<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, 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
<PAGE>
DIGITAL SOUND CORPORATION
-------------------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
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
</TABLE>
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
------------------------------
DIGITAL SOUND CORPORATION
-------------------------
BALANCE SHEETS
--------------
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
--------------- ----------------
(Unaudited)
<S> <C> <C>
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
=============== ================
</TABLE>
See accompanying notes
-3-
<PAGE>
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,
1997 1996 1997 1996
------------ ------------ ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
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
============ ============ ============ ============
</TABLE>
See accompanying notes
-4-
<PAGE>
DIGITAL SOUND CORPORATION
-------------------------
STATEMENT OF CASH FLOWS
-----------------------
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------------------------------------
June 30, June 30,
1997 1996
--------------- ---------------
(Unaudited)
<S> <C> <C>
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
=============== ===============
</TABLE>
See accompanying notes
-5-
<PAGE>
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-
<PAGE>
NOTE 2. 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,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
Raw materials and purchased parts $1,703 $1,528
Work in process 2,075 1,815
Finished goods 243 127
------ ------
$4,021 $3,470
====== ======
</TABLE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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:
<TABLE>
<CAPTION>
VOTES
--------------------------------
For Withhold Authority
---------- -------------------
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes
---------- --------- ------- ---------
<S> <C> <C> <C> <C>
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.
</TABLE>
<TABLE>
<CAPTION>
Broker
For Against Abstain Non-votes
---------- --------- ------- ---------
<S> <C> <C> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
For Against Abstain
---------- --------- -------
<S> <C> <C> <C>
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.
</TABLE>
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-
<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 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-
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 8,314
<SECURITIES> 0
<RECEIVABLES> 6,495
<ALLOWANCES> 595
<INVENTORY> 4,021
<CURRENT-ASSETS> 18,557
<PP&E> 14,151
<DEPRECIATION> 10,734
<TOTAL-ASSETS> 26,282
<CURRENT-LIABILITIES> 8,461
<BONDS> 0
0
5,000
<COMMON> 69,082
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 26,282
<SALES> 5,068
<TOTAL-REVENUES> 5,068
<CGS> 2,125
<TOTAL-COSTS> 6,718
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,685)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,685)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,685)
<EPS-PRIMARY> (0.18)
<EPS-DILUTED> (0.18)
</TABLE>
