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, 1999
or
(_) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to ____________.
Commission File Number: 0-18280
PULSEPOINT COMMUNICATIONS
------------------------------------------------------
(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
------------------------------
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months or for such shorter period that the
Registrant was required to file such reports, and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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The number of shares outstanding of Registrant's common stock as of July
25, 1999 was 8,043,384.
<PAGE>
PULSEPOINT COMMUNICATIONS
-------------------------
TABLE OF CONTENTS
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Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of June 30, 1999 1
and December 31, 1998
Consolidated Statements of Operations for the 2
Three months and Six months ended June 30, 1999
and June 30, 1998
Consolidated Statements of Cash Flows for the 3
Six months ended June 30, 1999 and June 30, 1998
Notes to Consolidated Financial Statements 4
Item 2. Management's Discussion and Analysis of 8
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal proceedings 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
ii
<PAGE>
<TABLE>
PART I - FINANCIAL INFORMATION
PULSEPOINT COMMUNICATIONS
-------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except per share data)
<CAPTION>
JUNE 30, DECEMBER 31,
1999 1998
===============================================================================
(Unaudited)
ASSETS
- -------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash, cash equivalents and pledged cash $ 6,830 $ 11,473
Accounts receivable, less allowance for doubtful
accounts of $598 and $725 at June 30, 1999 and
December 31, 1998, respectively 5,405 4,215
Inventories, net 7,307 7,652
Other current assets 545 516
- -------------------------------------------------------------------------------
Total current assets 20,087 23,856
Property and equipment, at cost:
Computers and other equipment 11,397 10,334
Furniture and fixtures 999 999
Leasehold improvements 1,931 1,955
- -------------------------------------------------------------------------------
14,327 13,288
Less accumulated depreciation and amortization (9,933) (9,046)
- -------------------------------------------------------------------------------
4,394 4,242
Other assets:
Investment securities 653 1,101
Other assets 1,075 1,328
- -------------------------------------------------------------------------------
Total other assets 1,728 2,429
- -------------------------------------------------------------------------------
Total assets $ 26,209 $ 30,527
===============================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Current liabilities:
Credit line $ 1,990 $ 540
Notes payable, current 877 613
Accounts payable 3,844 5,335
Accrued payroll and related 2,201 2,264
Other accrued liabilities 1,708 3,115
- -------------------------------------------------------------------------------
Total current liabilities 10,620 11,867
Trade-in allowance 1,656 1,360
Notes payable, long-term 1,619 1,498
Commitments and contingencies
Shareholders' equity:
Preferred stock, 15,000,000 shares authorized:
Series A, no par value, no shares issued and
outstanding at June 30, 1999 and December 31, 1998 - -
Series B, no par value, 3,208,534 and 3,333,334
shares issued and outstanding at June 30, 1999
and December 31, 1998, respectively 23,787 24,723
Common stock, no par value - 50,000,000 shares
authorized, 5,577,728 and 5,237,699 shares issued
and outstanding at June 30, 1999 and
December 31, 1998, respectively 70,881 69,820
Accumulated deficit (82,354) (78,741)
- -------------------------------------------------------------------------------
Total shareholders' equity 12,314 15,802
- -------------------------------------------------------------------------------
Total liabilities & shareholders' equity $ 26,209 $ 30,527
===============================================================================
See accompanying notes.
</TABLE>
1
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<TABLE>
PULSEPOINT COMMUNICATIONS
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CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(In thousands, except per share data)
<CAPTION>
Three Months Ended Six Months Ended
- ---------------------------------------------------------------------------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
===================================================================================================
(Unaudited)
<S> <C> <C> <C> <C>
Net sales $ 7,488 $ 6,842 $ 14,579 $ 11,043
Cost of sales 3,405 3,875 6,282 5,754
- ---------------------------------------------------------------------------------------------------
Gross margin 4,083 2,967 8,297 5,289
- ---------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 2,538 3,767 5,283 7,287
Engineering and development expenses 3,360 2,534 6,510 5,178
- ---------------------------------------------------------------------------------------------------
Total operating expense 5,898 6,301 11,793 12,465
- ---------------------------------------------------------------------------------------------------
Loss from operations (1,815) (3,334) (3,496) (7,176)
Interest and other income (expense), net (53) 189 (117) 395
- ---------------------------------------------------------------------------------------------------
Loss before provision for income taxes (1,868) (3,145) (3,613) (6,781)
Provision for income taxes - - - -
- ---------------------------------------------------------------------------------------------------
Net loss and comprehensive loss $ (1,868) $ (3,145) $ (3,613) $ (6,781)
===================================================================================================
Loss per common share - basic and diluted $ (0.34) $ (0.61) $ (0.67) $ (1.31)
Weighted average common and common
equivalent shares outstanding 5,425 5,172 5,346 5,157
===================================================================================================
See accompanying notes.
