UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
(X) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998.
OR
( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [FEE REQUIRED]
For the transition period from __________________ to _________________
Commission File Number: 0-18280
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PULSEPOINT COMMUNICATIONS
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(Exact name of Registrant as specified in its charter)
California 95-3222624
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(State or other jurisdiction of (I.R.S. Employer)
incorporation or organization) Identification No.)
6307 Carpinteria Avenue, Carpinteria, California 93013
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(Address of principal executive offices) (Zip Code)
(805) 566-2000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
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Common Stock, no par value
(Title of class)
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 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [ X ]
The aggregate market value of Registrant's voting stock held by non-affiliates
of the Registrant as of February 26, 1999 was approximately $19,751,185.
The number of shares outstanding of Registrant's Common Stock as of February 26,
1999: 5,289,545.
Documents Incorporated by Reference:
Part III of this Annual Report on 10-K is incorporated by reference: Proxy
Statement for the Registrant's 1999 Annual Meeting of Stockholders (the "1999
Proxy Statement").
<PAGE>
PULSEPOINT COMMUNICATIONS
Annual Report on Form 10-K
December 31, 1998
TABLE OF CONTENTS
PART I
Page
Item 1. Business.........................................................1
Item 2. Properties.......................................................6
Item 3. Legal Proceedings................................................6
Item 4. Submission of Matters to a Vote of Security Holders..............6
Executive Officers of the Company ...............................7
PART II
Item 5. Market for Company's Common Equity and Related
Stockholder Matters .............................................8
Item 6. Selected Financial Data..........................................9
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations...........................................10
Quantitative and Qualitative Disclosure About Market Risk.......14
Item 8. Financial Statements and Supplementary Data.....................16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................29
PART III
Item 10. Directors and Executive Officers of the Company.................30
Item 11. Executive Compensation..........................................30
Item 12. Security Ownership of Certain Beneficial Owners and Management..30
Item 13. Certain Relationships and Related Transactions..................30
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K .......................................................30
Signatures....................................................................32
_________________
Trademarks - PulsePoint(TM), PulsePoint Communications(TM), VoiceServer(R), and
InfoMail(R) are registered trademarks of the Company. Other products and company
names mentioned herein may be trademarks of their respective owners.
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PART I
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS CERTAIN
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE
FORWARD-LOOKING STATEMENTS. FACTORS THAT COULD CAUSE OR CONTRIBUTE TO SUCH
DIFFERENCE INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN THE SECTION
ENTITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS -- FACTORS THAT MAY AFFECT FUTURE RESULTS." READERS SHOULD
CAREFULLY REVIEW THE RISK FACTORS DESCRIBED IN OTHER DOCUMENTS THE COMPANY FILES
FROM TIME TO TIME WITH THE SECURITIES AND EXCHANGE COMMISSION, INCLUDING THE
QUARTERLY REPORTS ON FORM 10-Q AND ANY CURRENT REPORTS ON FORM 8-K.
ITEM 1. BUSINESS
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PulsePoint Communications, a California corporation, designs, develops and
markets high-capacity, network-based enhanced services solutions. The Company
has two product lines, the new product line and the legacy product line. The new
product line, the PulsePoint Enhanced Application Platform and Applications, and
the legacy product line, the VoiceServer Family of Multimedia Messaging
Products, are sold to telecommunications network service providers worldwide.
Both the PulsePoint Enhanced Application Platform and Applications and
VoiceServer products are architected to ultimately integrate voice, fax and
e-mail messaging applications on a single platform for implementation with
telephony (both wireline and wireless) and data networks to provide Unified
Messaging. Unified Messaging allows end users to manage their messages using
telephones, cellular phones, fax machines or screen-based devices, such as
desktop or portable personal computers. The VoiceServer platform functions in a
public switch telephony environment. The PulsePoint Enhanced Application
Platform functions in either a public switch telephone network or IP-telephony
environment, making it suitable for next generation network deployments.
The Company sells its products to progressive and competitive public network
service providers worldwide through a variety of channels. These channels
include both direct and indirect sales. Complementing a direct sales
organization, the public enhanced services markets are served by indirect
channels, including equipment manufacturers (OEMs). The public service provider
market includes a broad array of established and emerging carriers that provide
voice and data services to business and residential customers. These providers
offer enhanced services to their customers to increase adoption, reduce churn of
their customer base and provide strategic differentiation of their basic
services. These enhanced services are typically comprised of messaging
applications, which include voice and fax messaging, and occasionally e-mail
messaging, and are provided using enhanced services solutions located at the
service provider's central switching offices.
PLATFORM AND APPLICATION PRODUCTS
The PulsePoint Enhanced Application Platform - PulsePoint's next generation
enhanced services solution is a revolutionary new kind of enhanced services
platform, called an enhanced application platform. The PulsePoint Enhanced
Application Platform is the world's first carrier-grade and standards-based,
open-system Enhanced Application Platform based on the Microsoft(R) Windows
NT(R) Server operating system. It uses off-the-shelf hardware and software and
PulsePoint middleware to ensure scalability and availability and enable rapid
application innovation. The PulsePoint Enhanced Application Platform is
comprised of hardware components, along with the operating system, a middleware
software layer, rapid application creation tools, standard interfaces and
migration tools. PulsePoint's applications together with third party
applications ride on top of the enhanced application platform. Together, the
applications and platform comprise the enhanced services solution.
APPLICATIONS TO BE AVAILABLE ON THE PULSEPOINT ENHANCED APPLICATION PLATFORM
The PulsePoint Messaging Applications will be comprised of four applications:
The PulsePoint Call Answering, Voice Messaging, Home/Office Unified Messaging
and Enterprise Messaging Applications. The Company has completed development of
many of the features identified below and others are currently scheduled for
completion at various times over the next few years.
PulsePoint Call Answering targets home/office workers and consumers. It is
comprised of a core set of features, which provides a single inbox for both
wireline and wireless messages. For multiple member households, it offers
roommate features, allowing each member of a household to have a unique greeting
and private access to their messages. Major features supported by this
application at this time include: Call Answering, Any Phone Access, Multi-line
Mailbox, Wake-up and Reminder Calls, Extra Mailboxes, Paging/SMS Notification,
Unlimited Languages, Multiple Greetings.
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PulsePoint Voice Messaging targets home/office workers, consumers and small
business users. It is comprised of a core set of features, including all of the
features in Call Answering, plus features required to enable two-way messaging,
including reply from a message session. The primary benefits to an end user are
two-way messaging and broader reach and control of communications. Major
features ultimately to be supported by this application include: Call Answering
Application Features Plus, Send-Forward-Reply From a Subscriber Session, Mark
Message as Urgent and/or Private, Address Book to Manage Groups of Subscribers,
Main-Alternate-3 System Greetings, Mailbox Transfer Options, Enhanced
Tutorial--No User Training.
PulsePoint Home/Office Unified Messaging targets home office, consumer and small
business segments. In this implementation, voice, fax and e-mail messages will
be accessed using IMAP compatible clients. Voice and fax messages are accessed
by a telephone user interface. Message notification is provided for all
messages. Features will ultimately include: Voice Messaging Features plus a
single inbox for Voice-Fax-Email Messages, IMAP4 Client Access to Microsoft
OutLook & Outlook Express, Netscape(TM) Communicator, QUALCOMM(TM) Eudora and
IBM(TM)/Lotus Notes, Paging and SMS Notification for all Messages, Telephone
User Interface for Fax and Voice Messages.
This application also supports a web-based implementation, which targets heavy
wireless users. In this implementation, all messages will be accessed by either
a telephone user interface or by customizable web pages. Messages are accessible
by either thick PC browsers such as Netscape Navigator and Microsoft Internet
Explorer, or thin browsers, using protocols, such as extensible markup language
(XML) and the wireless markup language (WML), among others. Major features
ultimately supported by this application include: Voice Messaging plus a single
inbox for Voice-Fax-Email Messages, accessible by Telephone User Interface or
Browsers such as Netscape Navigator, Microsoft Internet Explorer, XML and WML,
with Paging and SMS Notification for all Messages.
PulsePoint Enterprise Unified Messaging targets medium business and enterprise
segments. In this implementation, voice, fax and e-mail messages will be
accessed using IMAP compatible clients or a telephone user interface. Full
collaboration and message notification will be provided for all messages.
Ultimately this carrier-grade solution will integrate with Microsoft Windows
2000, incorporating all of the features typically reserved for the enterprise,
into the public network. Major features ultimately supported by this application
include: Voice Messaging Features plus a single inbox for Voice-Fax-Email
Messages, accessible by Telephone User Interface or IMAP4-Compatible Clients
(Server-Integrated), for access to Microsoft Exchange, IBM/Lotus Notes Server,
Netscape Messaging Server, with Paging and SMS Notification for all Messages,
with a Remote Application Module Hosting Microsoft Exchange.
Initial implementation will ultimately incorporate Microsoft Exchange 5.5,
leveraging the broad medium-sized business and enterprise acceptance, and rich
services beyond the core message application, including contact database, shared
calendar and public folder collaboration, among others. The second
implementation of this solution will ultimately feature Microsoft Windows 2000
with Exchange Platinum Server, providing access to Microsoft's Active Directory
services, enabling additional features such as: Global Address List and
Company-wide Address List, Full Collaboration and Notification Support.
The PulsePoint Call Controller Application answers calls then directs callers
through a range of choices that include transferring to attendants and
extensions, or other services, and listening to Audiotext information. The call
logic, prompts and phrases are completely customizable in an unlimited number of
languages to meet the needs of individual businesses. Users can provision and
update phrases simply by using a touch tone telephone. This application targets
small business segments, which uses Centrex and voice mail services, is short on
administrative staff, and does not have an IT department to manage a CPE
solution. It also targets medium business segments, which will value the control
to route calls across multiple departments and multiple locations.
The VoiceServer Platform is based on UNIX System V operating system with a
number of PulsePoint Communications proprietary technologies.
VoiceServer 2110 - Designed to meet the voice and fax messaging needs of
small- to medium-sized telephone public service providers and resellers. It
supports up to 25,000 mailboxes and provides from 8 to 120 voice ports.
VoiceServer 3110 - Designed to meet the messaging needs of large-sized
public service providers and resellers. It supports up to 50,000 mailboxes
and provides up to 240 voice ports.
Applications Available on the VoiceServer Platform
InfoMail 4.3 -- InfoMail is a full-featured voice/fax messaging product for the
public enhanced service provider markets. It includes voice mail features and
offers flexible administration. InfoMail offers integrated fax messaging,
on-line tutorial, guest mailboxes, scheduled future delivery of messages up to
one year in advance, non-delivery notification, name delivery, a personal
reminder interface for users, user programming of calls to other extensions and
group distribution lists. Major features supported by this application include:
FaxMail with Voice Comment Attachments, Fax Overflow, Hands-Free Operation with
Spoken Password.
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InfoMail Express -- InfoMail Express integrates Internet e-mail with the
InfoMail multimedia platform to provide full unified messaging for the public
service provider market, and extends the unified messaging services of InfoMail
to personal computers. With InfoMail Express, users of personal computers
running Microsoft's Windows 95, Windows 98 and Internet Explorer can visually
access mailboxes on InfoMail Express to review voice, fax and e-mail messages.
Call Controller -- Call Controller provides call-processing capabilities, which
allow callers to route their calls to a specific destination by listening to
voice menus and entering responses on a telephone keypad. When integrated with
InfoMail, the caller can leave a voice message when encountering a busy line or
no answer when dialing an extension. As a flexible call processing and audiotex
application, Call Controller enables companies to program various greetings.
SWITCH INTEGRATIONS
The PulsePoint Enhanced Application Platform and VoiceServer Platform integrate
most major central office switches, including those manufactured by Lucent
Technologies Inc., Ericsson, Inc., Alcatel Alsthom S.A., Siemens AG and Northern
Telecom Ltd.
1998 PRODUCT DEVELOPMENT
During 1998, the Company continued development of the PulsePoint Enhanced
Application Platform, PulsePoint Messaging and Call Controller Applications.
Primary focus on the platform development was to create a platform that would
meet service provider requirements for reliability, availability,
serviceability, as well as scalability to enable central office deployments of
the platform. In addition, considerable investment was made to refine an
environment for rapid application innovation, so service providers ultimately
will be able to innovate in "Internet time". Finally, investments were made to
ensure the platform could bridge old and new networks and provide applications
for multiple networks from a single platform, giving service providers
investment protection and reducing their total cost of ownership. Principal
focus on application development was to replicate the feature sets currently
available on the VoiceServer platform, so legacy customers would be able to
migrate customers from VoiceServer platforms to Enhanced Application Platforms,
without a reduction in service. These efforts position PulsePoint Communications
with a platform for service providers that is able to perform reliably in a
mission-critical environment, with the basic features currently offered today,
on a platform architecture that positions them for next generation networks and
an application path for the future.
Also, to further strengthen its product line, the Company continued to
incorporate new hardware and software technologies into the VoiceServer product
line.
The Company continued to invest in upgrading the skills of the engineering
organization. The Company's engineering and development group included 66
employees at December 31, 1998. During the years ended December 31, 1996, 1997
and 1998 the Company spent approximately $8.9 million, $12.2 million and $11.3
million, respectively, on engineering and development. To date, all of the
Company's engineering and development expenses, including software development
costs, have been charged to operations as incurred.
1999 PRODUCT DEVELOPMENT OUTLOOK
In 1999, the Company intends to focus development activities on adding to its
messaging applications by building out the PulsePoint Voice Messaging,
Home/Office Unified Messaging and Call Controller Applications. The Home/Office
Unified Messaging Application will be a fundamental piece of development needed
to bring Unified Messaging onto the Enhanced Application Platform. It is also a
crucial foundation piece for the next release of Unified Messaging that enables
network service providers to target large and medium-sized business users, with
enterprise e-mail solutions. In addition, the Company intends to focus its
resources on moving the media modules of the PulsePoint Enhanced Application
Platform onto Microsoft Windows NT Server operating system and moving to compact
PCI technologies, which the Company believes will ultimately provide significant
cost reductions to the platform, enabling the Company to offer a lower capacity
configuration, as well as improve serviceability. There can be no assurance,
however, that the Company will realize such development goals or cost
reductions.
QUALITY ASSURANCE AND MANUFACTURING
PulsePoint Communications earned re-certification to one of the most rigorous
international quality standards, ISO 9001, initially achieving registration in
1995 and re-registration in each year since, including 1998. The ISO 9000 series
of standards represents an international consensus on the essential features of
a quality system to ensure the effective operation of any business, and more
than 90 countries have adopted the ISO 9001 series as national standards. There
have also been two large regional adoptions, CEN (European Committee for
Standardization) and COPANT (the Pan-American Standards Commission). The Company
believes its certification to be the most stringent level of the series (9001)
and it provides significant competitive advantage. Further, the quality
management system implemented in support of the certification effort ensures
that procedures are implemented and responsibilities defined to provide all
employees with the ability to pursue continuous quality improvement in meeting
customer requirements.
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The Company's manufacturing operations consist principally of final assembly and
testing of subassemblies and systems for VoiceServer products. The Company uses
independent manufacturers to perform printed circuit board assembly, building of
cabinets and subassemblies and sheet metal fabrication. These suppliers all
satisfy the strictest quality standards such as ISO or MIL-SPEC. Although the
Company generally uses standard parts and components in manufacturing these
products, certain components, primarily power supplies, disk drives, interface
cards and certain semiconductors, are presently available only from a single
source or from limited sources. To date, the Company has been able to obtain
adequate supplies of these components in a timely manner from existing sources.
However, delay or lack of supply from existing sources or the inability to
develop alternative sources, if and as required in the future, could adversely
affect the Company's operating results.
The Company uses Solectron Corp. to manufacture the PulsePoint Enhanced
Application Platform on a turnkey basis, buying components to the Company's
specifications. Solectron Corp., the world's largest third-party manufacturer,
is ISO 9000 certified and the only two-time winner of the Malcolm Baldridge
Award.
At December 31, 1998, the Company's quality assurance and manufacturing group
included 11 employees.
CUSTOMER SUPPORT, SALES AND MARKETING
The Company sells its products into the public network service market. This
market consists of local exchange carriers, including the Regional Bell
Operating Companies ("RBOCs"), Post Telephone and Telegraphs ("PTT's", providers
of telephone and telecommunications services in most foreign countries),
independent telephone companies, service bureaus, inter-exchange carriers,
cellular service providers and internet service providers. During 1998, the
Company maintained distribution agreements with Siemens AG of Germany, Marconi
Communications Limited of Coventry, England, Consultronix Systems Corporation of
the Philippines, PT Galva of Indonesia, Intecom and Volt Delta of the United
States.
Customer service and support are of great importance to the Company. The Company
believes customer satisfaction is achieved through continued high levels of
quality service and support. The Company's customer support group includes field
engineers, applications specialists, implementation specialists and third party
maintenance providers and is supported by a training staff and the Company's
entire technical staff when necessary. The Company maintains a 24-hour service
and support center at its Carpinteria facility. The Company has an extensive
field service organization and outsources service and support from IBM's Global
Services organization to provide on-site emergency assistance should the need
arise from IBM's 160 support offices, worldwide. Most customers' problems are
resolved over the telephone by remote diagnostic and corrective actions.
The Company maintains a training center at its Carpinteria facility to support
the needs of its customers for instructional, administrative and technical
training. Additionally, the Company maintains a staff of highly qualified
trainers available to support customers' requests for on-site training at all
levels. Prior to equipment delivery, training and implementation, personnel are
made available to the customer to ensure a smooth installation, with follow-up
visits performed to reinforce previous training and answer new questions. The
training organization also offers technical software, system maintenance,
customer support and administrative courses. The Company's customer support,
sales and marketing group included 57 employees at December 31, 1998.
During the year ended December 31, 1996, GTE Corp., PT Galva, Indonesia and GPT
Limited (now Marconi Communications Limited), England accounted for 40%, 13% and
11%, respectively, of the net sales for the Company. During the year ended
December 31, 1997, GTE accounted for 58% of the net sales for the Company.
During the year ended December 31, 1998, GTE and NEXTLINK Communications, Inc.
accounted for 55% and 16% of the net sales for the Company, respectively.
Sales depend on the Company's continued ability to meet agreed milestones,
specifications, requirements and conditions of sales contracts in a timely
manner. The Company's goal is to meet these requirements as agreed with each
customer, however, forward planning involves risk; there can be no assurance
that it will do so or realize the corresponding revenue.
The Company provides a system product warranty for parts and labor for 12 months
from date of shipment. The Company offers several options for maintenance and
support services of its products on a contractual basis after the limited
product warranty has expired. After June 30, 1999, it is the Company's intent
that coverage for maintenance and support services shall be limited to systems
that have been upgraded by the customer to a Year 2000 compliant version.
Customers may request maintenance and support services for
non-Year-2000-compliant systems for the period June 30, 1999 to December 31,
1999, and the Company shall, at its discretion, provide such maintenance and
support on a time and materials basis. Additionally, the Company offers a
performance guarantee for the VoiceServer, which guarantees the system
performance (measured by the average delay time for response to key presses)
will not deteriorate under maximum load conditions. Otherwise, the Company will
re-configure the system or replace it at no cost to the customer.
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BACKLOG
The Company's backlog at December 31, 1998 was $2.4 million compared to $1.5
million at December 31, 1997. The Company includes in backlog orders for
products or services to be shipped or performed within 180 days. Quarterly
revenues and operating results will depend on the volume and timing of new
orders received during a quarter, which are difficult to forecast. Because of
the possibility of customer changes in delivery schedules or cancellation of
orders, the Company's backlog as of any particular date may not result in actual
sales for any future period.
COMPETITION
The messaging industry is highly competitive and the Company believes that
competition will intensify as the industry grows, matures and consolidates. The
Company competes with different companies in the different customer markets it
serves and the principal competitive factors vary depending on the customer
market.
PulsePoint Communications focuses primarily on selling its products to the
domestic and international network service provider segments. Principal
competitive factors are reliability, scalability and the ability to offer a rich
suite of integrated multimedia applications on one platform. For public switch
telephone network service provider segments, the Company's principal competitors
include Lucent Technologies Inc., Comverse Technology Inc., Unisys Corp., and
Centigram Communications Corp. In IP-telephony network service provider
segments, the Company's principal competitors include Amteva Technologies, Inc.
and MediaGate, Inc.
The Company continues to develop enhancements to its products and to develop new
products in order to address what the Company believes are the emerging
requirements of public network service providers. However, there can be no
assurance that product requirements will not change as this market develops or
that other companies will not be faster or more successful in bringing
comparable products to market.
The Company believes that its competitive strengths include carrier-class
reliability and scalability, a modular and integrated suite of messaging and
communication-management applications, a rapid application creation environment,
state-of-the-art digital networking, software-embedded signaling technology,
easy-to-use interfaces, and the ability to integrate with the switches of
multiple manufacturers.
In the network service provider markets, these competitors and other new
entrants may introduce and deliver new products with expanded capabilities that
could adversely affect the competitive position of the Company. The Company
believes competition for the sale of voice processing systems in its markets
will continue to evolve as customers' applications and technology become more
sophisticated. Some of the Company's competitors have substantially greater
development, marketing and capital resources than the Company.
