was as follows (in thousands): Working capital acquired $ 494 Property and equipment, net 135 Goodwill 121 ------ Total purchase price $ 750 =======
8 9 NOTE F - SPECIAL CHARGES In the second half of 1997, the Company recorded special charges of $18.0 million associated with the Company's strategic restructuring program. This program is designed to streamline operations and control costs through management restructuring, operations consolidations, and increased focus on core activities and product lines. The special charges provided for costs associated with employee termination benefits for approximately 100 employees from all functional areas in various subsidiary locations; lease termination costs; the write-down of goodwill associated with the acquired hearing health business activity of 3M (which was renamed Sonar Hearing Health, "SHH"); the incremental impairments in the carrying value of certain product inventories; and losses on supplier commitments arising directly from the decision to exit product lines, as follows (in thousands):
Spending/ Total 1997 Balance Charges Balance Special Spending/ Dec. 31, 6-mos ended June 27, Charges Charges 1997 June 27, 1998 1998 ------- ------- ---- ------------- ---- Employee termination benefits and lease termination costs (recorded as Restructuring) $ 2,254 $ 765 $1,489 $ 894 $ 595 Write-down of SHH goodwill (recorded as Restructuring) 10,307 10,307 --- --- -- Write-down of inventories to net realizable value and losses on supplier commitments (recorded as Cost of Sales) 3,093 723 2,370 2,370 -- Write-down of capital assets to fair value (recorded as Selling, General and Administrative - $633, and Research and Development - $123) 756 -- 756 756 -- Other exit costs (recorded as Selling, General and Administrative) 1,566 -- 1,566 1,566 -- -------- -------- ------- ------- ------ $17,976 $11,795 $6,181 $5,586 $ 595 ======== ======== ======= ======= ======
During the six months ended June 27, 1998, the Company made approximately $1.4 million of cash payments relating to the special charges. 9 10 NOTE G USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results inevitably will differ from those estimates, and such differences may be material to the financial statements. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Form 10-Q contains forward-looking statements, which can be identified by words such as "may," "will," "believe," "expect," "anticipate," "estimate," "plan," "intend," and the like. These statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those contemplated in the statements. These risks and uncertainties are discussed in the section below entitled "Factors That May Affect Future Operating Results" and in the Company's reports filed with the Securities and Exchange Commission, including its Report on Form 10-K for the year ended December 31, 1997. The following discussion should be read in conjunction with the unaudited consolidated financial statements and notes thereto included in Part I - Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto, the Introductory Statement and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's Annual Report on Form 10-K for the year ended December 31, 1997. RESULTS OF OPERATIONS Three months ended June 27, 1998 and June 30, 1997 Net sales increased by 5% to $33.9 million in the quarter ended June 27, 1998, from $32.2 million in the quarter ended June 30, 1997. International sales accounted for 48 percent of the Company's net sales during the second quarters of 1998 and 1997. International sales for the second quarter were $16.4 million, an increase of 7 percent from the same quarter last year. Double-digit percentage sales growth occurred at the Company's sales subsidiaries in Holland, Sweden, Switzerland, and the UK. Additionally, Viennatone's sales to distributors in Southern and Eastern Europe and Arabia rose substantially over prior year levels. These revenue gains were partially offset by weaker European currencies compared to the U.S. dollar, poor hearing device market conditions in Germany and Austria, and lower shipments to the Company's Japanese distributor as a result of poor economic conditions in Japan. Sales in the U.S. and Canada increased 3 percent for the quarter ended June 27, 1998 to $17.5 million from $16.9 million for the quarter ended June 30, 1997, due primarily to unit volume growth being offset by declines in average unit sales prices as a result of increasing competition and product mix sales shifts from the Company's higher priced Premium Series product line to the Company's more moderately priced Encore Series product line. The Premium Series product line was enhanced by the addition of the Company's completely-in-the-canal device, the CC4, which first shipped in volume during the first quarter of 1998. Initial component supply 10 11 problems with the CC4 that caused a backlog of orders in the first quarter of 1998 were resolved during the second quarter, and the backlog situation was eliminated. Gross profit was 55.8 percent of net sales in the second quarter of 1998 compared to 54.3 percent of net sales in the second quarter of 