</TABLE>
2
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<TABLE>
PULSEPOINT COMMUNICATIONS
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CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(In thousands)
<CAPTION>
- ---------------------------------------------------------------------------
JUNE 30, JUNE 30,
1999 1998
===========================================================================
(Unaudited) (Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (3,613) $ (6,781)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization 1,264 1,314
Provision for losses on accounts
receivable (127) 110
Provision for losses on inventory 214 150
Changes in operating assets and
liabilities:
Accounts receivable (1,063) (1,986)
Inventories 131 (921)
Other current assets (29) 23
Other assets (108) -
Accounts payable (1,490) 34
Accrued payroll and related (62) (559)
Trade-in allowance 296 -
Other accrued liabilities (1,408) 241
- ---------------------------------------------------------------------------
Net cash used in operations (5,995) (8,375)
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Cash flows from investing activities:
(Increase) decrease in investment
securities 448 (9)
Additions to property and equipment (1,039) (675)
- ---------------------------------------------------------------------------
Net cash used in investing
activities (591) (684)
- ---------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 768 -
Principal payments of long-term debt (383) -
Proceeds from issuance of common stock 108 284
Net proceeds from line of credit 1,450 671
- ---------------------------------------------------------------------------
Net cash provided by financing
activities 1,943 955
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Net increase (decrease) in cash and equivalents (4,643) (8,104)
Cash and equivalents at beginning of period 11,473 20,973
- ---------------------------------------------------------------------------
Cash and equivalents at end of period $ 6,830 $ 12,869
===========================================================================
See accompanying notes.
</TABLE>
3
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PULSEPOINT COMMUNICATIONS
-------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
JUNE 30, 1999
-------------
(Unaudited)
NOTE 1. General
- ----------------
All interim financial data is unaudited, but in the opinion of PulsePoint
Communications (the "Company") such unaudited statements include all
adjustments, consisting of normal recurring accruals, necessary for a fair
presentation of the results for the interim periods. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to the rules and regulations of the Securities and Exchange
Commission. Nevertheless, the Company believes that the disclosures in these
financial statements are adequate to make the information presented not
misleading.
The results of operations for the current interim period are not
necessarily indicative of results to be expected for the current year.
REVENUE RECOGNITION. Generally sales are recognized when products are
shipped or when services are performed. Warranty costs are accrued at time of
sale. Revenue from sales of extended warranties is accounted for as deferred
revenues and recognized into income over the warranty or maintenance period.
In October 1997, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 97-2, "Software Revenue Recognition"
("SOP 97-2"). SOP 97-2 establishes standards relating to the recognition of all
aspects of software revenue. SOP 97-2 is effective for transactions entered into
in fiscal years beginning after December 15, 1997. The Company adopted the
provisions of SOP 97-2 as of June 30, 1998. The adoption had no effect on the
financial statements.
PRINCIPLES OF CONSOLIDATION. In September 1998, the names of the
corporation's wholly-owned subsidiaries DGSD Malaysia Corporation and Digital
Sound International Corporation were changed, respectively, to PulsePoint
Communications Malaysia Corporation and PulsePoint Communications International
Corporation. The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries, as noted above. All significant
intercompany transactions and balances have been eliminated.
SHORT TERM INVESTMENTS. The Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). The Company adopted the
provisions of SFAS 115 for investments held as of December 31, 1995. The
adoption had no effect on the financial statements. Short-term investments
(principally commercial paper and discount notes with maturity dates generally
within 90 days that are considered cash equivalents) are classified as "held to
maturity" based on the Company's positive intent and ability to hold the
securities until maturity. The securities are presented at amortized cost which
approximates fair value. Amortization and interest on securities classified as
"held to maturity" are included in investment income.
