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 March 31, 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
--------- ---------
The number of shares outstanding of Registrant's common stock as of April
23, 1999 was 5,289,699.
<PAGE>
PULSEPOINT COMMUNICATIONS
TABLE OF CONTENTS
Page Number
-----------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets as of March 31, 1999 1
and December 31, 1998
Consolidated Statements of Operations for the 2
Three Months ended March 31, 1999
and March 31, 1998
Consolidated Statements of Cash Flows for the 3
Three Months ended March 31, 1999
and March 31, 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 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
<PAGE>
PART I - FINANCIAL INFORMATION
PULSEPOINT COMMUNICATIONS
-------------------------
CONSOLIDATED BALANCE SHEETS
---------------------------
(In thousands, except per share data)
MARCH 31, DECEMBER 31,
1999 1998
===============================================================================
(Unaudited)
ASSETS
- -------------------------------------------------------------------------------
Current assets:
Cash, cash equivalents and pledged cash $ 9,235 $ 11,473
Accounts receivable, less allowance for doubtful
accounts of $598 and $725 at March 31, 1999 and
December 31, 1998, respectively 5,338 4,215
Inventories, net 8,547 7,652
Other current assets 596 516
- -------------------------------------------------------------------------------
Total current assets 23,716 23,856
Property and equipment, at cost:
Computers and other equipment 11,137 10,334
Furniture and fixtures 999 999
Leasehold improvements 1,910 1,955
- -------------------------------------------------------------------------------
14,046 13,288
Less accumulated depreciation and amortization (9,629) (9,046)
- -------------------------------------------------------------------------------
4,417 4,242
Other assets:
Investment securities 1,006 1,101
Other assets 1,225 1,328
- -------------------------------------------------------------------------------
Total other assets 2,231 2,429
- -------------------------------------------------------------------------------
Total assets $ 30,364 $ 30,527
===============================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------
Current liabilities:
Credit line $ 2,880 $ 540
Notes payable, current 881 613
Accounts payable 4,743 5,335
Accrued payroll and related 2,212 2,264
Other accrued liabilities 2,323 3,115
- -------------------------------------------------------------------------------
Total current liabilities 13,039 11,867
Trade-in allowance 1,419 1,360
Notes payable, long-term 1,849 1,498
Commitments and contingencies
Shareholders' equity:
Preferred stock, 15,000,000 shares authorized:
Series A, no par value, no shares issued and
at March 31, 1999 and December 31, 1998 - -
Series B, no par value, 3,312,534 and 3,333,334
shares issued and outstanding at March 31, 1999
and December 31, 1998, respectively 24,567 24,723
Common stock, no par value - 50,000,000 shares
authorized, 5,289,699 and 5,237,699 shares issued
and outstanding at March 31, 1999 and
December 31, 1998, respectively 69,976 69,820
Accumulated deficit (80,486) (78,741)
- -------------------------------------------------------------------------------
Total shareholders' equity 14,057 15,802
- -------------------------------------------------------------------------------
Total liabilities & shareholders' equity $ 30,364 $ 30,527
===============================================================================
See accompanying notes.
1
<PAGE>
PULSEPOINT COMMUNICATIONS
-------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
(In thousands, except per share data)
- ---------------------------------------------------------------------------
MARCH 31, MARCH 31,
1999 1998
===========================================================================
(Unaudited) (Unaudited)
Net sales $ 7,091 $ 4,200
Cost of sales 2,877 1,878
- ---------------------------------------------------------------------------
Gross margin 4,214 2,322
- ---------------------------------------------------------------------------
Selling, general and administrative expenses 2,746 3,519
Engineering and development expenses 3,149 2,644
- ---------------------------------------------------------------------------
Total operating expense 5,895 6,163
- ---------------------------------------------------------------------------
Loss from operations (1,681) (3,841)
Interest and other income (expense), net (64) 205
- ---------------------------------------------------------------------------
Loss before provision for income taxes (1,745) (3,636)
Provision for income taxes - -
- ---------------------------------------------------------------------------
Net loss and comprehensive loss $ (1,745) $ (3,636)
===========================================================================
Loss per common share - basic and diluted $ (0.33) $ (0.71)
Weighted average common and common
equivalent shares outstanding 5,266 5,141
===========================================================================
See accompanying notes.
2
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PULSEPOINT COMMUNICATIONS
-------------------------
CONSOLIDATED STATEMENT OF CASH FLOWS
------------------------------------
(In thousands)
- ---------------------------------------------------------------------------
MARCH 31, MARCH 31,
1999 1998
===========================================================================
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (1,745) $ (3,636)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization 777 657
Provision for losses on accounts
receivable (130) 75
Provision for losses on inventory 134 40
Changes in operating assets and
liabilities:
Accounts receivable (993) (257)
Inventories (1,029) (463)
Other current assets (80) (13)
Other assets (91) 28
Accounts payable (592) (212)
Accrued payroll and related (52) (281)
Trade-in allowance 59 -
Other accrued liabilities (792) (586)
- ---------------------------------------------------------------------------
Net cash used in operations (4,534) (4,648)
- ---------------------------------------------------------------------------
Cash flows from investing activities:
(Increase) decrease in investment
securities 95 -
Additions to property and equipment (758) (367)
- ---------------------------------------------------------------------------
Net cash used in investing
activities (663) (367)
- ---------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of long-term debt 768 -
Principal payments of long-term debt (149) -
Proceeds from issuance of common stock - 9
Net proceeds from line of credit 2,340 351
- ---------------------------------------------------------------------------
Net cash provided by financing
activities 2,959 360
- ---------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (2,238) (4,655)
Cash and equivalents at beginning of period 11,473 20,973
- ---------------------------------------------------------------------------
Cash and equivalents at end of period $ 9,235 $ 16,318
===========================================================================
See accompanying notes.
3
<PAGE>
PULSEPOINT COMMUNICATIONS
-------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
MARCH 31, 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 March 31, 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. and Mellon US Leasing 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:
- -------------------------------------------------------------------------------
(In thousands) Three Months Ended
- -------------------------------------------------------------------------------
MARCH 31, MARCH 31,
1999 1998
===============================================================================
(Unaudited) (Unaudited)
Voice Information Services (VIS) $ 6,238 $ 3,055
Customer Premises Equipment (CPE) 853 1,145
- -------------------------------------------------------------------------------
$ 7,091 $ 4,200
===============================================================================
Revenue by geographic area (based on domicile of customer):
- -------------------------------------------------------------------------------
(In thousands) Three Months Ended
- -------------------------------------------------------------------------------
MARCH 31, MARCH 31,
1999 1998
===============================================================================
(Unaudited) (Unaudited)
Domestic $ 6,904 $ 4,196
International 187 4
- -------------------------------------------------------------------------------
$ 7,091 $ 4,200
===============================================================================
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:
- -------------------------------------------------------------------------------
(In thousands) MARCH 31, DECEMBER 31,
1999 1998
===============================================================================
(Unaudited)
Raw material and purchased parts $ 5,368 $ 6,399
Work-in-process 967 751
Finished goods 2,212 502
- -------------------------------------------------------------------------------
$ 8,547 $ 7,652
===============================================================================
5
<PAGE>
NOTE 4. Debt
- -------------
The Company's Security and Loan Agreement (the "Credit Line") with Imperial
Bank was due to mature on February 26, 1999. In order to provide sufficient time
to negotiate and document a renewal, the Company received an extension of the
maturity date to March 29, 1999. On March 31, 1999, the Company renewed the
Credit Line to September 30, 1999. At February 28, 1999 and March 31, 1999, the
Company was in violation of one of the covenants of the Credit Line and has
received one-time waivers from the bank of these covenant violations. The
waivers eliminated any restricted access to the Credit Line that might have
otherwise been imposed due to the covenant violations. Continued access to the
Credit Line is subject to the Company's compliance with monthly and quarterly
covenant calculations. The Company expects to comply with future covenant
requirements, though no assurance can be provided that this will be the case. 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 March 31, 1999, there were 5,289,699 shares of the Company's Common
Stock outstanding and 10,003,793 shares of common stock equivalents, as follows:
Number of Common Shares
Outstanding and Potentially
Issuable Common Shares
---------------------------
(A) Common Stock outstanding 5,289,699
(B) Conversion of Series B Convertible Preferred Stock 8,281,335
(C) Options granted - 1983 Stock Option Plan 1,410,750
(D) Options granted - Directors' Stock Option Plan 61,400
(E) Warrants 250,308
-------
Additional shares potentially issuable 10,003,793
----------
Total potential shares of Common Stock 15,293,492
==========
(A) Number of shares of Common Stock outstanding at March 31, 1999.
