-----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, DvEo5YAUIbVRvTrgV5JgqgBPhe2CO2DuGQxlq/iMLtLrViT8o7y63LPqoyvCEHrR CsSMcAVSjP0cbkIIc/+c9Q== 0000898430-96-003880.txt : 19960816 0000898430-96-003880.hdr.sgml : 19960816 ACCESSION NUMBER: 0000898430-96-003880 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGITAL SOUND CORP CENTRAL INDEX KEY: 0000718576 STANDARD INDUSTRIAL CLASSIFICATION: TELEPHONE & TELEGRAPH APPARATUS [3661] IRS NUMBER: 953222624 STATE OF INCORPORATION: CA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-18280 FILM NUMBER: 96615253 BUSINESS ADDRESS: STREET 1: 6307 CARPINTERIA AVE CITY: CARPINTERIA STATE: CA ZIP: 93013 BUSINESS PHONE: 8055662000 MAIL ADDRESS: STREET 1: 6307 CARPINTERIA AVE CITY: CARPINTERIA STATE: CA ZIP: 93013 10-Q 1 FORM 10-Q DATED JUNE 30, 1996 FORM 10-Q --------- 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 June 30, 1996 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 --------------------------------------------------------- (Exact name of Registrant as specified in its charter) California 95-3222624 ------------------ --------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6307 Carpinteria Avenue, Carpinteria, California 93013 - -------------------------------------------------------------------------------- (Address of principal executive offices) Zip Code Registrant's telephone number, including area code (805) 566-2000 -------------------------- Not Applicable - -------------------------------------------------------------------------------- (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 -------------- -------------- The number of shares outstanding of Registrant's common stock as of July 31, 1996 was 20,093,241 DIGITAL SOUND CORPORATION ------------------------- TABLE OF CONTENTS ----------------- Page Number ----------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets as of June 30, 1996 3 and December 31, 1995 Statements of Operations for the 4 Three Months and Six Months ended June 30, 1996 and June 30, 1995 Statements of Cash Flows for the 5 Six Months ended June 30, 1996 and June 30, 1995 Notes to Financial Statements 6 Item 2. Management's Discussion and Analysis of 7 Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal proceedings 10 Item 4. Submission of Matters to a Vote of Security Holders 10 Item 6. Exhibits and Reports on Form 8-K 10 -2- PART I - FINANCIAL INFORMATION ------------------------------ DIGITAL SOUND CORPORATION ------------------------- BALANCE SHEETS -------------- (In thousands, except share data)
June 30, December 31, 1996 1995 ------------ ------------ (Unaudited) ASSETS - ------ Current assets: Cash and equivalents $ 19,189 $ 23,503 Accounts receivable, less allowance for doubtful accounts of $600 at both June 30, 1996 and December 31, 1995 5,485 3,407 Inventories 4,164 4,098 Other current assets 307 434 ------------ ------------ Total current assets 29,145 31,442 Property and equipment, at cost: Computers and other equipment 11,263 11,207 Furniture and fixtures 973 977 Leasehold improvements 801 769 ------------ ------------ 13,037 12,953 Less accumulated depreciation and amortization (11,338) (11,184) ------------ ------------ 1,699 1,769 Other assets Investment securities -- 1,400 Other assets 3,778 4,303 ------------ ------------ Total other assets 3,778 5,703 ------------ ------------ $ 34,622 $ 38,914 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 1,774 $ 2,712 Accrued payroll and related 1,949 1,613 Other accrued liabilities 2,164 2,032 ------------ ------------ Total current liabilities 5,887 6,357 Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 15,000,000 shares authorized, 2,631,579 issued and outstanding at June 30, 1996 and December 31, 1995 respectively 5,000 5,000 Common stock, no par value, 50,000,000 shares authorized; 20,093,241 and 20,000,954 shares issued and outstanding at June 30, 1996 and December 31, 1995 respectively 68,812 68,704 Accumulated deficit (45,077) (41,147) ------------ ------------ Total shareholders' equity 28,735 32,557 ------------ ------------ $ 34,622 $ 38,914 ------------ ------------
See accompanying notes -3- DIGITAL SOUND CORPORATION ------------------------- STATEMENT OF OPERATIONS ----------------------- (In thousands, except per share data)