COMPREHENSIVE INCOME (LOSS). As of January 1, 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes new rules for the reporting and
display of comprehensive income (loss) and its components; however, the adoption
of SFAS 130 had no impact on the Company's financial statements.
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. Pledged cash consists of funds deposited under lease agreements
with BancBoston Leasing Inc. which become available within 90 days.
RECLASSIFICATION. Certain data in the 1998 financial statements have been
reclassified to conform to the 1999 presentation.
4
<PAGE>
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, 1998, as filed with the Securities and Exchange
Commission.
NOTE 2. Segment Information
- ----------------------------
On December 31, 1998, the Company adopted Statement of Financial Accounting
Standards No. 131 "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 131"). The new rules establish revised standards for public
companies relating to the reporting of financial and descriptive information
about their business segments and their enterprise-wide operations. The Company
operates in one segment.
Enterprise-wide information required by SFAS 131 is as follows:
Revenue by product or service:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
- -------------------------------------------------------------------------------
(In thousands) June 30, June 30, June 30, June 30,
1999 1998 1999 1998
===============================================================================
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Voice Information Services (VIS) $ 6,419 $ 5,973 $ 12,657 $ 9,029
Customer Premises Equipment (CPE) 1,069 869 1,922 2,014
- -------------------------------------------------------------------------------
$ 7,488 $ 6,842 $ 14,579 $ 11,043
===============================================================================
</TABLE>
Revenue by geographic area (based on domicile of customer):
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
- -------------------------------------------------------------------------------
(In thousands) June 30, June 30, June 30, June 30,
1999 1998 1999 1998
===============================================================================
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Domestic $ 7,460 $ 6,727 $ 14,364 $ 10,924
International 28 115 215 119
- -------------------------------------------------------------------------------
$ 7,488 $ 6,842 $ 14,579 $ 11,043
===============================================================================
</TABLE>
All of the Company's long-lived assets are located in the United States.
NOTE 3. Inventories
- --------------------
Inventories are stated at the lower of standard cost (which approximates
the first-in, first-out method) or market:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
(In thousands) JUNE 30, DECEMBER 31,
1999 1998
===============================================================================
(Unaudited)
<S> <C> <C>
Raw material and purchased parts $ 4,573 $ 6,399
Work-in-process 43 751
Finished goods 2,691 502
- -------------------------------------------------------------------------------
$ 7,307 $ 7,652
===============================================================================
</TABLE>
5
<PAGE>
NOTE 4. Debt
- -------------
On March 31, 1999, the Company's Security and Loan Agreement (the "Credit
Line") with Imperial Bank was renewed to September 30, 1999. At June 30, 1999,
the Company was in violation of one of the covenants of the Credit Line and has
received a one-time waiver from the bank of this covenant violation. The waiver
eliminated any restricted access to the Credit Line that might have otherwise
been imposed due to the covenant violation. Continued access to the Credit Line
is subject to the Company's compliance with monthly and quarterly covenant
calculations. If compliance does not occur, the Company would seek an additional
waiver or to procure alternative financing sources, though no assurance can be
provided that such could be accomplished on terms favorable to the Company, if
at all.
NOTE 5. Equity
- ---------------
Common and Common Equivalent Stock
- ----------------------------------
At June 30, 1999, there were 5,577,728 shares of the Company's Common Stock
outstanding and 10,761,722 shares of common stock equivalents, as follows:
Number of Common Shares
Outstanding and Potentially
Issuable Common Shares
---------------------------
(A) Common Stock outstanding 5,577,728
(B) Conversion of Series B Convertible Preferred Stock 8,021,335
(C) Options granted - 1983 Stock Option Plan 1,321,742
(D) Options granted - Unisys Corporation 1,109,937
(E) Warrants 264,808
(F) Options granted - Directors' Stock Option Plan 43,900
---------
Additional shares potentially issuable 10,761,722
----------
Total potential shares of Common Stock 16,339,450
==========
(A) Number of shares of Common Stock outstanding at June 30, 1999.
(B) Shares of Common Stock issuable upon conversion of the Company's Series B
Convertible Preferred Stock outstanding at June 30, 1999.