(B) Shares of Common Stock issuable upon conversion of the Company's Series B
Convertible Preferred Stock outstanding at March 31, 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 1,410,750 options, 310,276 have exercise prices below the Company's
March 31, 1999 closing stock price of $4.19.
(D) Number of shares of Common Stock issuable pursuant to options granted under
the Company's Directors' Option Plan (assuming full vesting). Note: Of
these 61,400 options, 5,000 have exercise prices below the Company's March
31, 1999 closing stock price of $4.19.
(E) Warrants to purchase the Company's Common Stock at March 31, 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 58,000 warrants issued to NEXTLINK Communications,
Inc.
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.
6
<PAGE>
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 March 31, 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.
NOTE 7. Subsequent Events
- --------------------------
The annual meeting of shareholders for the Company was held on April 23,
1999. The shareholders approved all of the proposals as stated in the 1999 Proxy
Statement, which were:
1. The election of the Directors of the Company;
2. An increase in the number of shares of Common Stock available under the
Company's 1983 Stock Option Plan from 2,375,000 to 2,625,000 shares;
3. An increase in the number of shares of Common Stock available under the
Company's Employee Stock Purchase Plan from 500,000 to 675,000 shares.
Prior to the meeting of shareholders, Cameron D. Myhrvold informed the
Company that he no longer wished to stand for election to a seat on the
Company's Board of Directors.
7
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998
- -------------------------------------------------------------------------------
Net sales increased 69% from $4.2 million in 1998 to $7.1 million in 1999.
Consistent with the Company's focus on the Voice Information Services ("VIS")
market, sales to network service providers totaled $6.2 million, or 87%, of the
sales for the first three months of 1999, compared with sales of $3.1 million,
or 74%, of sales during the same period in 1998. Sales to the Customer Premise
Equipment ("CPE") market represented the remaining $0.9 million, or 13%, of
sales in the first three months of 1999, compared with $1.1 million, or 26%, of
sales during the same period in 1998.
Gross margin as a percentage of net sales increased to 59% in the 1999
period as compared to 55% 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 $3.5 million in
the 1998 period to $2.7 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 (39%) in the 1999 quarter as compared to the 1998 quarter
(84%).
Engineering and development expenses increased from $2.6 million in the
1998 quarter to $3.1 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 1999, engineering and development expenses were lower as a percentage
of sales in 1999 (44%) as compared to 1998 (63%).
There was no provision for income taxes in the first 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
March 31, 1999 was $1.7 million, an improvement of 53% as compared to a net loss
of $3.6 million for the comparable period last year.
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 April 27,
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.
8
<PAGE>
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 which 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.
The Company believes that its current products are either Year 2000
compliant or that Year 2000 compliant solutions are available for the products.
Although the Company has not received any customer complaints, there can be no
assurance that such complaints will not be received. The Company has also been
developing a new product line, the EAP. The EAP is a carrier-grade and
open-systems based product that integrates many third party components,
including, but not limited to, software. The Company has tested the EAP under
its published functionality that is described in the documentation set that
accompanies the EAP when purchased ("Published Functionality") to determine the
system's overall Year 2000 readiness status. The Company believes that it has
utilized tests sufficient to test Year 2000 compliance, and that the EAP is Year
2000 compliant. However, the Company has not tested each third party product
separately from its integration into the EAP. Although the Company believes that
its testing procedures are adequate to identify potential Year 2000 problems
relating to the Published Functionality, there is the possibility that such a
problem could have remained 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, the Company is aware that some third party vendors have
identified Year 2000 compliance issues in their products. The issues that have
been identified relating to those third party software products do not affect
the EAP with regard to Year 2000 compliance based upon the Published
Functionality of the EAP. 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 80% 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 20% and to have repaired or replaced any mission critical business
systems found to be non-Year 2000 compliant by June 30, 1999. The Company will
continue to remediate non-mission critical business systems through September
30, 1999 in accordance with The Program.
9
<PAGE>
The Program has identified third parties with which the Company has
material relationships. To date, approximately 40% 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. The Company currently plans to have received responses from the
remaining 60% by June 30, 1999. 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. With the exception of non-mission critical business systems and the
contingency plan, the Company currently plans to have The Program completed not
later than June 30, 1999, which is prior to any anticipated impact on the
Company's operating systems. The Company anticipates that The Program for some
non-mission critical business systems will not be completed until September 30,
1999. 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. As part of The Program, the Company is working to develop the
most reasonably likely worst case scenario after which the Company will develop
a contingency plan ("Contingency Plan"). The anticipated completion date for
assessing the worst case scenario is June 30, 1999. The anticipated completion
date for the Contingency Plan is September 30, 1999.
Liquidity and Capital Resources
- -------------------------------
For the three months ended March 31, 1999, net working capital decreased by
$1.3 million to $10.7 million compared to $12.0 million at December 31, 1998.
The decrease in working capital resulted principally from a reduction in cash of
$2.2 million, an increase in accounts receivable of $1.1 million, an increase in
inventory of $0.9 million, an increase in amounts borrowed under the Company's
Credit Line of $2.3 million, and a decrease in accounts payable and accrued
liabilities of $1.4 million.
At March 31, 1999, the Company had cash, cash equivalents and pledged cash
of $9.2 million and $2.7 million of long-term debt, $0.9 million of which was
due within twelve months. The Company's borrowings under the Credit Line were
$2.9 million, which was the maximum permissible borrowings 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 three months ended March 31, 1999, net
cash used by operations was $4.5 million, and capital expenditures were $0.8
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.
10
<PAGE>
PART II - OTHER INFORMATION
PULSEPOINT COMMUNICATIONS
Item 1. Legal Proceedings
-----------------
As reported in Note 11 to the Company's financial statements included in
the Company's 1997 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, 1997, 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. Theis has now
requested a Case Management Conference and the court has set a date for this
conference to discuss the status of the case.
11
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
a) The Annual Meeting of Shareholders of PulsePoint Communications was held
on April 23, 1999.
b) Matters voted on at the meeting and votes cast on each were as follows:
VOTES
--------------------------------------------
Withhold
For Authority
---------- ----------
1. To elect directors of the Company.
John D. Beletic 12,280,298 267,279
Bandel L. Carano 12,281,148 266,429
Scot B. Jarvis 12,280,898 266,679
Cameron D. Myhrvold 12,280,923 266,654
Mark C. Ozur 12,277,778 269,799
Frederick J. Warren 12,281,073 266,504
Broker
For Against Abstain Non-Votes
---------- ---------- ---------- ---------
2. To approve an 9,313,150 369,448 33,404 2,831,575
amendment to the
Company's 1983 Stock
Option Plan to increase
the number of shares of
the Company's Common
Stock available under
the Plan from 2,375,000
to 2,625,000 shares.
3. To approve an 9,583,219 101,741 31,042 2,831,575
amendment to the
Company's Employee Stock
Purchase Plan to
increase the number of
shares of the Company's
Common Stock available
under the Plan from
500,000 to 675,000
shares.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
a) Exhibits
--------
10.26 Warrant Agreement between the Company and Leap Wireless International,
Inc. dated January 21, 1999.
10.27 Third Amendment to Security and Loan Agreement, Domestic Credit and
Addendum thereto, by and between the Company and Imperial Bank, dated
March 31, 1999.
10.28 Third Amendment to Credit Terms and Conditions, by and between the
Company and Imperial Bank, dated March 31, 1999.
b) Reports on Form 8-K
-------------------
No reports on Form 8-K have been filed during the quarter for which this
report is filed.
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 April 30, 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
WARRANT AGREEMENT
BETWEEN
PULSEPOINT COMMUNICATIONS
and
LEAP WIRELESS INTERNATIONAL, INC.