Three Months Ended Six Months Ended ----------------------- ----------------------- June 30, June 30, June 30, June 30, 1996 1995 1996 1995 -------- -------- -------- -------- (Unaudited) Net sales $ 5,036 $ 6,039 $ 9,805 $14,329 Cost of sales 1,528 1,981 3,418 5,264 -------- -------- -------- -------- Gross margin 3,508 4,058 6,387 9,065 Selling, general and administrative 3,395 2,866 6,444 5,968 Engineering and development 2,440 1,774 4,510 3,495 -------- -------- -------- -------- 5,835 4,640 10,954 9,463 -------- -------- -------- -------- Income (loss) from operations (2,327) (582) (4,567) (398) Interest and other income 292 422 636 797 -------- -------- -------- -------- Income (loss) before provision for income taxes (2,035) (160) (3,931) 399 Provision for income taxes: -- -- -- (56) -------- -------- -------- -------- Net income (loss) $(2,035) $ (160) $(3,931) $ 343 ======== ======== ======== ======== Net income (loss) per common and common equivalent share $ (.10) $ (.01) $ (.20) $ .01 ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding 20,067 23,279 20,036 23,214 -------- -------- -------- --------
See accompanying notes -4- DIGITAL SOUND CORPORATION ------------------------- STATEMENT OF CASH FLOWS ----------------------- (In thousands)
Six Months Ended ------------------------------ June 30, June 30, 1996 1995 ---------- ---------- (Unaudited) Cash flows from operating activities Net income $ (3,931) $ 343 Adjustments to reconcile net income to net cash provided (used) by operations: Depreciation and amortization 154 637 Changes in operating assets and liabilities: Accounts receivable (2,078) (475) Inventories (66) (924) Other current assets 127 (168) Other assets 1,925 315 Accounts payable (938) 684 Accrued payroll and related 336 394 Other accrued liabilities 132 827 ---------- ---------- Net cash provided (used) by operations (4,339) 1,633 ---------- ---------- Cash flows from investing activities: (Additions to) disposition of property and equipment (83) (626) ---------- ---------- Cash flows from financing activities: Net proceeds from issuance of common stock 108 274 ---------- ---------- Net increase in cash and equivalents (4,314) 1,281 Cash and equivalents at beginning of period 25,503 26,833 ---------- ---------- Cash and equivalents at end of period $ 19,189 $ 28,114 ========== ==========
See accompanying notes -5- DIGITAL SOUND CORPORATION ------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ JUNE 30, 1996 ------------- (Unaudited) NOTE 1. General - ----------------- 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 current interim periods are not necessarily indicative of results to be expected for the current year. These financial statements should be read in conjunction with the financial statements and the notes thereto, included in the Company's 1995 Form 10-K, as filed with the Securities and Exchange Commission. NOTE 2. Principles of Consolidation - ------------------------------------ The consolidated financial statements include the accounts of Digital Sound Corporation ( the Company) and its wholly owned subsidiary Digital Sound International. All significant intercompany transactions and balances have been eliminated. NOTE 3. Inventories - -------------------- Inventories are stated at the lower of standard cost (which approximates the first-in, first-out method) or market:
June 30, December 31, 1996 1995 ----------- ------------ (Unaudited) Raw materials and purchased parts $ 1,626 $ 885 Work in process 1,902 2,263 Finished goods 636 950 ----------- ------------ $ 4,164 $ 4,098 ----------- ------------
NOTE 4. Per Share Information - ------------------------------ 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. -6- MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Results of Operations - --------------------- Three Months Ended June 30, 1996 Compared to Three Months Ended June 30, 1995 - ----------------------------------------------------------------------------- Net sales decreased 17% from $6.0 million in 1995 to $5.0 million in 1996, as the Company focused only on those sales opportunities that were aligned with the corporate longterm strategy for both domestic and international markets. Compared to the second quarter of 1995, sales into the VIS market essentially remained the same and sales into the CPE market decreased by $1.0 million. Combined sales of the