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 June 30, 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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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
July 31, 1998 was 5,213,927.
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 June 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the
Three Months and Six Months ended
June 30, 1998 and June 30, 1997 4
Consolidated Statements of Cash Flows for the
Six Months ended June 30, 1998
and June 30, 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 1. Legal proceedings 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 11
2
PART I - FINANCIAL INFORMATION
PULSEPOINT COMMUNICATIONS
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CONSOLIDATED BALANCE SHEET
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(In thousands, except share data)
June 30, December 31,
1998 1997
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Unaudited
Assets
Current assets:
Cash and cash equivalents $ 12,869 $ 20,973
Accounts receivable, less allowance for doubtful accounts of $678
and $527 at June 30, 1998 and December 31, 1997, respectively 6,752 4,111
Inventories, net 4,687 3,876
Other current assets 146 169
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Total current assets 24,454 29,129
Property and equipment, at cost:
Computers and other equipment 10,062 9,504
Furniture and fixtures 1,004 999
Leasehold improvements 1,469 1,357
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Total property and equipment, at cost 12,535 11,860
Less accumulated depreciation and amortization (7,624) (6,776)
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Property and equipment, net of depreciation and amortization 4,911 5,084
Other assets:
Investment securities 1,039 1,030
Other assets 1,732 2,198
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Total other assets 2,771 3,228
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Total assets $ 32,136 $ 37,441
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Liabilities & Shareholders' Equity
Current liabilities:
Credit Line $ 2,304 $ 1,581
Shareholder notes payable - 6,613
Accounts payable 3,566 3,532
Accrued payroll and related 2,491 3,102
Other accrued liabilities 2,411 2,170
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Total current liabilities 10,772 16,998
Other liabilities 805 -
Commitments and contingencies - -
Shareholders' equity:
Preferred stock, 15,000,000 shares authorized:
Series B, no par value, 3,333,334 and 2,451,667 shares issued and
outstanding at June 30, 1998 and December 31, 1997, respectively. 24,723 18,110
Common stock, no par value - 50,000,000 shares authorized,
5,213,927 and 5,140,398 shares issued and outstanding
at June 30, 1998 and December 31, 1997, respectively 69,489 69,205
Accumulated deficit (73,653) (66,872)
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Total shareholders' equity 20,559 20,443
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Total liabilities & shareholders' equity $ 32,136 $ 37,441
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See accompanying notes
3
PULSEPOINT COMMUNICATIONS
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CONSOLIDATED STATEMENT OF OPERATIONS
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(In thousands, except per share data)
Three Months Ended Six Months Ended
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June 30, June 30, June 30, June 30,
1998 1997 1998 1997
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(Unaudited)
Net sales $ 6,842 $ 5,068 $11,043 $ 8,427
Cost of sales 3,875 2,125 5,754 4,040
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Gross margin 2,967 2,943 5,289 4,387
Selling, general and administrative 3,767 3,923 7,287 7,823
Engineering and development 2,534 2,795 5,178 5,118
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6,301 6,718 12,465 12,941
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Income (loss) from operations (3,334) (3,775) (7,176) (8,554)
Interest and other income 189 90 395 241
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Income (loss) before provision for income taxes (3,145) (3,685) (6,781) (8,313)
Provision for income taxes: - - - -
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Net income (loss) $(3,145) $(3,685) $(6,781) $(8,313)
======= ======= ======= =======
Net income (loss) per common and common
equivalent share $ (.61) $ (.72) $ (1.31) $ (1.64)
======= ======= ======= =======
Weighted average common and common
equivalent shares outstanding 5,172 5,084 5,157 5,070
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See accompanying notes
4
PULSEPOINT COMMUNICATIONS
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CONSOLIDATED STATEMENT OF CASH FLOWS
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(In thousands)
Six Months Ended
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June 30 June 30
1998 1997
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(Unaudited)
Cash flows from operating activities
Net income $(6,781) $(8,313)
Adjustments to reconcile net income to
net cash provided (used) by operations:
Depreciation and amortization 1,314 801
Provision for loss on inventory 110 81
Provision for allowance for bad debt 150 25
Changes in operating assets and liabilities:
Accounts receivable (1,986) (230)
Inventories (921) (632)
Other current assets 23 (23)
Investment securities (9) (1,500)
Other assets - 15
Accounts payable 34 901
Accrued payroll and related (559) 353
Other accrued liabilities 241 (99)
Other liabilities - -
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Net cash provided (used) by
operations (8,384) (8,621)
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Cash flows from investing activities:
(Additions to) disposition of
property and equipment (675) (1,359)
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Net cash used in investing activities (675) (1,359)
Cash flows from financing activities:
Net proceeds from line of credit 671 -
Net proceeds from issuance of common stock 284 107
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Net cash provided from financing
activities 955 107
Net increase (decrease) in cash and equivalents (8,104) (9,873)
Cash and equivalents at beginning of period 20,973 18,187
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Cash and equivalents at end of period $12,869 $ 8,314
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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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JUNE 30, 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.