1997. The quarter-to-quarter increase in gross profit was largely attributable to an improved product mix, including an increase in CC4 sales in the second quarter, as well as progress made in reducing custom product costs through improved manufacturing efficiencies, SKU rationalization, and lower component procurement expenses. Research and Development ("R&D") spending during the second quarter of 1998 was $4.5 million (13.2 percent of net sales) compared to $3.9 million (12.0 percent of net sales) during the same quarter of 1997. The quarter-to-quarter increase in R&D was primarily due to increased spending on the development of the Company's Digital Signal Processing (DSP) and hearing enhancer programs and products being developed in alliance with Motorola. Selling, General, and Administrative ("SG&A") expenses were $14.0 million (41.2 percent of net sales) during the second quarter of 1998 compared to $14.4 million (44.8 percent of net sales) during the same quarter of 1997. The decrease in SG&A expenses resulted primarily from the effects of improved cost controls partially offset by increased sales and marketing activities in the U.S., increased spending at Viennatone's retail operation, one-time severance costs, and incremental expenses resulting from the acquisitions of ReSound Autac in January 1998 and Apex Acoustics, Ltd. in April 1998. Net interest expense was $251,000 for the second quarter of 1998 compared to $384,000 for the second quarter of 1997. This quarter-to-quarter decrease is attributable to reduction of debt, the effect of the stronger U.S. dollar compared to European currencies, and increased interest income due to higher average cash balances. Other income was $673,000 for the second quarter of 1998 compared to $83,000 for the second quarter of 1997. In the second quarter of 1998, income resulted primarily from receipts of $750,000 under a patent license agreement offset by foreign exchange losses. The agreement requires similar payments to be made to the Company in each of the remaining quarters of 1998. Income taxes have been provided for on a year-to-date basis and represent taxes on profits earned at the Company's European subsidiaries in Ireland, Germany, Switzerland, and Holland. The Company had net income of $683,000 in the quarter ended June 27, 1998 compared to a net loss of $1.5 million in the quarter ended June 30, 1997. The increase in net income was primarily the result of increased gross profit, lower SG&A expenses, and patent license income, partially offset by foreign exchange losses of $132,000 compared to foreign exchange gains of $66,000 in the same prior year quarter. Six months ended June 27, 1998 and June 30, 1997 Net sales increased by 1% to $65.0 million in the six months ended June 27, 1998, from $64.4 million in the six months ended June 30, 1997. International sales accounted for 48 percent of ReSound's net sales during the first six months of 1998, compared to 49 percent during the same 11 12 period of 1997. International sales for the six months ended June 27, 1998 were $31.3 million, down from $31.5 million the same period last year. The decrease in international sales was the result of weaker European currencies compared to the U.S. dollar and poor hearing device market conditions in Germany and Austria together with management and employee turnover at Viennatone, the Company's Austrian subsidiary. Additionally, economic uncertainty in Japan coupled with lower shipments to the Company's Japanese distributor (to improve the balance of inventory levels to in-market sales) contributed to sales reductions in the Asia-Pacific region in the first six months of 1998 when compared to the same period last year. Sales in the U.S. and Canada increased 2 percent for the six months ended June 27, 1998, to $33.7 million from $33.0 million for the comparable prior year period. This increase was primarily due to unit volume growth being offset by declines in average unit sales prices as a result of increasing competition and product mix sales shifts from the Company's higher priced Premium Series product line to the Company's more moderately priced Encore Series product line. The Premium Series product line was enhanced by the addition of the Company's completely-in-the-canal device, the CC4, which first shipped in volume during the first quarter of 1998. Gross profit was 54.7 percent of net sales in the first six months of 1998, compared to 53.7 percent of net sales for the same period of 1997. The improvement in gross margin was largely attributable to an improved product mix, including the addition of CC4 sales, as well as progress made in reducing custom product costs through improved manufacturing efficiencies, SKU rationalization, and lower component procurement expenses. R&D spending during the first six months of 1998 was $8.4 million (13.0 percent of net sales) compared to $8.2 million (12.7 percent of net sales) during the same period of 1997. The increase in 1998 R&D expenses was primarily due to planned spending on the program for ReSound's Digital Signal Processing technology platforms, an increase in the development