<PAGE>
SCHEDULE 13E-4
(RULE 13E-101)
Tender Offer Statement Pursuant to Section 13(e)(1) of the
Securities Exchange Act of 1934 and Rule 13e-4 Thereunder
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Issuer Tender Offer Statement (Pursuant to Section 13(e)(1)
of the Securities Exchange Act of 1934)
DIGITAL VIDEO SYSTEMS, INC.
---------------------------
(Name of Issuer)
DIGITAL VIDEO SYSTEMS, INC.
---------------------------
(Name of Person(s) Filing Statement)
Class A Warrants
----------------
(Title of Class of Securities)
00025387R1
----------
(CUSIP Number of Class of Securities)
JANIS GEMIGNANI
CHIEF FINANCIAL OFFICER
DIGITAL VIDEO SYSTEMS, INC.
2710 WALSH AVENUE
SANTA CLARA, CALIFORNIA 95051
TEL. (408) 748-2100 . FAX (408) 727-1770
- --------------------------------------------------------------------------------
(Name, Address and Telephone Number of Person Authorized to Receive
Notices and Communications on Behalf of Person(s) Filing Statement)
[_______________________________
COPY TO:
SANFORD J. HILLSBERG
TROY & GOULD PROFESSIONAL CORPORATION
1801 CENTURY PARK EAST, SUITE 1600
LOS ANGELES, CALIFORNIA 90067
TEL. (310) 553-4441 . FAX (310) 201-4746
_______________________________]
July 24, 1996
-------------
(Date Tender Offer First Published,
Sent or Given to Security-Holder)
Calculation of Filing Fee
- --------------------------------------------------------------------------------
Transaction Valuation* Amount of Filing Fee
- --------------------------------------------------------------------------------
$49,980,000 $9,996.00
- --------------------------------------------------------------------------------
* Calculated pursuant to Rule 0-11(b)(1) based upon the maximum amount of
cash to be paid for the securities to be acquired.
[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the form
or schedule and the date of its filing.
Amount Previously Paid: ________________________________________________________
Form or Registration No.: ______________________________________________________
Filing Party: __________________________________________________________________
Date Filed: ____________________________________________________________________
<PAGE>
ITEM 1. SECURITY AND ISSUER.
-------------------
(a) The issuer is Digital Video Systems, Inc. (the "Company") and the
address of its principal executive offices is 2710 Walsh Road, Santa Clara,
California 95051.
(b) As of the date hereof there are an aggregate of 8,330,000
redeemable Class A Warrants (the "Class A Warrants") outstanding. Each Class A
Warrant grants to the holder (the "Holder") the right to purchase one share of
the Company's Common Stock, $0.0001 par value (the "Common Stock"), and one
redeemable Class B Warrant (the "Class B Warrants") at an exercise price of
$6.50, subject to adjustment, at any time until May 8, 2001. The Company is
seeking the exercise of all of the Class A Warrants (the "Exercise Offer") by
offering to Holders, two alternative exercise options in lieu of the existing
terms of the Class A Warrants (described above). The two alternatives from which
each Holder may choose provide for the Company either (i) to reduce the exercise
price of Class A Warrants to $6.00 and to issue one share of Common Stock and
1.3 Class B Warrants, or (ii) to reduce the exercise price of Class A Warrants
to $3.00 and issue 2/3 of a share of Common Stock and one Class B Warrant. These
two alternative exercise options will be available to Holders if and only if
such Holder exercises his or her Class A Warrants prior to 5:00 p.m., New York
City time, on August 29, 1996, unless such date is extended by the Company (such
date, or such date as so extended, being referred to herein as the "Expiration
Date"). The terms of the Class B Warrants offered pursuant to the two
alternatives described above (the "New Class B Warrants") are identical to the
terms of the Company's currently outstanding redeemable Class B Warrants. The
Company has been informed that certain executive officers and directors of the
Company intend to exercise an aggregate of 1,500 Class A Warrants in the
Exercise Offer upon all of the terms and conditions applicable to all Holders of
Class A Warrants. The Company has satisfied the conditions contained in the
Class A Warrants to redeem all of the Class A Warrants for $.05 per warrant and
has called the Class A Warrants for redemption. Any Class A Warrants not
exercised pursuant to the Exercise Offer will be redeemed by the Company for
$.05 per warrant on the first business day following the Expiration Date.
(c) For a discussion of the market for and market price of the Common
Stock, Class A Warrants and Class B Warrants, see page 29 of the Company's
prospectus/exercise offer (the "Prospectus/Exercise Offer") filed as part of
Amendment No. 1 to the Company's Registration Statement on Form SB-2 (No.
333-8213), which pursuant to Rule 429 also constitutes an amendment to the
Company's Registration Statement on Form SB-2 (No. 333-2228-LA) effective May 8,
1996. The Common Stock, Class A Warrants and Class B Warrants are listed on the
Nasdaq National Market. The Company's Units (each of which consists of one share
of Common Stock, one Class A Warrant and one Class B Warrant) are listed on the
Nasdaq SmallCap Market.
(d) This Issuer Tender Offer Statement on Schedule 13E-4 is being
filed by the Company, as issuer.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
-------------------------------------------------
(a) The Company will issue up to an aggregate 8,333,000 shares of its
Common Stock and 10,829,000 Class B Warrants, respectively, if 100% of the Class
A Warrants are exercised in the Exercise Offer pursuant to the exercise option
that provides for one share of Common Stock and 1.3 New Class B Warrants per
Class A Warrant. Due to the fact that this transaction is an offer to the
Holders to exercise their Class A Warrants, there is no source and total amount
of funds or other consideration applicable to the Company. The Company estimates
that its expenses in connection with the Exercise Offer will be approximately
$500,000, which will be paid from the proceeds received by the Company from the
exercise of the Class A Warrants.
(b) No part of the consideration or expenses is expected to be
borrowed, directly or indirectly, for purposes of the Exercise Offer.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
-------------------------------------------------------------------
AFFILIATE.
- ---------
The purpose of the Exercise Offer is to assist the Company in raising
capital by providing Holders with incentive to exercise their Class A Warrants.
For further information on the use of the proceeds received upon exercise of the
Class A Warrants, see "Purpose of Exercise Offer and Use of Proceeds" at pages
25-26 of the Prospectus/Exercise Offer. All Class A Warrants not exercised
pursuant to the Exercise Offer will be redeemed by the Company for $.05 per
warrant on the first business day following the Expiration Date. The redemption
of all such Class A Warrants will result in the Class A Warrants becoming
eligible for termination of registration pursuant to Section 12(g)(4) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and following
the completion of the Exercise Offer, and redemption, if any, the Company
intends to terminate the registration of the Class A Warrants. Any Class A
Warrant that is exercised will thereupon no longer confer upon the Holder any
further rights (other than the right to receive the underlying Common Stock and
Class B Warrants), and such Class A Warrants, upon such exercise, will become
void. Except as described above, with respect to the Exercise Offer, there are
no plans or proposals which relate to or would result in:
(a) The acquisition by any person of additional securities of the
Company, or the disposition of other securities by the Company other than
through the exercise of the Class A Warrants.
(b) Any extraordinary corporate transaction, such as a merger,
reorganization or liquidation, involving the Company or any of its subsidiaries.
(c) Any sale or transfer of a material amount of assets of the Company
or any of its subsidiaries.
(d) Any change in the present board of directors or management of the
Company including, but not limited to, any plans or proposals to change the
number or the terms of directors, to filing any existing vacancy on the board,
or to change any material term of the employment contract of any executive
officer.
(e) Any material change in the present dividend rate or policy, or
indebtedness or capitalization of the Company, except to the extent that the
exercise of the Class A Warrants will provide proceeds to the Company, as
described under "Purpose of Exercise Offer and Use of Proceeds" at pages 25-26
of the Prospectus/Exercise Offer and reflected in the stockholders' equity in
the table under "Capitalization" at page 27 of the Prospectus/Exercise Offer.
(f) Any other material change in the Company's corporate structure or
business, except to the extent that the proceeds from the exercise of the Class
A Warrants will allow the Company to continue to implement its plan of
operations, as described under the caption "Management's Discussion and
Analysis of Financial Condition and Results of Operations" at pages 32-36 of
the Prospectus/Exercise Offer.
(g) Any changes in the Company's Certificate of Incorporation or By-
Laws or any other actions which might impede the acquisition of control of the
Company by any person.
(h) Causing a class of equity security of the Company to be delisted
from a national securities exchange or to cease to be authorized to be quoted in
an inter-dealer quotation system of a registered national securities
association.
(i) See explanation above.
(j) The suspension of the Company's obligations to file reports
pursuant to Section 15(d) of the Exchange Act.
2.
<PAGE>
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER
------------------------------------
No transaction by the Company, any executive officer or director of
the Company, any person controlling the Company, of any associate or subsidiary
of such person in the Class A Warrants was effected during the past 40 business
days.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDING OR RELATIONSHIPS WITH RESPECT TO
-----------------------------------------------------------------------
THE ISSUER'S SECURITIES
- -----------------------
There is no contract, arrangement, understanding or relationship
relating, directly or indirectly, to the Exercise Offer between the Company
(including its executive officers and directors) and any person with respect to
any securities of the Company.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED
-----------------------------------------------
NOT APPLICABLE.
