-----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, T8qVkn4HAgBSOLrdF+XcS6th/PiWG7Q2jn32R2J1/TFKglRsxlt5ej3NWLYweF2d tKGp7fPdwVtG/37nEs5+fQ== 0000944209-97-000989.txt : 19970807 0000944209-97-000989.hdr.sgml : 19970807 ACCESSION NUMBER: 0000944209-97-000989 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970806 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: 97652239 BUSINESS ADDRESS: STREET 1: 6307 CARPINTERIA AVE CITY: CARPINTERIA STATE: CA ZIP: 93013 BUSINESS PHONE: 8055662255X2154 MAIL ADDRESS: STREET 1: 6307 CARPINTERIA AVE CITY: CARPINTERIA STATE: CA ZIP: 93013 10-Q 1 FORM 10-Q 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, 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 ------------------------------------------- (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 20,386,004 DIGITAL SOUND CORPORATION ------------------------- TABLE OF CONTENTS -----------------
Page Number ----------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements: Balance Sheets as of June 30, 1997 3 and December 31, 1996 Statements of Operations for the 4 Three Months and Six Months ended June 30, 1997 and June 30, 1996 Statements of Cash Flows for the 5 Six Months ended June 30, 1997 and June 30, 1996 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 11 Item 4. Submission of Matters to a Vote of Security Holders 11 Item 6. Exhibits and Reports on Form 8-K 12
-2- PART I - FINANCIAL INFORMATION ------------------------------ DIGITAL SOUND CORPORATION ------------------------- BALANCE SHEETS -------------- (In thousands, except share data)
June 30, December 31, 1997 1996 --------------- ---------------- (Unaudited) ASSETS - ------ Current assets: Cash, cash equivalents and pledged cash $ 8,314 $ 18,187 Accounts receivable, less allowance for doubtful accounts of $595 and $600 at June 30, 1997 and December 31, 1996, respectively 5,900 5,695 Inventories 4,021 3,470 Other current assets 322 299 --------------- ---------------- Total current assets 18,557 27,651 Property and equipment, at cost: Computers and other equipment 11,922 11,077 Furniture and fixtures 994 982 Leasehold improvements 1,235 1,130 --------------- ---------------- 14,151 13,189 Less accumulated depreciation and amortization (10,734) (10,733) --------------- ---------------- 3,417 2,456 Investment securities 1,500 - Other assets 2,808 3,226 --------------- ---------------- Total other assets 4,308 3,226 --------------- ---------------- $ 26,282 $ 33,333 =============== ================ LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ Current liabilities: Accounts payable $ 4,540 $ 3,639 Accrued payroll and related 2,339 1,986 Other accrued liabilities 1,582 1,681 --------------- ---------------- Total current liabilities 8,461 7,306 Commitments and contingencies Shareholders' equity: Preferred stock, no par value, 15,000,000 shares authorized; 2,631,579 issued and outstanding at June 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 June 30, 1997 and December 31, 1996 respectively 69,082 68,975 Accumulated deficit (56,261) (47,948) --------------- ---------------- Total shareholders' equity 17,821 26,027 --------------- ---------------- $ 26,282 $ 33,333 =============== ================
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, 1997 1996 1997 1996 ------------ ------------ ------------ ------------ (Unaudited) Net sales $ 5,068 $ 5,036 $ 8,427 $ 9,805 Cost of sales 2,125 1,528 4,040 3,418 ------------ ------------ ------------ ------------ Gross margin 2,943 3,508 4,387 6,387 Selling, general and administrative 3,923 3,395 7,823 6,444 Engineering and development 2,795 2,440 5,118 4,510 ------------ ------------ ------------ ------------ 6,718 5,835 12,941 10,954 ------------ ------------ ------------ ------------ Income (loss) from operations (3,775) (2,327) (8,554) (4,567) Interest and other income 90 292 241 636 ------------ ------------ ------------ ------------ Income (loss) before provision for income taxes (3,685) (2,035) (8,313) (3,931) Provision for income taxes: - - - - ------------ ------------ ------------ ------------ Net income (loss) $ (3,685) $ (2,035) $ (8,313) $ (3,931) ============ ============ ============ ============ Net income (loss) per common and common equivalent share $ (.18) $ (.10) $ (.41) $ (.20) ============ ============ ============ ============ Weighted average common and common equivalent shares outstanding 20,335 20,067 20,280 20,036 ============ ============ ============ ============
See accompanying notes -4- DIGITAL SOUND CORPORATION ------------------------- STATEMENT OF CASH FLOWS ----------------------- (In thousands)