--------------------------------
Dated: January 21, 1999
================================
<PAGE>
<TABLE>
TABLE OF CONTENTS(1)
<CAPTION>
Page
----
<S> <C>
SECTION 1. Issuance of Warrants..............................................1
SECTION 2. Warrant Certificates..............................................2
SECTION 3. Execution of Warrant Certificates.................................2
SECTION 4. Registration......................................................2
SECTION 5. Restriction on Transfer; Registration of Transfers................3
SECTION 6. Warrants; Exercise of Warrants....................................4
(a) Warrants..............................................................4
(b) Exercise of Warrants..................................................4
SECTION 7. Payment of Taxes..................................................5
SECTION 8. Mutilated or Missing Warrant Certificates.........................5
SECTION 9. Reservation of Warrant Shares.....................................5
SECTION 10. Obtaining Stock Exchange Listings................................5
SECTION 11. Adjustment of Exercise Price and Number of
Warrant Shares Issuable .........................................6
(a) Adjustment for Change in Capital Stock................................6
(b) Adjustment for Rights Issue...........................................7
(c) Adjustment for Other Distributions....................................7
(d) When No Adjustment Required...........................................8
(e) Notice of Adjustment..................................................8
(f) Notice of Certain Transactions........................................9
(g) Reorganization of Company.............................................9
(h) Adjustment in Number of Warrant Shares...............................10
SECTION 12. Fractional Interests............................................10
i
<PAGE>
SECTION 13. Notices to Warrant holders; Delivery of Financial Statements...10
(a) Notices to Warrant Holders...........................................10
(b) Delivery of Financial Statements.....................................12
SECTION 14. Registration Rights..............................................12
SECTION 15. Notices to the Company and the Warrant Holders...................12
SECTION 16. Supplements and Amendments.......................................12
SECTION 17. Successors.......................................................12
SECTION 18. Termination......................................................13
SECTION 19. Governing Law....................................................13
SECTION 20. Benefits of This Agreement.......................................13
SECTION 21. Counterparts.....................................................13
EXHIBITS
EXHIBIT A - A-2
EXHIBIT B - B-1
EXHIBIT C - C-5
<FN>
(1) This Table of Contents does not constitute a part of this Agreement or have
any bearing upon the interpretaion of any of its terms or provision.
</FN>
</TABLE>
ii
<PAGE>
This WARRANT AGREEMENT dated as of January 21, 1999 (the
"Agreement") is by and between PulsePoint Communications, a California
corporation (the "Company"), and Leap Wireless International, Inc. a Delaware
corporation ("Leap").
RECITALS
A. The Company proposes to issue to Leap warrants (the "Warrants")
to purchase shares of Common Stock, no par value, of the Company ("Common
Stock") subject to the terms and conditions set forth in this Agreement.
B. The Warrants represent the right to purchase from the Company
authorized but unissued shares of Common Stock determined as set forth herein
(the Common Stock purchasable on exercise of the Warrants being referred to
herein as the "Warrant Shares") at an initial exercise price of the market price
per share as quoted on the NASDAQ stock exchange (or any successor thereto) at
the close of business on the day that this Agreement is first executed by one of
the parties (the "Exercise Price").
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Issuance of Warrants. If the following conditions are
---------------------
met, the Company shall issue Warrants to Leap at the times and in the amounts
set forth below, subject to adjustments, if any, as set forth in Section 11
hereof:
(a) On or before the third anniversary of the date hereof (the
"Final Contract Date"), upon the deployment of the first (1st) Enhanced
Applications Platform ("EAP") product in an operating network of Leap or another
company if Leap both (i) owns, directly or indirectly, no less than ten percent
(10%)* of the outstanding equity interests of such other company and (ii)
actively participates in the operations or management of such company
(including, without limitation, consulting with or advising such other company
in connection with its selection of voicemail and unified messaging equipment
vendor) (a "Leap Operating Company"), the Company shall issue to Leap Warrants
for the purchase of 100,000 shares of Common Stock at the initial Exercise Price
(subject to the adjustment of such number of shares and Exercise Price pursuant
to paragraph (e) of this Section 1.
(b) On or before the third anniversary of the Final Contract Date,
for each whole $12,500,000 of Net Cash Receipts (as defined herein) received by
the Company from Leap, a
* With the exception of the Chasetel properties ("Chasetel"), in which Leap
currently owns a seven percent (7%) interest, on the condition that Leap
maintains a valid management agreement with Chasetel or until Leap acquires an
outstanding equity interest of at least ten percent (10%).
1
<PAGE>
Leap Operating Company, an entity purchasing EAP product for Leap or a Leap
Operating Company (a "Purchasing Entity"), or an authorized distributor of
Company's products that has distributed Company's EAP product to Leap, a Leap
Operating Company, or a Purchasing Entity (each, an "Authorized Distributor" and
together, the "Authorized Distributors") pursuant to a valid purchase agreement
between either Leap, a Leap Operating Company, or a Purchasing Entity and the
Company, in the first instance, or the Company and an Authorized Distributor, in
the second instance, the Company shall issue to Leap Warrants for the purchase
of 100,000 shares of Common Stock at the initial Exercise Price (subject to the
adjustment of such number of shares and Exercise Price pursuant to paragraph (e)
of this Section 1); for purposes of this Agreement, "Net Cash Receipts" for any
period or periods shall mean the sum of: payments received by the Company during
such period(s) from Leap, a Leap Operating Company, or Purchasing Entity, or an
Authorized Distributor on amounts invoiced to Leap, a Leap Operating Company or
Purchasing Entity less returns, as determined in accordance with generally
accepted accounting principles, applied on the basis consistent with the present
accounting practices of the Company.
(c) The foregoing Sections 1(a) and (b) hereof notwithstanding, the
Company shall not be required to issue Warrants to Leap for the purchase of an
aggregate of more than 500,000 shares of Common Stock pursuant to this
Agreement, subject to the adjustment of such number of shares pursuant to
paragraph (e) of this Section 1 and Section 11.
(d) Thirty calendar days following the end of each quarter, the
Company shall provide Leap a summary of the Net Cash Receipts as of the date of
the end of the respective quarter for which the summary is provided and shall
issue, the appropriate number of Warrants to Leap as determined above.
(e) If an event occurs which would result under Section 11 hereof in
an adjustment to the Exercise Price of outstanding Warrants, if any, then the
number of shares of Common Stock for which Warrants to be issued pursuant to
Sections 1(a) and (b) hereof are exercisable, and the Exercise Price thereof,
shall be adjusted pursuant to the provisions of Section 11 hereof as though such
Warrant already were issued and outstanding at the time of such event.
SECTION 2. Warrant Certificates. The certificates evidencing the
----------------------
Warrants (the "Warrant Certificates") to be delivered pursuant to this Agreement
shall be substantially in the form set forth in Exhibit A attached hereto and
shall be delivered promptly after the Company determines that Warrants have been
earned pursuant to Section 1.
SECTION 3. Execution of Warrant Certificates. The Warrant
----------------------------------
Certificates shall be signed on behalf of the Company by its President.
SECTION 4. Registration. The Company may deem and treat the
-------------
registered holder of a Warrant Certificate as the absolute owner thereof
(notwithstanding any notation of ownership or other writing thereon made by
anyone), for all purposes, and shall not be affected by any notice to the
contrary. References herein to "Warrant holders" shall mean Leap, so long
2
<PAGE>
as Leap is registered holder of a Warrant Certificate, and any proper transferee
of a Warrant who has become a registered holder of a Warrant Certificate.
SECTION 5. Restriction on Transfer; Registration of Transfers.
--------------------------------------------------------
Anything in this Agreement to the contrary notwithstanding, the Warrants are not
transferable without the prior written consent of the Company, which consent
shall not be unreasonably withheld. Subject to the preceding sentence, the
Company shall from time to time register the transfer of Warrant Certificates in
a Warrant register to be maintained by the Company upon surrender thereof
accompanied by a written instrument or instruments of transfer in form
satisfactory to the Company, duly executed by the registered holder thereof or
by the duly appointed legal representative thereof or by a duly authorized
attorney. Upon any such registration of transfer, a new Warrant Certificate
shall be issued to the transferee and the surrendered Warrant Certificate shall
be canceled and disposed of by the Company.