ITEM 7. FINANCIAL INFORMATION
---------------------
(a) Audited and unaudited financial information concerning the Company
are set forth at pages F-1 through F-16 of the Prospectus/Exercise Offer.
(b) Certain pro forma data disclosing the effect of the exercise of
the Class A Warrants in the Exercise Offer are set forth under "Summary
Financial Information - Balance Sheet Data" at page 8, "Capitalization" at
page 27 and "Selected Financial Data - Balance Sheet Data" at page 29 of the
Prospectus/Exercise Offer.
3.
<PAGE>
ITEM 8. ADDITIONAL INFORMATION
----------------------
Except as disclosed in the Prospectus/Exercise Offer, and except as
would not be material to a decision by a Holder of the Class A Warrants as to
whether or not to exercise them, there are no:
(a) Present or proposed contracts, arrangements, understandings or
relationships between the Company and its executive officers, directors or
affiliates;
(b) Applicable regulatory requirements which must be complied with or
approvals which must be obtained in connection with the Exercise Offer other
than such requirements or approvals which have been complied with or obtained;
(c) Applications of the margin requirements of Section 7 of the
Exchange Act and the regulations promulgated thereunder;
(d) Material pending legal proceedings relating to the Exercise Offer;
or
(e) Additional information necessary to make the required statements
herein, in light of the circumstances under which they are made, not
materially misleading.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
--------------------------------
(a) Prospectus/Exercise Offer filed as part of Amendment No. 1 to
the Company's Registration Statement on Form SB-2 (No. 333-8213).
(b) Letter of Transmittal and related materials, filed as Exhibit 1.2
to Amendment No. 1 to the Company's Registration Statement on Form SB-2 (No.
333-8213).
4.
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
Dated: July 24, 1996
By /s/ JANIS GEMIGNANI
____________________________
JANIS GEMIGNANI
5.
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
- ----------- -----------
99(a) Prospectus/Exercise Offer filed as part of Amendment No. 1
to the Company's Registration Statement on Form SB-2 (No.
333-8213).
99(b) Letter of Transmittal and related materials, filed as
Exhibit 1.2 to Amendment No. 1 to the Company's Registration
Statement on Form SB-2 (No. 333-8213).
<PAGE>
EXHIBIT 99(a)
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JULY , 1996
PROSPECTUS/EXERCISE OFFER
DIGITAL VIDEO SYSTEMS, INC.
OFFER TO HOLDERS OF THE COMPANY'S CLASS A WARRANTS TO EITHER:
(A) REDUCE THE EXERCISE PRICE OF CLASS A
WARRANTS TO $6.00 AND ISSUE ONE SHARE OF
COMMON STOCK AND 1.3 CLASS B WARRANTS OR
(B) REDUCE THE EXERCISE PRICE OF CLASS A
WARRANTS TO $3.00 AND ISSUE 2/3 OF A SHARE OF
COMMON STOCK AND ONE CLASS B WARRANT
FOR EXERCISES ON OR BEFORE AUGUST 29, 1996
THE OFFER WILL EXPIRE ON THURSDAY, AUGUST 29,
1996, AT 5:00 P.M., NEW YORK CITY TIME, UNLESS
EXTENDED. WITHDRAWAL RIGHTS WILL ALSO EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON THURSDAY, AUGUST
29, 1996.
Digital Video Systems, Inc. (the "Company") hereby offers (the "Exercise
Offer"), to the holders (the "Holders") of the Company's redeemable Class A
Warrants (the "Class A Warrants") who exercise their Class A Warrants pursuant
to the Exercise Offer, two alternative exercise options in lieu of the existing
terms of the Class A Warrants (which provide for the issuance of one share of
Common Stock and one redeemable Class B Warrant for each Class A Warrant
exercised at a price of $6.50). The two alternatives from which each Holder may
choose provide for the Company either (i) to reduce the exercise price of Class
A Warrants to $6.00 and to issue one share of Common Stock and 1.3 Class B
Warrants or (ii) to reduce the exercise price of Class A Warrants to $3.00 and
to issue 2/3 of a share of Common Stock and one Class B Warrant for each Class
A Warrant so exercised. These two alternative exercise options will be
available to each Holder only if such Holder exercises his or her Class A
Warrants prior to 5:00 P.M., New York City time, on August 29, 1996, unless
such date is extended by the Company as described herein (such date, or such
date as so extended, being referred to as the "Expiration Date"). The terms of
the Class B Warrants offered pursuant to the two alternatives described above
(the "New Class B Warrants") are identical to the terms of the Company's
currently outstanding redeemable Class B Warrants (and except where the context
otherwise requires, are referred to collectively with the currently outstanding
Class B Warrants as the "Class B Warrants").
THE COMPANY HAS SATISFIED THE CONDITIONS CONTAINED IN THE CLASS A WARRANTS TO
REDEEM ALL OF THE CLASS A WARRANTS FOR $.05 PER WARRANT AND HAS CALLED THE
CLASS A WARRANTS FOR REDEMPTION. ANY CLASS A WARRANTS NOT EXERCISED PURSUANT TO
THE EXERCISE OFFER WILL BE REDEEMED BY THE COMPANY FOR $.05 PER WARRANT ON THE
FIRST BUSINESS DAY FOLLOWING THE EXPIRATION DATE, OR AS SOON THEREAFTER AS
POSSIBLE.
-----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 9.
-----------
THE BOARD OF DIRECTORS OF THE COMPANY HAS UNANIMOUSLY APPROVED THE MAKING OF
THE EXERCISE OFFER. HOWEVER, NEITHER THE COMPANY NOR ITS BOARD OF DIRECTORS IS
MAKING ANY RECOMMENDATION TO ANY HOLDER AS TO WHETHER TO EXERCISE CLASS A
WARRANTS PURSUANT TO THE EXERCISE OFFER OR AS TO WHICH ALTERNATIVE TO SELECT
SHOULD SUCH HOLDER ELECT TO EXERCISE HIS OR HER CLASS A WARRANTS. EACH
HOLDER SHOULD MAKE HIS OR HER OWN DECISION, AFTER READING THIS
PROSPECTUS/EXERCISE OFFER, AS TO WHETHER TO EXERCISE CLASS A WARRANTS AND,
IF SO, HOW MANY CLASS A WARRANTS TO EXERCISE. THE COMPANY HAS BEEN ADVISED
THAT CERTAIN OF ITS EXECUTIVE OFFICERS OR DIRECTORS INTEND TO EXERCISE
THEIR CLASS A WARRANTS PURSUANT TO THE EXERCISE OFFER.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus/Exercise Offer is July , 1996.
<PAGE>
On May 14, 1996, the Company completed an initial public offering (the
"IPO") through D.H. Blair Investment Banking Corp., the underwriter of the IPO
(the "Underwriter"), of 4,200,000 Units (the "Units"), each Unit consisting of
one share of Common Stock, par value $0.0001 per share (the "Common Stock"),
one Class A Warrant and one Class B Warrant. On May 22, 1996, the Company
completed the sale of an additional 630,000 Units upon the Underwriter,
exercising its over-allotment option to purchase these Units. There are an
additional 3,500,000 Class A Warrants outstanding that are held by certain
unaffiliated holders (the "Selling Securityholders") and which were acquired
in connection with an earlier private placement. The Class A Warrants held by
the Selling Securityholders are registered for resale pursuant to the
registration statement of which this Prospectus/Exercise Offer forms a part.
The Common Stock, Class A Warrants and Class B Warrants are listed on the
Nasdaq National Market and the Units are listed on the Nasdaq SmallCap Market
under the symbols DVID, DVIDW, DVIDZ, and DVIDU, respectively. On July 22,
1996, the closing sale prices of the Common Stock, Class A Warrants and Class
B Warrants on the Nasdaq National Market and the Units on the Nasdaq SmallCap
Market were $9.06, $6.00, $3.38, and $17.75, respectively. See "Price Range of
Securities" and "Description of Securities."
Each Class A Warrant entitles the holder to purchase one share of Common
Stock and one Class B Warrant at an exercise price of $6.50, subject to
adjustment, at any time until May 8, 2001. Each Class B Warrant and whole New
Class B Warrant (upon issuance) entitles the holder to purchase one share of
Common Stock at an exercise price of $8.75, subject to adjustment, at any time
until May 8, 2001. Commencing on May 9, 1996 the Class A Warrants, and
commencing on May 9, 1997 the Class B Warrants and New Class B Warrants
(collectively with the Class A Warrants and Class B Warrants, the "Warrants"),
are subject to redemption by the Company at a redemption price of $.05 per
Warrant on 30 days' written notice, provided the closing bid price of Common
Stock averages in excess of $9.10 per share with respect to the Class A
Warrants and $12.25 per share with respect to the Class B Warrants and New
Class B Warrants for any 30 consecutive trading days ending within 15 days of
the notice of redemption. See "Description of Securities."
