FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1997
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: 0-18280
DIGITAL SOUND CORPORATION
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(Exact name of Registrant as specified in its charter)
California 95-3222624
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6307 Carpinteria Avenue, Carpinteria, California 93013
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code (805) 566-2000
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Not Applicable
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(Former name, former address and former fiscal year, if changed since
last report)
Indicate by check mark whether 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 twelve 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
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The number of shares outstanding of Registrant's common stock as of October
31, 1997 was 20,386,004
DIGITAL SOUND CORPORATION
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TABLE OF CONTENTS
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Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of September 30, 1997 3
and December 31, 1996
Statements of Operations for the 4
Three Months and Nine Months ended
September 30, 1997 and September 30, 1996
Statements of Cash Flows for the 5
Nine Months ended September 30, 1997
and September 30, 1996
Notes to Financial Statements 6
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
-2-
PART I - FINANCIAL INFORMATION
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DIGITAL SOUND CORPORATION
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BALANCE SHEETS
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(In thousands, except share data)
September 30, December 31,
1997 1996
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(Unaudited)
ASSETS
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Current assets:
Cash, cash equivalents and pledged case $ 2,895 $ 18,187
Accounts receivable, less allowance for doubtful
accounts of $394 and $600 at September 30, 1997
and December 31, 1996, respectively 5,539 5,695
Inventories 5,751 3,470
Other current assets 230 299
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Total current assets 14,415 27,651
Property and equipment, at cost:
Computers and other equipment 11,794 11,077
Furniture and fixtures 1,001 982
Leasehold improvements 1,353 1,130
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14,148 13,189
Less accumulated depreciation and amortization (10,426) (10,733)
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3,722 2,456
Investment securities 1,775 --
Other assets 2,961 3,226
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Total other assets 4,736 3,226
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$ 22,873 $ 33,333
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LIABILITIES AND SHAREHOLDERS' EQUITY
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Current liabilities:
Accounts payable $ 5,411 $ 3,639
Accrued payroll and related 2,869 1,986
Other accrued liabilities 1,862 1,681
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Total current liabilities 10,142 7,306
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 15,000,000 shares
authorized; 2,631,579 issued and outstanding at
September 30, 1997 and December 31, 1996 5,000 5,000
Common stock, no par value, 50,000,000 shares
authorized; 20,386,004 and 20,224,540 shares
issued and outstanding at September 30, 1997
and December 31, 1996 respectively 69,082 68,975
Accumulated deficit (61,351) (47,948)
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Total shareholders' equity 12,731 26,027
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$ 22,873 $ 33,333
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See accompanying notes
-3-
DIGITAL SOUND CORPORATION
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STATEMENT OF OPERATIONS
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(In thousands, except per share data)
Three Months Ended Nine Months Ended
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September 30, September 30, September 30, September 30,
1997 1996 1997 1996
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(Unaudited)
Net sales $ 5,890 $ 6,369 $ 14,317 $16,174
Cost of sales 3,241 2,458 7,281 5,873
------- ------- -------- -------
Gross margin 2,649 3,911 7,036 10,301
Selling, general and administrative 4,481 3,295 12,304 9,741
Engineering and development 3,261 2,298 8,379 6,808
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7,742 5,593 20,683 16,549
------- ------- -------- -------
Income (loss) from operations (5,093) (1,682) (13,647) (6,248)
Interest and other income 4 248 244 884
------- ------- -------- -------
Income (loss) before provision for income taxes (5,089) (1,434) (13,403) (5,364)
Provision for income taxes: -- -- -- --
------- ------- -------- -------
Net income (loss) $(5,089) $(1,434) $(13,403) $(5,364)
======= ======= ======== =======
Net income (loss) per common and common
equivalent shares $ (.25) $ (.07) $ (.66) $ (.27)
======= ======= ======== =======
Weighted average common and common equivalent
shares outstanding 20,386 30,093 20,315 20,055
======= ======= ======== =======
See accompanying notes
-4-
DIGITAL SOUND CORPORATION
STATEMENT OF CASH FLOWS
(In thousands)
Nine Months Ended
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September 30, September 30,
1997 1996
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(Unaudited)
Cash flows from operating activities $(13,403) $(5,364)
Net income
Adjustments to reconcile net income to
net cash provided (used) by operations:
Depreciation and amortization 352 271
Changes in operating assets and liabilities:
Accounts receivable 156 (2,751)
Inventories (2,281) 826
Other current assets 69 153
Other assets (394) 2,226
Accounts payable 1,772 (839)
Accrued payroll and related 883 710
Other accrued liabilities 181 251
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Net cash provided (used) by operations (12,665) (4,517)
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Cash flows from investing activities:
Additions to investment securities (1,775)
Additions to property and equipment (959) (255)
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Net cash used for investing activities (2,734) (255)
Cash flows from financing activities:
Net proceeds from issuance of common stock 107 108
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Net decrease in cash and equivalents (15,292) 4,664
Cash and equivalents at beginning of period 18,187 23,503
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Cash and equivalents at end of period $ 2,895 $18,839
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See accompanying notes.