PATENTS, COPYRIGHTS AND TECHNOLOGY LICENSES
The Company policy on intellectual property is to develop, utilize and protect
its patents, trademarks, copyrights and trade secrets in order to maximize the
value of the Company's technological expertise and innovation.
The Company holds five United States patents and has seven patent applications
pending. The Company also has one foreign patent and ten foreign patent
applications pending. The Company has registered a number of trademarks in the
United States and has a number of trademark applications pending both in the
United States and in foreign countries. The Company's software is protected by
copyright and trade secrecy laws. However, such protection does not ensure that
the Company's competitors will not develop similar technology. The Company
periodically acquires technology from third parties to supplement its
development efforts. These acquisitions may require prepaid license fees and/or
the payment of royalties. The Company holds a perpetual license from AT&T for
the UNIX operating system.
EMPLOYEES
At December 31, 1998, the Company had 155 employees, including 57 in sales,
marketing and customer support, 66 in engineering and development, 11 in quality
assurance and manufacturing and 21 in corporate administration and finance. Many
of the Company's employees are highly skilled, and the Company's success will
depend in part on its ability to attract and retain such employees.
The Company has never had a work stoppage. No employees are represented by a
labor organization and the Company considers its employee relations to be good.
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ITEM 2. PROPERTIES
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The Company's corporate offices, engineering and development facilities and
manufacturing facilities are located in Carpinteria, California, in a total of
approximately 53,000 square feet. In December of 1996, the Company entered into
a ten year lease and consolidated into half of the facility that it currently
occupies. The move resulted in a savings of approximately 45% of the previous
annual lease payments. The facility is leased for a period of ten years
beginning in December 1996, with two five-year renewal options. Annual rental on
the facility was approximately $0.7 million in 1998, with the rent subject to
annual increases.
The Company currently maintains support and sales offices and/or has sales or
technical support representatives in the following locations: Phoenix, Arizona;
Irvine, California; Carpinteria, California; Tampa, Florida; Atlanta, Georgia;
Chicago, Illinois; Lowell, Massachusetts; Oakdale, Minnesota; Dallas, Texas;
Cedarpark, Texas; and Bobingen, Germany.
The Company believes that its current facilities are well maintained and
sufficient to satisfy its operations for the next several years.
ITEM 3. 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. The action should
remain stayed with respect to the Company at least until this appeal is
concluded.
Additionally, the Company is subject to pending claims primarily related to
contractual and product issues. Management, after review and consultation with
the Company's counsel, believes that the liability, if any, from the disposition
of such claims and litigation would not have a materially adverse effect on the
financial condition or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
None.
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Item S-K 401(b). EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to the Instructions to Paragraph (b) of Item 401 of Regulation S-K, the
current executive officers of the Company, their ages and respective positions
with the Company are set forth in the following table. Biographical information
on each of the executive officers is set forth following the table. There are no
family relationships between any director or executive officer and any other
director or executive officer of the Company. Executive officers serve at the
discretion of the Board of Directors.
Served as Officer
Name Age Position Since
================================================================================
Mark C. Ozur 43 President 1993
Chief Executive Officer
Keith M. Beckwith 44 Vice President, Sales 1994
James C. Eby 52 Vice President, Chief Quality and 1983
Operations Officer, Assistant
Secretary
Benn L. Schreiber 46 Vice President, Engineering 1997
B. Robert Suh 39 Vice President, Finance, 1995
Chief Financial Officer and
Corporate Secretary
Pamela J. Thompson 41 Vice President, Marketing 1997
MR. OZUR has been President and Chief Executive Officer of the Company since
December 1994. From April 1993 to November 1994 he served as Vice President
Chief Technical Officer. From 1990 to 1992 he was Vice President of Precision
Visuals, a software development company, and from 1978 to 1982 and 1986 to 1990
he was at Digital Equipment Corporation, a computer hardware and software
company, developing software. During 1982, he founded Omtool Corporation, a
compiler and software publishing company.
MR. BECKWITH has been Vice President, Sales since September 1994. From January
1991 to August 1994 he was Director, Voice Information Services. From August
1988 to December 1990 he was National Sales Manager. From August 1986 to July
1988 he was Regional Sales Manager.
MR. EBY has been Vice President, Chief Quality and Operations Officer since
September 1994. From January 1992 to August 1994 he was Vice President - Quality
Assurance and Manufacturing of the Company. From October 1983 to December 1991
he was Vice President, Manufacturing.
MR. SCHREIBER has been Vice President, Engineering since August 1997.
Previously, he worked at Digital Equipment Corporation (DEC) where he was the
director of Windows NT Systems Software. Previously, Mr. Schreiber held several
other engineering management positions at DEC.
MR. SUH has been Vice President and Chief Financial Officer since November 1995.
From September 1992 to October 1995 he was Chief Financial Officer for the Bank
of Boston's European Division. From February 1988 to August 1992 he was Director
of Finance for the Bank of Boston's retail franchise throughout New England.
From July 1985 to January 1988 he was a Manager in corporate development at MCI
Communications Corporation.
MS. THOMPSON has been Vice President, Marketing since October 1997. Ms. Thompson
came to PulsePoint Communications after eight years at Motorola, Inc. where she
was most recently the Director of Strategic Businesses, responsible for
developing and implementing wireless content solutions for paging carriers
around the globe. Prior to this, she was Managing Director for Motorola Air
Communications, Ltd. Previously, she held other senior management positions at
Motorola, including Vice President and Director of Asia Pacific Wireless Data
Network Operations and Manager of Corporate Strategy.
Page 7
<PAGE>
PART II
ITEM 5. MARKET FOR the COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
--------------------------------------------------------------
Through February 2, 1998, the Company's Common Stock traded on the Nasdaq Stock
Market under the symbol DGSD. From February 2, 1998 through May 13, 1998, the
Company's stock traded on the Nasdaq Stock Market under the symbol PLPTD.
Beginning May 14, 1998, the Company's stock began trading on the Nasdaq Stock
Market under the symbol PLPT. The following tables set forth the high and low
closing prices in each quarter during 1997 and 1998 as reported by the NASDAQ
National Market System. 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. The stock prices below have been adjusted to reflect the
reverse stock split for all periods reported.
1997
High Low
---------------------------------------
1st Quarter $ 6.88 $ 5.12
2nd Quarter 5.88 2.76
3rd Quarter 7.36 3.52
4th Quarter 6.52 3.76
=======================================
1998
High Low
---------------------------------------
1st Quarter $ 9.75 $ 6.50
2nd Quarter 10.13 5.63
3rd Quarter 7.69 2.00
4th Quarter 4.63 2.22
=======================================
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. At February 26, 1999, there were approximately
750 holders of record of the Company's Common Stock.
Page 8
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
<TABLE>
Consolidated Selected Financial Data
PulsePoint Communications
(In thousands, except per share data)
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
==============================================================================================================================
STATEMENT OF OPERATIONS DATA:
<S> <C> <C> <C> <C> <C>
Net sales $ 31,687 $ 23,201 $ 22,332 $ 20,644 $ 25,449
Cost of sales 13,295 10,858 8,312 10,523 12,268
- ------------------------------------------------------------------------------------------------------------------------------
Gross margin 18,392 12,343 14,020 10,121 13,181
- ------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative 10,165 11,781 12,846 17,122 14,386
Engineering and development 6,328 7,209 8,903 12,181 11,291
- ------------------------------------------------------------------------------------------------------------------------------
Total operating expense 16,493 18,990 21,749 29,303 25,677
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) from operations 1,899 (6,647) (7,729) (19,182) (12,496)
Interest and other income, net 669 1,473 950 273 645
- ------------------------------------------------------------------------------------------------------------------------------
Income (loss) before provision or income taxes 2,568 (5,174) (6,779) (18,909) (11,851)
Provision for income taxes (80) (14) (22) (15) (18)
- ------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 2,488 (5,188) (6,801) (18,924) (11,869)
- ------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per common share $ .52 $ (1.04) $ (1.36) $ (3.72) $ (2.29)
Earnings (loss) per common share -
assuming dilution $ .48 $ (1.04) $ (1.36) $ (3.72) $ (2.29)
Weighted average common and common
equivalent shares outstanding 5,295 4,970 5,021 5,090 5,188
==============================================================================================================================
<CAPTION>
Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
==============================================================================================================================
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital $ 31,695 $ 25,085 $ 20,345 $ 12,131 $ 11,989
Total assets 43,960 38,914 33,333 37,441 30,527
Long-term obligations, excluding current portion 127 - - - 1,498
Shareholders' equity 37,327 32,557 26,027 20,443 15,802
==============================================================================================================================
Page 9
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-----------------------------------------------------------
1998 COMPARED TO 1997. Net sales increased 23% to $25.4 million in 1998 from
$20.6 million in 1997. Consistent with the Company's focus on the Voice
Information Services (VIS) market, sales to network service providers totaled
$21.2 million and accounted for approximately 83% of total sales in 1998,
compared with sales of $15.5 million or 75% of total sales from the previous 12
months. Sales to the Customer Premise Equipment (CPE) market represented the
remaining 17% of total sales in 1998 compared with 25% in 1997.
Gross margin as a percentage of net sales increased to 52% in 1998 from 49% in
1997, primarily the result of the higher production volumes which allow for the
wider spreading of fixed costs and an increase in the number of larger systems
sold. During 1998, the Company established a reserve to allow for certain of the
Company's products sold to be potentially traded-in for new products, when
generally available. The allowance to establish this reserve was recognized in
Cost of Goods Sold and was $1.4 million at December 31, 1998. During 1997, the
Company took a one-time charge to cost of sales of approximately $1.5 million in
connection with a review of the Company's operations, cost structure and balance
sheet. Excluding these two events, the adjusted gross margin in 1998 would have
been 57% compared with an adjusted gross margin in 1997 of 55%. Margins on the
sale of new systems increased from 46% in 1997 to 49% in 1998. In addition, the
margin on the sale of system upgrades and enhancements and service increased
from 50% in 1997 to 59% in 1998.
Throughout 1998, the Company has effectively managed and controlled operating
expenses by instituting various cost efficiency measures. As a result, selling,
general and administrative expenses decreased from $17.1 million in 1997 to
$14.4 million in 1998. Combining the impact of the cost efficiency measures with
the higher volume in net sales resulted in selling, general and administrative
expenses as a percentage of sales of 57% in 1998 as compared to 83% in 1997.
Similar cost management and control measures have been applied to engineering
and development expenses, which decreased from $12.2 million in 1997 to $11.3
million in 1998. For 1997 and 1998, engineering and development expenses reflect
the Company's strategy of continued investment in new product development and
product enhancements. As a result of the decrease in spending for engineering
development and increased sales levels, engineering and development expenses
were lower as a percentage of sales in 1998 (44%) as compared to 1997 (59%).
Interest and other income increased from $0.3 million in 1997 to $0.6 million in
1998, principally as the result of a higher average cash balance.
The provision for income taxes in 1998 was $18,000. Totaling the above, the
Company incurred a net loss of $11.9 million as of December 31, 1998 compared to
a net loss of $18.9 million in 1997.
The extent and timing of new orders for the Company's existing products from VIS
providers have substantial effects on the Company's net sales. Such orders are
usually significant in size and can materially affect sales in any quarter. The
Company's operations are not subject to a particular seasonality; however,
historically first quarter sales have been less than fourth quarter sales. It is
difficult to predict receipt of new orders reliably and quarterly revenues and
operating results will depend on volume and timing of new orders received during
a quarter.
1997 COMPARED TO 1996. Net sales decreased 8% from $22.3 million in 1996 to
$20.6 million in 1997, a decrease of $1.7 million. Compared to the prior year,
sales in the Voice Information Services (VIS) market decreased $1.7 million
while sales in the Customer Premises Equipment (CPE) showed no change.
Gross margin as a percentage of net sales decreased from 63% in 1996 to 49% in
1997, primarily as a result of the decrease in international sales and as a
result of a one-time charge to cost of sales of approximately $1.5 million in
connection with a review of the Company's operations, cost structure and balance
sheet. Excluding the one-time charge, the gross margin was 55% in 1997. Margins
on the sale of new systems decreased from 50% in 1996 to 46% in 1997. In
addition, the margin on the sale of system upgrades and enhancements and service
decreased from 71% in 1996 to 50% in 1997. This decrease in margins for system
upgrades, enhancements and service was reflective of a smaller percentage of
software upgrades, principally upgrades to the Company's latest version of voice
messaging software, InfoMail 4.0, performed in 1997.
Selling, general and administrative expenses increased from $12.8 million in
1996 to $17.1 million in 1997 as the Company invested in upgrading its personnel
and capabilities, primarily in Sales and Marketing. As a result of the increased
investment and decreased sales levels, selling, general and administrative
expenses were higher as a percentage of sales in 1997 (83%) as compared to 1996
(53%).
Engineering and development expenses increased from $8.9 million in 1996 to
$12.2 million in 1997. For 1997, engineering and development expenses reflected
the Company's strategy of continued investment in new product development and
product enhancements. As a result of the increase in spending for engineering
development in 1997 and decreased sales levels, engineering and development
expenses were higher as a percentage of sales in 1997 (59%) as compared to 1996
(40%).
Page 10
<PAGE>
Interest and other income decreased from $1.0 million in 1996 to $0.3 million in
1997, principally as the result of a lower average cash balance.
The provision for income taxes in 1997 was $15,000. Given the above, the Company
incurred a net loss of $18.9 million as of December 31, 1997 compared to a net
loss of $6.8 million in 1996.
FACTORS THAT MAY AFFECT FUTURE RESULTS
The Annual Report to Shareholders and this Annual Report on Form 10-K contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21S of the Securities Exchange Act of 1934,
as amended. Actual results could differ materially from those projected in such
forward-looking statements as a result of the factors set forth below and
elsewhere in this document.
PulsePoint Communications operates in a rapidly changing environment that
involves a number of risks, some of which are beyond the Company's control. The
following discussion highlights some of these risks.
The Company has developed and introduced its new product line, the PulsePoint
Enhanced Application Platform and Communication-Management Suite of
Applications. The new platform and applications are designed to increase the
Company's market share and boost its position in the industry. See "Part I Item
1. Business." The successful introduction of these and other new products is
dependent upon a number of factors, some of which are beyond the Company's
control, including product acceptance in the marketplace, introduction of
competitive products by existing or new competitors, changes in technology,
price competition and other factors. Any failure of such products to achieve
acceptance in the marketplace could significantly reduce future expected
revenues or result in the need for additional expenses to bring the product to
market. Furthermore, there can be no assurance that the Company will be
successful in introducing new products or that such products will generate
significant revenues or profits. The Company's inability to successfully
generate revenues from the introduction of these new products would have a
material adverse effect on the Company's financial condition and ability to
implement its business strategy.
The Company has not been operating profitably. The Company's strategy has been
to develop new technology and to expand its marketing capabilities, with the
goal of creating successful new products and marketing them effectively, thereby
returning the Company to profitability. The Company's on-going investments in
technology and marketing require funds, and although the Company presently has a
positive cash balance as a result of the consummation of a private placement in
December 1997, the Company's financial resources are limited, and the Company's
funds will be exhausted if the Company's strategy does not succeed in returning
the Company to profitability or otherwise enable it to raise additional working
capital.
The voice processing and messaging industry is highly competitive, with rapid
technological advances and constantly improving price/performance. As the
markets in which the Company operates continue to grow, the Company is
experiencing an increase in competition, and it expects this trend to continue.
The Company is not one of the largest providers of voice processing and
messaging equipment in the industry. Some of the Company's competitors have
substantially greater technical, marketing and financial resources and, in some
markets, a larger installed base of customers and a wider range of available
applications software. Certain of the Company's potential customers may be
reluctant to purchase mission critical technology from a smaller supplier, such
as the Company.
The voice processing and messaging industry has experienced a continuing
evolution of product offerings and alternatives for delivery of services. These
trends have affected and may be expected to have a significant continuing
influence on conditions in the industry, although the impact on the industry
generally and on the Company's position in the industry cannot be predicted with
assurance. The Company and the industry are, in general, dependent upon the U.S.
domestic telephone companies for a large percentage of revenue. The suppliers to
the telephone company market, which is primarily composed of seven (7) regional
Bell operating companies and GTE, have largely been decided for first generation
voice processing requirements.
The market for voice processing and messaging systems is in a period of
transition. Budgetary constraints, uncertainties resulting from the introduction
of new technologies in the telecommunications environment and changes in the
government regulations have increased uncertainties in the market. Significant
changes in the domestic U.S. industry as a result of the 1996 Telecommunications
Act make planning decisions more difficult and increase the risk inherent in the
planning process.
The Company's operating results may fluctuate for a number of reasons. The
Company has short delivery cycles and as a result does not have a large order
backlog, which makes the forecasting of revenue inherently uncertain. This
uncertainty is compounded because each quarter's revenue results predominantly
from orders booked and shipped during the third month of the quarter. Because
the Company plans its operating expenses, many of which are relatively fixed in
the short term, on the basis of its anticipated revenues, even a relatively
small revenue shortfall may cause a period's results to be substantially below
expectations. Such a revenue shortfall could arise from any number of factors,
including lower than expected demand, supply constraints, delays in the
availability of new products, overall economic conditions or natural disasters.
Page 11
<PAGE>
The development of new technologies and products is increasingly complex and
uncertain, which increases the risk of delays. The introduction of new systems
requires close collaboration and continued technological advancement involving
multiple hardware and software design, manufacturing, marketing and sales teams
within the Company as well as teams at outside suppliers of key components. The
failure of any one of these elements could cause the Company's new products to
fail to meet specifications or to miss the aggressive timetables that the
Company establishes. As the variety and complexity of the Company's product
families increase, the process of planning production and inventory levels also
becomes more difficult. The Company expects to continue investing heavily in
supporting the development effort required to bring new technologies and
products to the market. To support this, substantial financial resources will be
expended.
The Company believes that its production capacity should be sufficient to
support anticipated unit volumes for the foreseeable future. The Company is
primarily engaged in the final assembly and testing of the hardware equipment of
its VoiceServer product line. The Company plans to outsource the assembly and
testing of the EAP product line to a third party service provider. The Company
currently buys the majority of its subassembly inventory from a limited number
of suppliers. The failure of these suppliers to provide such subassemblies on a
timely basis and within specifications could have a materially adverse effect on
the Company's business. If the Company is unable to obtain certain key
components, or to effectively forecast customer demand or manage its inventory,
increased inventory obsolescence or reduced utilization of production capacity
could adversely impact the Company's gross margins and results of operations.
The Company has historically derived a significant portion of its revenue and
operating profit from a relatively small number of customers. In 1998, the
Company derived 55% of its revenue from a single customer (GTE). Should sales to
this customer be significantly reduced, the Company's operating results could be
materially adversely affected. International proposals for large system
installations typically involve a lengthy and complex bidding and selection
process and the ability of the Company to obtain a particular proposal award is
inherently difficult to predict. The Company believes that the opportunities for
these installations will continue to grow and intends to continue to expand its
research and development, manufacturing, sales and marketing and product support
capabilities in anticipation of such growth. However, the timing and scope of
these opportunities and the pricing and margins associated with any eventual
proposal award are difficult to forecast, and may vary substantially from
transaction to transaction. The Company's future operating results may,
accordingly, exhibit a higher degree of volatility than the operating results of
other companies in its industry that have adopted different strategies. Although
the Company is actively pursuing a number of opportunities both in and out of
the United States, both the timing of any eventual opportunities and the
probability of the Company's receipts of significant purchase orders are
uncertain. The degree of dependence by the Company on large orders, and the
investment required to enable the Company to perform such orders, without
assurance of continuing order flow from the same customers and predictability of
gross margins on any future orders, increase the risk associated with its
business.
The Company's stock price, like that of other technology companies, is subject
to significant volatility. If revenues or earnings in any quarter fail to meet
the investment community's expectations, there could be an immediate impact on
the Company's stock price. The stock price may also be affected by broader
market trends unrelated to the Company's performance.
The Company routinely receives communications from third parties asserting
patent or other rights covering the Company's products and technologies. Based
upon the Company's evaluation, it may take no action or it may seek to obtain a
license. In any given case there is a risk that a license will not be available
with terms that the Company considers reasonable, or that litigation will ensue.
The Company expects that, as the number of hardware and software patents issued
continues to increase, and as the Company's business grows, the volume of these
third party communications will also increase.
The Company's corporate headquarters facility, at which the majority of its
research and development activities are conducted, is located near major
earthquake faults which have experienced earthquakes in the past. While the
Company does carry insurance at levels management believes to be prudent, in the
event of a major earthquake or other disaster affecting one or more of the
Company's facilities, it is likely that insurance proceeds would not cover all
of the costs incurred and, therefore, the operations and operating results of
the Company could be adversely affected.
Due to the factors noted above and elsewhere in management's discussion and
analysis of financial condition and results of operations, the Company's future
earnings and Common Stock price may be subject to significant volatility,
particularly on a quarterly basis. Past financial performance should not be
considered a reliable indicator of future performance and investors should not
use historical trends to anticipate results or trends in future periods. Any
shortfall in revenue or earnings from the levels anticipated by securities
analysts could have an immediate and significant adverse effect on the trading
price of the Company's Common Stock in any given period. Additionally, the
Company may not learn of such shortfalls until late in a fiscal quarter, which
could result in an even more immediate and adverse effect on the trading price
of the Company's Common Stock. Furthermore, the Company participates in a highly
dynamic industry which often results in volatility of the Company's Common Stock
price.