----------------
IMPORTANT
Any Holder desiring to exercise all or any portion of his or her Class A
Warrants should either (1) complete and sign the Letter of Transmittal or a
facsimile copy thereof in accordance with the instructions in the Letter of
Transmittal, mail or deliver it together with a certified or bank check
payable to "Digital Video Systems, Inc." in the amount of either $6.00 or
$3.00 per Class A Warrant exercised in the Exercise Offer (depending upon
which alternative exercise option is selected by the Holder) and any other
required documents to American Stock Transfer & Trust Company (the "Warrant
Agent") and either mail or deliver the Holder's Class A Warrant certificate(s)
for the Class A Warrants being exercised to the Warrant Agent or follow the
procedure for book-entry exercise set forth under the caption "The Exercise
Offer--Procedures for Exercising Class A Warrants--Book Entry Exercise," or
(2) request the Holder's broker, dealer, commercial bank, trust company or
other nominee to effect the transaction for him or her. A Holder having Class
A Warrants registered in the name of a broker, dealer, commercial bank, trust
company or other nominee must contact that broker, dealer, commercial bank,
trust company or other nominee if such Holder desires to exercise such Class A
Warrants. Holders who desire to exercise Class A Warrants and whose
certificates for such Class A Warrants are not immediately available should
exercise such Class A Warrants by following the procedures for guaranteed
delivery set forth under the caption "The Exercise Offer--Procedures for
Exercising Class A Warrants--Guaranteed Delivery."
----------------
Questions and requests for assistance or for additional copies of this
Prospectus/Exercise Offer, the Letter of Transmittal or the Notice of
Guaranteed Delivery may be delivered to the Warrant Agent at its address and
telephone number set forth on the back cover of this Prospectus/Exercise
Offer.
2
<PAGE>
PROSPECTUS/EXERCISE OFFER SUMMARY
The following summary does not purport to be complete and is qualified in its
entirety by the more detailed information and financial data (including the
financial statements and the notes thereto) appearing elsewhere in this
Prospectus/Exercise Offer. Unless otherwise noted, all information in this
Prospectus/Exercise Offer assumes no exercise of (i) the Warrants, (ii) the
Underwriter's Unit Purchase Option, (iii) options granted or available for
grant under the Company's 1993 Stock Option Plan (the "Option Plan") or (iv)
other outstanding options issued to a consultant to the Company. See
"Capitalization," "Management--Stock Option Plan" and "Description of
Securities."
THE COMPANY
The Company develops, manufactures and markets digital video compression and
decompression hardware and software for entertainment, business and educational
uses. The Company has developed proprietary digital video compression and
decompression technology that it believes will enable it to offer products with
a wide range of features at competitive prices. The Company's current primary
focus is on the manufacturing and marketing of a digital video compact disc
("Video CD") player incorporating the Company's technology primarily for
consumer and commercial entertainment applications. The Company markets its
Video CD players and Video CD components largely to electronics manufacturers
in China and Taiwan. The market for Video CD players has recently developed in
these countries as more consumer entertainment products have been encoded onto
Video CDs and Video CD players have become more affordable.
Since the 1930s, video images have been transmitted and stored almost
exclusively using analog formats such as video tape. Digital video, however,
unlike analog video, can be compressed, which allows for increased storage
capability and transmission efficiencies as well as the ability to reproduce
and transmit video images without perceptible image degradation. Digital video
also permits superior editing capabilities because of its greater compatibility
with computers. Although the large video entertainment markets throughout the
world are currently served primarily by VHS video cassettes and laser discs,
the Company believes that Video CDs, including digital video disc ("DVD") and
other new digital formats, may be able to effectively compete for these markets
in the future. The amount of entertainment media available on Video CDs,
including movies, karaoke and games, has increased from several hundred titles
in 1994 to over 2,000 titles worldwide in 1995.
Virtually all of the Company's product revenues to date have been generated
by sales of Video CD players and Video CD player components in Taiwan and
China. The Company has recently commenced manufacturing and marketing in the
United States and other countries video encoding systems for use by movie
studios and other businesses and educational institutions that are converting
large quantities of analog video material to digital video for storage on Video
CDs. In addition, the Company has developed an encoding board set for use with
certain personal computers to convert analog video materials to digital video.
This encoding board set, which the Company commenced marketing in the second
quarter of 1996, costs considerably less than an entire encoding system. The
Company also has developed a networked multimedia-on-demand system that can be
used for entertainment, education and business applications and expects to
commence marketing products incorporating this system in the United States and
other countries during the second half of 1996.
The Company's strategy is to market and sell its digital video products in
selected markets not already broadly developed by the major consumer electronic
manufacturers. The Company's longer-term objective is to develop specific
applications for the Company's products, such as for karaoke, educational and
business uses, including classroom teaching, consumer product education and
corporate training, and video delivery over the Internet. The Company also may
offer entertainment delivery systems for the hospitality industry, including
hotels and cruise ships. To implement its strategy, the Company has assembled a
highly experienced research and development team and may seek to enter into
strategic partnerships or other collaborative arrangements with other companies
to develop and market new products.
3
<PAGE>
DVS was founded in 1992 by Dr. Edmund Sun. Dr. Sun is the founder and former
Chief Executive Officer of C-Cube Microsystems Inc. ("C-Cube"), a leading
producer of digital video encoding and decoding products that are incorporated
into various consumer, communications and computer applications, including all
of the Company's products. In 1993, the Company entered into agreements with
Hyundai Electronics Industries Co., Ltd. ("Hyundai"), which funded a portion of
the Company's development of digital video karaoke players, jukeboxes, network
systems and encoding machines in exchange for an exclusive license to
manufacture, use and sell certain of the Company's products in Korea and a non-
exclusive license for other countries. Hyundai also made a substantial equity
investment in the Company.
Approximately 90% of the Company's revenues in 1994 consisted of sales of
certain products and services to Hyundai and other affiliated customers which
the Company did not expect to be a continuing source of revenues. In 1995, the
Company increasingly focused its efforts upon commercializing its products in
an attempt to meet the significant growth in demand for digital video products.
However, as a result at least in part of insufficient working capital to expand
its operations to meet such demand, the Company has recognized limited revenues
from sales of its products to date. The Company anticipates that the continued
increase in the demand for digital video products may enable it to generate
substantial revenue growth in 1996.
Except for historical information contained herein, statements in this
Prospectus/Exercise Offer are forward-looking statements that are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements involve known and unknown risks and
uncertainties which may cause the Company's actual results in future periods to
differ materially from forecast results. See "Risk Factors."
The principal executive offices of the Company are located at 2710 Walsh
Avenue, Santa Clara, California 95051. The Company's telephone number is (408)
748-2100.
4
<PAGE>
THE EXERCISE OFFER
Securities Offered.......... 8,330,000 shares of Common Stock underlying the
maximum number of Class A Warrants exercisable in
connection with the Exercise Offer (1).
10,829,000 New Class B Warrants, representing the
maximum number of New Class B Warrants issuable
in connection with the Exercise Offer (1).
Expiration Date............. August 29, 1996, unless extended by the Company
at its sole discretion. The "Expiration Date" is
the original expiration date of the Exercise Of-
fer or as that date may be extended. See "The Ex-
ercise Offer--Exercise Terms."
Class A Warrant Exercise
Price and Securities
Issued Pursuant to
Exercise Offer............. At the option of the Holder, either (i) $6.00 per
Class A Warrant for one share of Common Stock and
1.3 New Class B Warrants or (ii) $3.00 per Class
A Warrant for 2/3 of a share of Common Stock and
one New Class B Warrant.
Shares of Common Stock
Outstanding:
Prior to the Exercise
Offer.................... 16,796,658 shares(1)
After the Exercise Offer.. 25,126,658 shares(1)(2)
Class A Warrants
Outstanding:
Prior to the Exercise
Offer.................... 8,330,000 Class A Warrants(3)
After the Exercise Offer.. (4)
Class B Warrants
Outstanding:
Prior to the Exercise
Offer.................... 4,830,000 Class B Warrants(5)
After the Exercise Offer.. (6)
Closing Sale Price Prior to
Announcement of Exercise
Offer (July 22, 1996)...... Units: $17.75
Common Stock: $9.06
Class A Warrants: $6.00
Class B Warrants: $3.38
Current Closing Sale Price
( , 1996)............. Units: $
Common Stock: $
Class A Warrants: $
Class B Warrants: $
Ownership of Class A
Warrants................... Two officers (each of whom is also a director) of
the Company holding an aggregate of 1,500 Class A
Warrants have advised the Company that they in-
tend to exercise their Class A Warrants pursuant
to the Exercise Offer. See "Principal Stockhold-
ers."
5
<PAGE>
Warrant Agent............... American Stock Transfer and Trust Company, 40
Wall Street, 46th Floor, New York, NY 10005, 1-
800-937-5449 (Reorganization Department).
Method of Exercising........ In order to exercise Class A Warrants, Holders
must follow the procedures set forth under the
caption "The Exercise Offer--Procedures for Exer-
cising Class A Warrants."
Warrant Solicitation Fees... The Company will not pay any warrant solicitation
fees or other similar compensation to any third
party in connection with the Exercise Offer. See
"Plan of Distribution."
Use of Proceeds............. The net proceeds to the Company will be utilized
to expand the Company's engineering capabilities,
to increase the Company's product development ac-
tivities, to broaden the Company's Video CD prod-
uct lines, to expand the Company's marketing ac-
tivities, and to finance increased production and
sales of the Company's products should the Com-
pany experience substantial increases in sales
and to increase working capital. See "Purpose of
Exercise Offer and Use of Proceeds."
Risk Factors................ The securities offered hereby involve a high de-
gree of risk and should not be purchased by in-
vestors who cannot afford the loss of their en-
tire investment. See "Risk Factors."
