<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A-2
(MARK ONE)
[ ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended March 31, 1996
or
[x] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Transition Period From January 1, 1996 to March 31, 1996
Commission file number 0-28472
DIGITAL VIDEO SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
Delaware 77-0333728
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2710 Walsh Ave. 2/nd/ Fl.
Santa Clara, Ca. 95051
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(Address of principal executive offices) (Zip Code)
(408)748-2100
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the 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 periods 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
--- ---
Common Stock, $.0001 Par Value- 16,788,572 shares as of May 31, 1996
----------
<PAGE>
Index
DIGITAL VIDEO SYSTEMS, INC.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed balance sheets- March 31, 1996 and December 31,
1995
Condensed statements of operations- Three months ended
March 31, 1996 and 1995
Condensed statements of cash flows- Three months ended
March 31, 1996 and 1995
Notes to condensed financial statements- March 31, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. Other Information
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Resolutions adopted by unanimous written consent of the Preferred and
Common Stockholders of Digital Video Systems, Inc. January 22, 1996
approving the amendment and restatement of the Certificate of
Incorporation.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are included herein:
(10) Material Contracts:
Intermarkt (USA) L.L.C. Consulting Agreement incorporated by reference
to Exhibit 10.6 to the Company's Registration Statement on Form SB-2, as
declared effective on May 9, 1996 (Registration No: 333-2228-LA)
(11) Statement regarding the computation of per share loss
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on From 8-K were filed during the fiscal quarter
ended March 31, 1996.
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
CONDENSED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
------------ -------------
(Note)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 4,658,845 $ 1,218,920
Accounts receivable, net 534,969 169,185
Inventories 1,925,600 673,775
Prepaid expenses and other current assets 818,584 300,407
Deferred financing charges 832,059 --
----------- -----------
Total current assets 8,770,057 2,362,287
Property and equipment, net 537,584 558,087
Other assets 95,755 49,295
----------- -----------
Total assets $ 9,403,396 $ 2,969,669
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,092,082 $ 414,344
Accrued liabilities 383,379 506,118
Bridge loan payable 6,340,763 --
----------- -----------
Total current liabilities 7,816,224 920,462
Commitments
Stockholders equity:
Convertible preferred stock 524 524
Common stock 672 662
Additional paid-in capital 9,153,734 8,265,120
Accumulated deficit (7,385,418) (6,024,733)
Foreign currency translation adjustments (31,486) (30,616)
Deferred compensation (150,854) (161,750)
----------- -----------
Total stockholders equity 1,587,172 2,049,207
----------- -----------
Total liabilities and stockholders equity $ 9,403,396 $ 2,969,669
=========== ===========
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the audited
financial statements at that date but does not include all the information
and footnotes required by general accepted accounting principles for
complete financial statements.
See accompanying notes
<PAGE>
Digital Video Systems, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
Revenue:
Product revenue $ 523,729 $ 348,339
Development and services revenue 6,839 -
Component revenue 856,300 -
----------- ----------
Total revenue 1,386,868 348,339
Cost of product revenue 586,895 417,177
Cost of development revenue 27,951 -
Cost of component revenue 801,000 -
----------- ----------
Total cost of revenue 1,415,846 417,177
----------- ----------
Gross loss (28,978) (68,838)
Operating expenses:
Research and development 365,839 421,673
Sales and marketing 130,735 119,628
General and administration 385,652 323,604
----------- ----------
Total operating expenses 882,226 864,905
----------- ----------
Operating loss (911,204) (933,743)
Other income (expenses), net (449,481) (25,306)
----------- ----------
Net loss $(1,360,685) $ (959,049)
=========== ==========
Net loss per share ($0.33) ($0.23)
=========== ==========
Shares used in the calculation of net
loss per share 4,166,270 4,227,503
=========== ==========
Pro forma net loss per share ($0.26)
===========
Shares used in computing pro forma net loss
per share 5,292,061
===========
</TABLE>
See accompanying notes
<PAGE>
Digital Video Systems, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
March 31, March 31,
Operating activities: 1996 1995
----------- ---------
<S> <C> <C>
Net loss $(1,360,685) $(959,049)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 56,289 60,142
Deferred financing charges and accretion
from bridge loan payable, net 328,704 -
Amortization of deferred compensation 10,896 -
Changes in operating assets and liabilities:
Accounts receivable (366,654) 401,716
Inventories (1,251,825) (262,263)
Prepaid expenses and other (564,637) (84,852)
Accounts payable 677,738 (9,384)
Accrued liabilities (122,739) (21,129)
------------ ---------
Net cash used in operating activities (2,592,913) (874,819)
Investing activities:
Purchases of furniture and equipment (35,786) (64,016)
------------ ---------
Net cash provided by (used in) investing
activities (35,786) (64,016)
Financing activities:
Proceeds from sale of common stock 13,624 -
Net proceeds from line of credit - 365,356
Proceeds from note payable to stockholder - 500,000
Principal received on notes receivable
from stockholder - 15,000
Increase in restricted cash - (34,362)
Net proceeds from bridge financing 6,055,000 -
------------ ---------
Net cash provided by financing activities 6,068,624 845,994
Net increase (decrease) in cash & cash
equivalents 3,439,925 (92,841)
Cash and cash equivalents at beginning of
period 1,218,920 340,592
----------- ---------
Cash and cash equivalents at end of period $ 4,658,845 $ 247,751
=========== =========
</TABLE>
See accompanying notes
<PAGE>
Digital Video Systems, Inc.