-5-
DIGITAL SOUND CORPORATION
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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SEPTEMBER 30, 1997
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(Unaudited)
NOTE 1. General
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All interim financial data is unaudited, but in the opinion of the Company
such unaudited statements include all adjustments, consisting of normal
recurring accruals, necessary for a fair presentation of the results for the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Nevertheless, the
Company believes that the disclosures in these financial statements are adequate
to make the information presented not misleading.
The results of operations for the current interim period are not
necessarily indicative of results to be expected for the current year.
Principles of consolidation. The consolidated financial statements include
the accounts of Digital Sound Corporation (the Company) and its wholly owned
subsidiaries Digital Sound International and Pulsepoint Communications Malaysia.
All significant intercompany transactions and balances have been eliminated.
Short term investments. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). The Company adopted the
provisions of SFAS 115 for investments held as of December 31, 1995. The
adoption had no effect on the financial statements. Short term investments
(principally commercial paper and discount notes with maturity dates generally
within 90 days that are considered cash equivalents) are classified as "held to
maturity" based on the Company's positive intent and ability to hold the
securities until maturity. The securities are presented at amortized cost which
approximates fair value. Amortization and interest on securities classified as
"held to maturity" is included in investment income.
Cash, cash equivalents and pledged cash. The Company considers as cash
equivalents only those investments that are short-term, highly liquid, readily
convertible to cash, and so near their maturity that they present insignificant
risk of changes in value because of changes in interest rates. The Company
classifies as cash equivalents only those investments with maturities of three
months or less. The Company pledged $1.0 million of cash and cash equivalents
to facilitate a construction loan for its landlord to build new office space in
its existing building. The Company anticipates these pledged funds to become
available for general use by November 30, 1997. The Company also pledged $1.3
million and $0.5 million of cash and cash equivalents, respectively, to
facilitate the BancBoston and Mellon US Lease agreements.
Operating Lease Agreements. Effective January 1997, the Company entered
into master lease agreements with BancBoston Leasing Inc and Mellon US Leasing
("the Lease Agreements"). The purpose of the Lease Agreements is to provide
sale/leaseback financing for the purpose of capital acquisitions for 1997. The
BancBoston sale/leaseback agreement is for a total of $3.0 million in capital
equipment purchases and the term of the lease is 48 months. The terms of the
BancBoston sale/leaseback agreement require cash collateral equal to the
acquisition cost of the equipment leased. The Company has utilized $1.275
million of the BancBoston sale/leaseback agreement as of September 30, 1997.
The Mellon US Leasing sale/leaseback agreement is for $1.0 million in equipment
purchases and the term of the lease is for 30 months. The sale/leaseback
agreement requires a Letter of Credit equal to 50% of the limit of the credit
line ($0.5 million) which has been pledged. Bank of America has provided the
Company with this Letter of Credit, which is 100% collateralized by the
Company's certificate of deposit. The Company has fully utilized the Mellon US
Leasing sale/leaseback agreement as of September 30, 1997.
These financial statements should be read in conjunction with the financial
statements and the notes thereto included in the Company's Form 10-K for the
fiscal year ended December 31,1996, as filed with the Securities and Exchange
Commission.
-6-
NOTE 2. Inventories
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Inventories are stated at the lower of standard cost (which approximates
the first-in, first-out method) or market:
September 30, December 31,
1997 1996
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(Unaudited)
Raw materials and purchased parts $3,141 $1,528
Work in process 2,458 1,815
Finished goods 152 127
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$5,751 $3,470
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NOTE 3. Per Share Information
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Earnings (loss) per common and common equivalent share are computed based
upon the weighted average number of outstanding shares of common stock and
common stock equivalents. Antidilutive common stock equivalents were excluded
from this calculation for the periods in which a loss was incurred.