- --------
(1) Includes 7,818,232 shares of Common Stock (the "Escrow Shares") which have
been deposited into escrow by the holders thereof. Does not include
outstanding options to purchase 2,047,222 shares of Common Stock and
options to purchase 234,546 shares of Common Stock available for grant
under the Option Plan (collectively, the "Escrow Options") which have been
deposited and agreed to be deposited into escrow by the holders thereof and
the Company, respectively. The Escrow Shares and the Escrow Options
(collectively, the "Escrow Securities") are subject to cancellation and
will be contributed to the capital of the Company if the Company does not
attain certain earnings levels or the market price of the Company's Common
Stock does not achieve certain levels. Excludes (i) 14,490,000 shares of
Common Stock issuable upon exercise of outstanding Class A Warrants and
Class B Warrants issued as part of the Units and shares of Common Stock
issuable upon exercise of Class B Warrants underlying such Class A
Warrants; (ii) 7,000,000 shares of Common Stock issuable upon exercise of
3,500,000 outstanding Class A Warrants and 3,500,000 Class B Warrants
issuable upon exercise of such Class A Warrants which are registered for
resale by the Selling Securityholders; (iii) 1,680,000 shares of Common
Stock issuable upon exercise of unit purchase options and the Class A
Warrants and Class B Warrants underlying such options issued to Blair and
its designees in the IPO; (iv) up to 2,499,000 shares of Common Stock
issuable upon exercise of the maximum number of New Class B Warrants
issuable in the Exercise Offer that are in excess of the total number of
Class B Warrants that would be issuable upon exercise of all of the
outstanding Class A Warrants described in (i) and (ii) above, exclusive of
the Exercise Offer.
(2) Assumes 100% of the outstanding Class A Warrants are exercised in the
Exercise Offer pursuant to the exercise option that provides for one share
of Common Stock and 1.3 New Class B Warrants per Class A Warrant.
(3) Consists of 4,830,000 Class A Warrants issued in the IPO and 3,500,000
Class A Warrants held by the Selling Securityholders.
(4) If 100%, 75% or 50% of the Class A Warrants are exercised in the Exercise
Offer, 0, 2,082,500 or 4,165,000 Class A Warrants, respectively, would
remain outstanding after the Exercise Offer.
(5) Excludes 8,330,000 Class B Warrants issuable upon exercise of outstanding
Class A Warrants.
6
<PAGE>
(6) If 100%, 75% or 50% of the Class A Warrants are exercised in the Exercise
Offer pursuant to the alternative exercise option that provides for the
issuance of one share of Common Stock and 1.3 New Class B Warrants per
Class A Warrant, 10,829,000, 8,121,750 and 5,414,500 New Class B Warrants,
respectively, would be issued upon such exercise in addition to the
4,830,000 Class B Warrants outstanding prior to the Exercise Offer. If
100%, 75% or 50% of the Class A Warrants are exercised in the Exercise
Offer pursuant to the alternative exercise option that provides for the
issuance of 2/3 of a share of Common Stock and one New Class B Warrant per
Class A Warrant, 8,330,000, 6,247,500 or 4,165,000 New Class B Warrants,
respectively, would be issued upon such exercise in addition to the
4,830,000 Class B Warrants outstanding prior to the Exercise Offer. The
Company will redeem any unexercised Class A Warrants for $.05 per warrant
on the first business day following the Expiration Date, or as soon
thereafter as possible.
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------ ----------------------
1994 1995 1995 1996
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues.................... $ 7,808,633 $ 3,520,831 $ 348,339 $ 1,386,868
Cost of revenues............ 6,918,490 3,354,920 401,766 1,415,876
Gross profit (loss)......... 890,143 165,911 (53,427) (28,978)
Loss from operations........ (2,122,052) (3,154,131) (795,190) (911,204)
Net loss.................... $(1,653,661) $(4,483,311) $(803,540) $(1,360,685)
Pro forma net loss per
share(1)................... (.84) (.15) (.26)
Pro forma weighted average
number of shares of Common
Stock outstanding(1)....... 5,337,688 5,353,294 5,292,061
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------------------------------------------
PRO AS AS AS
ACTUAL FORMA(2) ADJUSTED(3) ADJUSTED(4) ADJUSTED(5)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $ 953,833 $19,788,537 $37,822,787 $52,608,537 $60,938,537
Total assets........... 9,403,396 21,897,337 39,931,587 54,717,337 63,047,337
Total liabilities...... 7,816,224 1,475,461 1,475,461 1,475,461 1,475,461
Accumulated deficit.... (7,385,418) (8,964,714) (8,964,714) (8,964,714) (8,964,714)
Total shareholders' eq-
uity.................. 1,587,172 20,508,876 38,543,126 53,328,876 61,658,876
</TABLE>
- --------
(1) See Note 1 of Notes to Financial Statements for explanation of
determination of the pro forma weighted average number of shares of Common
Stock used in computing the pro forma net loss per share. Excludes the
Escrow Securities. See "Principal Shareholders--Escrow Securities" and Note
11 of Notes to Financial Statements.
(2) Adjusted to give effect to (i) the sale of the 4,830,000 Units at an
offering price of $5.00 per Unit, and (ii) the receipt of the net proceeds
therefrom of approximately $20,501,000 and the use of a portion of the net
proceeds to repay the Bridge Notes, together with accrued interest of
$175,000 through May 14, 1996, and charges of approximately $1,570,000
relating to costs of the Bridge Financing and debt discount to be incurred
subsequent to March 31, 1996. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
(3) Assumes that 50% of the Class A Warrants are exercised pursuant to the
Exercise Offer and that (i) 25% of the Holders select the exercise option
whereby the Company reduces the exercise price of Class A Warrants to $6.00
and issues one share of Common Stock and 1.3 New Class B Warrants and, (ii)
25% of the Holders select the exercise option whereby the Company reduces
the exercise price of Class A Warrants to $3.00 and issues 2/3 of a share
of Common Stock and one New Class B Warrant for each Class A Warrant
exercised and, (iii) all unexercised Class A Warrants are redeemed by the
Company for $0.05 per warrant.
(4) Assumes that 100% of the Class A Warrants are exercised pursuant to the
Exercise Offer and that (i) 1/3 of the Holders select the exercise option
whereby the Company reduces the exercise price of Class A Warrants to $6.00
and issues one share of Common Stock and 1.3 New Class B Warrants for each
Class A Warrant exercised and, (ii) 2/3 of the Holders select the exercise
option whereby the Company reduces the exercise price of Class A Warrants
to $3.00 and issues 2/3 of a share of Common Stock and one New Class B
Warrant for each Class A Warrant exercised.
(5) Assumes that 100% of the Class A Warrants are exercised pursuant to the
Exercise Offer and that (i) 2/3 of the Holders select the exercise option
whereby the Company reduces the exercise price of Class A Warrants to $6.00
and issues one share of Common Stock and 1.3 New Class B Warrants for each
Class A Warrant exercised and, (ii) 1/3 of the Holders select the exercise
option whereby the Company reduces the exercise price of Class A Warrants
to $3.00 and issues 2/3 of a share of Common Stock and one New Class B
Warrant for each Class A Warrant exercised.
8
<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative in nature and involve a
high degree of risk. Prospective investors should carefully consider, along
with the other information contained in this Prospectus, the following
considerations and risks in evaluating an investment in the Company.
HISTORY OF LOSSES AND ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES. To
date, the Company has incurred significant losses. At March 31, 1996, the
Company had an accumulated deficit of approximately $7,385,000. The Company
incurred operating losses of approximately $2,122,000 and $3,154,000 for the
fiscal years ended December 31, 1994 and 1995, respectively. Such losses
resulted principally from limited revenues from operations and significant
costs associated with the development of the Company's technologies. The
Company had an operating loss of approximately $911,000 for the three-month
period ended March 31, 1996 (and took an additional charge of approximately
$450,000 resulting from interest expense, amortization of deferred financing
costs and accretion of debt discount pursuant to the Bridge Financing). The
Company incurred a substantial operating loss in the three-month period ended
June 30, 1996 and expects to incur further operating losses during at least
the next year and until such time, if ever, as there is a substantial increase
in orders for the Company's products and product sales generate sufficient
revenues to fund its continuing operations. There can be no assurance that
sales of the Company's products will ever generate significant revenue, that
the Company will generate positive cash flow from its operations or that the
Company will attain or thereafter sustain profitability in any future period.
UNCERTAINTY OF MARKET ACCEPTANCE OF VIDEO CDS; LACK OF ESTABLISHED MARKET
FOR PRODUCTS. The Company's business is dependent on market acceptance of its
digital video technology and the successful commercialization of products
utilizing this technology. To date, demand for the Company's Video CD products
has been principally in Taiwan and China, and there can be no assurance that
demand in these countries will increase or that acceptance of Video CD
products in any other countries, specifically the United States, will occur.