VoiceServer 1110, VoiceServer 2110 and VoiceServer 3110 increased from those of the prior period by $0.4 million while sales of system upgrades and enhancements and services decreased $1.4 million. Gross margin as a percentage of net sales increased to 70.0% in the 1996 period as compared to 67.2% for the same period in 1995. System margins were up from 50.8% in the 1995 period to 56.5% in the second quarter of 1996 and system upgrades, enhancements and service margins were up from 71.0% in the second quarter of 1995 compared to 75.5% in the comparable period in 1996. System margins were favorably impacted by proportionately higher sales of software for the second quarter of 1996. System upgrades and enhancements and services were 81.0% of total sales in the second quarter of 1995 and 69.6% in the comparable period in 1996. Selling, general and administrative expenses increased $0.5 million in the second quarter of 1996 as compared to the second quarter of 1995, reflecting an increase in spending for marketing programs. As a result of the lower volume in net sales, selling, general and administrative expenses were higher as a percentage of sales (67.4%) in 1996 as compared to the 1995 period (47.5%). Engineering and development expenses increased $0.7 million in the second quarter of 1996 as compared to the second quarter of 1995. For the 1996 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 lower volume in net sales and the increase in spending for engineering development in 1996, engineering and development expenses were higher as a percentage of sales in 1996 (48.5%) as compared to the 1995 period (29.4%). There was no provision for income taxes in the second quarter of 1996 due to the loss from operations, nor was a tax benefit recorded because it was fully offset by a valuation allowance resulting in no net benefit. There was no provision for income taxes in the second quarter of 1995 due to the loss from operations As a result of the above, the Company's net loss for the six months ended June 30, 1996 was $2.0 million as compared to a net loss of $0.2 million for the comparable period last year. Six Months Ended June 30, 1996 Compared to Six Months Ended June 30, 1995 - ------------------------------------------------------------------------- Net sales decreased 31.4% from $14.3 million in 1995 to $9.8 million in 1996, as the Company focused only on those sales opportunities that were aligned with the corporate longterm strategy for both domestic and international markets. Compared to 1995, sales into the VIS market decreased by $3.3 million and sales into the CPE market decreased by $1.2 million. Combined sales of the VoiceServer 1110, VoiceServer 2110 and VoiceServer 3110 decreased from those of the prior period by $2.0 million while sales of system upgrades and enhancements and services decreased $2.5 million. -7- Gross margin as a percentage of net sales increased to 65.1% in the 1996 period as compared to 63.3% for the same period in 1995. System margins were down from 53.8% in the 1995 period to 50.8% in 1996 and system upgrades, enhancements and service margins were up from 68.0% in 1995 compared to 70.1% in the comparable period in 1996. System upgrades and enhancements and services were 67.0% of total sales in 1995 and 74.0% in the comparable period in 1996. Selling, general and administrative expenses increased $0.5 million in 1996 as compared to the 1995 period, reflecting an increase in spending for marketing programs in line with the Company's strategy. As a result of the increased spending and lower volume in net sales, selling, general and administrative expenses were higher as a percentage of sales (65.7%) in 1996 as compared to the 1995 period (41.6%). Engineering and development expenses increased $1.0 million in 1996 as compared to the 1995 period. For the 1996 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 lower volume in net sales and the increase in spending for engineering development in 1996, engineering and development expenses were higher as a percentage of sales in 1996 (46.0%) as compared to the 1995 period (24.4%). There was no provision for income taxes in the second quarter of 1996 due to the loss from operations, nor was a tax benefit recorded because it was fully offset by a valuation allowance resulting in no net benefit. There was