<PAGE>
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
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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
--------------------------
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
-------------- --------------
The number of shares outstanding of Registrant's common stock as of
July 31, 1996 was 20,093,241
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DIGITAL SOUND CORPORATION
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TABLE OF CONTENTS
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Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Balance Sheets as of 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
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PART I - FINANCIAL INFORMATION
------------------------------
DIGITAL SOUND CORPORATION
-------------------------
BALANCE SHEETS
--------------
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
------------ ------------
(Unaudited)
<S> <C> <C>
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)
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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
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</TABLE>
See accompanying notes
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DIGITAL SOUND CORPORATION
-------------------------
STATEMENT OF OPERATIONS
-----------------------
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------- -----------------------
June 30, June 30, June 30, June 30,
1996 1995 1996 1995
-------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C>
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
-------- -------- -------- --------
</TABLE>
See accompanying notes
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<PAGE>
DIGITAL SOUND CORPORATION
-------------------------
STATEMENT OF CASH FLOWS
-----------------------
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
------------------------------
June 30, June 30,
1996 1995
---------- ----------
(Unaudited)
<S> <C> <C>
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
========== ==========
</TABLE>
See accompanying notes
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<PAGE>
DIGITAL SOUND CORPORATION
-------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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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:
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
----------- ------------
(Unaudited)
<S> <C> <C>
Raw materials and purchased parts $ 1,626 $ 885
Work in process 1,902 2,263
Finished goods 636 950
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$ 4,164 $ 4,098
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</TABLE>
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.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
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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-
<PAGE>
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.
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<PAGE>
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:
<TABLE>
<CAPTION>
VOTES
------------------------------
For Withhold Authority
---------- ------------------
<S> <C> <C>
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
<CAPTION>
For Against Abstain
---------- --------- -------
<S> <C> <C> <C>
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.
<CAPTION>
For Against Abstain
---------- --------- -------
<S> <C> <C> <C>
3. To approve an amendment to the 15,028,543 753,401 156,331
Company's Stock Option Plan
for Independent Directors.
<CAPTION>
For Against Abstain
---------- --------- -------
<S> <C> <C> <C>
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.
</TABLE>
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.
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<PAGE>
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-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 19,189
<SECURITIES> 0
<RECEIVABLES> 6,085
<ALLOWANCES> 600
<INVENTORY> 4,164
<CURRENT-ASSETS> 29,145
<PP&E> 13,037
<DEPRECIATION> 11,338
<TOTAL-ASSETS> 34,622
<CURRENT-LIABILITIES> 5,887
<BONDS> 0
0
5,000
<COMMON> 68,812
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 34,622
<SALES> 5,036
<TOTAL-REVENUES> 5,036
<CGS> 1,528
<TOTAL-COSTS> 5,835
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,035)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,035)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,035)
<EPS-PRIMARY> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