The Company is not aware of any marketing studies of the potential size of the
U.S. market or the willingness of potential customers to purchase this new
technology. The Company's ability to successfully market its Video CD products
will depend in part on the willingness of potential customers to incur the
costs involved in purchasing Video CD players, which in turn will depend on
the Company and others convincing potential customers of the benefits of
digital video. The Company has only recently released its latest generation of
Video CD players, and there can be no assurance that these players or any
other of the Company's products or product enhancements will meet the
requirements of the marketplace and achieve market acceptance. The willingness
of potential customers to purchase Video CD players will also depend on the
ability of consumers to purchase or rent Video CDs of desirable titles at
reasonable prices. Failure of the Company's products in general (and the Video
CD player in particular) to attain significant market acceptance would have a
material adverse effect on the Company's operating results and financial
condition.
RISK OF PLANNED RAPID GROWTH. The Company plans to significantly expand its
operations during 1996, which could place a significant strain on its limited
personnel, financial and other resources. The Company's ability to manage this
growth, should it occur, would require significant expansion of its product
development and marketing and sales capabilities and personnel. In particular,
the Company is in the process of expanding its sales and marketing
organization to increase coverage in the United States, the Asia-Pacific
region and Europe. There can be no assurance that the Company will be able to
find qualified personnel to fill such sales and marketing positions or be able
to successfully manage a broader sales and marketing organization. In
addition, the contemplated sale and distribution of products to numerous
licensees and subcontractors who will manufacture products incorporating the
Company's products in diverse markets and the requirements of such
manufacturers for design support will also place substantial demands on the
Company's product development, quality control and sales functions. The
failure of the Company's management to effectively expand or manage these
functions consistent with any growth which may occur could have a material
adverse effect on the Company's business and results of operations.
9
<PAGE>
DEPENDENCE ON SOLE SUPPLIER. The Company's products incorporate computer
chips produced by C-Cube Microsystems Inc. ("C-Cube"). The demand for C-Cube
chips currently exceeds C-Cube's ability to supply these chips. Consequently,
purchasers of such chips, including the Company, have been allocated fewer
chips than they have ordered. The Company has no contractual right to obtain
any specified number of chips from C-Cube. Should the Company's ability to
obtain the requisite number of C-Cube chips be limited for any lengthy period
of time or further impaired or if the cost of the C-Cube chips increases, the
Company's ability to supply products to its customers could be materially
adversely affected. There can be no assurance that any other company will be
able to create chips substantially equivalent to C-Cube's chips or that any
such chips can be successfully integrated into the Company's products without
significant expense to the Company or at all. The Company's inability to
obtain a sufficient quantity of chips would have a material adverse effect on
the Company's business, prospects, operations and financial condition.
Although C-Cube substantially increased its capacity to supply chips in
April 1996, there can be no assurance that the Company's allocation will
increase sufficiently to meet the Company's needs. In addition, any increase
in the supply of chips may allow the Company's existing competitors to produce
more competing products or encourage new competitors to produce Video CD
products.
RISKS OF INTERNATIONAL OPERATIONS. International revenues have accounted for
a significant portion of the Company's revenues to date (with sales to Taiwan
and China accounting for approximately 50% and 47% respectively, of the
Company's product revenues in 1995), and the Company believes that
international revenues will continue to account for a significant portion of
its future revenues. Moreover, the Company has been manufacturing a
substantial portion of its products in Taiwan, is considering additional
manufacturing operations through subcontractors in China and may establish
manufacturing operations in other countries to meet local demand for its
products in those markets when, if ever, such demand develops. Accordingly,
the Company will be subject to all of the risks inherent in international
operations, including work stoppages, transportation delays and interruptions,
political instability in countries such as Taiwan or China or conflict between
countries in which the Company is doing business, such as Taiwan and China,
foreign currency fluctuations, economic disruptions, expropriation, the
imposition of tariffs and import and export controls, changes in governmental
policies (including United States trade policy toward certain countries such
as China and Japan) and other factors which could have an adverse effect on
the Company's business. The Company will also be subject to the burdens of
complying with a wide variety of foreign laws and regulations. These
international trade factors may, under certain circumstances, materially and
adversely impact demand for the Company's products or the Company's ability to
deliver its products in a timely manner, which in turn may have an adverse
impact on the Company's relationships with its customers. The Company's
success will depend in part upon its ability to manage international marketing
and sales operations and manufacturing relationships.
While the Company sells certain of its products in international markets and
buys certain items incorporated into its products in currencies other than the
U.S. dollar, the Company does not currently hedge its exposure to foreign
currency fluctuations. As a result, currency fluctuations could have a
material adverse effect on the Company's business and results of operations.
With respect to international sales that are denominated in U.S. dollars, an
increase in the value of the U.S. dollar relative to foreign currencies can
increase the effective price of, and reduce demand for, the Company's products
relative to competitive products priced in the local currency.
EFFECT OF TRADE DISPUTES. The United States has had disputes with China
relating to trade and human rights issues and has considered trade sanctions
against China and Japan. If trade sanctions were imposed, China or Japan could
enact trade sanctions in response. Because a number of the Company's current
and prospective customers and suppliers of items incorporated into its
products are located in either China or Japan, trade sanctions, if imposed,
could have a material adverse effect on the Company's business and results of
operations. Similarly, protectionist trade legislation in either the United
States or foreign countries, such as China and Taiwan, could affect the
Company's ability to import and export products and have a material adverse
effect on the Company's ability to manufacture or to sell its products in
foreign markets. In addition, recent efforts by China to limit certain ongoing
practices, such as the pirating of Video CD titles, may increase the cost of
such titles and result in a decrease in demand in that country for the
Company's Video CD products, including the Video CD player.
10
<PAGE>
RAPID TECHNOLOGICAL CHANGE AND OBSOLESCENCE; RISKS ASSOCIATED WITH PRODUCT
DEVELOPMENT INTRODUCTIONS AND ANNOUNCEMENTS. The markets for the Company's
products are characterized by evolving industry standards, rapid technological
advances resulting in short product life cycles, price reductions, significant
price/performance improvements and frequent new product introductions. The
Company's future success will depend at least in part upon its ability to
enhance its existing products and to develop and introduce new products and
features which meet changing customer requirements and emerging industry
standards on a timely basis. There can be no assurance that one or more of the
Company's products will not be rendered noncompetitive or obsolete by
technological advances or changing customer preferences. In addition, from
time to time, the Company or others may announce products, features or
technologies which have the potential to shorten the life cycle of or replace
the Company's then existing products, including the Company's products that
only use the MPEG-I format. See "Business--Industry Background." Such
announcements could cause customers to defer the decision to buy or determine
not to buy the Company's products or cause the Company's distributors to seek
to return products to the Company, any of which could cause the Company to
write down some or all of its inventory. Any such writedown could have a
material adverse effect on the Company's business and results of operations.
The Company has from time to time experienced delays in introducing new
products and product enhancements, and there can be no assurance that the
Company will not experience difficulties that could delay or prevent the
successful development, introduction and marketing of new products or product
enhancements in the future. The Company will be required to continue to invest
in research and development to attempt to maintain and enhance its existing
technologies, and there can be no assurance that it will have the funds
available at such time as it will be necessary to do so. Furthermore, products
such as those offered by the Company may contain defects when they are first
introduced or as new or enhanced versions are released. The Company has in the
past discovered defects in certain of its new products, such as the karaoke
jukebox, and in certain of its product enhancements. These defects have
required correction by the Company, thereby resulting in delays in the
marketing of such products or product enhancements. There can be no assurance
that, despite significant quality control testing by the Company, defects will
not be found in new products and product enhancements after commencement of
commercial shipments, resulting in delays in or loss of market acceptance.
RISKS RELATING TO THE ESTABLISHMENT OF AN ACCEPTED DISC FORMAT FOR VIDEO
DISCS. A new digital video disk format, DVD, for storage of compressed audio
and video information, has been agreed to by the major electronic
manufacturers and entertainment companies as the basic industry standard for
digital video recording. As security codes for the format have not yet been
agreed upon by the computer industry, however, the new format has not been
released to the public and its viability has not yet been established.
Moreover, potential customers for the Company's products utilizing the new
format may be deterred from purchasing such products due to the possibility
that such products may become obsolete (as was the case with beta video
cassettes). Should this occur, demand for the Company's products could be
adversely affected. Further, if the new format is not accepted, the Company
may be forced to develop its Video CD products utilizing a different format.
Even if the new DVD format or another format which has enough storage capacity
for MPEG-II products is accepted, the new format could adversely affect the
Company's business by making its existing MPEG-I products obsolete. Moreover,
while the Company's research and development activities have included products
incorporating MPEG-II standards, the Company may have less experience with the
new DVD format than other companies and could be slower than its competitors
in developing products for this or any other new format. Accordingly, there
can be no assurance that the Company will be able to compete effectively in
the market for video players using the new format or any different format.
DEPENDENCE ON KEY PERSONNEL AND NEED FOR ADDITIONAL MANAGEMENT
EXECUTIVES. The Company's success to date has depended in large part on the
skills and efforts of Dr. Edmund Sun, the Company's Chairman, Chief Executive
Officer and founder and, to a lesser extent, Robert B. Pfannkuch, the
Company's President, Janis Gemignani, the Company's Chief Financial Officer,
James A. Munro, the Company's Director of Engineering, and Ed Martini, the
Company's Project Manager for Network Video. The Company has obtained key-man
life insurance on the lives of Dr. Sun, Ms. Gemignani, Mr. Munro and Mr.