Revenue recognition. Generally sales are recognized when products are
shipped or when services are performed. Warranty costs are accrued at the time
of sale. Revenue from sales of extended warranties is accounted for as deferred
revenue 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"). 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 and cash equivalents. 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.
Reclassification. Certain data in the 1997 financial statements have been
reclassified to conform to the 1998 presentation.
6
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:
June 30, December 31,
1998 1997
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(Unaudited)
Raw materials and purchased parts $ 1,612 $ 2,077
Work in process 2,557 1,521
Finished goods 518 278
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$ 4,687 $ 3,876
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NOTE 3: Equity
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Common and Common Equivalent Stock.
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At June 30, 1998, there were 5,213,927 shares of the Company's Common Stock
outstanding and 9,533,543 shares of common stock equivalents, as follows:
Number of Common and
Common Equivalent Shares
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(A) Common Stock Outstanding at 6/30/98 - 5,213,927
(B) Conversion of Series B Convertible Preferred
Stock 8,333,336
(C) Shares Grant - 1983 Stock Option Plan 1,045,057
(D) Shares Grant - Directors' Stock Option Plan 61,400
(E) Warrants 100,000
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Additional shares issuable 9,539,793
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Total Potential Shares of Common Stock 14,753,720
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(A) Number of shares of Common Stock outstanding at June 30, 1998.
(B) Shares of Common Stock issuable upon conversion of the Company's Series B
Convertible Preferred Stock outstanding at June 30, 1998.
(C) Number of shares of Common Stock issuable pursuant to options granted under
the Company's 1983 Stock Option Plan (assuming full vesting).
(D) Number of shares of Common Stock issuable pursuant to options granted under
the Company's Directors' Option Plan (assuming full vesting).
(E) 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.
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 881,667 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.
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 June 30, 1998 Compared to Three Months Ended June 30, 1997
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Net sales increased 35.0% from $5.1 million in 1997 to $6.8 million in 1998.
Compared to the second quarter of 1997, sales into the VIS market increased by
$1.9 million and sales into the CPE market decreased by $0.2 million. System
sales increased by $2.0 million from those of the prior period while sales of
system upgrades and enhancements and services decreased $0.3 million.
Gross margin as a percentage of net sales decreased to 43.4% in the 1998
period as compared to 58.1% for the same period in 1997. System margins were
down from 43.7% in the 1997 period to 38.7% in the second quarter of 1998 and
system upgrades, enhancements and service margins were down from 63.9% in the
second quarter of 1997 to 48.4% in the comparable period in 1998. During the
quarter, the Company established a reserve in the amount of $0.8 million to
allow for certain of the Company's products sold during the quarter to be
potentially traded-in for the Company's new products, when generally available.
The allowance to establish this reserve was recognized in Cost of Goods Sold and
was the primary cause of the lower overall gross margin.
System upgrades and enhancements and services were 71.1% of total sales in
the second quarter of 1997 and 48.2% in the comparable period in 1998.
Selling, general and administrative expenses decreased from $3.9 million in
1997 to $3.8 million in 1998 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
(55.1%) in 1998 as compared to 1997 (77.4%).
Engineering and development expenses decreased from $2.8 million in 1997 to
$2.5 million in 1998. For 1998, engineering and development expenses reflect
the Company's implementation of cost controls. As a result of the decrease in
spending for engineering development in 1998 and the higher volume in net sales,
engineering and development expenses were lower as a percentage of sales in 1998
(37.0%) as compared to 1997 (55.1%).
There was no provision for income taxes in the second quarter of 1998 due to
the loss from operations.
As a result of the above, the Company's net loss for the three months ended
June 30, 1998 was $3.1 million as compared to a net loss of $3.7 million for the
comparable period last year.
Six Months Ended June 30, 1998 Compared to Six Months Ended June 30, 1997
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Net sales increased 31.0% from $8.4 million in 1997 to $11.0 million in 1998.