NOTE 4. Subsequent Events
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On July 28, 1997, the Company entered into a Security and Loan Agreement
("the Credit Line") with Imperial Bank for the purpose of obtaining a credit
line of $5,000,000. The credit line was secured by substantially all of the
assets of the Company, and allowed for borrowings of up to the lesser of
$2,000,000 or an amount equal to 50% of eligible domestic accounts receivable.
Interest under the Credit Line was at the prime rate plus 0.5% (one-half per
cent). The Credit Line also allowed for borrowing up to the lesser of
$3,000,000 or an amount equal to 90% of eligible foreign accounts receivable and
inventory. Borrowings under the Credit Line were subject to certain financial
covenants and restrictions on receivables, financial guarantees, and other
related items.
On October 30, 1997, the Company was in violation of certain of the
financial covenants of the Credit Line. There were no borrowings under the
Credit Line at that time. On October 31, 1997, the Company entered into an
amendment to its $5.0 million line of credit from Imperial Bank providing for a
relaxation of certain financial covenants. The amendments also allowed for
borrowing up to $5,000,000 or an amount equal to 65% of eligible accounts
receivable, foreign or domestic. The interested charged under the Credit Line
was increased to prime plus 2.0% (two per cent). Although there can be no
assurance, the Company expects to be in compliance with all covenants contained
in the amended agreement through the end of 1997. As of November 10, 1997,
borrowings under the line aggregated $0.5 million approximately. In connection
with the agreement, the Company issued a warrant to Imperial Bank for the
purchase of 300,000 shares of the Company's Common Stock at an exercise price of
$1.00 per share. The terms of the warrant provide for "full ratchet"
antidilution for 180 days after its issuance and for "weighted average"
antidilution thereafter, subject to certain exceptions. In the event the
Company issues convertible preferred stock to investors on or before April 30,
1998 in a financing aggregating more than $1 million of gross proceeds, the
warrant will become exercisable for shares of the same class and series as those
issued in such financing, and the exercise price of the warrant will be adjusted
to reflect the price (on a fully converted basis) at which such shares were
issued to such investors, if such price is lower than the adjusted exercise
price of the warrant at the time of such issuance. The line expires in June
1998.
-7-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
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FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Results of Operations
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Three Months Ended September 30, 1997 Compared to Three Months Ended September
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30, 1996
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Net sales decreased 7.5% from $6.4 million in the 1996 quarter to $5.9
million in the 1997 quarter. Compared to the third quarter of 1996, sales into
the VIS market decreased by $0.5 million and sales into the CPE market
essentially stayed the same. Combined sales of the VoiceServer 1110,
VoiceServer 2110 and VoiceServer 3110 decreased by $3.0 million while sales of
system upgrades and enhancements and services increased $2.5 million.
Gross margin as a percentage of net sales decreased to 45.0% in the 1997
period as compared to 61.4% for the same period in 1996. System margins were
down from 58.1% in the 1996 period to 51.6% in the third quarter of 1997 and
system upgrades, enhancements and service margins were down from 66.3% in the
third quarter of 1996 to 48.9% in the comparable period in 1997. Margins
decreased because software sales were high in the same period in 1996; software
is a higher margin product than hardware. System upgrades and enhancements and
services were 39.7% of total sales in the third quarter of 1996 and 85.5% in the
comparable period in 1997.
Selling, general and administrative expenses increased from $3.3 million in
the 1996 period to $4.5 million in the 1997 period as the Company invested in
upgrading its personnel and capabilities primarily in Sales and Marketing. As a
result of these expenses and the lower volume in net sales, selling, general and
administrative expenses were higher as a percentage of sales (76.1%) in the 1997
quarter as compared to the 1996 quarter (51.7%).
Engineering and development expenses increased from $2.3 million in the
1996 quarter to $3.3 million in the 1997 quarter. Engineering and development
expenses reflect the Company's strategy of continued investment in new product
development and product enhancements. As a result of the increase in spending
for engineering development in 1997 and the lower volume in net sales,
engineering and development expenses were higher as a percentage of sales in the
1997 quarter (55.4%) as compared to the 1996 quarter (36.1%).
There was no provision for income taxes in the third quarter of 1997 due to
the loss from operations.
As a result of the above, the Company's net loss for the three months ended
September 30, 1997 was $5.1 million as compared to a net loss of $1.4 million
for the comparable period last year.