Martini in the amounts of $3,000,000, $1,000,000, $1,000,000 and $500,000,
respectively. The Company's success also depends to a significant extent on
the performance and continued service of certain other key employees. The
Company has hired a senior sales
11
<PAGE>
and marketing director and is seeking other personnel to complete its
management team in connection with the Company's proposed expansion of its
operations. Competition for highly-skilled business, product development,
technical and other personnel is intense, and there can be no assurance that
the Company will be successful in recruiting new personnel or in retaining any
of its existing personnel. The Company may experience increased costs in order
to retain and attract skilled employees. In addition, other than an employment
agreement with Dr. Sun and Mr. Pfannkuch, the Company does not have employment
contracts with any of its employees. The Company's failure to attract
additional qualified employees or to retain the services of key personnel
could have a material adverse effect on the Company's operating results and
financial condition.
COMPETITION. The Company's products compete with alternative methods of
displaying audio and video such as video cassette players, laser discs,
multimedia computers and game machines, as well as with other companies'
products that use similar technologies. The large video entertainment markets
of the United States and other industrial nations are currently served
primarily by VHS video cassettes and laser discs, and there can be no
assurance that Video CDs and newer digital video disc formats will be able to
effectively compete for these markets in the future. Most of the Company's
competitors and potential competitors are substantially larger in size and
have far greater financial, technical, marketing, customer service and other
resources than the Company. Certain of the Company's potential competitors may
have technological capabilities or other resources that would allow them to
develop alternative products which could compete with the Company's products.
Potential competitors may begin operations or expand their existing operations
into the Company's proposed markets before the Company is able to successfully
market its products. The Company's ability to effectively compete may be
adversely affected by the ability of these competitors to offer their products
at lower prices than the price of the Company's products and to devote greater
resources to the sales and marketing of their products than are available to
the Company. There can be no assurance that future technological advances will
not result in improved products or services that could adversely affect the
Company's business. Competition in the electronics industry also extends to
attracting and retaining qualified technical and marketing personnel, and
there can be no assurance that the Company will be successful in attracting
and retaining such qualified personnel. See "Business--Competition."
DEPENDENCE ON NONAFFILIATED MANUFACTURERS. The Company primarily relies on
subcontractors and licensees to manufacture its products or products
incorporating the Company's products. None of these manufacturers are
contractually obligated to meet the long-term production requirements of the
Company. There can be no assurance that the Company will be successful in
entering into any such future manufacturing arrangements with third parties on
terms acceptable to the Company or at all. The Company's reliance on third
parties for manufacturing its products reduces the Company's control over the
manufacture of its products and makes the Company substantially dependent upon
such third parties to deliver its products in a timely manner, with
satisfactory quality controls and on a competitive basis. Further, foreign
manufacturing is subject to a number of risks inherent in foreign operations,
including risks associated with the availability of and time required for the
transportation of products from such foreign countries. See "--Risks of
International Operations." To the extent the Company ultimately determines to
undertake commercial scale manufacturing, if ever, it will require substantial
additional personnel and financial resources.
LIMITED SALES AND MARKETING EXPERIENCE. The Company's operating results will
depend to a large extent on its ability to successfully sell and market its
Video CD products. The Company currently has limited marketing capabilities
and needs to hire additional sales and marketing personnel. There can be no
assurance that the Company will be able to recruit, train or retain qualified
personnel to sell and market its products or that it will develop a successful
sales and marketing strategy. The Company also has very limited marketing
experience. There can be no assurance that any marketing efforts undertaken by
the Company will be successful or will result in any significant sales of its
products.
RISKS OF LIMITED PROTECTION FOR COMPANY'S INTELLECTUAL PROPERTY AND
PROPRIETARY RIGHTS AND INFRINGEMENT OF THIRD PARTIES' RIGHTS. The Company
regards its products as proprietary and relies primarily on a combination of
trademark, copyright and trade secret laws and employee and third-party
nondisclosure agreements to protect its proprietary rights. The Company does
not possess any patent or other intellectual
12
<PAGE>
property rights which would limit competition against it, but plans to apply
for patent protection in the United States and certain other countries for
certain of its designs and components. There are few barriers to entry into
the market for the Company's products, and there can be no assurance that any
patents applied for by the Company will be granted or that the scope of any
patents that are granted will be broad enough to protect against the use of
similar technologies by the Company's competitors. There can be no assurance,
therefore, that any of the Company's competitors, many of whom have far
greater resources than the Company, will not independently develop
technologies that are substantially equivalent or superior to the Company's
technology. Further, the Company distributes its products in countries where
intellectual property laws are not well developed or are poorly enforced.
Legal protections of the Company's rights may be ineffective in such
countries, and software developed in such countries may not be protectable in
jurisdictions where protection is ordinarily available. Software piracy and
ineffective legal protection of the Company's software in foreign
jurisdictions may cause substantial losses of sales by the Company, which
could have a material adverse effect on the Company's operating results and
financial condition.
There can also be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to current
or future products. If infringement is alleged, the Company could be required
to discontinue the use of certain software codes or processes, to cease the
manufacture, use and sale of infringing products, to incur significant
litigation costs and expenses and to develop non-infringing technology or to
obtain licenses to the alleged infringing technology. There can be no
assurance that the Company would be able to develop alternative technologies
or to obtain such licenses or, if a license were obtainable, that the terms
would be commercially acceptable to the Company.
The Company may be involved from time to time in litigation to determine the
enforceability, scope and validity of any proprietary rights of the Company or
of third parties asserting infringement claims against the Company. Any such
litigation could result in substantial costs to the Company and diversion of
efforts by the Company's management and technical personnel.
CONTROL BY INSIDERS. The Company's directors and officers, together with
Hyundai (a principal shareholder of the Company), beneficially own shares of
the Company's capital stock representing approximately 70.6% of the total
voting power of the Company (47.2% if all of the Class A Warrants are
exercised pursuant to the exercise option in the Exercise Offer that requires
the Company to issue one share of Common Stock and 1.3 New Class B Warrants
per Class A Warrant). Accordingly, it is likely that they will continue to be
able to elect at least a majority of the Company's directors and thereby
direct the policies of the Company after completion of the Exercise Offer.
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROW SECURITIES. In the event
any Escrow Securities owned by securityholders of the Company who are
officers, directors, consultants or employees of the Company are released from
escrow, compensation expense will be recorded for financial reporting
purposes. Therefore, in the event the Company attains any of the earnings or
stock price thresholds required for the release of the Escrow Securities, the
release will be treated, for financial reporting purposes, as compensation
expense of the Company. Accordingly, the Company will, in the event of the
release of the Escrow Securities, recognize during the period that the
earnings or stock price thresholds are met a substantial noncash charge to
earnings that would increase the Company's loss or reduce or eliminate
earnings, if any, at such time. The amount of this charge will be equal to the
aggregate market price of such Escrow Securities at the time of release from
escrow. Although the amount of compensation expense recognized by the Company
will not affect the Company's total shareholders' equity or cash flow, it may
have a depressive effect on the market price of the Company's securities.
SUBSTANTIAL PORTION OF NET PROCEEDS TO BE ADDED TO WORKING CAPITAL. The
Company anticipates that the net proceeds of the Exercise Offer will be
utilized to expand its engineering capabilities, to increase the Company's
product development activities, to broaden its Video CD product lines, and to
expand marketing activities (including opening sales and support offices in
China and increasing marketing activities in Singapore, India and Eastern
Europe). Net offering proceeds also may be used to finance increased
production and sales of the Company's products should the Company experience
substantial increases in sales. In the event a substantial
13
<PAGE>
number of Class A Warrants are exercised utilizing the $6.00 exercise price
option, a significant portion of the net offering proceeds will be allocated
to the Company's working capital reserves and may be expended by the Company
in the future for purposes not specifically described herein.
SHARES AVAILABLE FOR FUTURE SALE; REGISTRATION RIGHTS. Future sales of
Common Stock by existing shareholders pursuant to Rule 144 under the
Securities Act or otherwise, could have an adverse effect on the price of the
Company's securities. 3,500,000 Class A Warrants held by the Selling
Securityholders and the underlying securities were registered for resale
concurrently with the IPO, subject to a contractual restriction that the
Selling Securityholders not sell any of the Selling Securityholders' Class A
Warrants for at least 90 days from the closing of the IPO and, during the
period from 91 to 270 days after the closing of the IPO, only sell specified
percentages of such Selling Securityholders' Warrants. The Company currently
has outstanding 16,796,658 shares of Common Stock, 8,330,000 Class A Warrants
and 4,830,000 Class B Warrants. The shares of Common Stock, Class A Warrants
and Class B Warrants sold in the IPO are freely tradeable without restriction
under the Securities Act, unless acquired by "affiliates" of the Company as
that term is defined in the Securities Act. The remaining 11,966,658
outstanding shares of Common Stock are "restricted securities" within the
meaning of Rule 144 under the Securities Act. Pursuant to Rule 144, 9,573,326
of these restricted shares will be eligible for resale commencing August 9,
1996. However, all the holders of the shares of Common Stock outstanding prior
to the IPO (including all of the shares of Common Stock issuable upon
conversion of the outstanding Preferred Stock) and holders of options to
purchase 1,261,862 shares of Common Stock have agreed not to sell or otherwise
dispose of any securities of the Company for a period of 13 months from the
date of the IPO without the prior written consent of the Underwriter. In
addition, holders of 7,818,232 shares of Common Stock and options to purchase
2,047,222 shares of Common Stock have placed such securities in escrow. The
holder of the Unit Purchase Option and the holder of 3,896,999 shares of the
Common Stock have certain demand and "piggy-back" registration rights covering
their securities. The exercise of such rights could involve substantial
expense to the Company. Sales of Common Stock, or the possibility of such
sales, in the public market may adversely affect the market price of the
securities offered hereby. See "Description of Securities" and "Shares
Eligible for Future Sale."
