FORM 10-Q
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
__________________________________
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 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: 0-18280
PULSEPOINT COMMUNICATIONS
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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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DIGITAL SOUND CORPORATION
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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 April
7, 1998 was 5,141,823
PULSEPOINT COMMUNICATIONS
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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:
Consolidated Balance Sheets as of March 31, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the
Three Months ended March 31, 1998
and March 31, 1997 4
Consolidated Statements of Cash Flows for the
Three Months ended March 31, 1998
and March 31, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 1. Legal proceedings 10
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 12
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PART I - FINANCIAL INFORMATION
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PULSEPOINT COMMUNICATIONS
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CONSOLIDATED BALANCE SHEET
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(In thousands, except share data)
March 31, December 31,
1998 1997
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Unaudited
ASSETS
Current assets:
Cash, cash equivalents and pledged cash $ 16,318 $ 20,973
Accounts receivable, less allowance for doubtful accounts of $603
and $527 at March 31, 1998 and December 31, 1997, respectively 4,293 4,111
Inventories, net 4,299 3,876
Other current assets 182 169
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Total current assets 25,092 29,129
Property and equipment, at cost:
Computers and other equipment 9,206 9,504
Furniture and fixtures 999 999
Leasehold improvements 2,022 1,357
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12,227 11,860
Less accumulated depreciation and amortization (7,271) (6,776)
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4,956 5,084
Other assets:
Investment securities 1,039 1,030
Other assets 2,008 2,198
Total other assets 3,047 3,228
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Total assets $ 33,095 $ 37,441
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LIABILITIES & SHAREHOLDER'S EQUITY
Current liabilities:
Credit Line $ 1,932 $ 1,581
Shareholder notes payable 6,613 6,613
Accounts payable 3,320 3,532
Accrued payroll and related 2,821 3,102
Other accrued liabilities 1,593 2,170
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Total current liabilities 16,279 16,998
Commitments and contingencies
Shareholders' equity:
Preferred stock, 15,000,000 shares authorized:
Series B, no par value, 2,451,667 shares authorized and
outstanding at March 31, 1998 and December 31, 1997. 18,110 18,110
Common stock, no par value - 50,000,000 shares authorized,
5,141,823 and 5,140,398 shares issued and outstanding
at March 31, 1998 and December 31, 1997, respectively 69,214 69,205
Accumulated deficit (70,508) (66,872)
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Total shareholders' equity 16,816 20,443
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Total liabilities & shareholders' equity $ 33,095 $ 37,441
========= =========
See accompanying notes.
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PULSEPOINT COMMUNICATIONS
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CONSOLIDATED STATEMENT OF OPERATIONS
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(In thousands, except per share data)
Three Months Ended
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March 31, March 31,
1998 1997
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(Unaudited)
Net sales $ 4,200 $ 3,359
Cost of sales 1,878 1,915
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Gross margin 2,322 1,444
Selling, general and administrative 3,519 3,899
Engineering and development 2,644 2,323
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6,163 6,222
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Income (loss) from operations (3,841) (4,778)
Interest and other income 205 150
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Income (loss) before provision for income taxes (3,636) (4,628)
Provision for income taxes: - -
Net income (loss) $ (3,636) $ (4,628)
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Net income (loss) per common and common
equivalent share $ (.71) $ (.92)
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Weighted average common and common
equivalent shares outstanding 5,141 5,056
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See accompanying notes
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PULSEPOINT COMMUNICATIONS
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CONSOLIDATED STATEMENT OF CASH FLOWS
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(In thousands)
Three Months Ended
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March 31, March 31,
1998 1997
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(Unaudited)
Cash flows from operating activities
Net income $ (3,636) $ (4,628)
Adjustments to reconcile net income to
net cash provided (used) by operations:
Depreciation and amortization 657 418
Provision for loss on inventory 40 34
Provision for allowance for bad debt 75 15
Changes in operating assets and liabilities:
Accounts receivable (257) (558)
Inventories (463) 53
Other current assets (13) (28)
Investment securities (9) (1,000)
Other assets 28 31
Accounts payable (212) 800
Accrued payroll and related (281) 227
Other accrued liabilities (557) 552
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Net cash provided (used) by
operations (4,648) (4,048)
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Cash flows from investing activities:
(Additions to) disposition of
property and equipment (367) (1,638)
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Net cash used in investing activities (367) (1,638)
Cash flows from financing activities:
Net proceeds from line of credit 351
Net proceeds from issuance of common stock 9 7
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Net cash provided from financing
activities 360 7
Net increase (decrease) in cash and equivalents (4,655) (5,715)
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Cash and equivalents at beginning of period 20,973 18,187
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Cash and equivalents at end of period $ 16,318 $ 12,472
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See accompanying notes
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PULSEPOINT COMMUNICATIONS
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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MARCH 31, 1998
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(Unaudited)
NOTE 1. General
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All interim financial data is unaudited, but in the opinion of PulsePoint
Communications (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. In April
1998, the Company changed its name from Digital Sound Corporation to PulsePoint
Communications.
