<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Period Ended June 30, 1996
or
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the first quarter April 1, 1996 to June 30, 1996.
Commission file number 0-28472
DIGITAL VIDEO SYSTEMS, INC.
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408)748-2100
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(Registrant's telephone number, including area code)
Not applicable
- --------------------------------------------------------------------------------
(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-16,796,658 shares as of July 31, 1996
----------
<PAGE>
Index
DIGITAL VIDEO SYSTEMS, INC.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets- June 30, 1996 and March 31, 1996
Condensed consolidated statements of income- Three months ended June
30, 1996 and 1995
Condensed consolidated statements of cash flows- Three months ended
June 30, 1996 and 1995
Notes to condensed consolidated financial statements- June 30, 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 dated April 19, 1996
of the Preferred and Common Stockholders of the Company (5,232,948
shares of Preferred Stock and 6,725,624 shares of Common Stock)
approving the Company's initial public offering and consenting to the
escrow of certain outstanding shares in connection with such public
offering.
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:
Escrow Agreement dated April 23, 1996 by and among American Stock
Transfer & Trust Company, the Company and the stockholders and
optionholders of the Company incorporated by reference to Exhibit 4.5
to the Company's Registration Statement on Form SB-2, as declared
effective May 9, 1996 (Registration No: 333-2228-LA)
Employment Agreement as of March 1, 1996 between the Company and Dr.
Edmund Sun incorporated by reference to Exhibit 10.2 to the Company's
Registration Statement on Form SB-2, as declared effective May 9, 1996
(Registration No: 333-2228-LA)
<PAGE>
Consulting and Employment Agreement as of March 15, 1996 between the
Company and Robert Pfannkuch incorporated by reference to Exhibit 10.12
to the Company's Registration Statement on Form SB-2, as declared
effective May 9, 1996 (Registration No: 333-2228-LA)
Indemnity Agreements as of June 4, 1996 between the Company and each
member of the Company's Board of Directors incorporated by reference to
Exhibit 10.9 to the Company's Registration Statement on Form SB-2, as
declared effective May 9, 1996 (Registration No: 333-2228-LA)
(11) Statement re: Computation of net loss per share
(27) Financial Data Schedule
(b) Reports on Form 8-K
A report on Form 8-K was filed on June 10, 1996 to announce the change
of the fiscal year from a calendar year end to a March 31 fiscal year,
with the Company's next fiscal year ending March 31, 1997.
<PAGE>
Digital Video Systems, Inc.
Condensed Balance Sheets
(unaudited)
<TABLE>
<CAPTION>
June 30, March 31,
1996 1996
----------- -----------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $16,708,617 $ 4,658,845
Accounts receivable, net 1,194,583 534,969
Inventories 2,754,112 1,925,600
Prepaid expenses and other
current assets 245,450 818,584
Deferred financing charges - 832,059
---------- -----------
Total current assets 20,902,762 8,770,057
---------- -----------
Property and equipment, net 510,072 537,584
Other assets 78,657 95,755
----------- -----------
Total assets $21,491,491 $ 9,403,396
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,570,548 $ 1,092,082
Accrued liabilities 181,991 383,379
Bridge loan payable - 6,340,763
---------- -----------
Total current liabilities 1,752,539 7,816,224
Commitments
Stockholders equity:
Convertible preferred stock - 524
Common stock 1,680 672
Additional paid-in capital 29,771,192 9,153,734
Accumulated deficit (9,955,923) (7,385,418)
Foreign currency
translation adjustments (29,274) (31,486)
Deferred compensation (48,723) (150,854)
----------- -----------
Total stockholders equity 19,738,952 1,587,172
----------- -----------
Total liabilities and
stockholders equity $21,491,491 $ 9,403,396
=========== ===========
</TABLE>
See accompanying notes
<PAGE>
Digital Video Systems, Inc.
Condensed Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
-----------------------------
1996 1995
------------ ------------
<S> <C> <C>
Net Sales $ 1,855,921 $ 1,172,614
Cost of sales 1,830,333 688,139
------------ ------------
Gross profit 25,588 484,475
Operating expenses:
Research and development 297,794 290,823
Sales and marketing 336,574 179,887
General and administration 498,155 452,134
------------ ------------
Total operating expenses 1,132,523 922,844
------------ ------------
Operating loss (1,106,935) (438,369)
Other expenses, net (247,240) (2,433)
------------ -------------
Net loss before extraordinary item ($1,354,175) ($440,802)
============= =============
Extraordinary item- loss on early
extinguishment of bridge notes (1,216,330) -
Net loss (2,570,505) (440,802)
============ ============
Net loss per share before extraordinary item ($0.18) ($0.08)
------------ ------------
Net loss per share ($0.34) ($0.08)
------------ ------------
Shares used in the calculation
of net loss per share 7,602,051 5,353,284
============ ============
</TABLE>
See accompanying notes
<PAGE>
Digital Video Systems, Inc.