Prior to any proposed transfer of a Warrant or of the Warrant
Shares, if such transfer is not made pursuant to an effective Registration
Statement under the Securities Act of 1933, as amended (the "Act"), or an
opinion of counsel, reasonably satisfactory in form and substance to the
Company, that the Warrant or Warrant Shares may be sold publicly without
registration under the Act, the Warrant holder will, if requested by the
Company, deliver to the Company:
(1) an investment representation reasonably satisfactory to the
Company signed by the proposed transferee;
(2) an agreement by the proposed transferee to the impression of the
restrictive investment legend set forth below on the Warrant Certificate
or the certificate representing the Warrant Shares;
(3) an agreement by the proposed transferee that the Company may
place a notation in the stock books of the Company or a "stop transfer
order" with any transfer agent or registrar with respect to the Warrant
Shares; and
(4) an agreement by such transferee to be bound by the provisions of
this Section 5 relating to the transfer of the Warrant or Warrant Shares.
Each certificate representing Warrant Shares will bear the following
legend:
"The securities evidenced or constituted hereby have been acquired
for investment and have not been registered under the Securities Act
of 1933, as amended. Such securities may not be sold, transferred,
pledged or hypothecated unless the registration provisions of said
Act have been complied with or unless the Company has received an
opinion of counsel reasonably satisfactory to the Company that such
registration is not required."
3
<PAGE>
SECTION 6. Warrants; Exercise of Warrants.
-------------------------------
(a) Warrants. Subject to the provisions of this Agreement, each
---------
Warrant holder shall have the right, upon exercise of his Warrant, to receive
from the Company that number of fully paid and nonassessable Warrant Shares
which the holder may at that time be entitled to receive on exercise of his
Warrant and payment of the Exercise Price then in effect for such Warrant
Shares. The Warrants may be exercised at any time before 5:00 p.m., Pacific Time
("PT") on December 31, 2003 (the "Expiration Date"). Warrants shall become void
and all rights thereunder and all rights in respect thereof under this Agreement
shall cease as of the Expiration Date. Other than as expressly provided for in
Section 11 hereof, no adjustments as to dividends will be made upon exercise of
the Warrants.
(b) Exercise of Warrants. Subject to the provisions of this
-----------------------
Agreement, a Warrant may be exercised upon (i) surrender to the Company at its
office designated for such purpose (the address of which is set forth in Section
15 hereof) of the Warrant Certificate with the form of election to purchase
attached as Exhibit B hereto duly completed and signed, which signature shall be
guaranteed by a bank or trust company having an office or correspondent in the
United States or a broker or dealer which is a member of a registered securities
exchange or the National Association of Securities Dealers, Inc., and (ii)
payment to the Company of the Exercise Price for the number of Warrant Shares in
respect of which the Warrant is exercised. Payment of the Exercise Price shall
be made in cash or by certified or official bank check to the order of the
Company.
Subject to the provisions of Section 7 and Section 10 hereof, upon
such proper surrender of the Warrant Certificate and payment of the Exercise
Price the Company shall cause to be delivered with all reasonable dispatch to or
upon the written order of the Warrant holder, and in such name or names as the
Warrant holder may designate, a certificate or certificates for the number of
full Warrant Shares purchasable upon the exercise of the Warrant together with
cash as provided in Section 12; provided, however, that if any consolidation,
merger or lease or sale of assets is proposed to be effected by the Company as
described in subsection (g) of Section 11 hereof, or a tender offer or an
exchange offer for shares of Common Stock of the Company shall be made, upon
such surrender of the Warrant Certificate and payment of the Exercise Price as
aforesaid, the Company shall, as soon as possible, but in any event not later
than five business days thereafter, issue and cause to be delivered the number
of full Warrant Shares issuable upon the exercise of the Warrant in the manner
described in this sentence together with cash as provided in Section 12. Such
certificate or certificates shall be deemed to have been transferred and any
person so designated to be named therein shall be deemed to have become a holder
of record of such Warrant Shares as of the date of the surrender of the Warrant
Certificate and payment of the Exercise Price.
Warrants shall be exercisable, at the election of the holders
thereof, either in full or from time to time in part and, in the event that a
certificate evidencing Warrants is exercised in respect of fewer than all of the
Warrant Shares issuable on such exercise at any time prior to the Expiration
Date, a new certificate evidencing the remaining Warrant or Warrants will be
issued and delivered pursuant to the provisions of this Section 6 and of Section
3 hereof.
4
<PAGE>
The Company shall keep copies of this Agreement and any notices
given or received hereunder available for inspection by the Warrant holders
during normal business hours at their respective offices.
SECTION 7. Payment of Taxes. The Company will pay all documentary
-----------------
stamp taxes attributable to the issuance of Warrant Shares upon the exercise of
a Warrant; provided, however, that the Company shall not be required to pay any
tax or taxes which may be payable in respect of any transfer involved in the
issue of any Warrant Certificate or any certificates for Warrant Shares in a
name other than that of the registered holder of the Warrant Certificate
surrendered upon the exercise of the Warrant, and, in connection with any such
transfer, the Company shall not be required to issue or deliver a Warrant
Certificate or Warrant Shares unless or until the person or persons requesting
the issuance or delivery thereof shall have paid to the Company the amount of
such tax or shall have established to the satisfaction of the Company that such
tax has been paid.
SECTION 8. Mutilated or Missing Warrant Certificates. In case a
---------------------------------------------
Warrant Certificate shall be mutilated, lost, stolen or destroyed, the Company
shall issue, in exchange and substitution for and upon cancellation of the
mutilated Warrant Certificate, or in lieu of and substitution for the Warrant
Certificate lost, stolen or destroyed, a new Warrant Certificate of like tenor,
but only upon receipt of evidence reasonably satisfactory to the Company of such
loss, theft or destruction of the Warrant Certificate and indemnity, if
requested, also reasonably satisfactory to it. Applicants for a substitute
Warrant Certificate shall also comply with such other reasonable regulations and
pay such other reasonable charges as the Company may prescribe.
SECTION 9. Reservation of Warrant Shares. The Company will at all
-------------------------------
times reserve and keep available, out of its authorized shares of Common Stock,
for the purpose of enabling it to satisfy its obligation to sell and issue
Warrant Shares upon exercise of the Warrants, the maximum number of shares of
Common Stock which may then be purchasable upon the exercise of the Warrants.
The Company will keep a copy of this Agreement on file with any
transfer agent for the Common Stock (the "Transfer Agent"). The Company will
furnish any such Transfer Agent a copy of all notices of adjustments and
certificates transmitted to the Warrant holders pursuant to Section 13 hereof.
The Company covenants that all Warrant Shares which are issued upon
exercise of Warrants will, upon delivery, be fully paid, nonassessable, and free
from all taxes, liens, charges and security interests.
SECTION 10. Obtaining Stock Exchange Listings. The Company will from
----------------------------------
time to time take all action which may be necessary so that the Warrant Shares,
immediately upon their issuance upon the exercise of the Warrants, will be
listed on the principal securities exchanges within the United States of
America, if any, on which other shares of Common Stock are then listed.
5
<PAGE>
SECTION 11. Adjustment of Exercise Price and Number of Warrant
--------------------------------- -------------------
Shares Issuable. The Exercise Price and the number of Warrant Shares purchasable
- ----------------
upon the exercise of the Warrants issued or issuable pursuant to this Agreement
are subject to adjustment from time to time upon the occurrence of the events
enumerated in this Section 11. For purposes of this Section 11, "Common Stock"
means shares now or hereafter authorized of any class of common stock of the
Company and any other stock of the Company, however designated, that has the
right (subject to any prior rights of any class or series of preferred stock) to
participate in any distribution of the assets or earnings of the Company without
limit as to per share amount. Anything in this Section 11 to the contrary
notwithstanding, the Exercise Price shall not be less than $.01 per share.
(a) Adjustment for Change in Capital Stock.