Page 12
<PAGE>
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, and any new products the Company releases are being designed to be
Year 2000 compliant. Insofar as the Company is incorporating third party
products into its new product line, the Company is both relying upon information
from such third parties concerning the Year 2000 readiness of such products and
attempting to ascertain the accuracy of such information with respect to the way
in which the Company has incorporated such product into the Company's product.
As such the Company is not in a position to confirm independently the complete
accuracy of the information reported by these third parties. If any aspect of
the third party product remains non-Year 2000 compliant or if any of the
statements concerning Year 2000 compliance of such products is inaccurate, the
non-compliance of such products could have material adverse effects upon the
operations of the Company.
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 70% 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 Company expects to complete testing of the remaining 30%
and to have repaired or replaced any systems that the Company has determined to
be mission critical that are found to be non-Year 2000 compliant by June 30,
1999.
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.
Non-Year 2000 compliance, by any of these third parties, 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
compliancy with the Year 2000 Problem, this amount could be substantially
increased. With the exception of non-mission critical business systems, 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. The anticipated completion date for this is June 30, 1999.
Page 13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
For the year ended December 31, 1998, net working capital decreased by $0.1
million to $12.0 million compared to $12.1 million at December 31, 1997. The
decrease in working capital resulted principally from a decrease in cash of $9.5
million, partially offset by the conversion of $6.6 million of shareholder notes
payable into 881,667 shares of the Company's Series B Convertible Preferred
Stock (see Note 11 to the Company's financial statements included in the
Company's 1998 Annual Report to Shareholders and in the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1998.) Other factors which
affected net working capital were an increase in inventory of $3.8 million, a
decrease in the amount borrowed under the Company's credit line of $1.1 million,
an increase in accounts payable and accrued liabilities of $1.1 million, an
increase in other liabilities of $0.9 million, an increase in the current
portion of notes payable of $0.6 million, and an increase in accounts receivable
and other current assets of $0.4 million.
At December 31, 1998, the Company had cash of $11.5 million and $2.1 million of
debt, $0.6 million of which was due within twelve months. During 1998, net cash
used by operations was $9.3 million. The 1998 capital expenditures were $1.6
million, principally hardware and software for test equipment and equipment
leased to GTE. Budgeted capital expenditures for 1999 are $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.
For the year ended December 31, 1997, net working capital decreased by $8.2
million to $12.1 million compared to $20.3 million at December 31, 1996. In 1997
the decrease in working capital resulted principally from a reduction in
accounts receivable of $1.6 million, an increase in amounts borrowed under the
Company's credit line of $1.6 million, and an increase in shareholder notes
payable of $6.6 million. The increase in shareholder notes payable is the result
of the Company's December 1997 private placement of convertible securities; see
Notes 8 and 9 to the Consolidated Financial Statements included in the Company's
1997 Annual Report.
At December 31, 1997, the Company had cash of $21.0 million and no long-term
debt. During 1997, net cash used by operations was $13.6 million. The 1997
capital expenditures were $4.1 million.
ITEM 7(a). QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
---------------------------------------------------------
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's cash equivalents. The Company does not have
operations subject to material risk of foreign currency fluctuations, nor does
it use derivative financial instruments. Cash equivalents consist of demand
deposit and money market accounts, certificates of deposit and short-term
commercial paper. The Company's $5 million credit line has a variable rate and
the Company's $3 million term loan has a fixed interest rate. The Company does
not believe that it has any material exposure to market risk associated with
interest rates.
Page 14
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
- -------------------------------------------------
The Board of Directors and Shareholders
PulsePoint Communications
We have audited the accompanying balance sheets of PulsePoint Communications as
of December 31, 1998 and 1997, and the related statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1998. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PulsePoint Communications at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Woodland Hills, CA
January 28, 1999
Page 15
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
<TABLE>
Consolidated Balance Sheets
PulsePoint Communications
(In thousands, except share data)
December 31,
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
1997 1998
=========================================================================================================================
ASSETS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash, cash equivalents and pledged cash $ 20,973 $ 11,473
Accounts receivable, less allowance for doubtful accounts of $527
and $725 at December 31, 1997 and 1998, respectively 4,111 4,215
Inventories, net 3,876 7,652
Other current assets 169 516
- -------------------------------------------------------------------------------------------------------------------------
Total current assets 29,129 23,856
Property and equipment, at cost:
Computers and other equipment 9,504 10,334
Furniture and fixtures 999 999
Leasehold improvements 1,357 1,955
- -------------------------------------------------------------------------------------------------------------------------
11,860 13,288
Less accumulated depreciation and amortization (6,776) (9,046)
- -------------------------------------------------------------------------------------------------------------------------
5,084 4,242
Other assets:
Investment securities 1,030 1,101
Other assets 2,198 1,328
- -------------------------------------------------------------------------------------------------------------------------
Total other assets 3,228 2,429
- -------------------------------------------------------------------------------------------------------------------------
Total assets $ 37,441 $ 30,527
=========================================================================================================================
LIABILITIES & SHAREHOLDERS' EQUITY
- -------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Credit line $ 1,581 $ 540
Notes payable, current - 613
Shareholder notes payable 6,613 -
Accounts payable 3,532 5,335
Accrued payroll and related 3,102 2,264
Other accrued liabilities 2,170 3,115
- -------------------------------------------------------------------------------------------------------------------------
Total current liabilities 16,998 11,867
Trade-in allowance - 1,360
Notes payable, long-term - 1,498
Commitments and contingencies
Shareholders' equity:
Preferred stock, 15,000,000 shares authorized:
Series A, no par value, no shares issued and outstanding
at December 31, 1997 and 1998 - -
Series B, no par value, 2,451,667 and 3,333,334 shares issued and
outstanding at December 31, 1997 and December 31, 1998, respectively 18,110 24,723
Common stock, no par value - 50,000,000 shares authorized,
5,140,398 and 5,237,699 shares issued and outstanding
at December 31, 1997 and December 31, 1998, respectively 69,205 69,820
Accumulated deficit (66,872) (78,741)
- -------------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 20,443 15,802
- -------------------------------------------------------------------------------------------------------------------------
Total liabilities & shareholders' equity $ 37,441 $ 30,527
=========================================================================================================================
See accompanying notes.
</TABLE>
Page 16
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
PulsePoint Communications
(In thousands, except per share data)
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1997 1998
=================================================================================================================================
<S> <C> <C> <C>
Net sales $ 22,332 $ 20,644 $ 25,449
Cost of sales 8,312 10,523 12,268
- ---------------------------------------------------------------------------------------------------------------------------------
Gross margin 14,020 10,121 13,181
- ---------------------------------------------------------------------------------------------------------------------------------
Selling, general and administrative expenses 12,846 17,122 14,386
Engineering and development expenses 8,903 12,181 11,291
- ---------------------------------------------------------------------------------------------------------------------------------
Total operating expense 21,749 29,303 25,677
- ---------------------------------------------------------------------------------------------------------------------------------
Loss from operations (7,729) (19,182) (12,496)
Interest and other income, net 950 273 645
- ---------------------------------------------------------------------------------------------------------------------------------
Loss before provision for income taxes (6,779) (18,909) (11,851)
Provision for income taxes (22) (15) (18)
- ---------------------------------------------------------------------------------------------------------------------------------
Net loss and comprehensive loss $ (6,801) $(18,924) $(11,869)
=================================================================================================================================
Loss per common share - basic and diluted $ (1.36) $ (3.72) $ (2.29)
=================================================================================================================================
See accompanying notes.
</TABLE>
Page 17
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
PulsePoint Communications
(In thousands, except share data)
<CAPTION>
Convertible Preferred Convertible Preferred Total
Stock Series A Stock Series B Common Stock Accumulated Shareholders'
- -----------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount Deficit Equity
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 2,631,579 $ 5,000 - $ - 5,000,239 $ 68,704 $(41,147) $ 32,557
Exercise of stock options 7,906 47 47
Shares issued under
employee stock purchase plan 47,990 224 224
Net loss (6,801) (6,801)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1996 2,631,579 $ 5,000 - $ - 5,056,135 $ 68,975 $(47,948) $ 26,027
Exercise of stock options 1,094 7 7
Shares issued under
employee stock purchase plan 83,169 223 223
Conversion of Series A shares
to Series B shares (2,631,579) (5,000) 666,667 5,000 -
Shares issued under
private placement of
convertible securities 1,785,000 13,110 13,110
Net loss (18,924) (18,924)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 - $ - 2,451,667 $ 18,110 5,140,398 $ 69,205 $(66,872) $ 20,443
Exercise of stock options 18,092 115 115
Shares issued under
employee stock purchase plan 79,209 246 246
Warrants issued - 254 254
Conversion of shareholder notes 881,667 6,613 6,613
Net loss (11,869) (11,869)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 - $ - 3,333,334 $ 24,723 5,237,699 $ 69,820 $(78,741) $ 15,802
===================================================================================================================================
See accompanying notes.
</TABLE>
Page 18
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
PulsePoint Communications
(In thousands)
<CAPTION>
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1997 1998
=================================================================================================================================
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $ (6,801) $(18,924) $(11,869)
Adjustments to reconcile net loss
to net cash used in operations:
Depreciation and amortization 2,349 2,979 3,377
Provision for losses on accounts receivable 60 393 300
Provision for losses on inventory 198 833 344
Stock warrant expense - - 64
Gain on disposal of fixed assets 3 - -
Changes in operating assets and liabilities:
Accounts receivable (2,351) 1,191 (404)
Inventories 430 (1,743) (4,120)
Other current assets 135 168 (284)
Other assets - - 28
Accounts payable 927 (145) 1,834
Accrued payroll and related 373 1,116 (838)
Trade-in allowance - - 1,360
Other accrued liabilities (351) 489 945
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in operations (5,028) (13,643) (9,263)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Increase in investment securities 1,400 (1,030) (71)
Additions to property and equipment (1,959) (4,075) (1,566)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (559) (5,105) (1,637)
- ---------------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Proceeds from issuance of preferred stock - 13,110 -
Proceeds from issuance of shareholder notes payable - 6,613 -
Proceeds from issuance of long-term debt - - 2,080
Proceeds from issuance of common stock 271 230 361
Net proceeds from (paydown of) line of credit - 1,581 (1,041)
- ---------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 271 21,534 1,400
- ---------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and equivalents (5,316) 2,786 (9,500)
Cash and equivalents at beginning of period 23,503 18,187 20,973
- ---------------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at end of period $ 18,187 $ 20,973 $ 11,473
=================================================================================================================================
Supplemental disclosures
Cash paid for interest $ - $ 6 $ 76
Cash paid for taxes $ 21 $ 23 $ 18
=================================================================================================================================
See accompanying notes.
</TABLE>
Page 19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Nature of business. PulsePoint Communications (the Company) designs, develops
and markets high-capacity, network-based enhanced services solutions.
Principles of consolidation. The consolidated financial statements include the
accounts of PulsePoint Communications and its wholly owned subsidiaries
PulsePoint Communications International Corporation and PulsePoint
Communications Malaysia Corporation. All significant intercompany transactions
and balances have been eliminated.
Revenue recognition. Generally sales are recognized when products are shipped or
when services are performed. Warranty costs are accrued at the 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 issued
Statement of Position, "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 January 1, 1998. The adoption had no effect on the financial
statements.
Short term investments. Short term investments (principally commercial paper and
discount notes with maturity dates generally within 90 days and considered cash
equivalents) are classified as "held to maturity" based on the Company's
positive intent and ability to hold the securities until maturity. The
securities are presented at amortized cost which approximates fair value.
Amortization and interest on securities classified as "held to maturity" are
included in investment income.
Engineering and development. Statement of Financial Accounting Standards No. 86,
"Accounting for the Cost of Computer Software to Be Sold, Leased or Otherwise
Marketed," requires that development costs incurred in connection with research
and development of software products and enhancements to existing software
products be expensed as incurred until technological feasibility has been
established. Costs incurred subsequent to the establishment of technological
feasibility must be capitalized until the product is released for sale. The
Company considers technological feasibility to be demonstrated when a fully
functional working model has been produced. To date, all costs associated with
the development of new software products or enhancements to existing software
products have been expensed as incurred. The costs incurred beyond the working
model stage are not significant. Other engineering and development costs are
also expensed as incurred.
Inventories. Inventories are stated at the lower of standard cost (which
approximates the first-in first-out method) or market.
Property and equipment. Property and equipment are depreciated using the
straight-line method over the respective estimated useful lives, which range
from two to five years. Leasehold improvements are amortized over the period of
the lease or the estimated useful life, whichever is shorter.
Loss per common share. Loss per common share is computed in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share," based
upon the weighted average number of common shares outstanding for the period.
Antidilutive Common Stock equivalents were 10,126,917 in 1998, 7,182,095 in 1997
and 662,881 in 1996 and were excluded from the calculation of loss per common
share.
Stock-based compensation. Effective January 1, 1996, the Company adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). Pursuant to SFAS No. 123, a company may elect to
continue expense recognition under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB No. 25") or to recognize
compensation expense for grants of stock, stock options, and other equity
instruments to employees based on the fair value methodology outlined in SFAS
No. 123. SFAS No. 123 further specifies that companies electing to continue
expense recognition under APB No. 25 are required to disclose pro forma net
income and pro forma earning per share as if fair value based accounting
prescribed by SFAS No. 123 has been applied. The Company has elected to continue
expense recognition pursuant to APB No. 25.
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.
Page 20
<PAGE>
Cash, cash equivalents and pledged cash. The Company considers as cash
equivalents only those investments that are short-term, highly liquid, readily
convertible to cash, and so near their maturity that they present insignificant
risk of changes in value because of changes in interest rates. The Company
classifies as cash equivalents only those investments with maturities of three
months or less. The Company pledged $1.0 million to facilitate a construction
loan for the landlord to build new office space in its existing building. These
funds became available to the Company in February 1998.
Income taxes. The Company accounts for income taxes in accordance with Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes". The
standard prescribes a liability method for calculating the provision for income
taxes.
Deferred license fees. The Company has entered into license agreements for which
the fees are amortized based on sales of product technology over the estimated
useful life of the technology, which is generally four years.
Estimates and assumptions. The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at December 31,
1998 and the reported amounts of revenues and expenses during the year then
ended. Actual results could differ from those estimates.
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:
- --------------------------------------------------------------------------------
1996 1997 1998
================================================================================
Voice Information Services (VIS) $ 16,451 $ 15,488 $ 21,244
Customer Premises Equipment (CPE) 5,881 5,156 4,205
- --------------------------------------------------------------------------------
$ 22,332 $ 20,644 $ 25,449
================================================================================
Revenue by geographic area (based on domicile of customer):
- --------------------------------------------------------------------------------
1996 1997 1998
================================================================================
Domestic $ 16,621 $ 19,521 $ 25,168
International 5,711 1,123 281
- --------------------------------------------------------------------------------
$ 22,332 $ 20,644 $ 25,449
================================================================================
All of the Company's long-lived assets are located in the United States.
3. Concentration of Financial Risk
During the year ended December 31, 1998, two customers accounted for 55% and
16%, respectively, of the Company's net sales. As of December 31, 1998,
$1,510,000 and $1,270,000 respectively, of the Company's accounts receivable
were due from these two customers. During the year ended December 31, 1997, one
customer accounted for 58% of the Company's net sales. During the year ended
December 31, 1996, three customers accounted for 40%, 13% and 11%, respectively,
of the Company's net sales. No other customer accounted for sales of 10% or
more. A majority of the Company's sales are made to telecommunications
companies. The Company performs ongoing credit evaluations of its customers'
financial condition and, generally, requires no collateral from its customers.
In 1998, export sales accounted for 1% of the Company's net sales as compared to
5% in 1997.
The Company's cash, cash equivalents and pledged cash is primarily comprised of
demand deposit and money market accounts, certificates of deposit and short-term
commercial paper with several financial institutions. Some account balances are
in excess of amounts insured by the Federal Deposit Insurance Corporation.
Page 21
<PAGE>
4. Inventories
Inventories at December 31 consist of the following:
- --------------------------------------------------------------------------------
(In thousands) 1997 1998
================================================================================
Raw material and purchased parts $ 2,077 $ 6,399
Work-in-process 1,521 751
Finished goods 278 502
- --------------------------------------------------------------------------------
$ 3,876 $ 7,652
================================================================================
5. Certain One Time Charges
In the fourth quarter of 1997, the Company recorded charges of approximately
$1.5 million in connection with a review of its operations, cost structure and
balance sheet. The charges included $0.5 million in property and equipment
write-offs related to obsolescence of test fixtures and other equipment used in
the production of the current product line, and $1.0 million in inventory
write-downs, resulting from obsolescence of current inventory and licenses that
are unable to be used in the new product line due to technological changes and
enhancements.
6. Other Assets
Other assets at December 31 consist of the following:
- --------------------------------------------------------------------------------
(In thousands) 1997 1998
================================================================================
Deferred license fees, net of accumulated
amortization of $5,769 and $6,753 at
December 31, 1997 and 1998, respectively $ 1,933 $ 1,049
Other 265 279
- --------------------------------------------------------------------------------
$ 2,198 $ 1,328
================================================================================
7. Leases
In December 1996, the Company entered into a ten year lease for the corporate
headquarters in Carpinteria, California. The lease is subject to an annual
adjustment based on total sales of the Company. In December 1996, the Company
consolidated into half of the building that it currently occupies. The new lease
coupled with the consolidation of space resulted in a reduction in monthly lease
expenses of approximately 45%. The Company also leases office equipment as well
as regional office space under one to five year operating lease agreements.
Effective January 1997, the Company entered into master lease agreements with
BancBoston Leasing Inc. and Mellon US Leasing ("the Lease Agreements"). The
BancBoston lease agreement is for a maximum of $3.0 million in equipment cost
and the term of the lease is 48 months. The BancBoston lease agreement requires
cash collateral equal to the acquisition cost of the equipment leased. The
Company has utilized $1.25 million of the BancBoston lease agreement as of
December 31, 1998. The Company accounts for these leases as operating leases.
The Mellon US Leasing lease agreement is for a maximum of $1.0 million in
equipment cost and the term of the lease is for 30 months. The Mellon lease
agreement requires collateralization via a letter of credit equal to 50% of the
acquisition cost of the equipment leased. During 1997, a bank had provided the
Company with this letter of credit, which was in turn collateralized by the
Company's certificate of deposit. Beginning in January 1998, the Company
collateralized the letter of credit with available borrowing under its credit
line. The Company has fully utilized the Mellon US Leasing lease agreement as of
December 31, 1998. The Company accounts for these leases as operating leases.
Page 22
<PAGE>
Minimum future lease payments as of December 31, 1998 are as follows:
- --------------------------------------------------------------------------------
(In thousands)
================================================================================
1999 $ 1,462
2000 1,291
2001 1,654
2002 999
2003 1,047
2004 and beyond 3,158
- --------------------------------------------------------------------------------
$ 9,611
================================================================================
Rent expense, including rent under noncancelable operating lease obligations,
was approximately $1.5 million, $1.6 million and $1.6 million for the years
ended December 31, 1996, 1997 and 1998, respectively.
8. Other Accrued Liabilities
Other accrued liabilities at December 31 consist of the following:
- --------------------------------------------------------------------------------
(In thousands) 1997 1998
================================================================================
Sales taxes payable $ 202 $ 139
Accrued legal and accounting 446 190
Deferred revenue 317 822
Accrued warranty reserve 429 438
Other 1,038 1,526
- --------------------------------------------------------------------------------
$ 2,432 $ 3,115
================================================================================
9. Income Taxes
The provision for income taxes included in the Consolidated Statements of
Operations consists of:
- --------------------------------------------------------------------------------
(In thousands) 1996 1997 1998
================================================================================
Current
Federal $ - $ - $ -
State 22 15 18
- --------------------------------------------------------------------------------
$ 22 $ 15 $ 18
================================================================================
The provision for income taxes is at a rate different than the U.S. federal
statutory tax rate for the following reasons:
- --------------------------------------------------------------------------------
(In thousands) 1996 1997 1998
================================================================================
Computed tax at statutory rate $ (2,380) $ (6,523) $ (4,158)
State taxes, net of federal benefit 14 10 12
Loss not benefited 2,336 6,519 4,145
Other 52 9 19
- --------------------------------------------------------------------------------
$ 22 $ 15 $ 18
================================================================================
Deferred income taxes reflect the tax impact of temporary differences between
the amounts of assets and liabilities for financial reporting purposes and such
amounts as measured by tax laws and regulations.