Nature of business. The Company designs, manufactures and markets
information processing systems which enable unified messaging.
Revenue recognition. Generally sales are recognized when products are
shipped or when services are performed. Warranty costs are accrued at time of
sale. Revenue from sales of extended warranties is accounted for as deferred
revenues and recognized into income over the warranty or maintenance period.
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2, "Software Revenue Recognition.
("SOP 97-2") establishes standards relating to the recognition of all aspects of
software revenue. SOP 97-2 is effective for transactions entered into in fiscal
years beginning after December 15, 1997. The Company adopted the provisions of
SOP 97-2 as of March 31, 1998. The adoption had no effect on the financial
statements.
Principles of consolidation. The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiaries Digital Sound
International and DGSD Malaysia Corporation. 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 also pledged $1.0 million to facilitate a
construction loan for the landlord to build new office space in its existing
building. The pledge was released making the funds available to the Company in
February 1998.
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Reclassification. Certain data in the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
Reverse Stock Split All share and per share information in the
accompanying consolidated financial statements and notes thereto has been
retroactively adjusted to reflect a one-for-four reverse stock split approved on
April 10, 1998 by the Company's shareholders, effective April 20, 1998.
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, 1997, as filed with the Securities and Exchange
Commission.
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:
March 31, December 31,
1998 1997
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(Unaudited)
Raw materials and purchased parts $ 1,728 $ 2,077
Work in process 2,438 1,521
Finished goods 133 278
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$ 4,299 $ 3,876
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NOTE 3: Equity
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Common and Common Equivalent Stock.
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At March 31, 1998, there were 5,141,823 shares of the Company's Common Stock
outstanding and 9,360,019 shares of common stock equivalents, as follows:
Number of Common and
Common Equivalent Shares
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(A) Common Stock Outstanding at 3/31/98 - 5,141,823
(B) Conversion of Series B Convertible Preferred
Stock 6,129,168
(C) Conversion of Shareholder Notes Payable 2,204,168
(D) Shares Grant - 1983 Stock Option Plan 876,534
(E) Shares Grant - Directors' Stock Option Plan 55,150
(F) Warrant to Imperial Bank 100,000
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Additional shares issuable 9,365,020
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Total Potential Shares of Common Stock 14,506,843
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(A) Number of shares of Common Stock outstanding at March 31, 1998.
(B) Shares of Common Stock issuable upon conversion of the Company's Series B
Convertible Preferred Stock outstanding at March 31, 1998.
(C) At March 31, 1998, there is $6,612,500 in Convertible Promissory Notes
Payable ("Shareholder Notes Payable"). The Notes were converted into
881,667 shares of Series B Convertible Preferred Stock in April 1998; the
shares of Series B Convertible Preferred Stock are in turn convertible into
2,204,168 shares of the Company's Common Stock.
(D) Number of shares of Common Stock issuable pursuant to options granted under
the Company's 1983 Stock Option Plan.
(E) Number of shares of Common Stock issuable pursuant to options granted under
the Company's Directors' Option Plan.
(F) Warrant to purchase 100,000 shares of the Company's Common Stock issued to
a bank.