---------------------------------------
If the Company:
(1) pays a dividend or makes a distribution on its Common Stock in
shares of its Common Stock;
(2) subdivides its outstanding shares of Common Stock into a greater
number of shares;
(3) combines its outstanding shares of Common Stock into a smaller
number of shares;
(4) makes a distribution on its Common Stock in shares of its
capital stock other than Common Stock or preferred stock; or
(5) issues by reclassification of its Common Stock any shares of its
capital stock;
then the Exercise Price in effect immediately prior to such action shall be
proportionately adjusted (and, if applicable, the securities for which the
Warrant is exercisable shall be adjusted) so that the holder of the Warrants
thereafter exercised may receive the aggregate number and kind of shares of
capital stock of the Company which he would have owned immediately following
such action if the Warrants had been exercised immediately prior to such action.
The adjustment shall become effective immediately after the record
date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, combination or reclassification.
If after an adjustment the holders of the Warrants upon exercise of
it may receive shares of two or more classes of capital stock of the Company,
the Company shall determine the allocation of the adjusted Exercise Price
between the classes of capital stock. If Leap is then a holder of a Warrant it
shall have the right of reasonable approval of such allocation. After such
allocation, the exercise privilege and the Exercise Price of each class of
capital stock shall
6
<PAGE>
thereafter be subject to adjustment on terms comparable to those applicable to
Common Stock in this Section 11.
Such adjustment shall be made successively whenever any event listed
above shall occur.
(b) Adjustment for Rights Issue.
----------------------------
If the Company distributes any rights, options or warrants to all
holders of its Common Stock entitling them for a period expiring within 60 days
after the record date mentioned below to purchase shares of Common Stock at a
price per share less than the current Exercise Price on that record date, the
Exercise Price shall be adjusted in accordance with the formula:
O + N x P
-----
E' = Ex E
----------
O + N
where:
E' = the adjusted Exercise Price.
E = the current Exercise Price.
O = the number of shares of Common Stock outstanding on the record date.
N = the number of additional shares of Common Stock offered.
P = the offering price per share of the additional shares.
The adjustment shall be made successively whenever any such rights,
options or warrants are issued and shall become effective immediately after the
record date for the determination of shareholders entitled to receive the
rights, options or warrants. If at the end of the period during which such
rights, options or warrants are exercisable, not all rights, options or warrants
shall have been exercised, the Exercise Price shall be immediately readjusted to
what it would have been if "N" in the above formula had been the number of
shares actually issued.
7
<PAGE>
(c) Adjustment for Other Distributions.
-----------------------------------
If the Company distributes to all holders of its Common Stock any of
its assets (including but not limited to cash), debt securities, preferred
stock, or any rights or warrants to purchase debt securities, preferred stock,
assets or other securities of the Company, the Exercise Price shall be adjusted
in accordance with the formula:
E' = E x E - F
-----
E
where:
E' = the adjusted Exercise Price.
E = the current Exercise Price.
F = the fair market value on the record date of the assets, securities,
rights or warrants applicable to one share of Common Stock. The Board
of Directors of the Company shall determine the fair market value in
good faith.
The adjustment shall be made successively whenever any such
distribution is made and shall become effective immediately after the record
date for the determination of shareholders entitled to receive the distribution.
This subsection does not apply to rights, options or warrants
referred to in subsection (b) of this Section 11.
(d) When No Adjustment Required.
----------------------------
No adjustment need be made for a transaction referred to in
subsections (a), (b) or (c) of this Section 11 if the Warrant holders are to
participate in the transaction on a basis and with notice that the Board of
Directors of the Company determines to be fair and appropriate in light of the
basis and notice on which holders of Common Stock participate in the
transaction.
No adjustment under this Section 11 shall be made for the sale by
the Company of Common Stock or any other equity securities of the Company or for
the issuance of any option, warrant or other right to purchase Common Stock or
other equity securities (except as expressly provided for in this Section 11).
However, in the event that the Company, or any affiliate of the Company,
purchases additional equity securities of the Company after the date of this
Agreement, the Warrant holders shall have the right to participate in such
purchase on that same basis to the extent necessary to preserve their pro-rata
common equity ownership based on the percentage ownership of the Company
represented by the Warrant Shares.
To the extent the Warrants become convertible into cash, no
adjustment need be made thereafter as to the cash. Interest will not accrue on
the cash.
(e) Notice of Adjustment.
---------------------
8
<PAGE>
Whenever the Exercise Price is adjusted, the Company shall provide
the notices required by Section 13 hereof.
(f) Notice of Certain Transactions.
-------------------------------
If:
(1) the Company takes any action that would require an adjustment in
the Exercise Price pursuant to subsections (a), (b) or (c) of this Section
11 and if the Company does not arrange for the Warrant holders to
participate pursuant to subsection (d) of this Section 11; or
(2) there is a liquidation or dissolution of the Company,
the Company shall mail to the Warrant holders a notice stating the proposed
record date for a dividend or distribution or the proposed effective date of a
subdivision, combination, reclassification, consolidation, merger, transfer,
lease, liquidation or dissolution. The Company shall mail the notice at least 15
days before such date. Failure to mail the notice or any defect in it shall not
affect the validity of the transaction.
(g) Reorganization of Company.
--------------------------
If the Company consolidates or merges with or into, or transfers or
leases all or substantially all its assets to, any person (any such transaction,
a "Merger"), the formed, surviving (including the Company, if applicable),
transferee or lessee corporation (the "Survivor") shall assume the obligations
of the Company hereunder. The date of such Merger shall be referred to herein as
the "Merger Date." Warrants issued, but unexercised, immediately prior to the
Merger Date shall automatically become exercisable on and after the Merger Date
for the kind and amount of securities, cash or other assets which the holder of
a Warrant would have owned immediately after the Merger if the holder had
exercised the Warrant in full immediately prior to the Merger Date. In addition,
the Survivor shall issue, at the times and in the amounts set forth in Section 1
hereof, Warrants for the purchase of the kind and amount of securities, cash or
other assets which Leap would have owned immediately after the Merger if Leap
had earned and exercised in full such Warrants immediately prior to the Merger
Date. If the substance of the Merger is the acquisition of the Company then,
notwithstanding anything to the contrary contained in Section 1 hereof, Warrants
may not be exercised for Common Stock on or after the Merger Date. Concurrently
with the consummation the Merger, the Survivor shall enter into a supplemental
Warrant Agreement so providing and which is fair and equitable under the
circumstances. The Survivor shall mail to the Warrant holders a notice
describing the supplemental Warrant Agreement.
If this subsection (g) applies, subsections (a), (b) and (c) of this
Section 11 do not apply.
9
<PAGE>
(h) Adjustment in Number of Warrant Shares.
---------------------------------------
Upon each adjustment of the Exercise Price pursuant to this Section
11, the Warrants, as outstanding prior to the making of the adjustment in the
Exercise Price, shall thereafter evidence the right to receive upon payment of
the adjusted Exercise Price that number of shares of Common Stock (calculated to
the nearest hundredth) obtained from the following formula:
N' = N x E
-
E'
where:
N' = the adjusted number of Warrant Shares issuable upon exercise of the
Warrants by payment of the adjusted Exercise Price.
N = the number or Warrant Shares previously issuable upon exercise of
the Warrants by payment of the Exercise Price prior to adjustment.
E' = the adjusted Exercise Price.
E = the Exercise Price prior to adjustment.
SECTION 12. Fractional Interests. The Company shall not be required
---------------------
to issue any fractional Warrant Share on the exercise of a Warrant. If any
fraction of a Warrant Share would, except for the provisions of this Section 12,
be issuable on the exercise of a Warrant, the Company shall pay an amount in
cash equal to the fair value of one Warrant Share on the day immediately
preceding the date the Warrant is presented for exercise, multiplied by such
fraction.
SECTION 13. Notices to Warrant holders; Delivery of Financial
-------------------------------------------------
Statements.