Six Months Ended ---------------------------------------------- June 30, June 30, 1997 1996 --------------- --------------- (Unaudited) Cash flows from operating activities Net income $ (8,313) $ (3,931) Adjustments to reconcile net income to net cash provided (used) by operations: Depreciation and amortization 388 154 Changes in operating assets and liabilities: Accounts receivable (205) (2,078) Inventories (551) (66) Other current assets (23) 127 Other assets 30 1,925 Accounts payable 901 (938) Accrued payroll and related 353 336 Other accrued liabilities (99) 132 --------------- --------------- Net cash provided (used) by operations (7,519) (4,339) --------------- --------------- Cash flows from investing activities: Additions to investment securities (1,500) Additions to property and equipment (961) (83) --------------- --------------- Net cash used for investing activities (2,461) (83) Cash flows from financing activities: Net proceeds from issuance of common stock 107 108 --------------- --------------- Net decrease in cash and equivalents (9,873) (4,314) Cash and equivalents at beginning of period 18,187 23,503 --------------- --------------- Cash and equivalents at end of period $ 8,314 $ 19,189 =============== ===============
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 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 subsidiary Digital Sound International. 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 and 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 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 October 31, 1997. The Company also pledged $1.0 million and $0.5 million, 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 requires a cash collateral equal to the limit of the credit line which will be pledged in a certificate of deposit account in $1.0 million dollar increments. The Company has utilized $1.0 million of the BancBoston sale/leaseback agreement as of 6/30/97. 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 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 June 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 - -------------------- Inventories are stated at the lower of standard cost (which approximates the first-in, first-out method) or market:
June 30, December 31, 1997 1996 ----------- ------------ (Unaudited) Raw materials and purchased parts $1,703 $1,528 Work in process 2,075 1,815 Finished goods 243 127 ------ ------ $4,021 $3,470 ====== ======
NOTE 3. 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. MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITION AND RESULTS OF OPERATIONS --------------------------------------------- Results of Operations - --------------------- Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996 - ----------------------------------------------------------------------------- Net sales increased 1.0% from $5.0 million in 1996 to $5.1 million in 1997. Compared to the second quarter of 1996, sales into the VIS market were unchanged and sales into the CPE market increased by $0.1 million. Combined sales of the VoiceServer 1110, VoiceServer 2110 and VoiceServer 3110 were unchanged from those of the prior period while sales of system upgrades and enhancements and services increased $0.1 million. Gross margin as a percentage of net sales decreased to 58.1% in the 1997 period as compared to 70.0% for the same period in 1996. System margins were down from 56.5% in the 1996 period to 43.7% in the second quarter of 1997 and system upgrades, enhancements and service margins were down from 75.5% in the second quarter of 1996 to 63.9% in the comparable period in 1997. Margins were decreased because software sales were unusually high in the same period in 1996; software is a higher margin product than hardware. System upgrades and enhancements and services were 69.6% of total sales in the second quarter of 1996 and 71.1% in the comparable period in 1997. Selling, general and administrative expenses increased from $3.4 million in 1996 to $3.9 million in 1997 as the Company invested in upgrading its personnel and capabilities primarily in Sales and Marketing. As a result of the increased investment and the lower volume in net sales, selling, general and administrative expenses were higher as a percentage of sales (77.4%) in 1997 as compared to 1996 (67.4%). Engineering and development expenses increased from $2.4 million in 1996 to $2.8 million in 1997. For 1997, 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 (55.2%) as compared to 1996 (48.5%). -7- There was no provision for income taxes in the second 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 June 30, 1997 was $3.7 million as compared to a net loss of $2.0 million for the comparable period last year. Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996 - ------------------------------------------------------------------------- Net sales decreased 14.0% from $9.8 million in 1996 to $8.4 million in 1997. Compared to 1996, sales into the VIS market decreased by $1.2 million and sales into the CPE market decreased by $0.2 million. Combined sales of the VoiceServer 1110, VoiceServer 2110 and VoiceServer 3110 decreased from those of the prior period by $0.4 million while sales of system upgrades and enhancements and services decreased $1.0 million. Gross margin as a percentage of net sales decreased to 52.1% in the 1997 period as compared to 65.1% for the same period in 1996. System margins were down from 50.8% in the 1996 period to 47.0% in 1997 and system upgrades, enhancements and service margins were down from 70.1% in 1996 to 53.9% in the comparable period in 1997. Margins were affected by lower than planned manufacturing volume. System upgrades and enhancements and services were 74.0% of total sales in 1996 and 74.0% in the comparable period in 1997. Selling, general and administrative expenses increased from $6.4 million in 1996 to $7.8 million in 1997 as the Company invested in upgrading its personnel and capabilities primarily in Sales and Marketing. As a result of the increased investment and the lower volume in net sales, selling, general and administrative expenses were higher as a percentage of sales (93.0%) in 1997 as compared to 1996 (65.7%). Engineering and development expenses increased from $4.5 million in 1996 to $5.1 million in 1997. For 1997, 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 (60.7%) as compared to 1996 (46.0%). There was no provision for income taxes in the second quarter of 1997 due to the loss from operations. As a result of the above, the Company's net loss for the six months ended June 30, 1997 was $8.3 million as compared to a net loss of $3.9 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 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. -8- 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, which represented 8.0% of revenues for the year ending June 30, 1997, 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. 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 June 30, 1997, the Company derived 51.7% 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. -9- 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. 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's strategy does not succeed in returning the Company to profitability or otherwise enable it to raise additional working capital. Liquidity and Capital Resources - ------------------------------- For the six months ended June 30, 1997, net working capital decreased by $10.2 million to $10.1 million compared to $20.3 million at December 31, 1996. The level of net working capital resulted principally from a reduction in cash of $8.4 million, a reclassification of $1.5 million from current assets to investment securities pledged in connection with the tax advantaged lease agreement with BancBoston Leasing and Mellon US Leasing, an increase in accounts receivable of $0.2 million, an increase in accounts payable of $0.9 million and an increase in accrued payroll and other accrued liabilities of $0.4 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, the enhancement of existing 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 half 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. If the Company's strategic initiatives do not succeed in enabling the Company to generate net cash from operations before the Company's cash resources have been substantially depleted, the Company will have to adopt one or more alternatives, such as reducing its scale of operations, seeking additional equity capital or otherwise restructuring. There can be no assurance these alternatives could be effected at that time in a manner favorable to the Company, if at all. -10- At June 30, 1997, the Company had cash and investments of $9.8 million and no long term debt. $1.5 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 June 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 October 31, 1997, but there can be no guarantee that this will be the case. During 1997, net cash used by operations was $ 7.5 million. Through June 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. 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 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 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- a) The Annual Meeting of Shareholders of Digital Sound Corporation was held on May 23, 1997. 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 16,546,621 758,920 Bandel L. Carano 16,545,821 759,720 J. David Hann 16,546,621 758,920 Mark C. Ozur 16,546,621 758,920 Frederick J. Warren 16,546,621 758,920
Broker For Against Abstain Non-votes ---------- --------- ------- --------- 2. To approve an amendment to the 5,386,949 2,552,095 143,435 9,223,062 Company's 1983 Stock Option Plan to increase the number of shares of the Company's Common Stock available under the Plan from 5,700,000 to 6,500,000 shares.
Broker For Against Abstain Non-votes ---------- --------- ------- --------- To approve an amendment to the 6,707,412 1,284,150 90,917 9,223,062 Employee Stock Purchase Plan to increase the number of shares of the Company's Common Stock available under the Plan from 1,500,000 to 2,000,000 shares
For Against Abstain ---------- --------- ------- 3. To ratify the appointment of 14,568,611 278,327 48,507 Ernst & Young as independent public accountants for the Company for the current fiscal year.