Page 23
<PAGE>
The components of deferred tax assets as of December 31, 1997 and 1998 are as
follows:
- --------------------------------------------------------------------------------
(In thousands) 1997 1998
================================================================================
Net operating loss carryforwards $ 21,323 26,022
General business credit carryforwards 3,140 2,312
Alternative minimum tax credit carryforwards 190 190
Inventory accounting methods 1,833 1,091
Allowance for doubtful accounts 220 297
Trade-in allowance - 560
Accrued vacation 278 291
Warranty service 179 180
Excess of tax over book depreciation (296) (1,749)
Research expenditures accounting method 821 970
Other 641 1,025
- --------------------------------------------------------------------------------
Deferred tax assets, net 28,329 31,189
Valuation allowance (28,329) (31,189)
- --------------------------------------------------------------------------------
Net deferred tax asset $ - $ -
================================================================================
Management determined that a valuation allowance of approximately $31.2 million,
primarily related to net operating loss and general business credit
carryforwards, was required. The valuation allowance increased approximately
$2.3 million during 1998, primarily reflecting the current year net operating
loss.
At December 31, 1998, the Company has net operating loss carryforward for
federal income tax purposes of approximately $71.2 million which expire from
2000 through 2012. The Company has net operating loss carryforwards for
California tax purposes of approximately $17.5 million at December 31, 1998
which expire from 1999 through 2003. The Company's ability to utilize the above
net operating loss carryforward may be limited due to the application of
statutory provisions.
At December 31, 1998, the Company has general business credits of approximately
$1.8 million for federal income tax purposes which expire from 1999 through
2007.
10. Debt
Shareholder notes payable. The $6.6 million in shareholder notes payable which
were outstanding at December 31, 1997 arose in connection with the December 1997
$20 million private placement (See Note 11).
Credit line. On July 28, 1997, the Company entered into a Security and Loan
Agreement ("the Credit Line") with Imperial Bank for the purpose of obtaining a
$5 million credit line. The credit line was secured by substantially all of the
assets of the Company, and allowed for borrowings of up to the lesser of $2
million or an amount equal to 50% of eligible domestic accounts receivable.
Interest under the Credit Line was at the Prime rate plus 0.5%. The Credit Line
also allowed for borrowing up to the lesser of $3 million or an amount equal to
90% of eligible foreign accounts receivable and inventory. Borrowings under the
Credit Line were subject to certain financial covenants and restrictions on
receivables, financial guarantees, and other related items. On October 31, 1997,
the Company entered into an amendment to the Credit Line providing for a
relaxation of certain financial covenants. The amendment also allowed for
borrowing up to $5 million or an amount equal to 65% of eligible accounts
receivable, foreign or domestic. The interest charged under the Credit Line was
increased to Prime plus 2% (two percent). The Company also issued a warrant to
the Imperial Bank (the "Warrant") for the purchase of 100,000 shares of the
Company's Common Stock at an exercise price of $3.00 per share.
In December 1997, due to the Company's achievement of certain milestone events,
the interest rate applicable to the Credit Line was decreased from Prime plus 2%
to Prime plus 0.5% (8.25% at December 31, 1998). At December 31, 1997, the
Credit Line was extended to June 30, 1998 and subsequently extended to March 29,
1999. Borrowings under the credit line were $1.6 million and $0.5 million at
December 31, 1997 and 1998, respectively. At December 31, 1998, the Company was
in violation of one of the covenants of the credit line and received from the
bank a one-time waiver of this covenant violation on January 27, 1999.
The Company maintains a lease agreement with Mellon US Leasing. At December 31,
1998, this lease agreement was collateralized by a $500,000 standby letter of
credit issued under the Company's Credit Line (See Note 7).
Page 24
<PAGE>
On October 1, 1998, the Company entered into an agreement with Transamerica
Business Credit Corporation ("Transamerica") to provide the Company with a Term
Loan in the amount of $3.0 million secured by certain of the assets of the
Company (the "Term Loan"). Each funding under the Term Loan is for a period of
36 months with equal monthly repayments of approximately 3.4% of the amount
funded. As additional incentive to enter into the Term Loan, the Company
provided warrants to purchase 92,308 shares of the Company's Common Stock at an
exercise price of $3.25 per share, the closing price on the date of the
commitment. At December 31, 1998 borrowings under the Term Loan totaled $2.0
million.
11. Shareholders' Equity and Related Items
The Company's amended Articles of Incorporation authorize 50,000,000 shares of
Common Stock and 15,000,000 shares of Preferred Stock (of which 3,373,334 have
been designated Series B), no par value, which may be issued by the Board of
Directors without further approval by the shareholders.
In December 1997, the Company created the Series B Preferred Stock. The holders
of the Series B Convertible Preferred Stock are entitled to dividends at the
applicable dividend rate for each share of the underlying Common Stock into
which the Series B Convertible Preferred Stock is convertible. Dividends on the
Series B Convertible Preferred Stock are not mandatory or cumulative. Upon
liquidation, the holders of the Series B Convertible Preferred Stock are
entitled to $7.50 per share plus all accrued and unpaid dividends to the extent
funds are available and subject to all amounts payable in respect of any other
shares of Preferred Stock of the Company that rank pari passu with the Series B
Convertible Preferred Stock. Each share of Series B Convertible Preferred Stock
is entitled to a number of votes equal to the number of shares of Common Stock
into which such share of Series B Convertible Preferred Stock could be
converted. The Series B Convertible Preferred Stock and the Common Stock vote
together. The Series B Convertible Preferred Stock is convertible at any time at
the option of the holder into Common Stock, initially at a conversion price (the
"Series B Preferred Conversion Price") of $3.00 per share of Common Stock. In
addition to customary antidilution provisions, the Series B Preferred Conversion
Price is subject to adjustment for certain issuances of the Company's Common
Stock if the consideration per share of such issuance is less than the Series B
Preferred Conversion Price. The Series B Convertible Preferred Stock is also
subject to automatic conversion upon the earliest to occur of an event that
would cause the Series B Convertible Preferred Stock to be required to be
registered pursuant to the Securities Exchange Act of 1934, or upon the filing
with the Secretary of the Company of the written approval of the holders of more
than 50% of the outstanding shares of the Series B Convertible Preferred Stock.
On December 19, 1997, the Company consummated a private placement of the
Company's convertible securities with certain investors (collectively, the
"Investors") for an aggregate of approximately $20 million pursuant to a
Preferred Stock Purchase Agreement (the "Purchase Agreement"). Pursuant to the
Purchase Agreement, the Company (i) sold for cash (A) 1,785,000 shares of the
Company's Series B Convertible Preferred Stock and (B) $6,612,502.50 aggregate
principal amount of the Company's Convertible Promissory Notes (the "Notes" and
together with the Series B Convertible Preferred Stock, the "Securities") and
(ii) exchanged the 2,631,579 shares of Series A Convertible Preferred Stock held
by affiliates of Oak Investment Partners ("Oak") for 666,667 shares of the
Series B Convertible Preferred Stock. Each share of Series B Convertible
Preferred Stock is convertible into 2.5 shares of Common Stock, subject to
certain antidilution adjustments. The Notes were issued because the Company did
not have an adequate number of shares of the underlying Common Stock authorized
to permit the conversion of the entire $25 million of Series B Convertible
Preferred Stock. The Company sold the Securities at a price of $3.00 per share
of Common Stock on an as-converted basis. At the Company's 1998 annual meeting,
the Company's shareholders approved an amendment to the Company's Ninth Amended
and Restated Articles of Incorporation effectuating a 1:4 reverse split of the
Company's Common Stock (the "Reverse Split"). The Reverse Split created a
sufficient number of shares of Common Stock available to permit conversion of
all of the Series B Convertible Preferred Stock issuable upon conversion of the
Notes, and the Notes were immediately converted into an additional 881,667
shares of Series B Convertible Preferred Stock.
Warrants. The Company has issued 250,308 warrants to purchase Common Stock as
follows:
1) In October 1997, the Company issued 100,000 warrants, with an exercise
price of $3.00 per share and an expiration date of October 2002, to
Imperial Bank.
2) In November 1998, the Company issued 73,846 and 18,462 warrants, with
an exercise price of $3.25 per shares and an expiration date of
November 2005, to Transamerica Business Credit Corporation and
Priority Capital, respectively.
3) In September and December 1998, the Company issued 58,000 warrants,
with an exercise price of $7.06 per share and an expiration date of
December 2003, to NEXTLINK Communications, Inc.
Page 25
<PAGE>
Common and potentially issuable common stock. At December 31, 1998, there were
5,237,545 shares of the Company's Common Stock outstanding and 10,126,917 shares
of Common Stock, potentially issuable, as follows:
Number of Common Shares
Outstanding and Potentially
Issuable Common Shares
---------------------------
(A) Common Stock outstanding 5,237,545
(B) Conversion of Series B Convertible Preferred Stock 8,333,336
(C) Options granted - 1983 Stock Option Plan 1,481,873
(D) Options granted - Directors' Stock Option Plan 61,400
(E) Warrants 250,308
-------
Additional shares potentially issuable 10,126,917
----------
Total potential shares of Common Stock 15,364,462
==========
(A) Number of shares of Common Stock outstanding at December 31, 1998.
(B) Shares of Common Stock issuable upon conversion of the Company's Series B
Convertible Preferred Stock outstanding at December 31, 1998.
(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 1,481,873 options, 333,358 have exercise prices below the Company's
December 31, 1998 closing stock price of $4.063.
(D) Number of shares of Common Stock issuable pursuant to options granted under
the Company's Directors' Option Plan (assuming full vesting).
(E) Warrants issued and outstanding at December 31, 1998.
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 reflect the reverse stock split for all reporting
periods. In addition, the calculation of earnings (loss) per share has given
effect to the reverse stock split.
1990 Employee Stock Purchase Plan. The Company maintains a stock purchase plan
to provide employees of the Company with a convenient means to acquire an equity
interest in the Company through payroll deductions, and to provide an incentive
for continued employment. The employee stock purchase plan reserves 500,000
shares of Common Stock for issuance under the plan.
The plan qualifies as an "employee stock purchase plan" under Section 423 of the
Internal Revenue Code. All full-time employees are eligible to participate
through payroll deductions up to 10% of their compensation; participants may, at
their option, purchase shares from the Company at the lower of 85% of the fair
market value of the Common Stock at either the beginning or end of each
six-month purchase period. In the event the market price at the end of any
purchase period is less than 50% of the market price at the beginning of the
period, employee purchases are limited to twice the shares that could have been
purchased using the beginning market price.
During 1998, 79,209 shares were purchased at prices ranging from $2.55 to $4.68.
During 1997, 83,169 shares were purchased at a price of $2.56. During 1996,
47,990 shares were purchased at a price of $4.68. At December 31, 1998, 1,893
shares were available for future issuance under the plan.
1983 Stock Option Plan. The Company maintains a stock option plan which provides
for the issuance of incentive stock options (ISOs) and nonqualified stock
options (NSOs) to officers, employees, independent contractors, consultants and
advisors of the Company. In July 1997, the Company filed a Form S-8 to register
the issuance and sales of an additional 800,000 shares reserved under the plan.
The Company has reserved 2,375,000 shares of Common Stock for issuance
thereunder. The Plan terminates October 31, 2003. At December 31, 1998, options
to purchase 1,481,873 shares were outstanding of which 297,150 were exercisable
at prices ranging from $2.28 to $11.00.
Page 26
<PAGE>
Directors' Stock Option Plan. The Company maintains a stock option plan which
provides for NSOs as equity incentives to assist the Company in recruiting and
retaining outside directors. In August 1996, the Company filed a Form S-8 to
register the issuance and sales of an additional 50,000 shares reserved under
the plan. The directors' stock option plan allows for the Company to issue
options covering up to 125,000 shares.
At December 31, 1998, options to purchase 61,400 shares were outstanding, of
which 28,587 were exercisable at prices ranging from $2.75 to $13.25 and 47,350
were available for future grant of options under the plan. The Company has
reserved 125,000 shares of Common Stock for issuance thereunder.
A summary of option transactions under the two option plans is as follows:
- --------------------------------------------------------------------------------
Number of Shares Option Price
================================================================================
Outstanding at December 31, 1995 587,842 $ 4.00 - 13.24
Granted 358,615 5.00 - 7.88
Exercised (7,906) 4.76 - 6.52
Canceled or expired (272,333) 4.00 - 20.24
- --------------------------------------------------------------------------------
Outstanding at December 31, 1996 666,218 $ 5.00 - 13.24
Granted 416,712 2.76 - 6.24
Exercised (1,094) 6.00
Canceled or expired (103,909) 3.72 - 12.52
- --------------------------------------------------------------------------------
Outstanding at December 31, 1997 977,927 $ 2.75 - 13.25
Granted 818,313 2.28 - 8.38
Exercised (18,092) 5.50 - 8.00
Canceled or expired (234,875) 2.28 - 13.00
- --------------------------------------------------------------------------------
Outstanding at December 31, 1998 1,543,273 $ 2.28 - 13.25
================================================================================
Fair value disclosures. Stock option grants are set at the closing price of the
Company's Common Stock on the date of grant and the related number of shares
granted are fixed at that point in time. Therefore under the principles of APB
Opinion No. 25, the Company does not recognize compensation expense associated
with the grant of stock options. SFAS No. 123, "Accounting for Stock-Based
Compensation," requires the use of option valuation models to provide
supplemental information regarding options granted after 1994. Pro forma
information regarding net loss and loss per share shown below was determined as
if the Company had accounted for its employee stock options and shares sold
under its stock purchase plan under the fair value method of the Statement.
The fair value of the options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1998, 1997 and 1996: risk-free interest rates of 6.25%; dividend
yields of 0%; volatility factors of the expected target price of the Company's
Common Stock of 62.8%; and expected life of the options of 5.0. These
assumptions resulted in weighted-average fair values of $5.15, $5.60, and $5.88
per share for stock options granted in 1998, 1997 and 1996, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options. The Company's employee stock options have
characteristics significantly different from those of traded options such as
vesting restrictions and extremely limited transferability. In addition, the
assumptions used in option valuation models (see above) are highly uncertain,
particularly the expected stock price volatility of the underlying stock.
Because changes in these uncertain input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not provide
a reliable single measure of the fair value of its employee stock options.
Page 27
<PAGE>
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized over the option vesting periods. The pro forma effect on net income
for 1996, 1997 and 1998 is not representative of the pro forma effect on net
income in future years because it does not take into consideration pro forma
compensation expense related to grants made prior to 1996. Pro forma information
in future years will reflect the amortization of a larger number of stock
options granted in several succeeding years. The Company's pro forma information
is as follows (in thousands, except per share information):
Year ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 1996 1997 1998
================================================================================
Net loss - as reported $ (6,801) $(18,924) $(11,869)
Net loss - pro forma (7,097) (19,428) (12,860)
Loss per share - as reported $ (1.36) $ (3.72) $ (2.29)
Loss per share - pro forma $ (1.40) $ (3.80) $ (2.48)
================================================================================
Information regarding outstanding stock options as of December 31, 1998 is as
follows:
Options Outstanding Options Exercisable
----------------------------------- ---------------------
Weighted-
Weighted- Average Weighted-
Average Remaining Average
Exercise Contractual Exercise
Price Range Shares Price Life Shares Price
- --------------------------------------------------------------------------------
$2.28 - $ 5.75 718,393 $4.51 7.74 32,480 $4.59
$6.13 - $ 6.50 531,861 $6.18 3.29 197,726 $6.24
$6.75 - $13.25 293,112 $8.49 5.08 95,531 $9.09
12. Employee Benefit Plan
In 1994, the Company established a 401(k) plan (the "Plan") covering
substantially all of its employees. The Plan allows eligible employees to
contribute up to 15% of their compensation. Company contributions are voluntary
and at the discretion of the Board of Directors. Contributions made by the
Company for the years ended December 31, 1996, 1997, and 1998 totaled $31,440,
$23,224, and $60,710, respectively.
13. Contingencies
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. The action should
remain stayed with respect to the Company at least until this appeal is
concluded.
Additionally, the Company is subject to pending claims primarily related to
contractual and product issues. Management, after review and consultation with
the Company's counsel, believes that the liability, if any, from the disposition
of such claims and litigation would not have a materially adverse effect on the
financial condition or results of operations of the Company.
Page 28
<PAGE>
14. Loss Per Share
The following table sets forth the computation of basic and diluted loss per
share (in thousands, except per share data):
Year ended December 31,
- --------------------------------------------------------------------------------
(In thousands) 1996 1997 1998
================================================================================
Numerator for basic and diluted loss
per share - net loss $ (6,801) $(18,924) $(11,869)
Denominator for basic and diluted loss per 5,021 5,090 5,188
share - weighted average shares outstanding
Basic and diluted loss per share $ (1.36) $ (3.72) $ (2.29)
================================================================================
The compilation of diluted loss per share did not assume the conversion of the
Company's Series B Convertible Preferred Stock nor the exercise of outstanding
stock options and stock purchase warrants because their inclusion would have
been antidilutive.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
-----------------------------------------------------------
None.
Page 29
<PAGE>
PART III
Item 10.* DIRECTORS AND EXECUTIVE OFFICERS
--------------------------------
Item 11.* EXECUTIVE COMPENSATION
----------------------
Item 12.* SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
*Information regarding the Executive Officers of the Company is included in Part
I of this Annual Report on Form 10-K. For the other information called for by
Items 10-12, reference is made to the Company's definitive proxy statement for
its annual meeting of shareholders, which will be filed with the Securities and
Exchange Commission within 120 days after March 31, 1999, and which is
incorporated herein by reference.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
----------------------------------------------------------------
(a) Financial Statements, Financial Statement Schedules and Exhibits
Exhibit
Number Document
- ------- --------
3.1 Ninth Amended and Restated Articles of Incorporation (incorporated by
reference to Exhibit 3.04 of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
3.2 Amendment to the Ninth Amended and Restated Articles of Incorporation
(incorporated by reference to Exhibit 3.03 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
3.3 By-Laws, as amended to date (incorporated by reference to Exhibit 3.02
of the Company's Registration Statement under the Securities Act of
1933, as amended, filed January 19, 1990, Registration No. 33-33066).
4.1 Certificate of Determination of Rights, Preferences, Privileges and
Restrictions of Series B Convertible Preferred Stock (incorporated by
reference to Exhibit 3.1 of the Company's Current Report on Form 8-K
dated December 23, 1997).
4.2 Preferred Stock Purchase Agreement dated December 19, 1997 (incorporated
by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K
dated December 23, 1997).
4.3 Form of Convertible Promissory Note (incorporated by reference to
Exhibit 10.2 of the Company's Current Report on Form 8-K dated December
23, 1997).
10.1 Form of Indemnity Agreement with Directors (incorporated by reference to
Exhibit 10.12 of the Company's Registration Statement under the
Securities Act of 1933, as amended, filed January 19, 1990, Registration
No. 33-33066).
10.2 Lease Agreement by and between the Company and Bluffs Group III dated
October 1, 1996 (incorporated by reference to Exhibit 10.44 of the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996).
10.3 Lease Agreement by and between the Company and BancBoston Leasing, Inc.,
dated January 8, 1997 (incorporated by reference to Exhibit 10.45 of the
Company's Quarterly Report on Form 10-Q for the quarter ended March 31,
1997).
10.4* The Company's 1983 Stock Option Plan (incorporated by reference to
Exhibit 10.07 of the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1991).
10.5* Amendment to the Company's 1983 Stock Option Plan (incorporated by
reference to Exhibit 10.47 of the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1997).
10.6* Amendment dated April 4, 1997 to the Company's 1983 Stock Option Plan
(incorporated by reference to Exhibit 10.46 of the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997).
10.7* Amendment dated March 26, 1993 to the Company's Employee Stock Purchase
Plan (incorporated by reference to Exhibit 10.47 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
Page 30
<PAGE>
Exhibit
Number Document
- ------- --------
10.8* Amendment dated April 4, 1997 to the Company's Employee Stock Purchase
Plan (incorporated by reference to Exhibit 10.48 of the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1997).
10.9* The Amended and Restated Stock Option Plan for Independent Directors of
PulsePoint Communications (incorporated by reference to Exhibit 10.08 of
the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1994).
10.10* Letter agreement between the Company and Mark C. Ozur (incorporated by
reference to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995).
10.11 Line of Credit Agreement between the Company and Imperial Bank dated
July 28, 1997 (incorporated by reference to Exhibit 10.49 of the
Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997).
10.12 First Amendment and Waiver to the Credit Terms and Conditions by and
between the Company and Imperial Bank dated October 30, 1997
(incorporated by reference to Exhibit 10.52 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997).
10.13 Second Amendment to the Credit Terms and Conditions by and between the
Company and Imperial Bank dated September 11, 1998 (incorporated by
reference to Exhibit 10.3 of the Company's Quarterly Report on Form 10-Q
for the quarter ended September 30, 1998).
10.14 Security and Loan Agreement Domestic Facility by and between the Company
and Imperial Bank dated July 28, 1997 (incorporated by reference to
Exhibit 10.50 of the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997).
10.15 First Amendment to Security and Loan Agreement, Domestic Credit by and
between the Company and Imperial Bank dated October 30, 1997
(incorporated by reference to Exhibit 10.53 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997).
10.16 Second Amendment to Security and Loan Agreement, Domestic Credit by and
between the Company and Imperial Bank dated September 11, 1998
(incorporated by reference to Exhibit 10.2 of the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1998).
10.17 Warrant Purchase Agreement by and between the Company and Imperial Bank
dated October 30, 1997 (incorporated by reference to Exhibit 10.54 of
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).