Condensed Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
June 30, June 30,
1996 1995
------------ ----------
<S> <C> <C>
Operating activities:
Net loss $ (2,570,505) $ (440,802)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 58,240 73,292
Amortization of deferred compensatiion 4,686 -
Deferred financing charges and accretion from
bridge loan payable, net 1,491,296 -
Changes in operating assets and liabilities:
Accounts receivable (659,614) (316,067)
Inventories (826,300) 364,095
Prepaid assets 573,134 187,730
Other Assets 17,098 -
Accounts payable 478,466 (111,088)
Accrued liabilities (201,388) 39745
Increase in deferred revenue - 536,965
------------ ----------
Net cash (used in) provided by operating activities (1,634,887) 333,870
Investing activities:
Aquisition of furniture and equipment (30,728) -
------------ ----------
Net cash provided by (used in) investing activities (30,728) -
Financing activities:
Proceeds from initial public offering
of common stock 20,713,843 -
Proceeds from exercise of common stock options
and sale of option 1,544 (15,287)
Payment of line of credit - (965,355)
Decrease in restricted cash - 1,034,362
Payment of bridge financing (7,000,000) -
------------ ----------
Net cash provided by financing activities 13,715,387 53,720
Net Increase (decrease) in cash & cash equivalents 12,049,772 387,590
Cash and cash equivalents at beginning of period 4,658,845 247,752
------------ ----------
Cash and cash equivalents at end of period $ 16,708,617 $ 635,342
============ ==========
</TABLE>
See accompaning notes
<PAGE>
Digital Video Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
June 30, 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 principles 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 adjustments) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended June 30,
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 consolidated financial statements and footnotes
thereto included in the 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 $20,714,000 after deducting underwriting
discounts and commissions and other expenses of the offering. Upon the closing
of the Offering, The Company agreed to grant an Underwriter option to purchase
up to 420,000 Units. The Option is exercisable during the three-year period
commencing two years from the date of the Company's initial public offering at
an exercise price of $6.50 per Unit.
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 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 placed in escrow in connection with the Company's initial public offering.
<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>
June 30, 1996 March 31, 1996
-------------- ---------------
<S> <C> <C>
Inventories:
Raw materials $1,447,252 $ 741,714
Work in process $ 303,421 $1,015,574
Finished goods $1,003,439 $ 168,312
---------- ----------
$2,754,112 $1,925,600
</TABLE>
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 was 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 June 30, 1996 7,818,232 shares of common stock and
2,047,222 and 234,546 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 Company had an operating loss of $1,106,935 for the quarter ending June 30,
1996 as compared to an operating loss of $438,369 for the quarter ending June
30, 1995 and a net loss of $2,570,505 in the June 30, 1996 quarter as compared
to a net loss of $440,802 for the June 30, 1995 quarter.
Net sales of the Company increased 58% in the quarter ending June 30,1996 to
$1,855,921 up $683,307 over the quarter ending June 30,1995. The 1996 sales
increase was due to increases in unit sales of digital video CD players and
components during the quarter ending June 30,1996 as compared to the quarter
ending June 30,1995.
The gross margin percentage for the June 30, 1996 quarter was only approximately
1% due to the fact that the Company was not able to produce products in
quantities which could result in greater economies of scale, and the gross
profit percentage for the 1995 quarter of 41% was significantly greater due to
the fact that during this quarter $250,000 was recognized as contract revenue
which had very little associated direct costs.
Research and development expenses remained consistent during the June 30, 1996
quarter at $297,794 as compared to the June 30, 1995 quarter of $290,823. As a
percentage of net sales, research and development expenses decreased from 25% in
the June 30, 1995 quarter to 16% in the June 30, 1996 quarter due to the
increase in sales in the June 30, 1996 quarter compared to the June 30, 1995
quarter.