Nine Months Ended September 30, 1997 Compared to Nine Months Ended September 30,
- --------------------------------------------------------------------------------
1996
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Net sales decreased 11.5% from $16.2 million in the 1996 period to $14.3
million in the 1997 period. Compared to 1996, sales into the VIS market
decreased by $1.9 million and sales into the CPE market decreased by $0.1
million. Combined sales of the VoiceServer 1110, VoiceServer 2110 and
VoiceServer 3110 decreased from those of the prior period by $3.3 million while
sales of system upgrades and enhancements and services increased $1.5 million.
Gross margin as a percentage of net sales decreased to 49.1% in the 1997
period as compared to 63.7% for the same period in 1996. System margins were
down from 48.3% in the 1996 period to 44.7% in 1997 and system upgrades,
enhancements and service margins were down from 73.9% in 1996 to 53.8% in the
comparable period in 1997. Margins were affected by lower than planned
manufacturing volume. System upgrades and enhancements and services were 60.3%
of total sales in 1996 and 78.5% in the comparable period in 1997.
Selling, general and administrative expenses increased from $9.7 million in
1996 to $12.3 million in 1997 as the Company invested in upgrading its personnel
and capabilities primarily in Sales and Marketing. As a result of these expenses
and the lower volume in net sales, selling, general and administrative expenses
were higher as a percentage of sales (85.9%) in 1997 as compared to the
comparable period in 1996 (60.2%).
-8-
Engineering and development expenses increased from $6.8 million in 1996 to
$8.4 million in the 1997 period. Engineering and development expenses reflect
the Company's strategy of continued investment in new product development and
product enhancements. As a result of the increase in spending for engineering
development in 1997 and the lower volume in net sales, engineering and
development expenses were higher as a percentage of sales in 1997 (58.5%) as
compared to the comparable period in 1996 (42.1%).
There was no provision for income taxes in the first three quarters of 1997
due to the loss from operations.
As a result of the above, the Company's net loss for the nine months ended
September 30, 1997 was $13.4 million as compared to a net loss of $5.4 million
for the comparable period last year.
Factors That May Affect Future Results
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Digital Sound operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. The following
discussion highlights some of these risks.
The voice processing and messaging industry is highly competitive, with
rapid technological advances and constantly improving price/performance. As the
markets in which the Company operates continue to grow, the Company is
experiencing an increase in competition, and it expects this trend to continue.
The Company is not one of the largest providers of voice processing and
messaging equipment in the industry. Some of the Company's competitors have
substantially greater technical, marketing and financial resources and, in some
markets, a larger installed base of customers and a wider range of available
applications software.
The voice processing and messaging industry has experienced a continuing
evolution of product offerings and alternatives for delivery of services. These
trends have affected and may be expected to have a significant continuing
influence on conditions in the industry, although the impact on the industry
generally and on the Company's position in the industry cannot be predicted with
assurance. The Company and the industry are, in general, dependent on the U.S.
domestic telephone companies for a large percentage of revenue. The suppliers
to the telephone company market, which is primarily comprised of 7 regional Bell
operating companies and GTE, have largely been decided for first generation
voice processing requirements.
The market for voice processing and messaging systems is in a period of
transition. Budgetary constraints, uncertainties resulting from the
introduction of new technologies in the telecommunications environment and
changes in the government regulations have increased uncertainties in the
market. Significant changes in the domestic U.S. industry as a result of the
1996 Telecommunications act make planning decisions more difficult and increase
the risk inherent in the planning process.
The Company's operating results may fluctuate for a number of reasons. The
Company has short delivery cycles and as a result does not have a large order
backlog, which makes the forecasting of revenue inherently uncertain. This
uncertainty is compounded because each quarter's revenue results predominantly
from orders booked and shipped during the third month of the quarter. Because
the Company plans its operating expenses, many of which are relatively fixed in
the short term, on the basis of its anticipated revenues, even a relatively
small revenue shortfall may cause a period's results to be substantially below
expectations. Such a revenue shortfall could arise from any number of factors,
including lower than expected demand, supply constraints, delays in the
availability of new products, overall economic conditions or natural disasters.