Notes to Condensed Financial Statements
(Unaudited)
March 31, 1996
Note 1-Basis of Presentation
Digital Video Systems, Inc. (the "Company") develops, manufactures and
markets digital video compression and decompression hardware and software for
entertainment, business and educational uses.
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principals for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended March 31, 1996
are not necessarily indicative of the results that may be expected for the year
ended March 31, 1997 or for any other future period. For further information,
refer to the financial statements and footnotes thereto included in the
Registrant Company's Registration Statement on Form SB-2 for the year ended
December 31, 1995.
Note 2-Closing of Initial Public Offering
On May 14, 1996, the Company closed its initial public offering which
consisted of 4,200,000 units ("Units") of common stock, Class A warrants and
Class B warrants, priced at $5.00 per unit. On May 22, 1996, the Company's
underwriter exercised its overallotment option to purchase an additional 630,000
units at $5.00 per unit. The Company received net offering proceeds from the
sale of units of approximately $20,000,000 after deducting underwriting
discounts and commissions and other expenses of the offering.
Note 3-Net Loss Per Share
Net loss per share is computed using the weighted average number of shares
of common stock outstanding. Common stock equivalent shares from convertible
preferred stock, stock options, and warrants are not included as the effect is
anti-dilutive. In accordance with Securities and Exchange Commission Staff
Accounting Bulletins, common stock and common stock equivalent shares issued by
the Company at prices below the initial public offering price during the period
beginning one year prior to the offering have been included in the calculation
as if they were outstanding for all periods presented (using the treasury stock
method and the initial public offering price of the Company's units). The
weighted average number of common shares used in the net loss per share
calculation was reduced by the common stock, preferred stock convertible into
common stock, and outstanding options placed in escrow in connection with the
company's initial public offering.
Pro forma net loss per share has been computed as described above and also
gives effect, pursuant to SEC policy, to common equivalent shares from
convertible preferred stock issued more than 12 months from the initial public
offering date that automatically converted upon completion of the offering
(using the if-converted method).
<PAGE>
Note 4-Stock Split
In January 1996, the Board of Directors approved a stock split of 1.078-
for-1 of all outstanding shares of common stock. All share and per share
information has been adjusted to give effect to the stock split in the
accompanying financial statements.
Note 5-Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
Inventories: March 31, 1996 December 31, 1995
-------------- -----------------
<S> <C> <C>
Raw materials $ 741,714 $657,153
Work in process $1,015,574 --
Finished goods $ 168,312 $ 16,622
---------- --------
$1,925,600 $673,775
========== ========
</TABLE>
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Note 6-Private Placement
In March 1996, the Company completed a $7,000,000 private placement of 140
units at $50,000 per unit. Each unit consisted of a $50,000 face value
promissory note bearing 10% interest and due in January and March 1997, and
25,000 warrants which initially enabled the holder to purchase shares of common
stock at $4.00 per share. The Company received net proceeds of approximately
$6,055,000 after deducting selling commissions and expenses of $945,000. The
$7,000,000 has been allocated $875,000 to warrants and $6,125,000 to bridge
notes payable. On May 14, 1996 the Company repaid these bridge notes in full
from the proceeds received pursuant to its initial public offering of Units.
Note 7-Escrow Securities
In April 1996, holders of the Company's common and preferred stock, and
holders of options to purchase common stock placed, on a pro rata basis, their
shares and options into escrow. Additionally, options reserved for future grant
under the Company's 1993 Stock Option Plan will be subject to escrow upon grant.
The common stock and options will be released to the stockholders on a pro rata
basis, in the event specified levels of pretax income of the Company for the
years ended March 31, 1997 to 2001 are achieved, or the market price of the
Company's common stock attains specified targets during a 36-month period
commencing from the effective date of the registration statement relating to the
Company's public offering. Any shares or options remaining in escrow on July
15, 2001 will be forfeited, which shares and options will then be contributed to
the Company's capital. At March 31, 1996 7,812,948 shares of common stock and
1,296,999 and 890,053 options granted and available for grant, respectively, are
subject to this escrow arrangement.