(C) Number of shares of Common Stock issuable pursuant to options granted under
the Company's 1983 Stock Option Plan (assuming full vesting). Note: Of
these 1,321,742 options, 676,608 have exercise prices below the Company's
June 30, 1999 closing stock price of $5.97.
(D) Number of shares of Common Stock issuable pursuant to options granted as a
condition and inducement of Unisys Corporation's willingness to enter into
a merger agreement with the Company.
(E) Warrants to purchase the Company's Common Stock at June 30, 1999, composed
of 100,000 warrants issued to Imperial Bank, 73,846 warrants issued to
Transamerica Business Credit Corporation, 18,462 warrants issued to
Priority Capital and 72,500 warrants issued to NEXTLINK Communications,
Inc.
(F) Number of shares of Common Stock issuable pursuant to options granted under
the Company's Directors' Option Plan (assuming full vesting). Note: Of
these 43,900 options, 6,250 have exercise prices below the Company's June
30, 1999 closing stock price of $5.97.
6
<PAGE>
Reverse Split of Common Stock
- -----------------------------
On April 10, 1998, the Company's Shareholders approved and on April 20,
1998, the Company effected a 1 for 4 reverse split of the Company's Common
Stock. In accordance with SAB 83, the financial statements and footnote
disclosure reflects the reverse stock split for all reporting periods. In
addition, the calculations of earnings (loss) per share have given effect to the
reverse stock split.
Warrants
- --------
In January 1999, the Company entered into an agreement with Leap Wireless
International, Inc. ("Leap"), whereby warrants to purchase the Company's Common
Stock will be issued to Leap upon certain EAP purchase milestones by Leap or a
Leap affiliate. At June 30, 1999 Leap had not made any EAP purchases from the
Company. The Company entered into a similar agreement with NEXTLINK
Communications, Inc. in 1998.
NOTE 6. 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.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
---------------------------------------------
Results of Operations
- ---------------------
Three Months Ended June 30, 1999 Compared to Three Months Ended June 30, 1998
- -----------------------------------------------------------------------------
Net sales increased 9% from $6.8 million in 1998 to $7.5 million in 1999.
Consistent with the Company's focus on the Voice Information Services ("VIS")
market, sales to network service providers totaled $6.4 million, or 86%, of the
sales in the three month period ended June 30, 1999, compared with sales of $6.0
million, or 87%, of sales during the same period in 1998. Sales to the Customer
Premise Equipment ("CPE") market represented the remaining $1.1 million, or 14%,
of sales in the three month period ended June 30, 1999, compared with $0.9
million, or 13%, of sales during the same period in 1998.
Gross margin as a percentage of net sales increased to 55% in the 1999
period as compared to 43% for the same period in 1998. The gross margin
improvement resulted from higher production volumes, which allowed for the wider
spreading of fixed costs, coupled with an increase in the number of larger
system sales.
Selling, general and administrative expenses decreased from $3.8 million in
the 1998 period to $2.5 million in the 1999 period as the Company continued
company-wide cost control measures. As a result of these controls and the higher
volume in net sales, selling, general and administrative expenses were lower as
a percentage of sales (34%) in the second quarter of 1999 as compared to the
same quarter in 1998 (55%).
Engineering and development expenses increased from $2.5 million in the
second quarter of 1998 to $3.4 million in 1999. Engineering and development
expenses reflect the Company's strategy of continued investment in new product
development and product enhancements. As a result of the increased expenditures,
engineering and development expenses were higher as a percentage of sales in
1999 (45%) as compared to 1998 (37%).
There was no provision for income taxes in the second quarter of 1999 or
1998 due to the losses from operations.
As a result of the above, the Company's net loss for the three months ended
June 30, 1999 was $1.9 million, an improvement of 41% as compared to a net loss
of $3.1 million for the comparable period last year.
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
- -------------------------------------------------------------------------
Net sales increased 32% from $11.0 million in 1998 to $14.6 million for the
first six months of 1999. Consistent with the Company's focus on the Voice
Information Services ("VIS") market, sales to network service providers totaled
$12.7 million, or 87%, of sales during the first six months of 1999, while sales
into the Customer Premise Equipment ("CPE") market represented the remaining
$1.9 million, or 13%, as compared to $9.0 million, or 82%, of sales for VIS and
$2.0 million, or 18%, for CPE during the same period in 1998.