Reverse Split of Common Stock
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On April 10, 1998, the Company's Shareholders approved, and the Company issued,
a 1 for 4 reverse split of the Company's Common Stock. In accordance with SAB
83, the financial statements and footnote disclosure reflects the reverse stock
split for all reporting periods. In addition the calculation of earnings (loss)
per share has given effect to the reverse stock split.
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Preferred Stock
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At March 31, 1998, there were outstanding Convertible Promissory Notes in the
amount of $6,612,502.50. At the Company's annual meeting of shareholders held
on April 10, 1998, the Company's shareholders approved a 1 for 4 reverse split
of the Company's Common Stock and the authorization of additional shares of
Common Stock. Upon such approval, the Convertible Promissory Notes were,
pursuant to their terms, automatically converted into shares of Series B
Convertible Preferred Stock. Such automatic conversion resulted in an
additional 881,689 shares of Series B Convertible Preferred Stock outstanding.
NOTE 4. 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 5. Subsequent Events
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The annual meeting of shareholders for the Company was held on April 10,
1998. The shareholders approved all of the proposals as stated in the 1997
Proxy Statement, which were:
1. The election of the Directors of the Company;
2. An increase in the number of shares of Common Stock available under the
Company's Stock Option Plan from 6,500,000 to 9,500,000;
3. Approval of a 1:4 reverse split of the Company's Common Stock;
4. An increase in the number of shares of Common Stock authorized from
50,000,000 to 90,000,000;
5. Approval to change the name of the Company to PulsePoint Communications;
6. Ratification of the appointment of Ernst & Young as independent public
accountants for the 1998 fiscal year.
As a result, in April 1998 the Company filed with the Secretary of State of the
State of California an amendment to the Company's Ninth Amended and Restated
Articles of Incorporation which effectuated Proposals No. 3 and No. 5, above.
This amendment was approved by the Secretary of the State of the State of
California on April 16, 1998.
As stated in the Company's Proxy Statement dated February 25, 1998, if both
Proposals No. 3 and No. 4 are approved, the Board of Directors would implement
Proposal No. 3 and would not implement Proposal No. 4. Consequently, Proposal
No. 4 was not implemented. The Company's stock began trading on a post-reverse
split basis on April 20, 1998.
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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 March 31, 1998 Compared to Three Months Ended March 31, 1997
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Net sales increased 25.0% from $3.4 million in 1997 to $4.2 million in
1998. Compared to the first quarter of 1997, sales into the VIS market
increased by $0.6 million and sales into the CPE market increased by $0.2
million. System sales stayed essentially the same while sales of system
upgrades and enhancements and services increased $0.8 million.
Gross margin as a percentage of net sales increased to 55.3% in the 1998
period as compared to 43.0% for the same period in 1997. System margins were
down from 41.6% in the 1997 period to 32.3% in the first quarter of 1998 and
system upgrades, enhancements and service margins were up from 43.3% in the
first quarter of 1997 to 61.0% in the comparable period in 1998. System
upgrades and enhancements and services were 77.0% of total sales in the first
quarter of 1997 and 80.3% in the comparable period in 1998.
Selling, general and administrative expenses decreased from $3.9 million in
the 1997 period to $3.5 million in the 1998 period as the Company instituted
cost control measures company wide. As a result of these controls and the
higher volume in net sales, selling, general and administrative expenses were
lower as a percentage of sales (83.8%) in the 1998 quarter as compared to the
1997 quarter (116.1%).
Engineering and development expenses increased from $2.3 million in the
1997 quarter to $2.6 million in 1998. Engineering and development expenses
reflect the Company's strategy of continued investment in new product
development and product enhancements. As a result of the higher volume in net
sales in 1998, engineering and development expenses were lower as a percentage
of sales in 1998 (63.0%) as compared to 1997 (69.2%).
There was no provision for income taxes in the first quarter of 1998 or
1997 due to the losses from operations.
As a result of the above, the Company's net loss for the three months ended
March 31, 1998 was $3.6 million as compared to a net loss of $4.6 million for
the comparable period last year.