10.18 Antidilution Agreement by and between the Company and Imperial Bank
dated October 30, 1997 (incorporated by reference to Exhibit 10.55 of
the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).
10.19 Registration Rights Agreement by and between the Company and Imperial
Bank dated October 30, 1997 (incorporated by reference to Exhibit 10.56
of the Company's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1997).
10.20 Registration Rights Agreement dated December 19, 1997 (incorporated by
reference to Exhibit 10.3 of the Company's Current Report on Form 8-K
dated December 23, 1997).
10.21 Purchase Agreement between GTE Communication Systems Corporation and the
Company (Contract Number 120900-92-01), dated January 13, 1993, and
Amendment Nos. 1 through 9 thereto (incorporated by reference to Exhibit
10.57 of the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997).
10.22** Description of the Company's Executive Officer Bonus Plan for 1999.
10.23** Master Loan and Security Agreement between the Company and Transamerica
Business Credit Corporation dated October 1, 1998.
10.24** Stock Subscription Warrant No. 1 issued by the Company to TBCC Funding
Trust II dated November 10, 1998.
10.25** Stock Subscription Warrant No. 2 issued by the Company to Priority
Capital Resources dated November 10, 1998.
23.1** Consent of Ernst & Young LLP, Independent Auditors.
Schedule II** Financial Data Schedule.
- --------------
* Management contract or compensatory plan or arrangement.
** Filed herewith.
(b) No Current Reports on Form 8-K were filed by the Company during the last
quarter of 1998.
Page 31
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized, on March 15, 1999.
PULSEPOINT COMMUNICATIONS
By: /s/ B. Robert Suh
---------------------------
B. Robert Suh
Vice President, Finance and
Chief Financial Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, this report has been signed by the following persons in the
capacities and on the dates indicated.
Name Title Date
---- ----- ----
Chief Executive Officer:
/s/ Mark C. Ozur President,
- ------------------------------ Chief Executive Officer, March 15, 1999
Mark C. Ozur and Director
Chief Financial Officer:
/s/ B. Robert Suh Vice President, Finance March 15, 1999
- ------------------------------ Chief Financial Officer
B. Robert Suh
Directors:
/s/ John D. Beletic Director March 15, 1999
- ------------------------------
John D. Beletic
/s/ Bandel L. Carano Director March 15, 1999
- ------------------------------
Bandel L. Carano
/s/ Scot B. Jarvis Director March 15, 1999
- ------------------------------
Scot B. Jarvis
/s/ Cameron D. Myhrvold Director March 15, 1999
- ------------------------------
Cameron D. Myhrvold
/s/ Frederick J. Warren Director March 15, 1999
- ------------------------------
Frederick J. Warren
Page 32
<PAGE>
PULSEPOINT COMMUNICATIONS
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998
(Amount in thousands)
Balance at Additions Deductions Balance
beginning charged to from at end
of period earnings allowance of period
================================================================================
December 31, 1996
Allowance for doubtful receivables $ 600 $ 60 $ (60) $ 600
Accrued warranty reserve $ 375 $ 217 $(232) $ 360
================================================================================
December 31, 1997
Allowance for doubtful receivables $ 600 $ 393 $(466) $ 527
Accrued warranty reserve $ 360 $ 589 $(520) $ 429
================================================================================
December 31, 1998
Allowance for doubtful receivables $ 527 $ 251 $ (53) $ 725
Accrued warranty reserve $ 429 $ 110 $(101) $ 438
================================================================================
Page 33
Exhibit 10.22
PULSEPOINT COMMUNICATIONS
DESCRIPTION OF COMPANY'S
EXECUTIVE OFFICER BONUS PLAN FOR 1999
The Company's 1999 Executive Officer Bonus Plan (the "Plan") is based on the
Company achieving certain targets. The cash portion of the Plan calls for a cash
bonus of 10% of base salary for each Officer Vice President and 12.5% of base
salary for the President if the revenue target is met, and an additional 10% and
12.5% of base salary for each Officer Vice President and the President,
respectively, if target pre-tax income is met. The Plan calls for cash bonuses
ranging from 0 to 2.5 times the above amounts, depending on actual revenue and
pre-tax income as compared to the predetermined targets.
The Plan also provides that a bonus of 5% of each Officers annual base salary
will be paid for the Company closing each contract in 1999 valued in excess of a
predetermined amount.
Page 34
Exhibit 23.1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the use of our report dated January 28, 1999 included in the
Annual Report on Form 10-K of PulsePoint Communications for the year ended
December 31, 1998 with respect to the consolidated financial statements included
in this form 10-K.
Our audits also included the financial data schedule of PulsePoint
Communications listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
We also consent to the incorporation by reference in the Registration Statements
(Form S-8 No. 333-09755, Form S-8 No. 33-35019, Form S-8 No. 33-42184, Form S-8
No. 33-50376, Form S-8 No. 33-67000, Form S-8 No. 84730, and Form S-8 No.
333-31783) pertaining to the 1983 Employee Stock Option Plan, the Directors'
Stock Option Plan and the Employee Stock Purchase Plan of PulsePoint
Communications of our report dated January 28, 1999, with respect to the
financial statements and schedule of PulsePoint Communications included in this
Annual Report on Form 10-K for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Woodland Hills, CA
March 17, 1999
Page 35
Customer No. 1186
MASTER LOAN AND SECURITY AGREEMENT
THIS AGREEMENT dated as of November 10, 1998, is made by PulsePoint
Communications (the "Borrower"), a California corporation having its principal
place of business and chief executive office at 6307 Carpinteria Avenue,
Carpinteria, California, 93013 in favor of Transamerica Business Credit
Corporation, a Delaware corporation (the "Lender"), having its principal office
at Riverway II, West Office Tower, 9399 West Higgins Road, Rosemont, Illinois
60018.
WHEREAS, the Borrower has requested that the Lender make Loans to it from
time to time; and
WHEREAS, the Lender has agreed to make such Loans on the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the premises and to induce the Lender
to extend credit, the Borrower hereby agrees with the Lender as follows:
SECTION 1. DEFINITIONS.
As used herein, the following terms shall have the following meanings, and
shall be equally applicable to both the singular and plural forms of the terms
defined:
AGREEMENT shall mean this Master Loan and Security Agreement together with all
schedules and exhibits hereto, as amended, supplemented, or otherwise modified
from time to time.
APPLICABLE LAW shall mean the laws of the State of Illinois (or any other
jurisdiction whose laws are mandatorily applicable notwithstanding the parties'
choice of Illinois law) or the laws of the United States of America, whichever
laws allow the greater interest, as such laws now exist or may be changed or
amended or come into effect in the future.
BUSINESS DAY shall mean any day other than a Saturday, Sunday, or public holiday
or the equivalent for banks in New York City.
CODE shall have the meaning specified in Section 8(d).
COLLATERAL shall have the meaning specified in Section 2.
EFFECTIVE DATE shall mean the date on which all of the conditions specified in
Section 3.3 shall have been satisfied.
EQUIPMENT shall have the meaning specified in Section 2.
EVENT OF DEFAULT shall mean any event specified in Section 7.
FINANCIAL STATEMENTS shall have the meaning specified in Section 6.1.
GAAP shall mean generally accepted accounting principles in the United States of
America, as in effect from time to time.
LOANS shall mean the loans and financial accommodations made by the Lender to
the Borrower in accordance with the terms of this Agreement and the Notes.
LOAN DOCUMENTS shall mean, collectively, this Agreement, the Notes, and all
<PAGE>
other documents, agreements, certificates, instruments, and opinions executed
and delivered in connection herewith and therewith, as the same may be modified,
extended, restated, or supplemented from time to time.
MATERIAL ADVERSE CHANGE shall mean, with respect to any Person, a material
adverse change in the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Person taken
as a whole.
MATERIAL ADVERSE EFFECT shall mean, with respect to any Person, a material
adverse effect on the business, prospects, operations, results of operations,
assets, liabilities, or condition (financial or otherwise) of such Person taken
as a whole.
NOTE shall mean each Promissory Note made by the Borrower in favor of the
Lender, as amended, supplemented, or otherwise modified from time to time.
OBLIGATIONS shall mean all indebtedness, obligations, and liabilities of the
Borrower under the Notes and under this Agreement, whether on account of
principal, interest, indemnities, fees (including, without limitation,
reasonable attorneys' fees, remarketing fees, origination fees, collection fees,
and all other reasonable professionals' fees), costs, expenses, taxes, or
otherwise.
PERMITTED LIENS shall mean such of the following as to which no enforcement,
collection, execution, levy, or foreclosure proceeding shall have been
commenced: (a) liens for taxes, assessments, and other governmental charges or
levies or the claims or demands of landlords, carriers, warehousemen, mechanics,
laborers, materialmen, and other like Persons arising by operation of law in the
ordinary course of business for sums which are not yet due and payable, or liens
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP; (b) deposits or pledges to secure the payment of
worker's compensation, unemployment insurance, or other social security benefits
or obligations, public or statutory obligations, surety or appeal bonds, bid or
performance bonds, or other obligations of a like nature incurred in the
ordinary course of business; (c) licenses, restrictions, or covenants for or on
the use of the Equipment which do not materially impair either the use of the
Equipment in the operation of the business of the Borrower or the value of the
Equipment; and (d) attachment or judgment liens that do not constitute an Event
of Default.
PERSON shall mean any individual, sole proprietorship, partnership, limited
liability partnership, joint venture, trust, unincorporated organization,
association, corporation, limited liability company, institution, entity, party,
or government (including any division, agency, or department thereof), and the
successors, heirs, and assigns of each.
SCHEDULE shall mean each Schedule in the form of Schedule A hereto delivered by
the Borrower to the Lender from time to time.
SOLVENT means, with respect to any Person, that as of the date as to which such
Person's solvency is measured:
(a) the fair saleable value of its assets is in excess of the total amount
of its liabilities (including contingent liabilities as valued in accordance
with GAAP) as they become absolute and matured;
(b) it has sufficient capital to conduct its business; and
(c) it is able generally to meet its debts as they mature.
Taxes shall have the meaning specified in Section 5.5.
SECTION 2. CREATION OF SECURITY INTEREST; COLLATERAL. The Borrower hereby
assigns and grants to the Lender a continuing general, first priority lien on,
and security interest in, all the Borrower's right, title, and interest in and
to the collateral described in the next sentence (the "Collateral") to secure
the payment and performance of all the Obligations. The Collateral consists of
2
<PAGE>
all equipment set forth on all the Schedules delivered from time to time under
the terms of this Agreement (the "Equipment"), together with all present and
future additions, parts, accessories, attachments, substitutions, repairs,
improvements, and replacements thereof or thereto, and any and all proceeds
thereof, including, without limitation, proceeds of insurance and all manuals,
blueprints, know-how, warranties, and records in connection therewith, all
rights against suppliers, warrantors, manufacturers, sellers, or others in
connection therewith, and together with all substitutes for any of the
foregoing.
SECTION 3. THE CREDIT FACILITY.
SECTION 3.1. Borrowings. Each Loan shall be in an amount not less than
$50,000, and in no event shall the sum of the aggregate Loans made exceed the
amount of the Lender's written commitment to the Borrower in effect from time to
time. Notwithstanding anything herein to the contrary, the Lender shall be
obligated to make the initial Loan and each other Loan only after the Lender, in
its sole discretion, determines that the applicable conditions for borrowing
contained in Sections 3.3 and 3.4 are satisfied. The timing and financial scope
of Lender's obligation to make Loans hereunder are limited as set forth in a
commitment letter executed by Lender and Borrower, dated as of October 1, 1998
and attached hereto as Exhibit A (the "Commitment Letter").
SECTION 3.2. Application of Proceeds. The Borrower shall not directly or
indirectly use any proceeds of the Loans, or cause, assist, suffer, or permit
the use of any proceeds of the Loans, for any purpose other than for the
purchase, acquisition, installation, or upgrading of Equipment or the
reimbursement of the Borrower for its purchase, acquisition, installation, or
upgrading of Equipment.
SECTION 3.3. Conditions to Initial Loan.
(a) The obligation of the Lender to make the initial Loan is subject
to the Lender's receipt of the following, each dated the date of the
initial Loan or as of an earlier date acceptable to the Lender, in form and
substance satisfactory to the Lender and its counsel:
(i) completed requests for information (Form UCC-11) listing all
effective Uniform Commercial Code financing statements naming the
Borrower as debtor and all tax lien, judgment, and litigation searches
for the Borrower as the Lender shall deem necessary or desirable;
(ii) Uniform Commercial Code financing statements (Form UCC-1)
duly executed by the Borrower (naming the Lender as secured party and
the Borrower as debtor and in form acceptable for filing in all
jurisdictions that the Lender deems necessary or desirable to perfect
the security interests granted to it hereunder) and, if applicable,
termination statements or other releases duly filed in all
jurisdictions that the Lender deems necessary or desirable to perfect
and protect the priority of the security interests granted to it
hereunder in the Equipment related to such initial Loan;
(iii) a Note duly executed by the Borrower evidencing the amount
of such Loan;
(iv) certificates of insurance required under Section 5.4 of this
Agreement together with loss payee endorsements for all such policies
naming the Lender as lender loss payee and as an additional insured;
(v) a copy of the resolutions of the Board of Directors of the
Borrower (or a unanimous consent of directors in lieu thereof)
authorizing the execution, delivery, and performance of this
Agreement, the other Loan Documents, and the transactions contemplated
hereby and thereby, attached to which is a certificate of the
Secretary or an Assistant Secretary of the Borrower certifying (A)
that the copy of the resolutions is true, complete, and accurate, that
such resolutions have not been amended or modified since the date of
such certification and are in full force and effect and (B) the
incumbency, names, and true signatures of the officers of the Borrower
authorized to sign the Loan Documents to which it is a party;
3
<PAGE>
(vi) the opinion of counsel for the Borrower covering such
matters incident to the transactions contemplated by this Agreement as
the Lender may reasonably require; and
(vii) such other agreements and instruments as the Lender deems
necessary in its sole and absolute discretion in connection with the
transactions contemplated hereby.
(b) There shall be no pending or, to the knowledge of the Borrower
after due inquiry, threatened litigation, proceeding, inquiry, or other
action (i) seeking an injunction or other restraining order, damages, or
other relief with respect to the transactions contemplated by this
Agreement or the other Loan Documents or thereby or (ii) which affects or
could affect the business, prospects, operations, assets, liabilities, or
condition (financial or otherwise) of the Borrower, except, in the case of
clause (ii), where such litigation, proceeding, inquiry, or other action
could not be expected to have a Material Adverse Effect in the judgment of
the Lender.
(c) The Borrower shall have paid all fees and expenses required to be
paid by it to the Lender as of such date.
(d) The security interests in the Equipment related to the initial
Loan granted in favor of the Lender under this Agreement shall have been
duly perfected and shall constitute first priority liens.
SECTION 3.4. Conditions Precedent to Each Loan. The obligation of the
Lender to make each Loan is subject to the satisfaction of the following
conditions precedent:
(a) the Lender shall have received the documents, agreements, and
instruments set forth in Section 3.3(a)(i) through (v) applicable to such
Loan, each in form and substance satisfactory to the Lender and its counsel
and each dated the date of such Loan or as of an earlier date acceptable to
the Lender;
(b) the Lender shall have received a Schedule of the Equipment related
to such Loan, in form and substance satisfactory to the Lender and its
counsel, and the security interests in such Equipment related to such Loan
granted in favor of the Lender under this Agreement shall have been duly
perfected and shall constitute first priority liens;
(c) all representations and warranties contained in this Agreement and
the other Loan Documents shall be true and correct on and as of the date of
such Loan as if then made, other than representations and warranties that
expressly relate solely to an earlier date, in which case they shall have
been true and correct as of such earlier date;
(d) no Event of Default or event which with the giving of notice or
the passage of time, or both, would constitute an Event of Default shall
have occurred and be continuing or would result from the making of the
requested Loan as of the date of such request; and
(e) the Borrower shall be deemed to have hereby reaffirmed and
ratified all security interests, liens, and other encumbrances heretofore
granted by the Borrower to the Lender.
SECTION 4. THE BORROWER'S REPRESENTATIONS AND WARRANTIES.
SECTION 4.1. Good Standing; Qualified to do Business. The Borrower (a) is
duly organized, validly existing, and in good standing under the laws of the
State of its organization, (b) has the power and authority to own its properties
and assets and to transact the businesses in which it is presently, or proposes
to be, engaged, and (c) is duly qualified and authorized to do business and is
in good standing in every jurisdiction in which the failure to be so qualified
could have a Material Adverse Effect on (i) the Borrower, (ii) the Borrower's
ability to perform its obligations under the Loan Documents, or (iii) the rights
of the Lender hereunder.
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SECTION 4.2. Due Execution, etc. The execution, delivery, and performance
by the Borrower of each of the Loan Documents to which it is a party are within
the powers of the Borrower, do not contravene the organizational documents, if
any, of the Borrower, and do not (a) violate any law or regulation, or any order
or decree of any court or governmental authority, (b) conflict with or result in
a breach of, or constitute a default under, any material indenture, mortgage, or
deed of trust or any material lease, agreement, or other instrument binding on
the Borrower or any of its properties, or (c) require the consent, authorization
by, or approval of or notice to or filing or registration with any governmental
authority or other Person. This Agreement is, and each of the other Loan
Documents to which the Borrower is or will be a party, when delivered hereunder
or thereunder, will be, the legal, valid, and binding obligation of the Borrower
enforceable against the Borrower in accordance with its terms, except as
enforceability may be limited by bankruptcy, insolvency, or similar laws
affecting creditors' rights generally and by general principles of equity.
SECTION 4.3. Solvency; No Liens. The Borrower is Solvent and will be
Solvent upon the completion of all transactions contemplated to occur hereunder
(including, without limitation, the Loan to be made on the Effective Date); the
security interests granted herein constitute and shall at all times constitute
the first and only liens on the Collateral other than Permitted Liens; and the
Borrower is, or will be at the time additional Collateral is acquired by it, the
absolute owner of the Collateral with full right to pledge, sell, consign,
transfer, and create a security interest therein, free and clear of any and all
claims or liens in favor of any other Person other than Permitted Liens.
SECTION 4.4. No Judgments, Litigation. No judgments are outstanding against
the Borrower nor is there now pending or, to the best of the Borrower's
knowledge after diligent inquiry, threatened any litigation, contested claim, or
governmental proceeding by or against the Borrower except judgments and pending
or threatened litigation, contested claims, and governmental proceedings which
would not, in the aggregate, have a Material Adverse Effect on the Borrower.
SECTION 4.5. No Defaults. The Borrower is not in default or has not
received a notice of default under any material contract, lease, or commitment
to which it is a party or by which it is bound. The Borrower knows of no dispute
regarding any contract, lease, or commitment which could have a Material Adverse
Effect on the Borrower.
SECTION 4.6. Collateral Locations. On the date hereof, each item of the
Collateral is located at the place of business specified in the applicable
Schedule.
SECTION 4.7. No Events of Default. No Event of Default has occurred and is
continuing nor has any event occurred which, with the giving of notice or the
passage of time, or both, would constitute an Event of Default.
SECTION 4.8. No Limitation on Lender's Rights. Except as permitted herein,
none of the Collateral is subject to contractual obligations that may restrict
or inhibit the Lender's rights or abilities to sell or dispose of the Collateral
or any part thereof after the occurrence of an Event of Default.
SECTION 4.9. Perfection and Priority of Security Interest. This Agreement
creates a valid and, upon completion of all required filings of financing
statements, perfected first priority and exclusive security interest in the
Collateral, securing the payment of all the Obligations.
SECTION 4.10. Model and Serial Numbers. The Schedules set forth the true
and correct model number and serial number of each item of Equipment that
constitutes Collateral.
SECTION 4.11. Accuracy and Completeness of Information. All data, reports,
and information heretofore, contemporaneously, or hereafter furnished by or on
behalf of the Borrower in writing to the Lender or for purposes of or in
connection with this Agreement or any other Loan Document, or any transaction
contemplated hereby or thereby, are or will be true and accurate in all material
respects on the date as of which such data, reports, and information are dated
or certified and not incomplete by omitting to state any material fact necessary
to make such data, reports, and information not misleading at such time. There
are no facts now known to the Borrower which individually or in the aggregate
would reasonably be expected to have a Material Adverse Effect and which have
not been specified herein, in the Financial Statements, or in any certificate,
opinion, or other written statement previously furnished by the Borrower to the
Lender.
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SECTION 4.12. Price of Equipment. The cost of each item of Equipment does
not exceed the fair and usual price for such type of equipment purchased in like
quantity and reflects all discounts, rebates and allowances for the Equipment
(including, without limitation, discounts for advertising, prompt payment,
testing, or other services) given to the Borrower by the manufacturer, supplier,
or any other person.
SECTION 5. COVENANTS OF THE BORROWER.