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. The Company has outstanding
8,330,000 Class A Warrants (including the Class A Warrants held by the Selling
Securityholders) and 4,830,000 Class B Warrants. In addition, the Company has
outstanding the Unit Purchase Option to purchase an aggregate of 1,680,000
shares of Common Stock (assuming exercise of the underlying Warrants),
3,183,342 shares of Common Stock reserved for issuance under the Option Plan,
under which options to purchase 2,811,663 shares are outstanding at exercise
prices ranging from $.14 to $3.50 per share, and additional options to
purchase 200,000 shares of Common Stock at an exercise price of $5.00 per
share. Holders of outstanding options to purchase 2,047,222 shares of Common
Stock have placed such options in escrow and the Company has agreed to place
options to purchase 234,546 shares of Common Stock reserved for issuance under
the Option Plan in escrow. Holders of such options and warrants may exercise
them at a time when the Company would otherwise be able to obtain additional
equity capital on terms more favorable to the Company. Moreover, while these
options are outstanding, the Company's ability to obtain financing on
favorable terms may be adversely affected. See "Management," "Principal
Shareholders--Escrow Securities" and "Description of Securities."
IMMEDIATE AND SUBSTANTIAL DILUTION. Exercisers of the Class A Warrants will
incur immediate and substantial dilution in the net tangible book value of the
Common Stock issued upon exercise of the Class A Warrants as compared to the
market price of the Common Stock as of the date of this Prospectus/Exercise
Offer. The current net tangible book value of the Common Stock is $.22 per
share. Additional dilution to exercisers of the Class A Warrants, if any, may
result to the extent that the Warrants (including any Class A Warrants that
remain outstanding after the completion of the Exercise Offer), the Unit
Purchase Option or outstanding options and warrants are exercised at a time
when the net tangible book value per share of Common Stock exceeds the
exercise price of any such securities.
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POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK; POTENTIAL
ANTI-TAKEOVER PROVISIONS. The Company's Amended and Restated Certificate of
Incorporation authorizes the issuance upon the closing of the IPO of a maximum
of 5,000,000 shares of Preferred Stock on terms which may be fixed by the
Company's Board of Directors without further shareholder action. The terms of
any series of preferred stock, which may include priority claims to assets and
dividends and special voting rights, could adversely affect the rights of
holders of the Common Stock and thereby reduce the value of the Common Stock.
The issuance of preferred stock could make the possible takeover of the
Company or the removal of management of the Company more difficult, discourage
hostile bids for control of the Company in which shareholders may receive
premiums for their shares of Common Stock or otherwise dilute the rights of
holders of Common Stock. In addition, the agreement governing the Escrow
Securities contains certain procedures that may make a possible takeover of
the Company more difficult. See "Principal Shareholders--Escrow Securities."
ARBITRARY DETERMINATION OF WARRANT EXERCISE PRICE; CONTINUATION OF PUBLIC
MARKET AND POSSIBLE VOLATILITY OF WARRANT PRICE. The exercise prices and other
terms of the Warrants were arbitrarily determined by negotiation between the
Company and the Underwriter and such prices and other terms (as modified by
the terms of the Exercise Offer) do not necessarily bear any relationship to
the Company's assets, net worth or other established criteria of value. The
exercise and redemption prices of the Warrants should not be construed to
imply or predict any increase in the market price of the Common Stock. No
assurance can be given that an active trading market in the Company's
securities will continue to exist following the completion of the Exercise
Offer. No assurance can be given that the market price of the Company's Common
Stock (or the aggregate market prices of the Common Stock and New Class B
Warrants issuable upon exercise of the Class A Warrants pursuant to the
Exercise Offer) will not fall below the exercise prices of the Class A
Warrants in the Exercise Offer's alternative exercise options. The Company
believes factors such as quarterly fluctuations in financial results and
announcements of new technology in the entertainment industry may cause the
market price of the Company's securities to fluctuate, perhaps substantially.
These fluctuations, as well as general economic conditions, such as recessions
or high interest rates, may adversely affect the market price of the
securities.
POSSIBLE DELISTING OF SECURITIES FROM THE NASDAQ MARKET. Although the
Company's Units, Common Stock, Class A Warrants and Class B Warrants meet the
current Nasdaq listing requirements and are included or, in the case of the
New Class B Warrants, will be included upon issuance on The Nasdaq National
Market (except for the Units, which are included on the Nasdaq SmallCap
Market), the Company will have to maintain certain minimum financial
requirements for continued inclusion on Nasdaq.
If the Company is unable to satisfy Nasdaq's maintenance requirements, the
Company's securities may be delisted from Nasdaq. In such event, trading if
any, in the Units, Common Stock and Warrants would thereafter be conducted in
the over-the-counter markets in the so-called "pink sheets" or the NASD's
"Electronic Bulletin Board." Consequently, the liquidity of the Company's
securities could be impaired, not only in the number of securities which could
be bought and sold, but also through delays in the timing of the transactions,
reductions in security analysts' and the news media's coverage of the Company,
and lower prices for the Company's securities than might otherwise be
attained.
RISK OF LOW-PRICE STOCKS. If the Company's securities were to be delisted
from Nasdaq, they could become subject to Rule 15g-9 under the Exchange Act,
which imposes additional sales practice requirements on broker-dealers which
sell such securities to persons other than established customers and
"accredited investors" (generally, individuals with net worths in excess of
$1,000,000 or annual incomes exceeding $200,000, or $300,000 together with
their spouses). For transactions covered by this rule, a broker-dealer must
make a special suitability determination for the purchaser and have received
the purchaser's written consent to the transaction prior to sale.
Consequently, the rule may adversely affect the ability of broker-dealers to
sell the Company's securities and may adversely affect the ability of the
holders of any of the Company's securities to sell such securities in the
secondary market.
Commission regulations define a "penny stock" to be any non-Nasdaq equity
security that has a market price (as therein defined) of less than $5.00 per
share or with an exercise price of less than $5.00 per share,
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subject to certain exceptions. For any transaction involving a penny stock,
unless exempt, the rules require delivery, prior to any transaction in a penny
stock, of a disclosure schedule prepared by the Commission relating to the
penny stock market. Disclosure is also required to be made about commissions
payable to both the broker-dealer and the registered representative and
current quotations for the securities. Finally, monthly statements are
required to be sent disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks.
The foregoing required penny stock restrictions will not apply to the
Company's securities if such securities are listed on Nasdaq and have certain
price and volume information provided on a current and continuing basis or
meet certain minimum net tangible assets or average revenue criteria. There
can be no assurance that the Company's securities will qualify for exemption
from these restrictions. In any event, even if the Company's securities were
exempt from such restrictions, it would remain subject to Section 15(b)(6) of
the Exchange Act, which gives the Commission the authority to prohibit any
person that is engaged in unlawful conduct while participating in a
distribution of a penny stock from associating with a broker-dealer or
participating in a distribution of a penny stock, if the Commission finds that
such a restriction would be in the public interest. If the Company's
securities were subject to the rules on penny stocks, the market liquidity for
the Company's securities could be severely adversely affected.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE
WARRANTS. Although the Warrants will not knowingly be sold in connection with
the Exercise Offer to purchasers in jurisdictions in which such Warrants and
Common Stock underlying such Warrants are not registered or otherwise
qualified for sale, purchasers who reside in or move to jurisdictions in which
the securities underlying the Warrants are not so registered or qualified
during the period that the Warrants are exercisable may would not be able to
exercise their Warrants unless and until the underlying securities could be
qualified for sale in the jurisdictions in which such purchasers reside, or
unless an exemption from such qualification exists in such jurisdictions. No
assurance can be given that the Company will be able to effect any such
required registration or qualification.
Additionally, purchasers of the Warrants will be able to exercise the
Warrants only if a current prospectus relating to the securities underlying
the Warrants is then in effect under the Securities Act and such securities
are qualified for sale or exempt from qualification under the applicable
securities or "blue sky" laws of the states in which the various holders of
the Warrants then reside. Although the Company has undertaken to use
reasonable efforts to maintain the effectiveness of a current prospectus
covering the securities underlying the Warrants, no assurance can be given
that the Company will be able to do so. The value of the Warrants may be
greatly reduced if a current prospectus covering the securities issuable upon
the exercise of the Warrants is not kept effective or if such securities are
not qualified or exempt from qualification in the states in which the holders
of the Warrants then reside.
ADVERSE EFFECT OF POSSIBLE REDEMPTION OF WARRANTS. The Class A Warrants are
subject to immediate redemption by the Company and the Class B Warrants are
subject to redemption commencing May 9, 1997, on at least 30 days' prior
written notice, if the average of the closing bid prices of the Common Stock
for 30 consecutive trading days ending within 15 days of the date on which the
notice of redemption is given exceeds $9.10 per share with respect to the
Class A Warrants and $12.25 per share with respect to the Class B Warrants.