Factors That May Affect Future Results
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The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. These risks
are discussed in the Company's 1997 Annual Report to Shareholders and
incorporated by reference to the Company's Annual Report on Form 10-K for thE
fiscal year ended December 31, 1997.
Liquidity and Capital Resources
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For the three months ended March 31, 1998, net working capital decreased by
$3.3 million to $8.8 million compared to $12.1 million at December 31, 1997. In
1998 the decrease in working capital resulted principally from a reduction in
cash of $4.7 million, an increase in accounts receivable of $0.2 million, an
increase in inventory of $0.4 million, an increase in amounts borrowed under the
Company's credit line of $0.4 million, and a decrease in accrued liabilities of
1.2 million. In April 1998, the $6.6 million of shareholders notes were
converted to 881,667 shares of the Company's Series B Convertible Preferred
Stock. (See Note 9 to the Company's financial statements included in the
Company's 1997 Annual Report to Shareholders and in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1997.)
At March 31, 1998, the Company had cash and investments of $17.4 million
and no long term debt. During 1998, net cash used by operations was $4.3
million. Through March 31, 1998, capital expenditures were $0.4 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.
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PART II - OTHER INFORMATION
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PULSEPOINT COMMUNICATIONS
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Item 1. Legal Proceedings
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As reported in Note 11 to the Company's financial statements included in
the Company's 1997 Annual Report to Shareholders and incorporated by reference
to the Company's Annual Report on Form 10-K for the fiscal year ended December
31,1997, the Company is involved in patent litigation with Theis Research, Inc
("Theis"). In 1997, the U.S. Court of Appeals affirmed a district court's
decision that Theis' patents were either invalid or not infringed by Lucent
Technologies, Inc., thereby continuing the stay of Theis action against the
Company. In Theis' action against Lucent Technologies, Inc., Theis has
requested an extension through April 29, 1998, to file a writ of certiorari with
the US Supreme Court.
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Item 4. Submission of Matters to a Vote of Security Holders
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a) The Annual Meeting of Shareholders of PulsePoint Communications was
held on April 10, 1998.
b) Matters voted on at the meeting and votes cast on each were as
follows:
VOTES
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For Withhold Authority
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1. To elect directors of the Company:
John D. Beletic 40,956,076 205,650
Bandel L. Carano 40,968,076 193,650
J. David Hann 40,960,576 201,150
Scot B. Jarvis 40,974,576 187,150
Cameron D. Myhrvold 40,967,576 194,150
Mark C. Ozur 40,963,876 197,850
Frederick J. Warren 40,967,376 194,350
Broker
For Against Abstain Non-votes
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2. To approve an amendment to the Company's 30,225,939 1,829,576 196,303 8,909,908
1983 Stock Option Plan to increase the number
of shares of the Company's Common Stock
available under the plan from 6,500,000 to
9,500,000 shares.
3. To approve an amendment to the Company's 39,609,111 1,423,863 128,752 -
Ninth Amended and Restated Articles of
Incorporation effectuating a 1:4 reverse
stock split of the Company's Common Stock
4. To approve an amendment to the Company's 39,874,873 1,113,824 173,029 -
Ninth Amended and Restated Articles of
Incorporation increasing the number of
shares of Common Stock authorized from
50,000,000 to 90,000,000.
5. To approve an amendment to the Company's 40,791,831 268,518 101,377 -
Ninth Amended and Restated Articles of
Incorporation changing the name of the
Company to PulsePoint Communications.
6. To ratify the appointment of Ernst & Young 40,984,487 120,590 56,649 -
as independent public accountants for the
Company for the 1998 fiscal year.
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Item 6. Exhibits and Reports on Form 8-K
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a) Exhibits
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3.03 Amendment to the Registrants Ninth Amended and Restated
Articles of Incorporation dated as of April 16, 1998.
3.04 Registrants Ninth Amended and Restated Articles of
Incorporation dated as of January 16, 1990
b) Reports on Form 8-K
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No reports on Form 8-K have been filed during the quarter for
which this report is filed.
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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 May 13, 1998.
PULSEPOINT COMMUNICATIONS
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
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