The international portion of the Company's business is subject to a number of
inherent risks, including difficulties in building and managing international
operations and international reseller networks and international service and
support of the Company's products, difficulties or delays in translating
products into foreign languages, fluctuations in the value of foreign
currencies, import/export duties and quotas, and unexpected regulatory, economic
or political changes in international markets. Although the majority of
international transactions are performed through confirmed letters of credit,
due to the competitive environment in the international marketplace, certain
international customers may require longer payment terms; and as a result, days
sales outstanding may periodically extend beyond ninety days on amounts due from
these customers.
-9-
The development of new technologies and products is increasingly complex
and uncertain, which increases the risk of delays. The introduction of new
systems requires close collaboration and continued technological advancement
involving multiple hardware and software design, manufacturing, marketing and
sales teams within the Company as well as teams at outside suppliers of key
components. The failure of any one of these elements could cause the Company's
new products to fail to meet specifications or to miss the aggressive timetables
that the Company establishes. As the variety and complexity of the Company's
product families increase, the process of planning production and inventory
levels also becomes more difficult. The Company expects to continue investing
heavily in supporting the development effort required to bring new technologies
and products to the market. To support this, substantial financial resources
will be expended.
The Company believes that its production capacity should be sufficient to
support anticipated unit volumes for the foreseeable future. The Company is
primarily engaged in the final assembly and testing of the hardware equipment.
The Company currently buys the majority of its subassembly inventory from a
limited number of suppliers. The failure of these suppliers to provide such
subassemblies on a timely basis and within specifications could have a
materially adverse effect on the Company's business. If the Company is unable
to obtain certain key components, or to effectively forecast customer demand or
manage its inventory, increased inventory obsolescence or reduced utilization of
production capacity could adversely impact the Company's gross margins and
results of operations.
The Company has historically derived a significant portion of its revenue
and operating profit from a relatively small number of customers. Thru
September 30, 1997, the Company derived 57.1% of its revenue from a single
customer. International proposals for large system installations typically
involve a lengthy and complex bidding and selection process, and the ability of
the Company to obtain a particular proposal award is inherently difficult to
predict. The Company believes that the opportunities for these installations
will continue to grow and intends to continue to expand its research and
development, manufacturing, sales and marketing and product support capabilities
in anticipation of such growth. However, the timing and scope of these
opportunities and the pricing and margins associated with any eventual proposal
award are difficult to forecast, and may vary substantially from transaction to
transaction. The Company's future operating results may, accordingly, exhibit a
higher degree of volatility than the operating results of other companies in its
industry that have adopted different strategies. Although the Company is
actively pursuing a number of opportunities both in and out of the United
States, both the timing of any eventual opportunities and the probability of the
Company's receipts of significant purchase orders are uncertain. The degree of
dependence by the Company on large orders, and the investment required to enable
the Company to perform such orders, without assurance of continuing order flow
from the same customers and predictability of gross margins on any future
orders, increase the risk associated with its business.
The Company's stock price, like that of other technology companies, is
subject to significant volatility. If revenues or earnings in any quarter fail
to meet the investment community's expectations, there could be an immediate
impact on the Company's stock price. The stock price may also be affected by
broader market trends unrelated to the Company's performance.
The Company routinely receives communications from third parties asserting
patent or other rights covering the Company's products and technologies. Based
upon the Company's evaluation, it may take no action or it may seek to obtain a
license. In any given case there is a risk that a license will not be available
with terms that the Company considers reasonable, or that litigation will ensue.
The Company expects that, as the number of hardware and software patents issued
continues to increase, and as the Company's business grows, the volume of these
third party communications will also increase.
-10-
Company's corporate headquarters facility, at which the majority of its
research and development activities are conducted, is located near major
earthquake faults which have experienced earthquakes in the past. While the
Company does carry insurance at levels management believes to be prudent, in the
event of a major earthquake or other disaster affecting one or more of the
Company's facilities, it is likely that insurance proceeds would not cover all
of the costs incurred and, therefore, the operations and operating results of
the Company could be adversely affected.
Due to the factors noted above and elsewhere in management's discussion and
analysis of financial condition and results of operations, the Company's future
earnings and Common Stock price may be subject to significant volatility,
particularly on a quarterly basis. Past financial performance should not be
considered a reliable indicator of future performance and investors should not
use historical trends to anticipate results or trends in future periods. Any
shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's Common Stock in any given period. Additionally, the
Company may not learn of such shortfalls until late in a fiscal quarter, which
could result in an even more immediate and adverse effect on the trading price
of the Company's Common Stock. Furthermore, the Company participates in a
highly dynamic industry which often results in volatility of the Company's
Common Stock price.