Item 6. Exhibits and Reports on Form 8-K -------------------------------- a) Exhibits -------- 10.46 Amendment to the Registrant's 1983 Stock Option Plan. 10.47 Amendment to the Registrant's Employee Stock Purchase Plan. 10.48 Amendment to the Registrant's Employee Stock Purchase Plan. b) Reports on Form 8-K ------------------- No reports on Form 8-K have been filed during the quarter for which this report is filed. -11- 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 6, 1997. DIGITAL SOUND CORPORATION By /s/ Mark C. Ozur ------------------------- Mark C. Ozur President, Chief Executive Officer By /s/ B. Robert Suh ------------------------- B. Robert Suh Vice President, Finance and Chief Financial Officer -12- EX-10.46 2 AMENDMENT TO THE REGISTRANT'S 1983 STOCK OPT. PLAN 10.46 AMENDMENT TO THE DIGITAL SOUND CORPORATION 1983 STOCK OPTION PLAN Approved by the Board of Directors on April 4, 1997 Approved by the Shareholders on May 23, 1997 Section 15 of the Digital Sound Corporation 1983 Stock Option Plan, as amended to date (the "Plan"), provides that the Board of Directors of Digital Sound Corporation (the "Corporation") may amend the Plan to increase the number of shares that may be issued under the Plan, provided that the shareholders of the Corporation approve such amendment. Pursuant to such Section 15, the Board of Directors therefore hereby amends the Plan as follows, subject to such shareholder approval: The first sentence of Section 4 of the Plan is hereby amended to read in its entirety as follows: The maximum number of Shares that may be issued pursuant to Options granted under this Plan shall be 6,500,000 shares, subject to adjustment as provided in Section 11 below. EX-10.47 3 AMENDMENT TO THE REGISTRANT'S EMPLOYEE STOCK PURCH 10.47 AMENDMENT TO THE DIGITAL SOUND CORPORATION EMPLOYEE STOCK PURCHASE PLAN Approved by the Board of Directors on April 4, 1997 Approved by the Shareholders on May 23, 1997 Section 25 of the Digital Sound Corporation Employee Stock Purchase Plan (the "Plan") provides that the Board of Directors of Digital Sound Corporation (the "Company") may amend the Plan to increase the number of shares that may be issued under the Plan, provided that the shareholders of the Company approve such amendment in accordance with Section 21 of the Plan at or before the next annual meeting of the Company's shareholders. In accordance with such Section 21, the Board of Directors has determined (after consultation with the Company's legal counsel as required by such Section 21) that approval by the affirmative vote of the holders of a majority of the outstanding shares of the Company present or represented and entitled to vote at the annual meeting of the Company's shareholders to be held on May 23, 1997 would constitute shareholder approval of such an amendment and would not adversely affect the qualification of the Plan under Section 423 of the Internal Revenue Code or Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended. Pursuant to such Section 25, the Board of Directors therefore hereby amends the Plan as follows, subject to such shareholder approval: The penultimate sentence of Section 1 of the Plan is hereby amended to read in its entirety as follows: A total of 2,000,000 shares of Common Stock are reserved for issuance under the Plan. EX-10.48 4 AMENDMENT TO THE REGISTRANT'S EMPLOYEE STOCK PURCH 10.48 AMENDMENT TO THE DIGITAL SOUND CORPORATION EMPLOYEE STOCK PURCHASE PLAN Approved by the Board of Directors on April 4, 1997 Section 25 of the Digital Sound Corporation Employee Stock Purchase Plan (the "Plan") provides that, with certain limited exceptions, the Board of Directors of Digital Sound Corporation (the "Company") may at any time amend the Plan, provided that no such amendment may make any change in an option previously granted which would adversely affect the right of any participant. Pursuant to such Section 25, the Board of Directors hereby amends the Plan as follows, such amendment to be effective with respect to all options granted pursuant to the Plan after April 4, 1997 (capitalized terms used herein to have the meanings ascribed to such terms in the Plan): 1. Section 9(e) is amended to read in its entirety as follows: (e) As promptly as practical after the lapse pursuant to the terms of Section 15 hereof of the transfer restrictions with respect to the shares of Common Stock purchased on a Purchase Date, the Company shall arrange the delivery to each participant, as appropriate, of a certificate representing the shares purchased upon exercise of his option; provided that the Company may deliver such certificate to a broker that that will hold such certificate in street name for the benefit of such participant. 2. Section 15 is amended to read in its entirety as follows: 15. Nonassignability and Transfer Restrictions. Neither payroll ------------------------------------------ deductions credited to a participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 22 hereof) by the participant. In addition, shares purchased under the Plan on a Purchase Date may not be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 22 hereof) prior to the first anniversary of such Purchase Date. The Company may take any reasonable steps to ensure that no such assignment, transfer, pledge or other disposition contrary to the terms of this Section 15 may occur, including without limitation retaining custody of the certificate representing such shares until such first anniversary. Any attempt at assignment, transfer, pledge or other disposition in contravention of this Section 15 shall be void and without effect, and the Company shall be entitled to treat the participant as the sole owner of such account, rights and shares for any and all purposes. 3. Section 17 is amended to read in its entirety as follows: 17. Legends. The Company may, at any time prior to the first anniversary ------- of the Purchase Date of any shares acquired pursuant to the Plan, cause a legend or legends to be imprinted on any certificate representing such shares specifying that such shares may not be transferred in contravention of the Plan, including Section 15 hereof. EX-27 5 FINANCIAL DATA SCHEDULE
5 1,000 3-MOS DEC-31-1997 APR-01-1997 JUN-30-1997 8,314 0 6,495 595 4,021 18,557 14,151 10,734 26,282 8,461 0 0 5,000 69,082 0 26,282 5,068 5,068 2,125 6,718 0 0 0 (3,685) 0 (3,685) 0 0 0 (3,685) (0.18) (0.18)
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