SECTION 5.1. Existence, etc. The Borrower shall: (a) retain its existence
and its current yearly accounting cycle, (b) maintain in full force and effect
all licenses, bonds, franchises, leases, trademarks, patents, contracts, and
other rights necessary or desirable to the profitable conduct of its business
unless the failure to do so could not reasonably be expected to have a Material
Adverse Effect on the Borrower, (c) continue in, and limit its operations to,
the same general lines of business as those presently conducted by it, and (d)
comply with all applicable laws and regulations of any federal, state, or local
governmental authority, except for such laws and regulations the violations of
which would not, in the aggregate, have a Material Adverse Effect on the
Borrower.
SECTION 5.2. Notice to the Lender. As soon as possible, and in any event
within five days after the Borrower learns of the following, the Borrower will
give written notice to the Lender of (a) any proceeding instituted or threatened
to be instituted by or against the Borrower in any federal, state, local, or
foreign court or before any commission or other regulatory body (federal, state,
local, or foreign) involving a sum, together with the sum involved in all other
similar proceedings, in excess of $50,000 in the aggregate, (b) any contract
that is terminated or amended and which has had or could reasonably be expected
to have a Material Adverse Effect on the Borrower, (c) the occurrence of any
Material Adverse Change with respect to the Borrower, and (d) the occurrence of
any Event of Default or event or condition which, with notice or lapse of time
or both, would constitute an Event of Default, together with a statement of the
action which the Borrower has taken or proposes to take with respect thereto.
SECTION 5.3. Maintenance of Books and Records. The Borrower will maintain
books and records pertaining to the Collateral in such detail, form, and scope
as the Lender shall require in its commercially reasonable judgment. The
Borrower agrees that the Lender or its agents may enter upon the Borrower's
premises at any time and from time to time during normal business hours, and at
any time upon the occurrence and continuance of an Event of Default, for the
purpose of inspecting the Collateral and any and all records pertaining thereto.
SECTION 5.4. Insurance. The Borrower will maintain insurance on the
Collateral under such policies of insurance, with such insurance companies, in
such amounts, and covering such risks as are at all times satisfactory to the
Lender. All such policies shall be made payable to the Lender, in case of loss,
under a standard non-contributory "lender" or "secured party" clause and are to
contain such other provisions as the Lender may reasonably require to protect
the Lender's interests in the Collateral and to any payments to be made under
such policies. Certificates of insurance policies are to be delivered to the
Lender, premium prepaid, with the loss payable endorsement in the Lender's
favor, and shall provide for not less than thirty days' prior written notice to
the Lender, of any alteration or cancellation of coverage. If the Borrower fails
to maintain such insurance, the Lender may arrange for (at the Borrower's
expense and without any responsibility on the Lender's part for) obtaining the
insurance. Unless the Lender shall otherwise agree with the Borrower in writing,
the Lender shall have the sole right, in the name of the Lender or the Borrower,
to file claims under any insurance policies, to receive and give acquittance for
any payments that may be payable thereunder, and to execute any endorsements,
receipts, releases, assignments, reassignments, or other documents that may be
necessary to effect the collection, compromise, or settlement of any claims
under any such insurance policies.
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SECTION 5.5. Taxes. The Borrower will pay, when due, all taxes,
assessments, claims, and other charges ("Taxes") lawfully levied or assessed
against the Borrower or the Collateral other than taxes that are being
diligently contested in good faith by the Borrower by appropriate proceedings
promptly instituted and for which an adequate reserve is being maintained by the
Borrower in accordance with GAAP. If any Taxes remain unpaid after the date
fixed for the payment thereof, or if any lien shall be claimed therefor, then,
without notice to the Borrower, but on the Borrower's behalf, the Lender may pay
such Taxes, and the amount thereof shall be included in the Obligations.
SECTION 5.6. Borrower to Defend Collateral Against Claims; Fees on
Collateral. The Borrower will defend the Collateral against all claims and
demands of all Persons at any time claiming the same or any interest therein.
The Borrower will not permit any notice creating or otherwise relating to liens
on the Collateral or any portion thereof to exist or be on file in any public
office other than Permitted Liens. The Borrower shall promptly pay, when
payable, all transportation, storage, and warehousing charges and license fees,
registration fees, assessments, charges, permit fees, and taxes (municipal,
state, and federal) which may now or hereafter be imposed upon the ownership,
leasing, renting, possession, sale, or use of the Collateral, other than taxes
on or measured by the Lender's income and fees, assessments, charges, and taxes
which are being contested in good faith by appropriate proceedings diligently
conducted and with respect to which adequate reserves are maintained to the
extent required by GAAP.
SECTION 5.7. No Change of Location, Structure, or Identity. The Borrower
will not (a) change the location of its chief executive office or establish any
place of business other than those specified herein or (b) move or permit the
movement of any item of Collateral from the location specified in the applicable
Schedule, except that the Borrower may change its chief executive office and
keep Collateral at other locations within the United States provided that the
Borrower has delivered to the Lender (i) prior written notice thereof and (ii)
duly executed financing statements and other agreements and instruments (all in
form and substance satisfactory to the Lender) necessary or, in the opinion of
the Lender, desirable to perfect and maintain in favor of the Lender a first
priority security interest in the Collateral. Notwithstanding anything to the
contrary in the immediately preceding sentence, the Borrower may keep any
Collateral consisting of motor vehicles or rolling stock at any location in the
United States provided that the Lender's security interest in any such
Collateral is conspicuously marked on the certificate of title thereof and the
Borrower has complied with the provisions of Section 5.9.
SECTION 5.8. Use of Collateral; Licenses; Repair. The Collateral shall be
operated by competent, qualified personnel in connection with the Borrower's
business purposes, for the purpose for which the Collateral was designed and in
accordance with applicable operating instructions, laws, and government
regulations, and the Borrower shall use every reasonable precaution to prevent
loss or damage to the Collateral from fire and other hazards. The Collateral
shall not be used or operated for personal, family, or household purposes. The
Borrower shall procure and maintain in effect all orders, licenses,
certificates, permits, approvals, and consents required by federal, state, or
local laws or by any governmental body, agency, or authority in connection with
the delivery, installation, use, and operation of the Collateral. The Borrower
shall keep all of the Equipment in a satisfactory state of repair and
satisfactory operating condition in accordance with industry standards, and will
make all repairs and replacements when and where necessary and practical. The
Borrower will not waste or destroy the Equipment or any part thereof, and will
not be negligent in the care or use thereof. The Equipment shall not be annexed
or affixed to or become part of any realty without the Lender's prior written
consent.
SECTION 5.9. Further Assurances. The Borrower will, promptly upon request
by the Lender, execute and deliver or use its best efforts to obtain any
document required by the Lender (including, without limitation, warehouseman or
processor disclaimers, mortgagee waivers, landlord disclaimers, or subordination
agreements with respect to the Obligations and the Collateral), give any
notices, execute and file any financing statements, mortgages, or other
documents (all in form and substance satisfactory to the Lender), mark any
chattel paper, deliver any chattel paper or instruments to the Lender, and take
any other actions that are necessary or, in the opinion of the Lender, desirable
to perfect or continue the perfection and the first priority of the Lender's
security interest in the Collateral, to protect the Collateral against the
rights, claims, or interests of any Persons, or to effect the purposes of this
Agreement. The Borrower hereby authorizes the Lender to file one or more
financing or continuation statements, and amendments thereto, relating to all or
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any part of the Collateral without the signature of the Borrower where permitted
by law. A carbon, photographic, or other reproduction of this Agreement or any
financing statement covering the Collateral or any part thereof shall be
sufficient as a financing statement where permitted by law. To the extent
required under this Agreement, the Borrower will pay all costs incurred in
connection with any of the foregoing.
SECTION 5.10. No Disposition of Collateral. The Borrower will not in any
way hypothecate or create or permit to exist any lien, security interest,
charge, or encumbrance on or other interest in any of the Collateral, except for
the lien and security interest granted hereby and Permitted Liens which are
junior to the lien and security interest of the Lender, and the Borrower will
not sell, transfer, assign, pledge, collaterally assign, exchange, or otherwise
dispose of any of the Collateral. In the event the Collateral, or any part
thereof, is sold, transferred, assigned, exchanged, or otherwise disposed of in
violation of these provisions, the security interest of the Lender shall
continue in such Collateral or part thereof notwithstanding such sale, transfer,
assignment, exchange, or other disposition, and the Borrower will hold the
proceeds thereof in a separate account for the benefit of the Lender. Following
such a sale, the Borrower will transfer such proceeds to the Lender in kind.
SECTION 5.11. No Limitation on Lender's Rights. The Borrower will not enter
into any contractual obligations which may restrict or inhibit the Lender's
rights or ability to sell or otherwise dispose of the Collateral or any part
thereof.
SECTION 5.12. Protection of Collateral. Upon notice to the Borrower
(provided that if an Event of Default has occurred and is continuing the Lender
need not give any notice), the Lender shall have the right at any time to make
any payments and do any other acts the Lender may deem necessary to protect its
security interests in the Collateral, including, without limitation, the rights
to satisfy, purchase, contest, or compromise any encumbrance, charge, or lien
which, in the reasonable judgment of the Lender, appears to be prior to or
superior to the security interests granted hereunder, and appear in, and defend
any action or proceeding purporting to affect its security interests in, or the
value of, any of the Collateral. The Borrower hereby agrees to reimburse the
Lender for all payments made and expenses incurred under this Agreement
including fees, expenses, and disbursements of attorneys and paralegals
(including the allocated costs of in-house counsel) acting for the Lender,
including any of the foregoing payments under, or acts taken to protect its
security interests in, any of the Collateral, which amounts shall be secured
under this Agreement, and agrees it shall be bound by any payment made or act
taken by the Lender hereunder absent the Lender's gross negligence or willful
misconduct. The Lender shall have no obligation to make any of the foregoing
payments or perform any of the foregoing acts.
SECTION 5.13. Delivery of Items. The Borrower will (a) promptly (but in no
event later than one Business Day) after its receipt thereof, deliver to the
Lender any documents or certificates of title issued with respect to any
property included in the Collateral, and any promissory notes, letters of credit
or instruments related to or otherwise in connection with any property included
in the Collateral, which in any such case come into the possession of the
Borrower, or shall cause the issuer thereof to deliver any of the same directly
to the Lender, in each case with any necessary endorsements in favor of the
Lender and (b) deliver to the Lender as soon as available copies of any and all
press releases and other similar communications issued by the Borrower.
SECTION 5.14. Solvency. The Borrower shall be and remain Solvent at all
times.
SECTION 5.15. Fundamental Changes. The Borrower shall not (a) amend or
modify its name, unless the Borrower delivers to the Lender thirty days prior to
any such proposed amendment or modification written notice of such amendment or
modification and within ten days before such amendment or modification delivers
executed Uniform Commercial Code financing statements (in form and substance
satisfactory to the Lender) or (b) merge or consolidate with any other entity or
make any material change in its capital structure, in each case without the
Lender's prior written consent which shall not be unreasonably withheld,
provided that no consent shall be required if the merger or consolidation is
with a company which (i) has a minimum of $1,000,000,000 in annual sales, (ii)
is profitable and (iii) has a market capitalization of at least $1,000,000,000.
Unless Lender is provided reasonable advance notice and consents in writing to
the following before it occurs, there shall be no change, which change results
from a single transaction or series of related transactions, but not from the
sale of newly issued securities to investors, in more than 35% of the ownership
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of any equity interests of the Borrower on the date hereof and no more than 35%
of such interests may become subject to any contractual, judicial, or statutory
lien, charge, security interest, or encumbrance. Notwithstanding the foregoing,
no consent shall be required if the entity acquiring Borrower's equity
securities (i) has a minimum of $1,000,000,000 in annual sales, (ii) is
profitable and (iii) has a market capitalization of at least $1,000,000,000.
SECTION 5.16. Additional Requirements. The Borrower shall take all such
further actions and execute all such further documents and instruments as the
Lender may reasonably request.
SECTION 6. FINANCIAL STATEMENTS. Until the payment and satisfaction in full
of all Obligations, the Borrower shall deliver to the Lender the following
financial information:
SECTION 6.1. Annual Financial Statements. As soon as available, but not
later than 120 days after the end of each fiscal year of the Borrower and its
consolidated subsidiaries, the consolidated balance sheet, income statement, and
statements of cash flows and shareholders equity for the Borrower and its
consolidated subsidiaries (the "Financial Statements") for such year, reported
on by independent certified public accountants without an adverse qualification;
and
SECTION 6.2. Quarterly Financial Statements. As soon as available, but not
later than 60 days after the end of each of the first three fiscal quarters in
any fiscal year of the Borrower and its consolidated subsidiaries, the Financial
Statements for such fiscal quarter, together with a certification duly executed
by a responsible officer of the Borrower that such Financial Statements have
been prepared in accordance with GAAP and are fairly stated in all material
respects (subject to normal year-end audit adjustments).
SECTION 7. EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an Event of Default hereunder:
(a) the Borrower shall fail to pay within five days of when due any
amount required to be paid by the Borrower under or in connection with any
Note and this Agreement;
(b) any representation or warranty made or deemed made by the Borrower
under or in connection with any Loan Document or any Financial Statement
shall prove to have been false or incorrect in any material respect when
made;
(c) the Borrower shall fail to perform or observe (i) any of the
terms, covenants or agreements contained in Sections 5.4, 5.7, 5.10, 5.14,
or 5.15 hereof or (ii) any other term, covenant, or agreement contained in
any Loan Document (other than the other Events of Default specified in this
Section 7) and such failure remains unremedied for the earlier of fifteen
days from (A) the date on which the Lender has given the Borrower written
notice of such failure and (B) the date on which the Borrower knew or
should have known of such failure;
(d) any provision of any Loan Document to which the Borrower is a
party shall for any reason cease to be valid and binding on the Borrower,
or the Borrower shall so state;
(e) dissolution, liquidation, winding up, or cessation of the
Borrower's business, failure of the Borrower generally to pay its debts as
they mature, admission in writing by the Borrower of its inability
generally to pay its debts as they mature, or calling of a meeting of the
Borrower's creditors for purposes of compromising any of the Borrower's
debts;
(f) the commencement by or against the Borrower of any bankruptcy,
insolvency, arrangement, reorganization, receivership, or similar
proceedings under any federal or state law and, in the case of any such
involuntary proceeding, such proceeding remains undismissed or unstayed for
forty-five days following the commencement thereof, or any action by the
Borrower is taken authorizing any such proceedings;
(g) an assignment for the benefit of creditors is made by the
Borrower, whether voluntary or involuntary, the appointment of a
trustee,custodian, receiver, or similar official for the Borrower or for
any
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substantial property of the Borrower, or any action by the Borrower
authorizing any such proceeding;
(h) the Borrower shall default in (i) the payment of principal or
interest on any indebtedness in excess of $50,000 (other than the
Obligations) beyond the period of grace, if any, provided in the instrument
or agreement under which such indebtedness was created; or (ii) the
observance or performance of any other agreement or condition relating to
any such indebtedness or contained in any instrument or agreement relating
thereto, or any other event shall occur or condition exist, the effect of
which default or other event or condition is to cause, or to permit the
holder or holders of such indebtedness to cause, with the giving of notice
if required, such indebtedness to become due prior to its stated maturity;
or (iii) any loan or other agreement under which the Borrower has received
financing from Transamerica Corporation or any of its affiliates;
(i) the Borrower suffers or sustains a Material Adverse Change;
(j) any tax lien, other than a Permitted Lien, is filed of record
against the Borrower and is not bonded or discharged within five Business
Days;
(k) any judgment which has had or could reasonably be expected to have
a Material Adverse Effect on the Borrower and such judgment shall not be
stayed, vacated, bonded, or discharged within sixty days; or
(l) any material covenant, agreement, or obligation, as determined in
the good faith business judgment of the Lender, made by the Borrower and
contained in or evidenced by any of the Loan Documents shall cease to be
enforceable, or shall be determined to be unenforceable, in accordance with
its terms; the Borrower shall deny or disaffirm the Obligations under any
of the Loan Documents or any liens granted in connection therewith; or any
liens granted on any of the Collateral in favor of the Lender shall be
determined to be void, voidable, or invalid, or shall not be given the
priority contemplated by this Agreement.
SECTION 8. REMEDIES. If any Event of Default shall have occurred and be
continuing:
(a) The Lender may, without prejudice to any of its other rights under
any Loan Document or Applicable Law, declare all Obligations to be
immediately due and payable (except with respect to any Event of Default
set forth in Section 7(f) hereof, in which case all Obligations shall
automatically become immediately due and payable without necessity of any
declaration) without presentment, representation, demand of payment, or
protest, which are hereby expressly waived.
(b) The Lender may take possession of the Collateral and, for that
purpose may enter, with the aid and assistance of any person or persons,
any premises where the Collateral or any part hereof is, or may be placed,
and remove the same.
(c) The obligation of the Lender, if any, to make additional Loans or
financial accommodations of any kind to the Borrower shall immediately
terminate.
(d) The Lender may exercise in respect of the Collateral, in addition
to other rights and remedies provided for herein (or in any Loan Document)
or otherwise available to it, all the rights and remedies of a secured
party under the applicable Uniform Commercial Code (the "Code") whether or
not the Code applies to the affected Collateral and also may (i) require
the Borrower to, and the Borrower hereby agrees that it will at its expense
and upon request of the Lender forthwith, assemble all or part of the
Collateral as directed by the Lender and make it available to the Lender at
a place to be designated by the Lender that is reasonably convenient to
both parties and (ii) without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or private
sale, at any of the Lender's offices or elsewhere, for cash, on credit, or
for future delivery, and upon such other terms as the Lender may deem
commercially reasonable. The Borrower agrees that, to the extent notice of
sale shall be required by law, at least ten days' notice to the Borrower of
the time and place of any public sale or the time after which any private
sale is to be made shall constitute reasonable notification. The Lender
shall not be obligated to make any sale of Collateral regardless of notice
of sale having been given. The
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Lender may adjourn any public or private sale from time to time by
announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned.
(e) All cash proceeds received by the Lender in respect of any sale
of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of the Lender, be held by the Lender as
collateral for, or then or at any time thereafter applied in whole or in
part by the Lender against, all or any part of the Obligations in such
order as the Lender shall elect. Any surplus of such cash or cash proceeds
held by the Lender and remaining after the full and final payment of all
the Obligations shall be paid over to the Borrower or to such other Person
to which the Lender may be required under applicable law, or directed by a
court of competent jurisdiction, to make payment of such surplus.
SECTION 9. MISCELLANEOUS PROVISIONS.
SECTION 9.1. Notices. Except as otherwise provided herein, all notices,
approvals, consents, correspondence, or other communications required or desired
to be given hereunder shall be given in writing and shall be delivered by
overnight courier, hand delivery, or certified or registered mail, postage
prepaid, if to the Lender, then to Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department, and if to the Borrower, then to PulsePoint Communications, 6307
Carpinteria Avenue, Carpinteria, California 93013, Attention: Vice President and
CFO or such other address as shall be designated by the Borrower or the Lender
to the other party in accordance herewith. All such notices and correspondence
shall be effective when received.
SECTION 9.2. Headings. The headings in this Agreement are for purposes of
reference only and shall not affect the meaning or construction of any provision
of this Agreement.
SECTION 9.3. Assignments. The Borrower shall not have the right to assign
any Note or this Agreement or any interest therein unless the Lender shall have
given the Borrower prior written consent and the Borrower and its assignee shall
have delivered assignment documentation in form and substance satisfactory to
the Lender in its sole discretion. The Lender may assign its rights and delegate
its obligations under any Note or this Agreement.
SECTION 9.4. Amendments, Waivers, and Consents. Any amendment or waiver of
any provision of this Agreement and any consent to any departure by the Borrower
from any provision of this Agreement shall be effective only by a writing signed
by the Lender and shall bind and benefit the Borrower and the Lender and their
respective successors and assigns, subject, in the case of the Borrower, to the
first sentence of Section 9.3.
SECTION 9.5. Interpretation of Agreement. Time is of the essence in each
provision of this Agreement of which time is an element. All terms not defined
herein or in a Note shall have the meaning set forth in the applicable Code,
except where the context otherwise requires. To the extent a term or provision
of this Agreement conflicts with any Note, or any term or provision thereof, and
is not dealt with herein with more specificity, this Agreement shall control
with respect to the subject matter of such term or provision. Acceptance of or
acquiescence in a course of performance rendered under this Agreement shall not
be relevant in determining the meaning of this Agreement even though the
accepting or acquiescing party had knowledge of the nature of the performance
and opportunity for objection.
SECTION 9.6. Continuing Security Interest. This Agreement shall create a
continuing security interest in the Collateral and shall (i) remain in full
force and effect until the indefeasible payment in full of the Obligations, (ii)
be binding upon the Borrower and its successors and assigns and (iii) inure,
together with the rights and remedies of the Lender hereunder, to the benefit of
the Lender and its successors, transferees, and assigns.
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SECTION 9.7. Reinstatement. To the extent permitted by law, this Agreement
and the rights and powers granted to the Lender hereunder and under the Loan
Documents shall continue to be effective or be reinstated if at any time any
amount received by the Lender in respect of the Obligations is rescinded or must
otherwise be restored or returned by the Lender upon the insolvency, bankruptcy,
dissolution, liquidation, or reorganization of the Borrower or upon the
appointment of any receiver, intervenor, conservator, trustee, or similar
official for the Borrower or any substantial part of its assets, or otherwise,
all as though such payments had not been made.