no provision for income taxes in the second quarter of 1995 due to the loss from operations As a result of the above, the Company's net loss for the six months ended June 30, 1996 was $3.9 million as compared to net income of $.3 million for the comparable period last year. Factors That May Affect Future Results - -------------------------------------- Digital Sound operates in a rapidly changing environment that involves a number of risks, some of which are beyond the CompanyOs control. These risks are discussed in the CompanyOs 1995 Annual Report to Shareholders and incorporated by reference in the CompanyOs Annual Report on Form 10-K for the fiscal year ended December 31,1995. Liquidity and Capital Resources - ------------------------------- For the six months ended June 30, 1996, working capital decreased $1.7 million to $23.3 million as compared to December 31, 1995. The level of working capital reflects a decrease in cash of $4.3 million which is a use of gross cash of $5.7 million, offset by a reclassification of $1.4 million in cash equivalents from other assets to current assets, an increase in receivables of $2.1 million due to sales and shipments late in the quarter plus an increase in inventory of $0.1 million. Current liabilities reflected a decrease in accounts payable of $1.0 million and a increase in other current accrued liabilities of $0.1 million At June 30, 1996, the Company had cash of $19.2 million and no debt. During the six-month period, net cash used by operations was $4.3 million, net of $0.6 million of interest earned on cash balances. Capital expenditures for the six-month period were $0.1 million. The Company believes that current cash balances will be sufficient to meet its working capital requirements for the next 12 months. -8- PART II - OTHER INFORMATION ---------------------------- DIGITAL SOUND CORPORATION ------------------------- Item 1. Legal Proceedings ----------------- As reported in Note 10 to the Company's financial statements included in the Company's 1995 Annual Report to Shareholders and incorporated by reference in the Company's Annual Report on Form 10-K for the fiscal year ended December 31,1995, the Company is involved in patent litigation with Theis Research, Inc. No material developments have occurred in 1996. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- a) The Annual Meeting of Shareholders of Digital Sound Corporation was held on May 24, 1996. b) Matters voted on at the meeting and votes cast on each were as follows:
VOTES ------------------------------ For Withhold Authority ---------- ------------------ 1. To elect directors of the Company: John D. Beletic 15,519,854 418,421 Bandel L. Carano 15,519,854 418,421 J. David Hann 15,519,854 418,421 Mark C. Ozur 15,519,854 418,421 Frederick J. Warren 15,519,854 418,421 For Against Abstain ---------- --------- ------- 2. To approve an amendment to the 14,508,172 1,272,949 157,154 Company's 1983 Stock Option Plan to increase the number of shares of the Company's Common Stock available under the Plan from 5,500,000 to 5,700,000 shares. For Against Abstain ---------- --------- ------- 3. To approve an amendment to the 15,028,543 753,401 156,331 Company's Stock Option Plan for Independent Directors. For Against Abstain ---------- --------- ------- 3. To ratify the appointment of 15,734,905 127,420 75,950 Ernst & Young as independent public accountants for the Company for the current fiscal year.
Item 2. Exhibits and Reports on Form 8-K -------------------------------- a) Exhibits -------- 27 FINANCIAL DATA SCHEDULE b) Reports on Form 8-K ------------------- No reports on Form 8-K have been filed during the quarter for which this report is filed. -9- 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, on August 14, 1996. DIGITAL SOUND CORPORATION By /s/ Mark C. Ozur ----------------------------------------- Mark C. Ozur President, Chief Executive Officer By /s/ Jo E. Lamoreaux ----------------------------------------- Jo E. Lamoreaux Controller and Principle Accounting Officer -10- EX-27 2 FINANCIAL DATA SCHEDULE
5 1000 3-MOS DEC-31-1996 APR-01-1996 JUN-30-1996 19,189 0 6,085 600 4,164 29,145 13,037 11,338 34,622 5,887 0 0 5,000 68,812 0 34,622 5,036 5,036 1,528 5,835 0 0 0 (2,035) 0 (2,035) 0 0 0 (2,035) (0.10) (0.10)
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