Sales and marketing expenses increased 87% in the June 30, 1996 quarter to
$336,574 from $179,887 in the comparable quarter of 1995. As a percentage of
net sales, sales and marketing expenses increased from 15% in the June 30, 1995
quarter to 18% in the comparable quarter of 1996. This increase is due
primarily to the increase in sales and marketing personnel as well as increased
trade show activities for the June 30, 1996 quarter.
General and administrative expenses increased 10% to $498,155, up $46,021 in the
June 30, 1996 quarter compared to the June 30, 1995 quarter. This increase was
due to increases in salaries and related expenses, which increased as a result
of the hiring of additional administrative personnel and increases in facility
costs. As a percentage of net sales, general and administrative expenses
decreased from 39% in the June 30, 1995 quarter to 27% in the comparable quarter
of 1996 due to the increase in sales in the June 30, 1996 quarter compared to
the June 30, 1995 quarter.
Other non-operating expenses increased by $244,807 in the June 30, 1996 quarter
compared to the comparable quarter of 1995 as a result of interest expense on
the bridge notes. The Company recorded an extraordinary item in the quarter
ended June 30, 1996 of $1,216,330 as a result of amortization of deferred
financing costs and accretion of debt discount pursuant to the Company's early
extinguishment of the bridge notes, which were repaid in May 1996 from proceeds
of the Company's initial public offering.
<PAGE>
LIQUIDITY AND SOURCES OF CAPITAL
The Company had working capital of $19,150,223. as of June 30, 1996 as compared
to working capital of $953,833 as of March 31, 1996.
Cash flows used in operations were $1,634,887 for the June 30, 1996 quarter as
compared to cash flows provided by operations of $333,870 in the comparable
period in 1995. Net cash provided by financing activities was $13,715,387 for
the June 30, 1996 quarter as compared to $53,720 for the June 30, 1995 quarter.
Cash provided by financing activities in the quarter ended June 30, 1996
includes funds generated pursuant to the Company's initial public offering of
$20,714,000 net of offering costs, which were partially offset by the repayment
of the $7,000,000 in bridge notes.
The Company expects that its available cash 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. The Company may
seek to raise such funds for working capital or other purposes 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)
Date 8-14-96 /s/ Janis Gemignani
------------------ ----------------------------------------
Janis Gemignani- Chief Financial Officer
(principal financial officer)
Date 8-14-96 /s/ Edmund Sun
------------------ ----------------------------------------
Edmund Sun- Chief Executive Officer
(principal executive officer)
<PAGE>
EXHIBIT 11.1
DIGITAL VIDEO SYSTESM, INC.
STATEMENT REGARDING THE COMPUTATION OF PER SHARE LOSS
<TABLE>
<CAPTION>
Three months ended June 30,
-------------------------------
1996 1995
------------ -----------
<S> <C> <C>
Net loss $(2,570,505) $ (440,802)
=========== ===========
Weighted average common shares outstanding 5,610,293 3,361,526
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 451,135 451,135
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 7,602,051 5,353,284
========== ===========
Net loss per share ($0.34) ($0.08)
========== ===========
</TABLE>
Page 1
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> MAR-31-1996 MAR-31-1995
<PERIOD-START> APR-01-1996 JAN-01-1996
<PERIOD-END> JUN-30-1996 MAR-31-1996
<CASH> 16,708,617 4,658,845
<SECURITIES> 0 0
<RECEIVABLES> 1,194,583 534,969
<ALLOWANCES> 0 0
<INVENTORY> 2,754,112 1,925,600
<CURRENT-ASSETS> 20,902,762 8,770,057
<PP&E> 945,182 914,455
<DEPRECIATION> (435,111) (376,871)
<TOTAL-ASSETS> 21,491,491 9,403,396
<CURRENT-LIABILITIES> 1,752,539 7,816,224
<BONDS> 0 0
0 0
0 524
<COMMON> 1,680 672
<OTHER-SE> 19,737,272 1,585,976
<TOTAL-LIABILITY-AND-EQUITY> 21,491,491 9,403,396
<SALES> 1,855,921 1,386,868
<TOTAL-REVENUES> 1,855,921 1,386,868
<CGS> 1,830,333 1,415,846
<TOTAL-COSTS> 1,132,523 882,226
<OTHER-EXPENSES> 0 449,841
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (1,354,175) (1,360,685)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> (1,216,330) 0
<CHANGES> 0 0
<NET-INCOME> (2,570,505) (1,360,685)
<EPS-PRIMARY> (0.34) (0.33)
<EPS-DILUTED> (0.34) (0.26)
</TABLE>