Gross margin as a percentage of net sales increased to 57% in the 1999
period as compared to 48% for the same period in 1998. The gross margin
improvement resulted from higher production volumes, which allowed for the wider
spreading of fixed costs, coupled with an increase in the number of larger
system sales.
Selling, general and administrative expenses decreased from $7.3 million in
1998 to $5.3 million in 1999 as the Company continued company-wide cost control
measures. As a result of these controls and the higher volume in net sales,
selling, general and administrative expenses were lower as a percentage of sales
(36%) in 1999 as compared to 1998 (66%).
Engineering and development expenses increased from $5.2 million in 1998 to
$6.5 million in 1999. Engineering and development expenses reflect the Company's
strategy of continued investment in new product development and product
enhancements. As a result of the higher volume in net sales in the first six
months of 1999, engineering and development expenses were lower as a percentage
of sales in 1999 (45%) as compared to 1998 (47%).
8
<PAGE>
There was no provision for income taxes for the six months ended June 30,
1999 or 1998 due to the losses from operations.
As a result of the above, the Company's net loss for the six months
improved 47% from a net loss of $6.8 million for the six months ended June 30,
1998 to a $3.6 million net loss for the comparable period of 1999.
Factors That May Affect Future Results
- --------------------------------------
The Company operates in a rapidly changing environment that involves a
number of risks, some of which are beyond the Company's control. These risks are
discussed in the Company's 1998 Annual Report to Shareholders and incorporated
by reference to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998.
For the past several years, the Company has relied upon sales and services
related to its VoiceServer family of products. In February 1998, the Company
introduced its new product line, the PulsePoint(TM) Enhanced Application
Platform ("EAP"). The EAP is a carrier-grade, internet-ready open-system
enhanced services solution based on Microsoft(R) Windows NT(TM) Server. It is
designed for the messaging needs of small- to large-sized network service
providers and resellers. Its architecture supports a wide variety of port
capacities from tens to thousands of ports.
In July 1998, the Company announced the renewal of its multi-year contract
with GTE. As part of that renewal, GTE provided a $50 million minimum purchase
commitment, subject to the Company meeting certain delivery milestones. Also in
July 1998, the Company announced that one of those milestones had been missed
and as such, GTE now has the option of choosing to reduce, cancel, or maintain
the purchase commitment clause within the overall contract. Through July 26,
1999, no action has been taken to modify the purchase commitment clause. The
Company also announced in July 1998 that the EAP was in integration testing and
standardization at GTE and in February 1999 the Company announced that GTE had
completed testing and standardization of the EAP. The Company continues to
maintain its goal of deployment of the EAP with GTE and other customers, but
there can be no assurance that this goal will be achieved.
Though demand for the Company's VoiceServer product lines remains strong,
the Company's management believes that future sales will depend largely upon the
successful completion, standardization, and build-out of the EAP product line.
There can, however, be no assurance that this goal will be achieved.
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 ongoing 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 is unsuccessful in creating, developing, and marketing
new products such as the EAP product line and is unable to raise additional
working capital.
Year 2000 Update
- ----------------
Certain computer programs and embedded computer chips are unable to
distinguish between the year 1900 and the year 2000 (the "Year 2000 Problem").
The Company has undertaken a comprehensive program to address the effects of the
Year 2000 Problem on its products and systems ("The Program"). The Program
addresses the Year 2000 Problem as it impacts the Company in three distinct
areas: (1) the Company's products; (2) the Company's internal systems; and (3)
third parties with which the Company has material relationships.
The Company sold certain equipment prior to 1992 that may still be in
service but which the Company no longer supports. As the Company no longer takes
responsibility for any aspect of this equipment, the Company does not believe it
has any responsibility to remediate the Year 2000 Problem with regard to these
systems. Though the Company does not anticipate receiving any requests for such
remediation, there can be no assurance that these claims will not occur.