In the event that the foregoing earnings or market price levels are
attained and the escrow securities released, the Securities and Exchange
Commission has adopted the position that the release of escrow securities to
officers, directors, employees and consultants of the Company will be
compensatory and, accordingly, will result in compensation expense for financial
reporting purposes. The expense will equal the fair market value of the escrow
securities on the date of release and will result in a material charge to
operations.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion contains forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 that involve risks and uncertainties. The Company's actual
results could differ materially from those discussed herein. Factors that could
cause or contribute to such differences include, but are not limited to, those
discussed below as well as those discussed elsewhere in this Form 10-QSB/A and
any document incorporated herein by reference. The following discussion should
be read in conjuction with the financial statements and notes thereto appearing
elsewhere in this Form 10-QSB/A.
In October 1996, the Company determined that its previously reported operating
results and balance sheet data for the three-month periods ended March 31, 1995
and June 30, 1995 and for the three-month period ended June 30, 1996 required
restatement. The revisions to the March 31, 1995 and June 30, 1995 quarters were
made to more accurately reflect certain previously recorded year-end adjustments
in the appropriate 1995 quarterly periods. The revisions to the June 30, 1996
quarter related primarily to (a) the Company's determination that certain
development revenues previously recognized in this quarter (approximately
$225,000) should not yet have been recognized, and (b) data errors caused by
improper installation of a new manufacturing accounting system for the Company's
Taiwan operation. Pending proper installation of a new accounting system for the
Taiwan operation, the Company continues to use the system it has used in prior
accounting periods, which the Company believes is an accurate system. The
foregoing revisions did not require any restatement of the Company's previously
reported audited financial statements for the year ended December 31, 1995, and
the Company believes that the restated quarterly financial results do not
represent a material change in the aggregate from the results as previously
reported.
The Company had an operating loss of approximately $911,000 for the quarter
ended March 31, 1996 as compared to an operating loss of approximately $934,000
for the March 31, 1995 quarter, and a net loss of approximately $1,361,000 in
the March 31, 1996 quarter as compared to a net loss of approximately $959,000
for the March 31, 1995 quarter.
Total revenue increased approximately 298% in the quarter ended March 31, 1996
to approximately $1,387,000, up approximately $1,039,000 over the quarter ended
March 31, 1995. This increase was due to increases in unit sales of
Video CD players and components during the quarter ended March 31, 1996 as
compared to the quarter ended March 31, 1995.
The gross profit percentages for both the 1996 and 1995 quarters were negative
due to the fact that the Company was not able to produce products in quantities
which could result in greater economies of scale. There can be no assurance,
however, that unit costs will decrease if Video CD players and components, and,
to a lesser extent, MPEG encoding board sets, are produced in greater
quantities.
Total operating expenses increased by approximately $17,000 or 2% during the
March 31, 1996 quarter from approximately 865,000 in the March 31, 1995 quarter
to approximately $882,000 in the March 31, 1996 quarter. This increase resulted
from the Company's increased sales and marketing and general and administrative
expenses in the March 31, 1996 quarter, offset in part by decreased research and
development expenses in the March 31, 1996 quarter, in each case as described
below.
Research and development expenses consist primarily of personnel and equipment
costs required to conduct the Company's development efforts. The Company
believes that investments in research and development are required to remain
competitive. These expenses decreased approximately $56,000 or 13% from
approximately $422,000 in the March 31, 1995 quarter to approximately $366,000
in the March 31, 1996 quarter due primarily to reduced development expenditures
for Video CD players in the March 31, 1996 quarter compared to the prior period.
As a percentage of total revenue, research and development expenses decreased
from approximately 121% in the March 31, 1995 quarter to approximately 26% in
the March 31, 1996 quarter, due to the increase in sales in the March 31, 1996
quarter compared to the March 31, 1995 quarter. Costs incurred in the March 31,
1995 quarter included the cost to develop the CDV340 Video CD player, which was
completed in May 1995.
Sales and marketing expenses consist primarily of personnel and consulting costs
involved in the sales process, including sales commissions. These expenses
increased approximately 9% in the March 31, 1996 quarter to approximately
$131,000 from approximately $120,000 in the comparable quarter of 1995. As a
percentage of total revenue, sales and marketing expenses decreased from
approximately 34% in the March 31, 1995 quarter to approximately 9% in the
comparable quarter of 1996. This decrease was due primarily to the increase in
net sales in the March 31, 1996 quarter.