- -----------
(a) Notices to Warrant Holders. Upon any adjustment of the Exercise
---------------------------
Price pursuant to Section 11, the Company shall promptly thereafter deliver to
the Warrant holders a certificate signed by the Chief Financial Officer of the
Company setting forth the Exercise Price after such adjustment and setting forth
in reasonable detail the method of calculation and the facts upon which such
calculations are based and setting forth the number of Warrant Shares issuable
after such adjustment in the Exercise Price, upon exercise of the Warrants and
payment of the adjusted Exercise Price, which certificate shall be conclusive
evidence of the correctness of the matters set forth therein unless the Warrant
holders, within 20 days after receipt of such certificate, notify the Company in
writing that they dispute matters set forth in the certificate, in which case,
the Warrant holders may request the firm of independent public accountants who
are the regular auditors of the Company at the Warrant holders' expense to
prepare a certificate concerning the calculation of the adjusted Exercise Price
and the other matters set forth above in the certificate, which accountant's
certificate shall be delivered to the Company and shall be conclusive evidence
of the correctness of the matters set forth therein.
In case:
10
<PAGE>
(i) the Company shall authorize the issuance to all holders of
shares of Common Stock of rights, options or warrants to subscribe for or
purchase shares of Common Stock or of any other subscription rights or
warrants; or
(ii) the Company shall authorize the distribution to all holders of
shares of Common Stock of evidences of its indebtedness or assets (other
than cash dividends or cash distributions payable out of consolidated
earnings or earned surplus or dividends payable in shares of Common Stock
or distributions referred to in subsection (a) of Section 11 hereof); or
(iii) of any consolidation or merger to which the Company is a party
and for which approval of any shareholders of the Company is required, or
of the conveyance or transfer of the properties and assets of the Company
substantially as an entirety, or of any reclassification or change of
Common Stock issuable upon exercise of the Warrants (other than a change
in par value, or from par value to no par value, or from no par value to
par value, or as a result of a subdivision or combination), or a tender
offer or exchange offer for shares of Common Stock; or
(iv) of the voluntary or involuntary dissolution, liquidation or
winding up of the Company; or
(v) the Company proposes to take any action (other than actions of
the character described in subsection (a) of Section 11) which would
require an adjustment of the Exercise Price pursuant to Section 11;
then the Company shall cause to be given to each holder of a Warrant at his
address appearing on the Warrant register, at least 20 days (or 10 days in any
case specified in clauses (i) or (ii) above) prior to the applicable record date
hereinafter specified, or promptly in the case of events for which there is no
record date, by first-class mail, postage prepaid, a written notice stating (i)
the date as of which the holders of record of shares of Common Stock to be
entitled to receive any such rights, options, warrants or distribution are to be
determined, or (ii) the initial expiration date set forth in any tender offer or
exchange offer for shares of Common Stock, or (iii) the date on which any such
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up is expected to become effective or consummated, and the date as of which it
is expected that holders of record of shares of Common Stock shall be entitled
to exchange such shares for securities or other property, if any, deliverable
upon such reclassification, consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up. The failure to give the notice required
by this Section 13 or any defect therein shall not affect the legality or
validity of any distribution, right, option, warrant, consolidation, merger,
conveyance, transfer, dissolution, liquidation or winding up, or the vote upon
any action.
Nothing contained in this Agreement or in the Warrant Certificates
shall be construed as conferring upon the holder thereof the right to vote or to
consent or to receive notice as shareholders in respect of the meetings of
shareholders or the election of Directors of the Company or any other matter, or
any rights whatsoever as shareholders of the Company.
11
<PAGE>
(b) Delivery of Financial Statements. Promptly after they become
-----------------------------------
available but in any event within 90 days after the last day of each fiscal
year, the Company will deliver to each Warrant holder the audited consolidated
financial statements of the Company for such fiscal year.
SECTION 14. Registration Rights. The Company grants registration
---------------------
rights to Leap as set forth in Exhibit C hereto. Upon the transfer by Leap of
all of its Warrants to a single transferee in compliance with Section 5, or the
transfer by Leap of all Warrant Shares issuable upon exercise of such Warrants
to a single transferee in a private offering, the Company shall amend this
Agreement to provide that such transferee may exercise Leap's registration
rights hereunder, provided that such transferee agrees to assume all obligations
of Leap hereunder with respect to such registration rights.
SECTION 15. Notices to the Company and the Warrant Holders. Any
--------------------------------------------------
notice or demand authorized by this Agreement to be given or made by the
registered holder of any Warrant Certificate to or on the Company shall be
sufficiently given or made when and if deposited in the mail, first class or
registered, postage prepaid, addressed (until the Warrant holders are otherwise
notified in accordance with this Section 15), as follows:
PulsePoint Communications
6307 Carpinteria Avenue
Carpinteria, California 93013
Attention: Corporate Secretary
Any notice pursuant to this Agreement to be given by the Company to
the registered holder of each Warrant Certificate shall be sufficiently given
when and if deposited in the mail, first-class or registered, postage prepaid,
addressed (until the Company is otherwise notified in accordance with this
Section 15 by such holder) to the Warrant holder at his address appearing on the
Warrant register of the Company.
SECTION 16. Supplements and Amendments. The Company may from time to
---------------------------
time supplement or amend this Agreement with the approval of Leap, and the
holders of the Warrant Certificates, if any, which approval shall not be
unreasonably withheld, in order to cure any ambiguity or to correct or
supplement any provision contained herein which may be defective or inconsistent
with any other provision herein, or to make any other provisions in regard to
matters or questions arising hereunder which the Company may deem necessary or
desirable.
SECTION 17. Successors. All the covenants and provisions of
-----------
this Agreement by or for the benefit of the Company shall bind and inure to
the benefit of the respective successors and assigns hereunder.
SECTION 18. Termination. This Agreement shall terminate on the
------------
Expiration Date. Notwithstanding the foregoing, this Agreement will terminate on
any earlier date if the Warrants have been exercised in full. Notwithstanding
the other provisions of this Agreement,
12
<PAGE>
the registration rights granted pursuant to Section 14 shall survive the
termination of this Agreement.
SECTION 19. Governing Law. This Agreement and the Warrant
----------------
Certificates issued hereunder shall be deemed to be a contract made under the
laws of the State of California and for all purposes shall be construed in
accordance with the internal laws of said State.
SECTION 20. Benefits of This Agreement. Nothing in this Agreement
----------------------------
shall be construed to give to any person, partnership, corporation or other
entity other than the Company and the registered holders of the Warrant
Certificates any legal or equitable right, remedy or claim under this Agreement;
and this Agreement shall be for the sole and exclusive benefit of the Company
and the registered holders of the Warrant Certificates.
SECTION 21. Counterparts. This Agreement may be executed in any
------------
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, as of the day and year first above written.
PULSEPOINT COMMUNICATIONS
By: /s/ Mark C. Ozur
---------------------------
Name: Mark C. Ozur
Title: President
LEAP WIRELESS INTERNATIONAL, INC.
By: /s/ Harvey P. White
---------------------------
Name:
Title:
13
<PAGE>
EXHIBIT A
[Form of Warrant Certificate]
[Face]
THE SECURITIES EVIDENCED OR CONSTITUTED HEREBY HAVE BEEN ACQUIRED FOR INVESTMENT
AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. SUCH
SECURITIES MAY NOT BE SOLD, TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS THE
REGISTRATION PROVISIONS OF SAID ACT HAVE BEEN COMPLIED WITH OR UNLESS THE
COMPANY HAS RECEIVED AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED.
EXERCISABLE ON OR BEFORE 5:00 P.M. PACIFIC TIME,
DECEMBER 31, 2003
Warrant Certificate
For
____________ Warrant Shares
PULSEPOINT COMMUNICATIONS
This Warrant Certificate certifies that Leap Wireless International.
Inc., or registered assigns, is the registered holder of a Warrant expiring at
5:00 p.m. PACIFIC TIME ("PT") December 31, 2003 (the "Warrant") to purchase
shares of the outstanding Common Stock (the "Common Stock"), of PulsePoint
Communications, a California corporation (the "Company"). The Warrant entitles
the holder upon exercise on or before 5:00 p.m. PT on December 31, 2003, to
receive from Company that number of fully paid and nonassessable shares of
Common Stock ("Warrant Shares") set forth above, and as specified in the Warrant
Agreement referred to below, at the initial exercise price (the "Exercise
Price") of $ per share payable in lawful money of the United States of America
upon surrender of this Warrant Certificate and payment of the Exercise Price at
the office of the Company designated for such purpose, but only subject to the
provisions of, and satisfaction of the conditions set forth in, the Warrant
Agreement. The Exercise Price and number of Warrant Shares issuable upon
exercise of the Warrant are subject to adjustment upon the occurrence of certain
events as set forth in the Warrant Agreement.