9
<PAGE>
The Company believes that the products it currently supports are either
Year 2000 compliant or that Year 2000 compliant solutions are available for
those products. Although the Company has not received any customer complaints,
there can be no assurance that such complaints will not be received. The
Company's newest product, the EAP, is a carrier-grade and open-systems based
product that integrates many third party components, including, but not limited
to, software. In the Company's previously published Year 2000 Update, the
Company had tested the EAP under its Published Functionality that is described
in the documentation set that accompanies the EAP when purchased ("Published
Functionality"). The Company believed that the tests utilized were sufficient to
determine the EAP to be Year 2000 compliant. Since that time the Company has
completed a review of all of the third party software products in the EAP for
Year 2000 compliance. Through this review the Company has become aware of a
small percentage of third party software in the EAP with Year 2000 compliance
issues. The vendors for these third party software components have Year 2000
compliant solutions available. As a result, the Company has expanded its Year
2000 testing to determine whether these products will affect the Published
Functionality of the EAP. The Company believes that these tests will be adequate
to identify potential Year 2000 problems relating to the Published
Functionality. If necessary, the Company will apply the appropriate vendor
solutions. There is the possibility that such a problem could remain undetected.
If an aspect of a third party product that relates to the Published
Functionality remains non-Year 2000 compliant, the non-compliance of such
products could have material adverse effects upon the operations of the Company.
In addition, should the EAP be utilized in a manner other than its Published
Functionality, these third party software issues may affect the EAP's
performance.
In 1997, the Company replaced its primary internal accounting,
manufacturing, and inventory systems with a new system which the vendor warrants
is Year 2000 compliant. The Company is approximately 90% complete with its
testing of other internal systems and imbedded processors. These include, among
many others, the Company's payroll, internal networking, engineering development
and office security systems. The systems with which the Company performs
warranty, maintenance and support services have been warranted by the vendors as
being Year 2000 compliant. The Company expects to complete testing of the
remaining 10% and to have repaired or replaced any mission critical business
systems found to be non-Year 2000 compliant by September 30, 1999. As part of
The Program, the Company has developed a contingency plan for all of the mission
critical business systems. The Company will continue to remediate non-mission
critical business systems through December 31, 1999 in accordance with The
Program.
The Program has identified third parties with which the Company has
material relationships. At July 25, 1999, all of these third parties have
responded to the Company's queries regarding their Year 2000 compliance and, to
date, none of these third parties have disclosed any material risk to the
Company. In many cases, the Company is not in a position to confirm
independently the accuracy of the information reported by these third parties.
If any of these third parties remain non-Year 2000 compliant, it could have
material adverse effects upon the operations of the Company.
The Company expects the total cost of The Program to be approximately $0.8
million. To date, the Company has incurred approximately $0.6 million of these
costs. Should the Company encounter unexpected problems in any area of
compliance with the Year 2000 Problem, this amount could be substantially
increased. The Company currently plans to have The Program completed not later
than September 30, 1999, which is prior to any anticipated impact on the
Company's operating systems. While the Company does not expect the Year 2000
Problem to cause any significant operational problems, there can be no assurance
that such problems will not occur.
Liquidity and Capital Resources
- -------------------------------
For the six months ended June 30, 1999, net working capital decreased by
$2.5 million to $9.5 million compared to $12.0 million at December 31, 1998. The
decrease in working capital resulted principally from a reduction in cash of
$4.6 million, an increase in accounts receivable of $1.2 million, a decrease in
inventory of $0.3 million, an increase in amounts borrowed under the Company's
Credit Line of $1.5 million, an increase in the current notes payable of $0.3
million and a decrease in accounts payable and accrued liabilities of $3.0
million.
10
<PAGE>
At June 30, 1999, the Company had cash and cash equivalents of $6.8 million
and $2.4 million of long-term debt, $0.8 million of which was due within twelve
months. The Company's borrowings under the Credit Line were $2.0 million, which
was the maximum permissible borrowing under the agreement. The Credit Line
matures on September 30, 1999. The Company anticipates that it will seek to
renew the Credit Line, but there can be no assurance that the line will be
renewed at that time. For the six months ended June 30, 1999, net cash used by
operations was $6.0 million, and 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.