activities for the ReSound hearing enhancer program, and products being developed in alliance with Motorola. SG&A expenses were $26.1 million (40.2 percent of net sales) for the first six months of 1998 compared to $27.0 million (41.9 percent of net sales) for the first six months of 1997. The decrease in SG&A expenses resulted primarily from the effects of improved cost controls partially offset by increased spending at Viennatone's retail operation, one-time severance costs, and incremental expenses resulting from the acquisitions of ReSound Autac in January, 1998 and Apex Acoustics, Ltd. in April, 1998. Net interest expense was $507,000 for the first six months of 1998 compared to $782,000 for the first six months of 1997. This decrease is attributable to reduction of debt, the effect of the stronger U.S. dollar compared to European currencies, and increased interest income due to higher average cash balances. Other income was $1.5 million for the first six months of 1998 compared to other expense of $335,000 for the first six months of 1997. In the first six months of 1998, income resulted primarily from receipts of $1.5 million under a patent license agreement. The agreement requires similar payments to be made to the Company in each of the remaining quarters of 1998. The other expense in the first six months of 1997 primarily resulted from losses on foreign exchange. 12 13 Income taxes have been provided for on a year-to-date basis and represent taxes on profits earned at the Company's European subsidiaries in Ireland, Germany, Switzerland, and Holland. The Company had net income of $1.7 million in the six months ended June 27, 1998 compared to a net loss of $2.4 million in the six months ended June 30, 1997. The increase in net income was primarily the result of increased gross profit, lower SG&A expenses, patent license income, and a significant reduction of foreign exchange losses, to $114,000 from $443,000 in the prior year six- month period. LIQUIDITY AND CAPITAL RESOURCES In the six months ended June 27, 1998 the Company used $902,000 of cash in operations, compared to $3.1 million in cash generated from operations in the six months ended June 30, 1997. Cash used in operations in the first six months of 1998 included an increase in accounts receivable of $3.6 million, primarily due to large tender contract shipments late in the second quarter, increasingly larger shipments of CC4 products as supplier component deliveries improved and backlog cleared, and shipments resulting from newly formed distributor relationships in Europe. Other uses of cash in operations include increases in other assets of $1.1 million and reductions in accrued liabilities of $2.7 million caused primarily by spending and other charges in connection with the Company's restructuring program initiated in the second half of 1997. The above uses of cash in operations were partially offset by non-cash charges of $3.6 million relating to depreciation and amortization, improvements in inventory management of $1.5 million, and net income for the period of $1.7 million. Net cash used in investing activities for the six months ended June 27, 1998 of $2.6 million resulted from additions of property and equipment and cash used in the acquisitions of ReSound Autac and Apex Acoustics, Ltd. These amounts were partially offset by changes in the cumulative translation adjustment account and by $900,000 in patent fees received for licensing certain technology acquired by the Company in 1996 and 1997. The primary financing activity in the six months ended June 27, 1998 was the payment of long-term debt of $2.8 million partially offset by proceeds of $1.2 million from the issuance of common stock. At June 27, 1998, the Company had available cash and cash equivalents of $14.8 million. While the Company believes that available cash will be sufficient to meet the Company's short-term operating and capital requirements for at least the next twelve months, the Company may be required to raise additional capital for its currently envisaged long-term needs, and in connection with its previously announced restructuring program, which will commence in August, 1998, and in connection with any future acquisitions. FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS Competition, especially from new digital hearing device products, is expected to continue to increase. The Company's ability to grow and maintain profitability will depend upon its ability to develop, individually and jointly with current or future strategic partners, or otherwise acquire and effectively market, competitive DSP and other products. There can be no assurance that the Company can develop and introduce these products in a timely manner, or that these products will be able to compete effectively against current or new competing products. The development or 13 14 acquisition of new products is always subject to technological risks and uncertainties which could cause termination of the development of the product or termination of or delay in the introduction of the product, or which could significantly decrease the originally anticipated