General and administrative expenses, which consist of administrative salaries
and benefits, insurance and other business support costs, increased
approximately 19% to approximately $386,000, up approximately $62,000 in the
March 31, 1996 quarter compared to the March 31, 1995 quarter. This increase was
due to increases in salaries and related expenses, which increased as a result
of hiring additional administrative personnel and increases in facility costs.
As a percentage of total revenue, general and administrative expenses decreased
from approximately 93% in the March 31, 1995 quarter to approximately 28% in the
comparable quarter of 1996 due to the increase in sales in the March 31, 1996
quarter compared to the March 31, 1995 quarter.
Other expenses, net increased by approximately $424,000 in the March 31, 1996
quarter compared to the comparable quarter of 1995 as a result of interest
expense, amortization of deferred financing costs and accretion of debt discount
pursuant to the Company's bridge financing that closed in the March 31, 1996
quarter. The Company will incur a non-operating charge of approximately
$1,264,000 in the quarter ending June 30, 1996 related to the early repayment of
the bridge notes which were repaid in May of 1996 from proceeds of the Company's
initial public offering.
LIQUIDITY AND SOURCES OF CAPITAL
The Company had working capital of approximately $954,000 as of March 31, 1996
as compared to working capital of approximately $1,442,000 as of December 31,
1995.
Cash flows used in operations were approximately $2,593,000 for the three
month period ended March 31, 1996 as compared to approximately $875,000 in the
comparable period in 1995.
The Company expects that its available cash and cash equivalents and the net
proceeds of approximately $20,000,000 from its initial public offering
(including an over allotment option), $7,174,000 of which was used in May 1996
to repay principal and interest under the bridge financing, will be sufficient
to meet its normal operating requirements, including increased manufacturing
expenditures, for at least the next twelve months. Thereafter, the Company may
require additional funds to support its working capital requirements or for
other purposes and may seek to raise such funds through public or private equity
financing or from other sources to the extent such additional capital is not
provided to the Company through the exercise of its outstanding Class A and
Class B warrants. There can be no assurance that any such financing will be
available to the Company on favorable terms or at all.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Digital Video Systems, Inc.
----------------------------------------
(Registrant)
Dated: October 31, 1996 /s/ Arvin S. Erickson
----------------------------------------
Arvin S. Erickson - Chief Financial Officer
<PAGE>
EXHIBIT 11.1
DIGITAL VIDEO SYSTEMS, INC.
STATEMENT REGARDING THE COMPUTATION OF PER SHARE LOSS
<TABLE>
<CAPTION>
Three months ended March 31,
---------------------------------
1996 1995
------------- -------------
<S> <C> <C>
Net loss $(1,360,685) $(959,049)
============ =============
Weighted average common shares outstanding.............. 2,174,502 2,235,735
Common equivalent shares from preferred stock
issued during the twelve month period prior to
the Company's proposed initial public offering(1)...... 688,297 688,297
Common equivalent shares from warrants
issued during the twelve month period prior to
the Company's proposed initial public offering(1)...... 700,000 700,000
Common eqivalent shares from stock options
issued during the twelve month period prior to
the Company's proposed initial public offering......... 451,145 451,145
Common equivalent shares from common stock
issued during the twelve month period prior
to the Company's proposed initial public offering(1)... 152,326 152,326
------------- -------------
Shares used in computing net loss per share................ 4,166,270 4,227,503
============= =============
Net loss per share......................................... $(0.33) $(0.23)
============= =============
Convertible preferred stock issued more than twelve
months prior to the proposed initial public offering(1). 1,125,791
-------------
Pro forma weighted average shares outstanding.............. 5,292,061
=============
Pro forma net loss per share............................... $(0.26)
=============
</TABLE>
_________
(1) Excludes shares to be placed into escrow according to the "Escrow Agreement"
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 4,658,845
<SECURITIES> 0
<RECEIVABLES> 534,969
<ALLOWANCES> 0
<INVENTORY> 1,925,600
<CURRENT-ASSETS> 8,770,057
<PP&E> 914,455
<DEPRECIATION> (376,871)
<TOTAL-ASSETS> 9,403,396
<CURRENT-LIABILITIES> 7,816,224
<BONDS> 0
0
524
<COMMON> 672
<OTHER-SE> 1,587,172
<TOTAL-LIABILITY-AND-EQUITY> 9,403,396
<SALES> 1,386,868
<TOTAL-REVENUES> 1,386,868
<CGS> 1,415,846
<TOTAL-COSTS> 882,226
<OTHER-EXPENSES> 449,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,360,685)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,360,685)
<EPS-PRIMARY> (0.33)
<EPS-DILUTED> (0.26)
</TABLE>