Proposed Merger
- ---------------
On June 15, 1999 PulsePoint Communications and Unisys Corporation
("Unisys") announced that they had signed an agreement for Unisys to acquire the
Company in a tax-free, stock-for-stock merger. The acquisition, which will be
accounted for as a pooling of interests, is expected to close in the third
quarter of 1999. The transaction is subject to approval by the Company's common
and preferred shareholders, as well as regulatory approvals and customary
closing conditions. Although the Company expects this merger to occur, there can
be no assurances that this will be the case.
11
<PAGE>
PART II - OTHER INFORMATION
---------------------------
PULSEPOINT COMMUNICATIONS
-------------------------
Item 1. Legal Proceedings
-----------------
As reported in Note 13 to the Company's financial statements included in
the Company's 1998 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, 1998, the Company is involved in patent litigation with Theis Research, Inc.
("Theis"). This action was stayed pending resolution of Theis' patent
infringement action against Octel Communications Corporation (now a division of
Lucent Technologies) and Northern Telecom Inc. In 1997, the U.S. Court of
Appeals affirmed a district court's decision that the claims of the five patents
Theis asserted against both Octel and Northern Telecom were each either invalid,
not infringed or both. Theis' writ of certiorari to the U.S. Supreme Court was
denied on June 26, 1998, exhausting Theis' appeals. On September 29, 1998, the
district court entered a judgment that the claims of a sixth patent asserted
against Northern Telecom are invalid. Theis filed a notice of appeal to the U.S.
Court of Appeals for the Federal Circuit on October 29, 1998. On July 21, 1999,
the Company filed a motion to dismiss. A hearing date has been scheduled for
August 27, 1999. On July 23, 1999, the court indicated that they intend to
dismiss the case without prejudice, though the Company has not received a
written order as of July 26, 1999.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
--------
10.29 Agreement and Plan of Merger dated as of June 14, 1999, between
PulsePoint Communications, Unisys Corporation and ShellCo Inc.
(incorporated by reference to Exhibit 2.1 of the Company's Current
Report on Form 8-K filed June 14, 1999).
10.30 Stock Option Agreement dated as of June 14, 1999, between Unisys
Corporation and PulsePoint Communications, as Grantor (incorporated by
reference to Exhibit 10.1 of the Company's Current Report on Form 8-K
filed June 14, 1999).
10.31* Form of Voting Agreement dated as of June 14, 1999 (incorporated by
reference to Exhibit 10.2 of the Company's Current Report on Form 8-K
filed June 14, 1999).
10.32** Form of Letter Agreement (incorporated by reference to Exhibit 10.3 of
the Company's Current Report on Form 8-K filed June 14, 1999).
* Attached as Exhibit B to the Merger Agreement. Unisys Corporation has
entered into a Voting Agreement in substantially the form filed
herewith with Oak Investment Partners V, Limited Partnership; Oak
Investment Partners VII, Limited Partnership; Oak Investment Partners
III, A Limited Partnership; Oak VII Affiliates Fund, Limited
Partnership; Oak V Affiliates Fund, Limited Partnership; and Bandel L.
Carano (collectively, the "Oak Entities"); Frederick J. Warren;
Microsoft Corporation; Citiventure 96 A.P. Partnership Fund, L.P.;
Chancellor Private Capital Offshore Partners II, L.P.; Chancellor
Private Capital Partners III, Limited Partnership; Chancellor Private
Capital Offshore Partners I, C.V.; Moore Global Investments, Ltd. and
Remington Investment Strategies, L.P.
** Unisys and PulsePoint have received letters in substantially the form
filed herewith from the Oak Entities; Frederick J. Warren; Microsoft
Corporation; Citiventure 96 A.P. Partnership Fund, L.P.; Chancellor
Private Capital Offshore Partners II, L.P.; Chancellor Private Capital
Partners III, Limited Partnership; Chancellor Private Capital Offshore
Partners I, C.V.; Moore Global Investments, Ltd. and Remington
Investment Strategies, L.P.; provided that the letter from the Oak
Entities provides for the conversion of thirty three percent (33%) of
the PulsePoint Preferred shares held by them.
b) Reports on Form 8-K
-------------------
During the quarter ended June 30, 1999 the Company filed a Current
Report on Form 8-K, dated June 14, 1999 to report under Items 5 and 7
of such Form.
12
<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 July 27, 1999.
PULSEPOINT COMMUNICATIONS
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
13
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