Compared to 1997, sales into the VIS market increased by $2.6 million and sales
into the CPE market had no change. System sales increased from those of the
prior period by $2.1 million while sales of system upgrades and enhancements and
services increased $0.5 million.
Gross margin as a percentage of net sales decreased to 47.9% in the 1998
period as compared to 52.1% for the same period in 1997. System margins were
down from 47.0% in the 1997 period to 40.8% in 1998 and system upgrades,
enhancements and service margins were down from 53.9% in 1997 to 52.6% in the
comparable period in 1998. Margins decreased due to the $0.8 million reserve
for trade-ins established during the quarter.
8
System upgrades and enhancements and services were 73.6% of total sales in
1997 and 60.4% in the comparable period in 1998.
Selling, general and administrative expenses decreased from $7.8 million in
1997 to $7.3 million in 1998 as the Company instituted cost control measures
company wide. As a result of these controls and of the higher volume of net
sales, selling, general and administrative expenses were lower as a percentage
of sales (66.0%) in 1998 as compared to 1997 (92.8%).
Engineering and development expenses increased from $5.1 million in 1997 to
$5.2 million in 1998. As a result of the higher volume in net sales,
engineering and development expenses were lower as a percentage of sales in
(46.9%) as compared to 1997 (60.7%).
There was no provision for income taxes in the second quarter of 1998 due to
the loss from operations.
As a result of the above, the Company's net loss for the six months ended
June 30, 1998 was $6.8 million as compared to a net loss of $8.3 million for the
comparable period of 1997.
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 six months ended June 30, 1998, net working capital increased by $1.6
million to $13.7 million compared to $12.1 million at December 31, 1997. The
increase in net working capital resulted principally from the conversion of the
Shareholder Notes Payable to Series B Preferred Stock of $6.6 million, an
increase in accounts receivable of $2.6 million, and an increase in inventory of
$0.8 million partially offset by a decrease in cash of $8.1 million. (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 June 30, 1998, the Company had cash and short-term investments of $12.9
million and no long term debt. Through June 30, 1998 capital expenditures were
$0.7 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.
The Company's cash and cash equivalents balance has declined by approximately
$8.1 million during the first six months of 1998. The Company's level of sales
during the first half of 1998 has been insufficient to generate net cash from
operations. If the Company's sales were to increase substantially in response
to heightened demand for the Company's new products, the Company initially would
be required to increase its outlays to meet such demand. As a result, the
Company expects its operations to continue to use net cash, and the Company may
be required to seek additional debt or equity financings during the coming
quarters. There can be no assurance that the Company will be able to consummate
debt or equity financings in a timely manner on a basis favorable to the
Company, or at all.
9
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 in
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"). This action was stayed pending resolution of Theis' patent
infringement action against Octel Communications Corporation (now a division of
Lucent Technologies) and Northern Telecom Inc. In 1997, the U.S. Court of
Appeals affirmed a district court's decision that the patents Theis asserted
against Octel and Northern Telecom were each either invalid, not infringed or
both. Theis' writ of certiorari to the U.S. Supreme Court was denied on June
26, 1998, exhausting Theis' appeals. The Company has not received notice from
the district court that the stay of the action involving the Company has been
lifted and has not received any communication from Theis regarding lifting the
stay.
Item 5. Other Information
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New Securities and Exchange Commission ("SEC") rules regarding shareholder
proposals became effective on June 29, 1998. Pursuant to these new rules, if
the Company has not received notice on or before January 11, 1999 of any matter
a shareholder intends to propose for a vote at the 1999 Annual Meeting of
Shareholders, then a proxy solicited by the board of directors may be voted on
such matter in the discretion of the proxy holder, without a discussion of the
matter in the proxy statement soliciting such proxy and without such matter
appearing as a separate matter on the proxy card. As previously disclosed in the
Company's proxy statement for the annual meeting of shareholders held earlier
this year on April 10, 1998, a shareholder who wishes to include a proposal and
the shareholder's statement in support thereof in the Company's proxy statement
must send such material in accordance with SEC Rules to the Company at its
principal executive offices for receipt no later than December 17, 1998.
Item 6. Exhibits and Reports on Form 8-K
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a) Exhibits
10.1 Form of Warrant Agreement between Registrant and NEXTLINK
Communications, Inc.
b) Reports on Form 8-K
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
10
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 August 12, 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
11