SECTION 9.8. Survival of Provisions. All representations, warranties, and
covenants of the Borrower contained herein shall survive the execution and
delivery of this Agreement, and shall terminate only upon the full and final
payment and performance by the Borrower of the Obligations secured hereby.
SECTION 9.9. Indemnification. The Borrower agrees to indemnify and hold
harmless the Lender and its directors, officers, agents, employees, and counsel
from and against any and all costs, expenses, claims, or liability incurred by
the Lender or such Person hereunder and under any other Loan Document or in
connection herewith or therewith, unless such claim or liability shall be due to
willful misconduct or gross negligence on the part of the Lender or such Person.
SECTION 9.10. Counterparts; Telecopied Signatures. This Agreement may be
executed in counterparts, each of which when so executed and delivered shall be
an original, but both of which shall together constitute one and the same
instrument. This Agreement and each of the other Loan Documents and any notices
given in connection herewith or therewith may be executed and delivered by
telecopier or other facsimile transmission all with the same force and effect as
if the same was a fully executed and delivered original manual counterpart.
SECTION 9.11. Severability. In case any provision in or obligation under
this Agreement or any Note or any other Loan Document shall be invalid, illegal,
or unenforceable in any jurisdiction, the validity, legality, and enforceability
of the remaining provisions or obligations, or of such provision or obligation
in any other jurisdiction, shall not in any way be affected or impaired thereby.
SECTION 9.12. Delays; Partial Exercise of Remedies. No delay or omission of
the Lender to exercise any right or remedy hereunder, whether before or after
the happening of any Event of Default, shall impair any such right or shall
operate as a waiver thereof or as a waiver of any such Event of Default. No
single or partial exercise by the Lender of any right or remedy shall preclude
any other or further exercise thereof, or preclude any other right or remedy.
SECTION 9.13. Entire Agreement. The Borrower and the Lender agree that this
Agreement, the Schedule hereto, and the Commitment Letter are the complete and
exclusive statement and agreement between the parties with respect to the
subject matter hereof, superseding all proposals and prior agreements, oral or
written, and all other communications between the parties with respect to the
subject matter hereof. Should there exist any inconsistency between the terms of
the Commitment Letter and this Agreement, the terms of this Agreement shall
prevail.
SECTION 9.14. Setoff. In addition to and not in limitation of all rights of
offset that the Lender may have under Applicable Law, and whether or not the
Lender has made any demand or the Obligations of the Borrower have matured, the
Lender shall have the right to appropriate and apply to the payment of the
Obligations of the Borrower all deposits and other obligations then or
thereafter owing by the Lender to or for the credit or the account of the
Borrower.
SECTION 9.15. WAIVER OF JURY TRIAL. THE BORROWER AND THE LENDER IRREVOCABLY
WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING, OR COUNTERCLAIM
ARISING OUT OF OR RELATING TO THIS AGREEMENT, ANY OTHER LOAN DOCUMENT, OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
12
<PAGE>
SECTION 9.16. GOVERNING LAW. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT
OF THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS
OF THE STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
SECTION 9.17. Venue; Service of Process. ANY LEGAL ACTION OR PROCEEDING
WITH RESPECT TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT MAY BE BROUGHT IN THE
COURTS OF THE STATE OF ILLINOIS SITUATED IN COOK COUNTY, OR OF THE UNITED STATES
OF AMERICA FOR THE NORTHERN DISTRICT OF ILLINOIS, AND, BY EXECUTION AND DELIVERY
OF THIS AGREEMENT, THE BORROWER HEREBY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS
PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID
COURTS. THE BORROWER HEREBY IRREVOCABLY WAIVES, IN CONNECTION WITH ANY SUCH
ACTION OR PROCEEDING, (a) ANY OBJECTION, INCLUDING, WITHOUT LIMITATION, ANY
OBJECTION TO THE LAYING OF VENUE OR BASED ON THE GROUNDS OF FORUM NON
CONVENIENS, THAT IT MAY NOW OR HEREAFTER HAVE TO THE BRINGING OF ANY SUCH ACTION
OR PROCEEDING IN SUCH RESPECTIVE JURISDICTIONS AND (b) THE RIGHT TO INTERPOSE
ANY NONCOMPULSORY SETOFF, COUNTERCLAIM, OR CROSS-CLAIM. THE BORROWER IRREVOCABLY
CONSENTS TO THE SERVICE OF PROCESS OF ANY OF THE AFOREMENTIONED COURTS IN ANY
SUCH ACTION OR PROCEEDING BY THE MAILING OF COPIES THEREOF BY REGISTERED OR
CERTIFIED MAIL, POSTAGE PREPAID, TO THE BORROWER AT THE ADDRESS FOR IT SPECIFIED
IN SECTION 9.1 HEREOF. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE LENDER TO
SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO COMMENCE LEGAL
PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY OTHER JURISDICTION,
SUBJECT IN EACH INSTANCE TO THE PROVISIONS HEREOF WITH RESPECT TO RIGHTS AND
REMEDIES.
IN WITNESS WHEREOF, the undersigned Borrower has caused this Agreement to
be duly executed and delivered by its proper and duly authorized officer as of
the date first set forth above.
PULSEPOINT COMMUNICATIONS
By: /s/ B. Robert Suh
------------------------------
Name: B. Robert Suh
Title: Vice President and CFO
Federal Tax ID: 953222624
Accepted as of the
10th day of November, 1998
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Gary P. Moro
------------------------------
Name: Gary P. Moro
Title: Vice President
Form16
13
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS OR UNLESS, IF THE COMPANY SO REQUESTS OF HOLDER, THE COMPANY HAS RECEIVED
AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL TO THE COMPANY) REASONABLY
SATISFACTORY TO THE COMPANY AS TO SUCH EXEMPTION.
No. 1
STOCK SUBSCRIPTION WARRANT
To Purchase Common Stock of
PULSEPOINT COMMUNICATIONS (the "Company")
DATE OF INITIAL ISSUANCE: November 10, 1998
THIS CERTIFIES THAT for value received, TBCC FUNDING TRUST II or its
registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant, Seventy Three
Thousand Eight Hundred Forty-Six (73,846) shares of common stock, no par value,
of the Company (the "Common Stock"), at the Warrant Price, payable as provided
herein. The exercise of this Warrant shall be subject to the provisions,
limitations and restrictions herein contained, and may be exercised in whole or
in part.
SECTION 1. DEFINITIONS.
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
COMMON STOCK - shall mean and include the Company's authorized Common
Stock, no par value, as constituted at the date hereof.
EXCHANGE ACT - shall mean the Securities Exchange Act of 1934, as amended
from time to time.
SECURITIES ACT - the Securities Act of 1933, as amended from time to time.
TERM OF THIS Warrant - shall mean the period beginning on the date of
initial issuance hereof and ending on November 10, 2005.
WARRANT PRICE - $3.25 per share, subject to adjustment in accordance with
Section 5 hereof.
WARRANTS - this Warrant and any other Warrant or Warrants issued in
connection with a Commitment Letter dated October 1, 1998 executed by the
Company and Transamerica Business Credit Corporation (the "Commitment Letter")
to the original holder of this Warrant, or any transferees from such original
holder or this Holder.
<PAGE>
WARRANT SHARES - shares of Common Stock purchased or purchasable by the
Holder of this Warrant upon the exercise hereof.
SECTION 2. EXERCISE OF WARRANT.
2.1. PROCEDURE FOR EXERCISE OF WARRANT. To exercise this Warrant in whole
or in part (but not as to any fractional share of Common Stock), the Holder
shall deliver to the Company at its office referred to in Section 12 hereof at
any time and from time to time during the Term of this Warrant: (i) the Notice
of Exercise in the form attached hereto, (ii) cash, certified or official bank
check payable to the order of the Company, wire transfer of funds to the
Company's account, or evidence of any indebtedness of the Company to the Holder
(or any combination of any of the foregoing) in the amount of the Warrant Price
for each share being purchased, and (iii) this Warrant. Notwithstanding any
provisions herein to the contrary, if the Current Market Price (as defined in
Section 5) is greater than the Warrant Price (at the date of calculation, as set
forth below), in lieu of exercising this Warrant as hereinabove permitted, the
Holder may elect to receive shares of Common Stock equal to the value (as
determined below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the office of the Company referred to in Section 12
hereof, together with the Notice of Exercise, in which event the Company shall
issue to the Holder that number of shares of Common Stock computed using the
following formula:
CS = WCS x (CMP-WP)
--------------
CMP
Where
CS equals the number of shares of Common Stock to be issued to the Holder
WCS equals the number of shares of Common Stock purchasable under the Warrant
or, if only a portion of the Warrant is being exercised, the portion of the
Warrant being exercised (at the date of such calculation)
CMP equals the Current Market Price (at the date of such calculation)
WP equals the Warrant Price (as adjusted to the date of such calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the Warrant was
surrendered and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
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<PAGE>
2.2. TRANSFER RESTRICTION LEGEND. Each certificate for Warrant Shares
shall bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof unless at the time of exercise such Warrant Shares shall be registered
under the Securities Act:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or any state securities
laws, and may not be sold or transferred in the absence of any such
registration or unless the Company has requested of Holder and
receives an opinion of counsel (which may be counsel to the Company)
that such sale or transfer is pursuant to an exemption therefrom under
said Act and any applicable state securities laws (which counsel and
opinion, if requested of Holder shall be reasonably satisfactory to
counsel for the Company)."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the holder thereof (which counsel shall be reasonably satisfactory
to counsel for the Company) the securities represented thereby are not, at such
time, required by law to bear such legend.
SECTION 3. COVENANTS AS TO COMMON STOCK. The Company covenants and agrees that
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that it will pay
when due and payable any and all federal and state documentary stamp or similar
taxes which may be payable in respect of the issue of this Warrant or any Common
Stock or certificates therefor issuable upon the exercise of this 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 from the original Holder
hereof or any subsequent holder involved in any such issuance. The Company
further covenants and agrees that the Company will at all times have authorized
and reserved, free from preemptive rights, a sufficient number of shares of
Common Stock to provide for the exercise of the rights represented by this
Warrant. Holder and any direct or remote transferee from Holder by acceptance of
delivery of this Warrant hereby represents and agrees that (i) such person will
acquire the warrant Shares for its own account for investment purposes only and
not with a view to distribution within the meaning of the Securities Act, and
(ii) such person is an accredited investor, as such term is defined in
Regulation D under the Securities Act, has the knowledge and experience in
financial matters necessary to evaluate an investment in the Warrant Shares and
has the financial resources necessary to suffer the complete loss of the value
of such investment. If and so long as the Common Stock issuable upon the
exercise of this Warrant is listed on any national securities exchange, the
Company will, if permitted by the rules of such exchange, list and keep listed
on such exchange, upon official notice of issuance, all shares of such Common
Stock issuable upon exercise of this Warrant.
SECTION 4. ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
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<PAGE>
SECTION 5. ADJUSTMENT OF WARRANT PRICE. The Warrant Price shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of shares
of Common Stock outstanding is increased by a stock dividend payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock, then,
following the record date fixed for the determination of holders of Common Stock
entitled to receive such stock dividend, subdivision or split-up, the Warrant
Price shall be appropriately decreased so that the number of shares of Common
Stock issuable upon the exercise hereof shall be increased in proportion to such
increase in outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of shares
of Common Stock outstanding is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date for such combination,
the Warrant Price shall appropriately increase so that the number of shares of
Common Stock issuable upon the exercise hereof shall be decreased in proportion
to such decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than out
of earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock, and of which the denominator shall be such Current
Market Price.
(iv) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
(v) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 15 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or as reported by Nasdaq (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of the Common Stock are not reported by Nasdaq then such
price shall be equal to the average of the last reported bid and asked prices on
such day as reported by The National Quotation Bureau Incorporated or any
similar reputable quotation and reporting service, if such quotation is not
reported by The National Quotation Bureau Incorporated); provided, however, that
- 4 -
<PAGE>
if the Common Stock is not traded in such manner that the quotations referred to
in this clause (v) are available for the period required hereunder, the Current
Market Price shall be determined in good faith by the Board of Directors of the
Company or, if such determination cannot be made, by a nationally recognized
independent investment banking firm selected by the Board of Directors of the
Company (or if such selection cannot be made, by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in accordance with its rules).
(vi) Whenever the Warrant Price shall be adjusted as provided in Section
5, the Company shall prepare a statement showing the facts requiring such
adjustment and the Warrant Price that shall be in effect after such adjustment.
The Company shall cause a copy of such statement to be sent by mail, first class
postage prepaid, to each Holder of this Warrant at its, his or her address
appearing on the Company's records. Where appropriate, such copy may be given in
advance and may be included as part of the notice required to be mailed under
the provisions of subsection (viii) of this Section 5.
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above shall
be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall give to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall require
that an adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event issuing to the
Holder of all or any part of this Warrant which is exercised after such record
date and before the occurrence of such event the additional shares of capital
stock issuable upon such exercise by reason of the adjustment required by such
event over and above the shares of capital stock issuable upon such exercise
before giving effect to such adjustment exercise; provided, however, that the
Company shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
SECTION 6. OWNERSHIP.
6.1. OWNERSHIP OF THIS WARRANT. The Company may deem and treat the person
in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. TRANSFER AND REPLACEMENT. This Warrant and all rights hereunder are
transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 12
hereof. Prior to any proposed transfer of a Warrant or of the Warrant
- 5 -
<PAGE>
Shares, if such transfer is not made pursuant to an effective Registration
Statement under the Securities Act or under Rule 144, the transferor will, if
requested by the Company, deliver to the Company: (1) a customary 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 required by this agreement on the certificate(s)
representing the Warrant or Warrant Shares; (3) an agreement by such transferee
to be bound by the provisions of this agreement. Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft or destruction, and,
in such case, of indemnity or security reasonably satisfactory to it, and upon
surrender of this Warrant if mutilated, the Company will make and deliver a new
Warrant of like tenor, in lieu of this Warrant; provided that if the Holder
hereof is an instrumentality of a state or local government or an institutional
holder or a nominee for such an instrumentality or institutional holder with a
credit standing reasonably satisfactory to the Company an irrevocable agreement
of indemnity by such Holder shall be sufficient for all purposes of this Section
6, and no evidence of loss or theft or destruction shall be necessary. This
Warrant shall be promptly cancelled by the Company upon the surrender hereof in
connection with any transfer or replacement. Holder will not transfer this
Warrant and the rights hereunder except in compliance with federal and state
securities laws.
SECTION 7. MERGERS, CONSOLIDATION, SALES. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such consolidation,
merger, sale, reorganization or reclassification) be issued or payable with
respect to or in exchange for the number of shares of such Common Stock
purchasable hereunder immediately before such consolidation, merger, sale,
reorganization or reclassification. In any such case appropriate provision shall
be made with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof shall thereafter be applicable as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of this Warrant.
SECTION 8. NOTICE OF DISSOLUTION OR LIQUIDATION. In case of any distribution of
the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
SECTION 9. NOTICE OF EXTRAORDINARY DIVIDENDS. If the Board of Directors of the
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the Holder hereof not
less than thirty (30) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution, and
the Holder hereof shall not participate in such dividend or other distribution
unless this Warrant is exercised prior to such record date. The provisions of
this Section 9 shall not apply to distributions made in connection with
transactions covered by Section 7.
- 6 -
<PAGE>
SECTION 10. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
SECTION 11. SPECIAL ARRANGEMENTS OF THE COMPANY. The Company covenants and
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
11.1. WILL RESERVE SHARES. The Company will reserve and set apart and have
available for issuance at all times, free from preemptive or other preferential
rights, the number of shares of authorized but unissued Common Stock deliverable
upon the exercise of this Warrant.
11.2. WILL NOT AMEND CERTIFICATE. The Company will not amend its
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. WILL BIND SUCCESSORS. This Warrant shall be binding upon any
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
SECTION 12. NOTICES. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department or to such other address as shall have been furnished to the Company
in writing by the Holder. Any notice or other document required or permitted to
be given or delivered to the Company shall be delivered at, or sent by certified
or registered mail to, the Company at 6307 Carpinteria Avenue, , Carpinteria,
California, 93013, Attention: Vice President and CFO or to such other address as
shall have been furnished in writing to the Holder by the Company. Any notice so
addressed and mailed by registered or certified mail shall be deemed to be given
when so mailed. Any notice so addressed and otherwise delivered shall be deemed
to be given when actually received by the addressee.
SECTION 13. NO RIGHTS AS STOCKHOLDER; LIMITATION OF LIABILITY. This Warrant
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No provision
hereof, in the absence of affirmative action by the Holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give rise to any liability of the Holder for the Warrant Price
hereunder or as a shareholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.
SECTION 14. LAW GOVERNING. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
- 7 -
<PAGE>
SECTION 15. MISCELLANEOUS. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by both
parties (or any respective predecessor in interest thereof). The headings in
this Warrant are for purposes of reference only and shall not affect the meaning
or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer this 10 day of November, 1998.
PULSEPOINT COMMUNICATIONS
[CORPORATE SEAL]
By: /s/ B. Robert Suh
---------------------------
Title: Vice President and CFO
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<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase _________ shares of
Common Stock which the undersigned is entitled to purchase by the terms of the
within Warrant according to the conditions thereof, and herewith
[check one]
[ ] makes payment of $_____________ therefor; or
[ ] directs the Company to issue ___________
shares, and to withhold _________ shares in
lieu of payment of the Warrant Price, as
described in Section 2.1 of the Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following
denominations:
_______________________________
[Type Name of Holder]
By:____________________________
Title:_________________________
Dated:___________________________
- 9 -
<PAGE>
FORM OF ASSIGNMENT
(ENTIRE)
[To be signed only upon transfer of entire Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns and
transfers unto _______________________________ all rights of the undersigned
under and pursuant to the within Warrant, and the undersigned does hereby
irrevocably constitute and appoint _______________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
_______________________________
[Type Name of Holder]
By:____________________________
Title:_________________________
Dated:___________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
- 10 -
<PAGE>
FORM OF ASSIGNMENT
(PARTIAL)
[To be signed only upon partial transfer of Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _______________________________ (i) the rights of the undersigned
to purchase ___ shares of Common Stock under and pursuant to the within Warrant,
and (ii) on a non-exclusive basis, all other rights of the undersigned under and
pursuant to the within Warrant, it being understood that the undersigned shall
retain, severally (and not jointly) with the transferee(s) named herein, all
rights assigned on such non-exclusive basis. The undersigned does hereby
irrevocably constitute and appoint __________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
_______________________________
[Type Name of Holder]
By:____________________________
Title:_________________________
Dated:___________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
- 11 -
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR ANY STATE SECURITIES LAWS. THEY MAY NOT BE SOLD OR OFFERED FOR SALE
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT AS TO THE SECURITIES UNDER
SAID ACT AND ANY APPLICABLE STATE SECURITIES LAWS OR THE AVAILABILITY OF AN
EXEMPTION FROM REGISTRATION UNDER SAID ACT AND ANY APPLICABLE STATE SECURITIES
LAWS OR UNLESS, IF THE COMPANY SO REQUESTS OF HOLDER, THE COMPANY HAS RECEIVED
AN OPINION OF COUNSEL (WHICH MAY BE COUNSEL TO THE COMPANY) REASONABLY
SATISFACTORY TO THE COMPANY AS TO SUCH EXEMPTION.
No. 2
STOCK SUBSCRIPTION WARRANT
To Purchase Common Stock of
PULSEPOINT COMMUNICATIONS (the "Company")
DATE OF INITIAL ISSUANCE: November 10, 1998
THIS CERTIFIES THAT for value received, PRIORITY CAPITAL RESOURCES or its
registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant, Eighteen Thousand
Four Hundred Sixty Two (18,462) shares of common stock, no par value, of the
Company (the "Common Stock"), at the Warrant Price, payable as provided herein.
The exercise of this Warrant shall be subject to the provisions, limitations and
restrictions herein contained, and may be exercised in whole or in part.
SECTION 1. DEFINITIONS.
For all purposes of this Warrant, the following terms shall have the
meanings indicated:
COMMON STOCK - shall mean and include the Company's authorized Common
Stock, no par value, as constituted at the date hereof.
EXCHANGE ACT - shall mean the Securities Exchange Act of 1934, as amended
from time to time.
SECURITIES ACT - the Securities Act of 1933, as amended from time to time.
TERM OF THIS Warrant - shall mean the period beginning on the date of
initial issuance hereof and ending on November 10, 2005.
WARRANT PRICE - $3.25 per share, subject to adjustment in accordance with
Section 5 hereof.
WARRANTS - this Warrant and any other Warrant or Warrants issued in
connection with a Commitment Letter dated October 1, 1998 executed by the
Company and Transamerica Business Credit Corporation (the "Commitment Letter")
to the original holder of this Warrant, or any transferees from such original
holder or this Holder.
<PAGE>
WARRANT SHARES - shares of Common Stock purchased or purchasable by the
Holder of this Warrant upon the exercise hereof.
SECTION 2. EXERCISE OF WARRANT.