The Warrant may not be exercised after 5:00 p.m., PT on December 31,
2003 and to the extent not exercised by such time the Warrant shall become void.
The Warrant evidenced by this Warrant Certificate entitles the
holder on exercise to receive authorized but unissued shares of Common Stock and
is issued pursuant to a Warrant Agreement dated as of December ____, 1998 (the
"Warrant Agreement"), duly executed and
A-1
<PAGE>
delivered by the Company and Leap Wireless International, Inc. which Warrant
Agreement is hereby incorporated by reference in and made a part of this
instrument and is hereby referred to for a description of the rights, limitation
of rights, obligations, duties and immunities thereunder of the Company and the
Warrant holder (the words "Warrant holder" meaning the registered holder of this
Warrant Certificate). A copy of the Warrant Agreement may be obtained by the
holder hereof upon written request to the Company.
The Warrant is not transferable except in the limited circumstances
set forth in the Warrant Agreement.
IN WITNESS WHEREOF, PulsePoint Communications has caused this
Warrant Certificate to be signed by its President.
Dated: _______________, 19__
PULSEPOINT COMMUNICATIONS
By _______________________________
Name:
Title: President
A-2
<PAGE>
EXHIBIT B
[Form of Election to Purchase]
(To Be Executed Upon Exercise Of Warrant)
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to receive __________ shares of Common
Stock and herewith tenders payment for such shares to PulsePoint Communications
in the amount of $_________ in accordance with the terms hereof. The undersigned
requests that a certificate for such shares be registered in the name of
__________________________, whose address is ___________________________________
____________________ and that such shares be delivered to ________________ whose
address is _______________________ _______________________.
The undersigned represents that to the extent the aforesaid shares
of Common Stock are being registered in the name of the undersigned, such shares
are being acquired for the account of the undersigned for investment purposes
only and not with a view to, or for resale in connection with, any
"distribution" thereof for purposes of the Securities Act of 1933, as amended.
Signature:
Date:
Signature Guaranteed:
B-1
<PAGE>
EXHIBIT C
REGISTRATION RIGHTS
1. Definitions. Terms defined in the foregoing Warrant Agreement
------------
(the "Agreement") are used as therein defined in this Exhibit C. In addition,
the following term shall have the meaning indicated:
"Securities Act" means the Securities Act of 1933, as amended, or
any successor federal statute, and the rules and regulations of the Securities
and Exchange Commission (the "Commission") thereunder, all as the same shall be
in effect from time to time.
2. Piggy-Back Registrations. If at any time the Company proposes to
-------------------------
register (other than a registration (1) on Form S-8 or any successor form
thereto, (2) of debt securities of the Company, (3) of preferred stock of the
Company, or (4) of securities for the purpose of consummating any acquisition by
the Company including a registration on Form S-4 or any successor form thereto)
any public offering of shares of Common Stock under the Securities Act, the
Company will give written notice to Leap of its intention so to do at least 20
days prior to the filing of the registration statement.
A. In the event of an underwritten public offering:
(a) If the representative of the underwriters (the "Representative")
participating in the sale and distribution of the Company's securities covered
by said registration statement agrees that a number of shares of outstanding
Common Stock (the "Permissible Secondary Shares") may be included in the
offering covered by the registration statement, the Company's notice shall
afford Leap an opportunity to elect to include in such filing all or any part of
the Warrant Shares then held by Leap or issuable pursuant to the exercise of a
Warrant or Warrants held by Leap. Leap shall have 10 days after receipt of the
Company's notice to notify the Company in writing of the number of Warrant
Shares (the "Elected Shares") which Leap elects to include in the offering. The
Elected Shares shall be included in the offering to the extent permitted by the
Representative. If the aggregate number of Elected Shares that Leap and all
other holders of Common Stock of the Company possessing registration rights
desire to include in such filing exceeds the number of Permissible Secondary
Shares, then Leap shall, subject to any priority or pro rata registration rights
available to other holders of securities, be entitled to include that number of
Warrant Shares that bears the same ratio to the number of Permissible Secondary
Shares as the number of Elected Shares bears to the number of shares of Common
Stock that all such eligible holders of Common Stock desire to include. The
Representative may increase or decrease the number of Permissible Secondary
Shares at any time until all shares of Common Stock included in such offering
have been sold by such underwriters.
(b) The Company shall afford Leap the right to participate in each
underwritten registration until Leap shall have had an opportunity (whether or
not availed of) to participate in at least three effective registrations.
C-1
<PAGE>
B. In the event of a public offering which is not underwritten:
(a) Leap shall have 10 days after receipt of the Company's notice to
notify the Company in writing of the number of Warrant Shares which Leap elects
to include in the offering.
C. With respect to each offering covered by this Section 2:
(a) The Company will use its best efforts to prepare and file with
the Commission a registration statement with respect to the Warrant Shares to be
registered and shall cause such registration statement to become effective, to
prepare and file with the Commission such amendments and supplements to such
registration statement and the prospectus used in connection therewith as may be
necessary to keep such registration statement effective until the earlier of the
sale of all shares of Common Stock covered thereby or the expiration of a period
of 120 days after its effective date and to comply with the provisions of the
Securities Act with respect to the disposition of all Warrant Shares covered by
a registration statement pursuant to this Exhibit C. If any Warrant Shares
remain unsold at the end of such period, the Company may file a post-effective
amendment to the registration statement for the purpose of deregistering such
shares.
(b) The Company will furnish to Leap so many copies of a prospectus,
including a preliminary prospectus, in conformity with the requirements of the
Securities Act, and such other documents, as Leap may reasonably request.
(c) The Company will use its best efforts to register or qualify the
Warrant Shares covered by such registration statement under such other
securities or blue sky laws of such jurisdictions (not exceeding 10 in number)
as Leap shall request, and do any and all other acts and things that may be
reasonably necessary or advisable to enable Leap to consummate the disposition
in such jurisdictions of the Warrant Shares covered by the registration
statement; provided, however, that the Company shall not be obligated, by reason
thereof, to qualify as a foreign corporation or file any general consent to
service of process under the laws of any such jurisdiction or subject itself to
taxation as doing business in any such jurisdiction.
(d) The Company shall notify Leap when the registration statement
covering the offering of the Warrant Shares to be registered has been filed with
the Commission under the Securities Act and when it has been made effective by
order of the Commission.
D. Anything contained in this Section 2 notwithstanding, the Company shall
have no obligation to Leap if the Board of Directors of the Company determines,
for any reason, not to complete any proposed public offering of its securities.
C-2
<PAGE>
3. Obligations of Leap. To include any Warrant Shares in any
---------------------
registration statement, Leap shall:
(a) cooperate with the Company in preparing each such registration
statement and execute all such agreements as the Representative may reasonably
deem necessary in favor of the underwriters;
(b) promptly supply the Company with all information, documents,
representations and agreements as the Representative or the Company may
reasonably deem necessary in connection with such registration; and
(c) agree in writing not to sell or transfer any shares of the
capital stock of the Company not included in such registration statement during
the period beginning ten days prior to the filing and ending 120 days after the
effective date of such registration statement without the Representative's or
the Company's prior written consent.
4. Conditions. The inclusion of Warrant Shares in an offering
-----------
pursuant to Sections 2 or 3 hereof shall be subject to the following conditions:
(a) Leap shall exercise its Warrant or Warrants representing the
Warrant Shares to be registered in such offering, or irrevocably commit in
writing to do so prior to the effective date of the registration statement on
such terms as the Company may reasonably request, prior to the initial filing of
a registration statement with respect to such Warrant Shares; and
(b) the President or any Vice President, the Chief Executive
Officer, the Chief Financial Officer or the Treasurer of Leap shall certify in
writing to the Company and, in the case of an underwritten offering, to the
underwriters that Leap has a present intention to sell all of the Warrant Shares
which Leap elects to include in such offering.