level of customer acceptance of the product. Also, there can be no assurance that a new product can be manufactured on a cost-effective basis, that regulatory approvals, where necessary, can be obtained, or that the expected level of customer acceptance will be met. Also, there can be no assurance that the Company will be able to continue its successful relationships with its current strategic partners or establish successful relationships with new strategic partners. In addition, announcements of new products may cause hearing care professionals or hearing impaired persons to defer purchases of existing products or return previously purchased products. The Company's failure to introduce competitive products in a timely manner would have a material, adverse impact on the Company's financial condition and results of operations. The Company anticipates that it will continue to experience, at least for the near term, lower average unit sales prices of its products due to aggressive competitive pricing and product mix shift to the Company's more moderately priced products. In order to offset this, the Company will need to increase unit sales volume, about which there can be no assurance. The Company also expects that the negative impact caused by weak economic conditions and/or reductions in government reimbursement levels available to consumers purchasing hearing devices in Austria, France, and Germany, reduced shipments to its Japanese distributor, and unsettled economic conditions in Japan will continue, at least for the near term. While the Company has mechanisms in place to lessen the negative impact of foreign currency fluctuations, continued or increased weakness of European currencies against the US Dollar also are likely to adversely impact the Company's sales in Europe. Finally, there can be no assurance that the Company will be able to complete its restructuring program in a timely manner, consolidate targeted operations successfully, and otherwise achieve the cost reductions and other restructuring benefits anticipated to result from the restructuring. The Company has determined that it will need to modify or replace significant portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and beyond. All required software modifications and replacements are expected to be completed not later than March, 1999, which is prior to the estimated occurrence of any year 2000 issues. While the Company believes its planning efforts are adequate to address its year 2000 concerns, there can be no guarantee that the systems of other companies on which the Company's systems and operations rely will be converted on a timely basis and will not have a material effect on the Company. The cost of the year 2000 initiatives is not expected to be material to the Company's results of operations or financial position. 14 15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS Not applicable. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS Not applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES Not applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (a) The Annual Meeting of Shareholders of the Company was held on May 21, 1998. (b) The following directors were elected at the meeting.
SHARES PRESENT NOMINEE FOR WITHHELD ABSTAIN BUT NOT VOTING - ------- --- -------- ------- -------------- Richard L. Goode 16,615,287 83,421 0 0 Russell D. Hays 16,620,918 77,790 0 0 Eugene Kleiner 16,619,718 78,990 0 0 Rodney Perkins 16,619,018 79,690 0 0 Philip S. Schlein 16,619,018 79,690 0 0 Robert C. Wilson 16,452,498 246,210 0 0
(c) The shareholders voted to authorize the amendment of the Company's 1992 Employee Stock Purchase Plan to increase the number of shares of Common Stock reserved for issuance thereunder by 200,000 shares to an aggregate of 600,000 shares. The results of that vote were as follows:
SHARES PRESENT BUT IN FAVOR OPPOSED ABSTAIN NOT VOTING ---------- ------- ------- ----------- 15,674,728 463,233 55,494 505,253
15 16 (d) The shareholders voted to ratify and approve the selection of Ernst & Young LLP as independent auditors for the Company for the fiscal year ending December 31, 1998. The results of that vote were as follows:
SHARES PRESENT BUT IN FAVOR OPPOSED ABSTAIN NOT VOTING ---------- ------- ------- ----------- 16,650,282 27,380 21,046 0
ITEM 5. OTHER INFORMATION Not applicable. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 27: Financial data schedule (b) Reports on Form 8-K None 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. RESOUND CORPORATION /s/ Christopher H. Pascoe ---------------------------------- Christopher H. Pascoe Vice President, Corporate Controller (Principal Financial and Accounting Officer) Date: August 7, 1998 17 18 INDEX TO EXHIBITS
Exhibit Number Description - ------- ----------- 27 Financial data schedule
EX-27 2 FINANCIAL DATA SCHEDULE
5 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-27-1998 14,751 0 28,420 6,259 14,156 53,574 42,212 31,015 88,567 31,530 0 0 0 97,936 (58,063) 88,567 65,027 65,027 29,444 64,006 (1,520) 0 507 2,034 378 1,656 0 0 0 1,656 .08 .08
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