2.1. PROCEDURE FOR EXERCISE OF WARRANT. To exercise this Warrant in whole
or in part (but not as to any fractional share of Common Stock), the Holder
shall deliver to the Company at its office referred to in Section 12 hereof at
any time and from time to time during the Term of this Warrant: (i) the Notice
of Exercise in the form attached hereto, (ii) cash, certified or official bank
check payable to the order of the Company, wire transfer of funds to the
Company's account, or evidence of any indebtedness of the Company to the Holder
(or any combination of any of the foregoing) in the amount of the Warrant Price
for each share being purchased, and (iii) this Warrant. Notwithstanding any
provisions herein to the contrary, if the Current Market Price (as defined in
Section 5) is greater than the Warrant Price (at the date of calculation, as set
forth below), in lieu of exercising this Warrant as hereinabove permitted, the
Holder may elect to receive shares of Common Stock equal to the value (as
determined below) of this Warrant (or the portion thereof being canceled) by
surrender of this Warrant at the office of the Company referred to in Section 12
hereof, together with the Notice of Exercise, in which event the Company shall
issue to the Holder that number of shares of Common Stock computed using the
following formula:
CS = WCS x (CMP-WP)
--------------
CMP
Where
CS equals the number of shares of Common Stock to be issued to the Holder
WCS equals the number of shares of Common Stock purchasable under the Warrant
or, if only a portion of the Warrant is being exercised, the portion of the
Warrant being exercised (at the date of such calculation)
CMP equals the Current Market Price (at the date of such calculation)
WP equals the Warrant Price (as adjusted to the date of such calculation)
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Common Stock so purchased,
registered in the name of the Holder or such other name or names as may be
designated by the Holder, shall be delivered to the Holder hereof within a
reasonable time, not exceeding fifteen (15) days, after the rights represented
by this Warrant shall have been so exercised; and, unless this Warrant has
expired, a new Warrant representing the number of shares (except a remaining
fractional share), if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the Holder hereof within such time.
The person in whose name any certificate for shares of Common Stock is issued
upon exercise of this Warrant shall for all purposes be deemed to have become
the holder of record of such shares on the date on which the Warrant was
surrendered and payment of the Warrant Price and any applicable taxes was made,
irrespective of the date of delivery of such certificate, except that, if the
date of such surrender and payment is a date when the stock transfer books of
the Company are closed, such person shall be deemed to have become the holder of
such shares at the close of business on the next succeeding date on which the
stock transfer books are open.
- 2 -
<PAGE>
2.2. TRANSFER RESTRICTION LEGEND. Each certificate for Warrant Shares
shall bear the following legend (and any additional legend required by (i) any
applicable state securities laws and (ii) any securities exchange upon which
such Warrant Shares may, at the time of such exercise, be listed) on the face
thereof unless at the time of exercise such Warrant Shares shall be registered
under the Securities Act:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, or any state securities
laws, and may not be sold or transferred in the absence of any such
registration or unless the Company has requested of Holder and
receives an opinion of counsel (which may be counsel to the Company)
that such sale or transfer is pursuant to an exemption therefrom under
said Act and any applicable state securities laws (which counsel and
opinion, if requested of Holder shall be reasonably satisfactory to
counsel for the Company)."
Any certificate issued at any time in exchange or substitution for any
certificate bearing such legend (except a new certificate issued upon completion
of a public distribution under a registration statement of the securities
represented thereby) shall also bear such legend unless, in the opinion of
counsel for the holder thereof (which counsel shall be reasonably satisfactory
to counsel for the Company) the securities represented thereby are not, at such
time, required by law to bear such legend.
SECTION 3. COVENANTS AS TO COMMON STOCK. The Company covenants and agrees that
all shares of Common Stock that may be issued upon the exercise of the rights
represented by this Warrant will, upon issuance, be validly issued, fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. The Company further covenants and agrees that it will pay
when due and payable any and all federal and state documentary stamp or similar
taxes which may be payable in respect of the issue of this Warrant or any Common
Stock or certificates therefor issuable upon the exercise of this 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 from the original Holder
hereof or any subsequent holder involved in any such issuance. The Company
further covenants and agrees that the Company will at all times have authorized
and reserved, free from preemptive rights, a sufficient number of shares of
Common Stock to provide for the exercise of the rights represented by this
Warrant. Holder and any direct or remote transferee from Holder by acceptance of
delivery of this Warrant hereby represents and agrees that (i) such person will
acquire the warrant Shares for its own account for investment purposes only and
not with a view to distribution within the meaning of the Securities Act, and
(ii) such person is an accredited investor, as such term is defined in
Regulation D under the Securities Act, has the knowledge and experience in
financial matters necessary to evaluate an investment in the Warrant Shares and
has the financial resources necessary to suffer the complete loss of the value
of such investment. If and so long as the Common Stock issuable upon the
exercise of this Warrant is listed on any national securities exchange, the
Company will, if permitted by the rules of such exchange, list and keep listed
on such exchange, upon official notice of issuance, all shares of such Common
Stock issuable upon exercise of this Warrant.
SECTION 4. ADJUSTMENT OF NUMBER OF SHARES. Upon each adjustment of the Warrant
Price as provided in Section 5, the Holder shall thereafter be entitled to
purchase, at the Warrant Price resulting from such adjustment, the number of
shares (calculated to the nearest tenth of a share) obtained by multiplying the
Warrant Price in effect immediately prior to such adjustment by the number of
shares purchasable pursuant hereto immediately prior to such adjustment and
dividing the product thereof by the Warrant Price resulting from such
adjustment.
- 3 -
<PAGE>
SECTION 5. ADJUSTMENT OF WARRANT PRICE. The Warrant Price shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of shares
of Common Stock outstanding is increased by a stock dividend payable in shares
of Common Stock or by a subdivision or split-up of shares of Common Stock, then,
following the record date fixed for the determination of holders of Common Stock
entitled to receive such stock dividend, subdivision or split-up, the Warrant
Price shall be appropriately decreased so that the number of shares of Common
Stock issuable upon the exercise hereof shall be increased in proportion to such
increase in outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of shares
of Common Stock outstanding is decreased by a combination of the outstanding
shares of Common Stock, then, following the record date for such combination,
the Warrant Price shall appropriately increase so that the number of shares of
Common Stock issuable upon the exercise hereof shall be decreased in proportion
to such decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, the Company
shall declare a cash dividend upon its Common Stock payable otherwise than out
of earnings or earned surplus or shall distribute to holders of its Common Stock
shares of its capital stock (other than Common Stock), stock or other securities
of other persons, evidences of indebtedness issued by the Company or other
persons, assets (excluding cash dividends and distributions) or options or
rights (excluding options to purchase and rights to subscribe for Common Stock
or other securities of the Company convertible into or exchangeable for Common
Stock), then, in each such case, immediately following the record date fixed for
the determination of the holders of Common Stock entitled to receive such
dividend or distribution, the Warrant Price in effect thereafter shall be
determined by multiplying the Warrant Price in effect immediately prior to such
record date by a fraction of which the numerator shall be an amount equal to the
difference of (x) the Current Market Price of one share of Common Stock minus
(y) the fair market value (as determined by the Board of Directors of the
Company, whose determination shall be conclusive) of the stock, securities,
evidences of indebtedness, assets, options or rights so distributed in respect
of one share of Common Stock, and of which the denominator shall be such Current
Market Price.
(iv) All calculations under this Section 5 shall be made to the nearest
cent or to the nearest one-tenth (1/10) of a share, as the case may be.
(v) For the purpose of any computation pursuant to this Section 5, the
Current Market Price at any date of one share of Common Stock shall be deemed to
be the average of the daily closing prices for the 15 consecutive business days
ending on the last business day before the day in question (as adjusted for any
stock dividend, split, combination or reclassification that took effect during
such 15 business day period). The closing price for each day shall be the last
reported sales price regular way or, in case no such reported sales took place
on such day, the average of the last reported bid and asked prices regular way,
in either case on the principal national securities exchange on which the Common
Stock is listed or admitted to trading or as reported by Nasdaq (or if the
Common Stock is not at the time listed or admitted for trading on any such
exchange or if prices of the Common Stock are not reported by Nasdaq then such
price shall be equal to the average of the last reported bid and asked prices on
such day as reported by The National Quotation Bureau Incorporated or any
similar reputable quotation and reporting service, if such quotation is not
reported by The National Quotation Bureau Incorporated); provided, however, that
- 4 -
<PAGE>
if the Common Stock is not traded in such manner that the quotations referred to
in this clause (v) are available for the period required hereunder, the Current
Market Price shall be determined in good faith by the Board of Directors of the
Company or, if such determination cannot be made, by a nationally recognized
independent investment banking firm selected by the Board of Directors of the
Company (or if such selection cannot be made, by a nationally recognized
independent investment banking firm selected by the American Arbitration
Association in accordance with its rules).
(vi) Whenever the Warrant Price shall be adjusted as provided in Section
5, the Company shall prepare a statement showing the facts requiring such
adjustment and the Warrant Price that shall be in effect after such adjustment.
The Company shall cause a copy of such statement to be sent by mail, first class
postage prepaid, to each Holder of this Warrant at its, his or her address
appearing on the Company's records. Where appropriate, such copy may be given in
advance and may be included as part of the notice required to be mailed under
the provisions of subsection (viii) of this Section 5.
(vii) Adjustments made pursuant to clauses (i), (ii) and (iii) above shall
be made on the date such dividend, subdivision, split-up, combination or
distribution, as the case may be, is made, and shall become effective at the
opening of business on the business day next following the record date for the
determination of stockholders entitled to such dividend, subdivision, split-up,
combination or distribution.
(viii) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii), or (iii) of this Section 5, the Company
shall forward, at the same time and in the same manner, to the Holder of this
Warrant such notice, if any, which the Company shall give to the holders of
capital stock of the Company.
(ix) In any case in which the provisions of this Section 5 shall require
that an adjustment shall become effective immediately after a record date for an
event, the Company may defer until the occurrence of such event issuing to the
Holder of all or any part of this Warrant which is exercised after such record
date and before the occurrence of such event the additional shares of capital
stock issuable upon such exercise by reason of the adjustment required by such
event over and above the shares of capital stock issuable upon such exercise
before giving effect to such adjustment exercise; provided, however, that the
Company shall deliver to such Holder a due bill or other appropriate instrument
evidencing such Holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
SECTION 6. OWNERSHIP.
6.1. OWNERSHIP OF THIS WARRANT. The Company may deem and treat the person
in whose name this Warrant is registered as the holder and owner hereof
(notwithstanding any notations of ownership or writing hereon made by anyone
other than the Company) for all purposes and shall not be affected by any notice
to the contrary until presentation of this Warrant for registration of transfer
as provided in this Section 6.
6.2. TRANSFER AND REPLACEMENT. This Warrant and all rights hereunder are
transferable in whole or in part upon the books of the Company by the Holder
hereof in person or by duly authorized attorney, and a new Warrant or Warrants,
of the same tenor as this Warrant but registered in the name of the transferee
or transferees (and in the name of the Holder, if a partial transfer is
effected) shall be made and delivered by the Company upon surrender of this
Warrant duly endorsed, at the office of the Company referred to in Section 12
hereof. Prior to any proposed transfer of a Warrant or of the Warrant
- 5 -
<PAGE>
Shares, if such transfer is not made pursuant to an effective Registration
Statement under the Securities Act or under Rule 144, the transferor will, if
requested by the Company, deliver to the Company: (1) a customary 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 required by this agreement on the certificate(s)
representing the Warrant or Warrant Shares; (3) an agreement by such transferee
to be bound by the provisions of this agreement. Upon receipt by the Company of
evidence reasonably satisfactory to it of the loss, theft or destruction, and,
in such case, of indemnity or security reasonably satisfactory to it, and upon
surrender of this Warrant if mutilated, the Company will make and deliver a new
Warrant of like tenor, in lieu of this Warrant; provided that if the Holder
hereof is an instrumentality of a state or local government or an institutional
holder or a nominee for such an instrumentality or institutional holder with a
credit standing reasonably satisfactory to the Company an irrevocable agreement
of indemnity by such Holder shall be sufficient for all purposes of this Section
6, and no evidence of loss or theft or destruction shall be necessary. This
Warrant shall be promptly cancelled by the Company upon the surrender hereof in
connection with any transfer or replacement. Holder will not transfer this
Warrant and the rights hereunder except in compliance with federal and state
securities laws.
SECTION 7. MERGERS, CONSOLIDATION, SALES. In the case of any proposed
consolidation or merger of the Company with another entity, or the proposed sale
of all or substantially all of its assets to another person or entity, or any
proposed reorganization or reclassification of the capital stock of the Company,
then, as a condition of such consolidation, merger, sale, reorganization or
reclassification, lawful and adequate provision shall be made whereby the Holder
of this Warrant shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein, in lieu of the shares of the
Common Stock of the Company immediately theretofore purchasable hereunder, such
shares of stock, securities or assets as may (by virtue of such consolidation,
merger, sale, reorganization or reclassification) be issued or payable with
respect to or in exchange for the number of shares of such Common Stock
purchasable hereunder immediately before such consolidation, merger, sale,
reorganization or reclassification. In any such case appropriate provision shall
be made with respect to the rights and interests of the Holder of this Warrant
to the end that the provisions hereof shall thereafter be applicable as nearly
as may be, in relation to any shares of stock, securities or assets thereafter
deliverable upon the exercise of this Warrant.
SECTION 8. NOTICE OF DISSOLUTION OR LIQUIDATION. In case of any distribution of
the assets of the Company in dissolution or liquidation (except under
circumstances when the foregoing Section 7 shall be applicable), the Company
shall give notice thereof to the Holder hereof and shall make no distribution to
shareholders until the expiration of thirty (30) days from the date of mailing
of the aforesaid notice and, in any case, the Holder hereof may exercise this
Warrant within thirty (30) days from the date of the giving of such notice, and
all rights herein granted not so exercised within such thirty-day period shall
thereafter become null and void.
SECTION 9. NOTICE OF EXTRAORDINARY DIVIDENDS. If the Board of Directors of the
Company shall declare any dividend or other distribution on its Common Stock
except out of earned surplus or by way of a stock dividend payable in shares of
its Common Stock, the Company shall mail notice thereof to the Holder hereof not
less than thirty (30) days prior to the record date fixed for determining
shareholders entitled to participate in such dividend or other distribution, and
the Holder hereof shall not participate in such dividend or other distribution
unless this Warrant is exercised prior to such record date. The provisions of
this Section 9 shall not apply to distributions made in connection with
transactions covered by Section 7.
- 6 -
<PAGE>
SECTION 10. FRACTIONAL SHARES. Fractional shares shall not be issued upon the
exercise of this Warrant but in any case where the Holder would, except for the
provisions of this Section 10, be entitled under the terms hereof to receive a
fractional share upon the complete exercise of this Warrant, the Company shall,
upon the exercise of this Warrant for the largest number of whole shares then
called for, pay a sum in cash equal to the excess of the value of such
fractional share (determined in such reasonable manner as may be prescribed in
good faith by the Board of Directors of the Company) over the Warrant Price for
such fractional share.
SECTION 11. SPECIAL ARRANGEMENTS OF THE COMPANY. The Company covenants and
agrees that during the Term of this Warrant, unless otherwise approved by the
Holder of this Warrant:
11.1. WILL RESERVE SHARES. The Company will reserve and set apart and have
available for issuance at all times, free from preemptive or other preferential
rights, the number of shares of authorized but unissued Common Stock deliverable
upon the exercise of this Warrant.
11.2. WILL NOT AMEND CERTIFICATE. The Company will not amend its
Certificate of Incorporation to eliminate as an authorized class of capital
stock that class denominated as "Common Stock" on the date hereof.
11.3. WILL BIND SUCCESSORS. This Warrant shall be binding upon any
corporation or other person or entity succeeding to the Company by merger,
consolidation or acquisition of all or substantially all of the Company's
assets.
SECTION 12. NOTICES. Any notice or other document required or permitted to be
given or delivered to the Holder shall be delivered at, or sent by certified or
registered mail to, the Holder at Transamerica Technology Finance Division, 76
Batterson Park Road, Farmington, Connecticut 06032, Attention: Assistant Vice
President, Lease Administration, with a copy to the Lender at Riverway II, West
Office Tower, 9399 West Higgins Road, Rosemont, Illinois 60018, Attention: Legal
Department or to such other address as shall have been furnished to the Company
in writing by the Holder. Any notice or other document required or permitted to
be given or delivered to the Company shall be delivered at, or sent by certified
or registered mail to, the Company at 6307 Carpinteria Avenue, , Carpinteria,
California, 93013, Attention: Vice President and CFO or to such other address as
shall have been furnished in writing to the Holder by the Company. Any notice so
addressed and mailed by registered or certified mail shall be deemed to be given
when so mailed. Any notice so addressed and otherwise delivered shall be deemed
to be given when actually received by the addressee.
SECTION 13. NO RIGHTS AS STOCKHOLDER; LIMITATION OF LIABILITY. This Warrant
shall not entitle the Holder to any of the rights of a shareholder of the
Company except upon exercise in accordance with the terms hereof. No provision
hereof, in the absence of affirmative action by the Holder to purchase shares of
Common Stock, and no mere enumeration herein of the rights or privileges of the
Holder, shall give rise to any liability of the Holder for the Warrant Price
hereunder or as a shareholder of the Company, whether such liability is asserted
by the Company or by creditors of the Company.
SECTION 14. LAW GOVERNING. THE VALIDITY, INTERPRETATION, AND ENFORCEMENT OF THIS
WARRANT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE
STATE OF ILLINOIS WITHOUT GIVING EFFECT TO THE CONFLICT OF LAW PRINCIPLES
THEREOF.
- 7 -
<PAGE>
SECTION 15. MISCELLANEOUS. This Warrant and any provision hereof may be changed,
waived, discharged or terminated only by an instrument in writing signed by both
parties (or any respective predecessor in interest thereof). The headings in
this Warrant are for purposes of reference only and shall not affect the meaning
or construction of any of the provisions hereof.
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer this 10 day of November, 1998.
PULSEPOINT COMMUNICATIONS
[CORPORATE SEAL]
By: /s/ B. Robert Suh
---------------------------
Title: Vice President and CFO
- 8 -
<PAGE>
FORM OF NOTICE OF EXERCISE
[To be signed only upon exercise of the Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO EXERCISE THE WITHIN WARRANT
The undersigned hereby exercises the right to purchase _________ shares of
Common Stock which the undersigned is entitled to purchase by the terms of the
within Warrant according to the conditions thereof, and herewith
[check one]
[ ] makes payment of $_____________ therefor; or
[ ] directs the Company to issue ___________
shares, and to withhold _________ shares in
lieu of payment of the Warrant Price, as
described in Section 2.1 of the Warrant.
All shares to be issued pursuant hereto shall be issued in the name of and the
initial address of such person to be entered on the books of the Company shall
be:
The shares are to be issued in certificates of the following
denominations:
_______________________________
[Type Name of Holder]
By:____________________________
Title:_________________________
Dated:___________________________
- 9 -
<PAGE>
FORM OF ASSIGNMENT
(ENTIRE)
[To be signed only upon transfer of entire Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED ___________________________ hereby sells, assigns and
transfers unto _______________________________ all rights of the undersigned
under and pursuant to the within Warrant, and the undersigned does hereby
irrevocably constitute and appoint _______________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
_______________________________
[Type Name of Holder]
By:____________________________
Title:_________________________
Dated:___________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
- 10 -
<PAGE>
FORM OF ASSIGNMENT
(PARTIAL)
[To be signed only upon partial transfer of Warrant]
TO BE EXECUTED BY THE REGISTERED HOLDER
TO TRANSFER THE WITHIN WARRANT
FOR VALUE RECEIVED _________________________ hereby sells, assigns and
transfers unto _______________________________ (i) the rights of the undersigned
to purchase ___ shares of Common Stock under and pursuant to the within Warrant,
and (ii) on a non-exclusive basis, all other rights of the undersigned under and
pursuant to the within Warrant, it being understood that the undersigned shall
retain, severally (and not jointly) with the transferee(s) named herein, all
rights assigned on such non-exclusive basis. The undersigned does hereby
irrevocably constitute and appoint __________________________ Attorney to
transfer the said Warrant on the books of the Company, with full power of
substitution.
_______________________________
[Type Name of Holder]
By:____________________________
Title:_________________________
Dated:___________________________
NOTICE
The signature to the foregoing Assignment must correspond to the name as
written upon the face of the within Warrant in every particular, without
alteration or enlargement or any change whatsoever.
- 11 -
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> DEC-31-1998
<CASH> 11,473
<SECURITIES> 0
<RECEIVABLES> 4,940
<ALLOWANCES> 725
<INVENTORY> 7,652
<CURRENT-ASSETS> 23,856
<PP&E> 13,288
<DEPRECIATION> 9,046
<TOTAL-ASSETS> 30,527
<CURRENT-LIABILITIES> 11,867
<BONDS> 0
0
24,723
<COMMON> 69,820
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 30,527
<SALES> 25,449
<TOTAL-REVENUES> 25,449
<CGS> 12,268
<TOTAL-COSTS> 25,677
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 105
<INCOME-PRETAX> (11,851)
<INCOME-TAX> 18
<INCOME-CONTINUING> (11,869)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
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</TABLE>