(c) The inclusion of Warrant Shares in an offering pursuant to
Section 2 shall be subject to the condition that Leap shall sell its Warrant
Shares to the underwriters on the same terms and conditions as the Company and
any other selling holders of Common Stock.
5. No Registration Required. The Company shall have no obligation
---------------------------
under Sections 2 to register any Warrant Shares if the Company shall deliver to
Leap an opinion reasonably satisfactory to Leap and its counsel to the effect
that the proposed sale or disposition for which registration was requested does
not require registration under the Securities Act.
6. Registration Expenses. The costs and expenses (other than
-----------------------
underwriting discount or commission, fees and disbursements of Leap's counsel
and such fees as state securities officials may require that Leap pay) of all
registrations and qualifications under the
C-3
<PAGE>
Securities Act, and of all other actions that the Company is required to take or
effect pursuant to this Exhibit C, shall be paid by the Company (including,
without limitation, all registration and filing fees, printing expenses, costs
of special audits incident to or required by any such registration, and fees and
disbursements of counsel for the Company).
7. Indemnification by Company. In the event of any registration
-----------------------------
under the Securities Act of any Warrant Shares, the Company hereby agrees to
indemnify and hold harmless Leap, its officers, directors, agents, and each
person, if any, who controls Leap within the meaning of the Securities Act
against any losses, claims, damages or liabilities, joint or several, to which
Leap may become subject under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or proceedings in respect thereof) arise
out of or are based upon (i) any untrue statement or alleged untrue statement of
any material fact contained in any registration statement under which Warrant
Shares were registered under the Securities Act, or in any preliminary
prospectus or final prospectus contained therein or any amendment or supplement
thereto, (ii) the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading or (iii) any failure or alleged failure of the Company to comply with
any applicable statute, rule or regulation in connection with the registration
statement or the offering, and will reimburse Leap for any legal or other
expenses reasonably incurred by Leap in connection with investigating or
defending any such loss, claim, damage, liability or proceeding; provided that
the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement or omission or alleged omission made in
such registration statement, or in said preliminary or final prospectus or said
amendment or supplement, in reliance upon and in conformity with written
information furnished by Leap for use in the preparation thereof.
8. Indemnification by Leap. In the event of any registration under
-------------------------
the Securities Act of any Warrant Shares, Leap hereby agrees to indemnify and
hold harmless the Company, and each other person, if any, who controls the
Company within the meaning of the Securities Act and each other person
(including each underwriter, and each other person, if any, who controls such
underwriter) who participates in the offering of such Common Shares against any
losses, claims, damages or liabilities, joint or several, to which the Company,
such controlling person or participating person may become subject under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or proceedings in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact contained,
on the effective date thereof, in any registration statement under which such
Warrant Shares were registered under the Securities Act, or in any preliminary
prospectus or final prospectus contained therein or any amendment or supplement
thereto, or arise out of or are based upon the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse the Company and each
such controlling person or participating person for any legal or other
C-4
<PAGE>
expenses reasonably incurred by the Company or such controlling person or
participating person in connection with investigating or defending any such
loss, claim, damage, liability or proceeding; provided that Leap will be liable
in any such case to the extent, and only to the extent, that any such loss
claim, damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in such
registration statement, or in said preliminary or final prospectus or said
amendment or supplement, in reliance upon and in conformity with written
information furnished by Leap for use in the preparation thereof and, provided
further, that Leap's obligations hereunder shall be limited to an amount equal
to the proceeds to Leap of the securities sold pursuant to the registration
statement.
9. Available Information. As long as the Company is the issuer of a
----------------------
security registered pursuant to Section 12 or Section 15(d) of the Securities
Exchange Act of 1934, as amended (the "Act"), the Company will comply with the
reporting requirements of Sections 13 and 15(d) of the Act to permit Leap to
dispose of the Warrant Shares pursuant to an exemption from the Securities Act
(including without limitation a disposition under Rule 144).
C-5
THIRD AMENDMENT TO
SECURITY AND LOAN AGREEMENT, DOMESTIC CREDIT
AND ADDENDUM THERETO
This Third Amendment ("Third Amendment") amends that certain Security and Loan
Agreement, Domestic Credit, dated July 28, 1997, ("Loan Agreement") by and
between Imperial Bank ("Bank") and PulsePoint Communications, formerly known as
Digital Sound Corporation, ("Borrower") and the Addendum, "Exhibit A,"
("Addendum") thereto, of even date, and all amendments thereto (the
"Amendments"). The Loan Agreement, Addendum, and Amendments are collectively
referred to herein as the "Agreement", and are modified as follows:
1. Section A of the Addendum is amended by replacing the date "February 26,
1999" with the date "September 30, 1999".
2. Section E(4) of the Addendum is amended in its entirety to read as follows:
"Accounts with respect to which 25% or more of the account debtor's total
accounts or obligations outstanding to Borrower are more than 120 calendar
days from invoice date, except for obligations owed to Borrower by Nextlink
Communications."
3. Section E(12) of the Addendum is amended in its entirety read as follows:
"Those portions of Accounts against which a deferred revenue obligation may
be offset for revenue not yet recognized by Borrower."
4. A new Section E(18) is added to the Addendum to read in its entirety as
follows:
"Account balances owed to Borrower by Nextlink Communications for which
extended repayment terms (i.e. due in greater than 30 days from date of
invoice) have been granted."
5. Section I(1) of the Addendum is amended in its entirety to read as follows:
"Facility Fee. A facility fee will be assessed equal to one-half percent
(0.50%) of the commitment or $25,000 ("Facility Fee"), which shall be due
and payable upon the execution of the Third Amendment ."
6. Except as provided above, the Loan Agreement and Amendments remain
unchanged.
<PAGE>
7. This Third Amendment is effective as of March 31, 1999, and the parties
hereby confirm that the Agreement as amended is in full force and effect
PULSEPOINT COMMUNICATIONS "BORROWER"
By: /s/ B. Robert Suh
---------------------------------
B. Robert Suh
Title: Vice President and Chief Financial Officer
IMPERIAL BANK "BANK"
By: /s/ Clinton E. Anderson
---------------------------------
Clinton E. Anderson
Title: Vice President
2
Third Amendment to
Credit Terms and Conditions
This Third Amendment ("Amendment") amends that certain Credit Terms and
Conditions dated July 28, 1997 ("Agreement") and amended on October 30, 1997,
and September 11, 1998, executed by PulsePoint Communications, formerly known as
Digital Sound Corporation ("Borrower") in favor of Imperial Bank ("Bank") as
follows:
1. Section B.5(a). is amended by replacing the figure "$15,000,000" with the
figure "$10,000,000".
2. Sections B.5(b) and B.5(c) are deleted in their entirety.
3. Section B.5(e) is amended by replacing the word "monthly" with the word
"quarterly".
4. Section B.5(f) is amended in its entirety to read as follows:
"not sustain a loss, as measured in accordance with generally accepted
accounting principles, of more than $2,500,000 for each of the periods ending
March 31, 1999, and June 30, 1999, and of more than $1,000,000 for the period
ending September 30, 1999."
5. Except as provided above, the Agreement remains unchanged.
6. This Amendment is effective as of March 31, 1999, and the parties hereby
confirm that the Agreement as amended is in full force and effect.
PULSEPOINT COMMUNICATIONS ("Borrower")
BY: /s/ B. Robert Suh
---------------------------------
B. Robert Suh
Vice President and Chief Financial Officer
IMPERIAL BANK ("Bank")
BY: /s/ Clinton E. Anderson
---------------------------------
Clinton E. Anderson
Vice President
1
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<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 9235
<SECURITIES> 0
<RECEIVABLES> 5936
<ALLOWANCES> 598
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<PP&E> 14046
<DEPRECIATION> 9629
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<CURRENT-LIABILITIES> 13039
<BONDS> 0
0
24567
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<TOTAL-LIABILITY-AND-EQUITY> 30364
<SALES> 7091
<TOTAL-REVENUES> 7091
<CGS> 2877
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