Finally, the Company has not been operating profitably. The Company's
strategy has been to develop new technology and to expand its marketing
capabilities, with the goal of creating successful new products and marketing
them effectively, thereby returning the Company to profitability. The Company's
on-going investments in technology and marketing require funds and the Company's
financial resources are limited so that the Company's funds will be exhausted if
the Company is unable to raise additional working capital. See "Liquidity and
Capital Resources" below.
Liquidity and Capital Resources
- -------------------------------
For the nine months ended September 30, 1997, net working capital decreased
by $16.0 million to $4.3 million compared to $20.3 million at December 31, 1996.
The level of net working capital resulted principally from a reduction in cash
of $15.3 million, an increase in accounts payable of $1.8 million and an
increase in accrued payroll and other accrued liabilities of $1.0 million. The
decrease in cash reflects the level of the Company's sales combined with the
Company's continued commitment to investment in certain strategic long-term
initiatives focusing on the development of new products, and the strengthening
of the Company' marketing and sales capabilities. The Company's goal is for
these initiatives to begin showing concrete results by no later than the end of
1997. The level of sales achieved by the Company during the first nine months
of 1997 and before has been insufficient to provide the Company with net cash
from operations, and the Company does not expect to generate net cash from
operations in 1997. The Company's strategic initiatives will not succeed in
enabling the Company to generate net cash from operations before the Company's
cash resources have been substantially depleted. The Company is actively
seeking additional financing from a variety of potential sources. Any such
financing is likely to involve a substantial issuance of equity securities or
securities convertible into equity securities and is likely to have a
substantial dilutive effective on the current holders of the Company's Common
Stock and to involve covenants and conditions that would provide various rights
and preferences to the investors in any such financing that would not be shared
by the current holders of the Company's Common Stock. There can be no assurance
that the Company will be able to obtain such additional financing in a timely
manner on terms favorable to the Company, or at all. If the Company is unable
to obtain such financing, it may be required to undertake strategic or
restructuring alternatives that could provide little or not return to the
current holders of the Company's Common Stock.
At September 30, 1997, the Company had cash and investments of $4.7 million
and no long term debt. $1.8 million of this cash was held as collateral under
the sale/leaseback agreements and is classified as "Investment securities" on
the Company's balance sheet for the period ending September 30, 1997. An
additional $1.0 million is held as collateral for a construction loan obtained
by the landlord of the Company's Carpinteria facility. The Company expects this
$1.0 million to be accessible by November 30, 1997, but there can be no
guarantee that this will be the case. During the first three quarters of 1997,
net cash used by operations was $ 12.7 million. Through September 30, 1997
capital expenditures were $ 1.0 million. The Company has never paid any cash
dividends on its stock and anticipates that, for the foreseeable future, it will
continue to retain any earnings for use in the operation of its business.
-11-
PART II - OTHER INFORMATION
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DIGITAL SOUND CORPORATION
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Item 1. Legal Proceedings
-----------------
As reported in Note 10 to the Company's financial statements included in
the Company's 1996 Annual Report to Shareholders and incorporated by reference
in the Company's Annual Report on Form 10-K for the fiscal year ended December
31,1996, the Company is involved in patent litigation with Theis Research, Inc.
No material developments have occurred in 1997.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
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10.49 Line of Credit Agreement between Registrant and Imperial Bank dated
July 28, 1997.
10.50 Security and Loan Agreement Domestic Facility by and between
Registrant and Imperial Bank dated July 28, 1997.
10.51 First Amendment and Waiver to Digital Sound Corporation Credit Terms
and Conditions by and between Registrant and Imperial Bank dated
October 30, 1997.
10.52 First Amendment to Security and Loan Agreement, Domestic Credit by
and between Registrant and Imperial Bank dated October 30, 1997.
10.53 Warrant Purchase Agreement by and between Registrant and Imperial
Bank dated October 30, 1997.
10.54 Antidilution Agreement by and between Registrant and Imperial Bank
dated October 30, 1997.
10.55 Registration Rights Agreement by and between Registrant and Imperial
Bank dated October 30, 1997
b) Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
-12-
SIGNATURES
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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, on November 11, 1997.
DIGITAL SOUND CORPORATION
By /s/ Mark C. Ozur
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Mark C. Ozur
President, Chief Executive Officer
By /s/ B. Robert Suh
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B. Robert Suh
Vice President, Finance and Chief
Financial Officer