The Company has satisfied the conditions contained in the Class A Warrants to
redeem all of the Class A Warrants for $.05 per warrant and has called the
Class A Warrants for redemption. Any Class A Warrants not exercised purusant
to the Exercise Offer will be redeemed by the Company for $.05 per warrant on
the first business day following the Expiration Date, or as soon thereafter as
possible. If the Class A Warrants or Class B Warrants are redeemed, holders of
the class of Warrants being redeemed will lose their right to exercise the
Warrants, except during such 30-day notice of redemption period. Upon the
receipt of a notice of redemption of the Warrants, the holders thereof would
be required to: (i) exercise the Warrants and pay the exercise price at a time
when it may be disadvantageous for them to do so; (ii) sell the Warrants, to
the extent then permitted, at the then current market price (if any) when they
might otherwise wish to hold the Warrants; or (iii) accept the redemption
price, which is likely to be substantially less than the market value of the
Warrants at the time of redemption. See "Description of Securities--Redeemable
Warrants."
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NO DIVIDENDS. The Company has paid no dividends to its shareholders since
its inception and does not plan to pay dividends in the foreseeable future.
The Company intends to reinvest earnings, if any, in the development and
expansion of its business. See "Dividend Policy."
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER DELAWARE
LAW. Pursuant to the Company's Amended and Restated Certificate of
Incorporation, and as authorized under applicable Delaware law, directors of
the Company are not liable for monetary damages for breach of fiduciary duty,
except (i) in connection with a breach of the duty of loyalty, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for dividend payments or stock repurchases
illegal under Delaware law or (iv) for any transaction in which a director has
derived an improper personal benefit. See "Management--Limitation of Liability
and Indemnification Matters."
POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF THE COMPANY'S SECURITIES DUE TO
INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION OF THE UNDERWRITER AND
D.H. BLAIR & CO. The Commission is conducting an investigation concerning
various business activities of the Underwriter and D.H. Blair & Co., Inc.
("Blair & Co."), a selling group member that distributed substantially all of
the Units offered in the IPO. The investigation appears to be broad in scope,
involving numerous aspects of the Underwriter's and Blair & Co.'s compliance
with the Federal securities laws and compliance with the Federal securities
laws by issuers whose securities were underwritten by the Underwriter or Blair
& Co., or in which the Underwriter or Blair & Co. made over-the-counter
markets, persons associated with the Underwriter or Blair & Co., such issuers
and other persons. The Company has been advised by the Underwriter that the
investigation has been ongoing since at least 1989 and that it is cooperating
with the investigation. The Underwriter cannot predict whether this
investigation will ever result in any type of formal enforcement action
against the Underwriter or Blair & Co. or, if so, whether any such action
might have an adverse effect on the Underwriter or the securities offered
hereby. The Company has been advised that Blair & Co. intends to continue to
make a market in the securities following the Exercise Offer. An unfavorable
resolution of the Commission's investigation could have the effect of limiting
such firm's ability to make a market in the Company's securities, which could
adversely affect the liquidity or price of such securities. See "Plan of
Distribution."
POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN THE COMPANY'S
SECURITIES. Blair & Co. has been making a market in the Company's securities.
Rule 10b-6 under the Exchange Act will prohibit Blair & Co. from engaging in
any market-making activities with regard to the Company's securities for the
period from nine business days (or such other applicable period as Rule 10b-6
may provide) prior to any solicitation by the Underwriter of the exercise of
Warrants until the later of the termination of such solicitation activity or
the termination (by waiver or otherwise) of any right that the Underwriter may
have to receive a fee for the exercise of Warrants following such
solicitation. As a result, in the event that the Underwriter determines to
solicit the Warrants in connection with this Prospectus/Exercise Offer, Blair
& Co. may be unable to provide a market for the Company's securities during
certain periods while the Warrants are exercisable. In addition, under
applicable rules and regulations under the Exchange Act, any person engaged in
the distribution of the Warrants held by the Selling Securityholders may not
simultaneously engage in market-making activities with respect to any
securities of the Company for the applicable "cooling off" period (at least
two and possibly nine business days) prior to the commencement of such
distribution. Accordingly, in the event the Underwriter or Blair & Co. is
engaged in a distribution of the Warrants held by the Selling Securityholders,
neither of such firms will be able to make a market in the Company's
securities during the applicable restrictive period. Any temporary cessation
of such market-making activities could have an adverse effect on the market
prices of the Company's securities. See "Plan of Distribution."
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THE EXERCISE OFFER
THE EXERCISE OFFER FOR AND REDEMPTION OF THE CLASS A WARRANTS
The Class A Warrants (as well as the Class B Warrants and, upon issuance,
the New Class B Warrants) are subject to a Warrant Agreement (the "Warrant
Agreement") by and among the Company, the Underwriter and American Stock
Transfer and Trust Company, as Warrant Agent. Pursuant to the terms of the
Warrant Agreement, the Class A Warrants are exercisable for one share of
Common Stock and one Class B Warrant per Class A Warrant exercised at an
exercise price of $6.50, subject to adjustment, at any time until May 8, 2001.
See "Description of Securities--Redeemable Warrants."
THE COMPANY HEREBY OFFERS, TO THE HOLDERS OF THE CLASS A WARRANTS WHO
EXERCISE THEIR CLASS A WARRANTS PURSUANT TO THE EXERCISE OFFER, TWO
ALTERNATIVE EXERCISE OPTIONS IN LIEU OF THE EXISTING TERMS OF THE CLASS A
WARRANTS (WHICH PROVIDE FOR THE ISSUANCE OF ONE SHARE OF COMMON STOCK AND ONE
CLASS B WARRANT FOR EACH CLASS A WARRANT EXERCISED AT A PRICE OF $6.50). THE
TWO ALTERNATIVES FROM WHICH EACH HOLDER MAY CHOOSE PROVIDE FOR THE COMPANY
EITHER (I) TO REDUCE THE EXERCISE PRICE OF CLASS A WARRANTS TO $6.00 AND TO
ISSUE ONE SHARE OF COMMON STOCK AND 1.3 NEW CLASS B WARRANTS OR (II) TO REDUCE
THE EXERCISE PRICE OF CLASS A WARRANTS TO $3.00 AND TO ISSUE 2/3 OF A SHARE OF
COMMON STOCK AND ONE NEW CLASS B WARRANT FOR EACH CLASS A WARRANT SO
EXERCISED. THESE TWO ALTERNATIVE EXERCISE OPTIONS WILL BE AVAILABLE TO EACH
HOLDER ONLY IF SUCH HOLDER EXERCISES HIS OR HER CLASS A WARRANTS PRIOR TO 5:00
P.M., NEW YORK CITY TIME, ON AUGUST 29, 1996 UNLESS SUCH DATE IS EXTENDED BY
THE COMPANY AS DESCRIBED HEREIN (SUCH DATE, OR SUCH DATE AS SO EXTENDED, BEING
REFERRED TO AS THE "EXPIRATION DATE"). THE TERMS OF THE NEW CLASS B WARRANTS
OFFERED PURSUANT TO THE TWO ALTERNATIVES DESCRIBED ABOVE ARE IDENTICAL TO THE
TERMS OF THE COMPANY'S CURRENTLY OUTSTANDING REDEEMABLE CLASS B WARRANTS.
THE COMPANY HAS SATISFIED THE CONDITIONS CONTAINED IN THE CLASS A WARRANTS
TO REDEEM ALL OF THE CLASS A WARRANTS FOR $.05 PER WARRANT AND HAS CALLED THE
CLASS A WARRANTS FOR REDEMPTION. ANY CLASS A WARRANTS NOT EXERCISED PURSUANT
TO THE EXERCISE OFFER WILL BE REDEEMED BY THE COMPANY FOR $.05 PER WARRANT ON
THE FIRST BUSINESS DAY FOLLOWING THE EXPIRATION DATE, OR AS SOON THEREAFTER AS
POSSIBLE.
TERMS OF THE EXERCISE OFFER
Upon the terms and subject to the conditions of the Exercise Offer, the
Company will accept exercises for any and all Class A Warrants that are
validly exercised in accordance with the terms of the Exercise Offer prior to
the Expiration Date (as hereinafter defined) and not withdrawn in accordance
with the procedures set forth under the caption "--Withdrawal Rights." As used
in the Exercise Offer, the term "Expiration Date" means 5:00 p.m. New York
City time, on August 29, 1996; provided, however, that if the Company, in its
sole discretion, has extended the period of time during which the Exercise
Offer will be open, the term "Expiration Date" means the latest time and date
on which the Exercise Offer, as so extended, will expire.
The Company reserves the right, in its sole discretion, at any time and from
time to time, to extend the period of time during which the Exercise Offer is
open by giving oral or written notice of such extension to the Warrant Agent.
There can be no assurance that the Company will exercise its right to extend
the Exercise Offer. The Company may decide, in its sole discretion, to
decrease the number of Class A Warrants exercisable in the Exercise Offer or
to increase or decrease the number of New Class B Warrants issuable to Holders
exercising Class A Warrants or either the $6.00 or $3.00 exercise price
applicable in the Exercise Offer (depending upon which alternative exercise
option is selected by the Holder). If, at the time that notice of such
increase or decrease is first published, sent or given to holders of Class A
Warrants in the manner specified below, the Exercise Offer
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is scheduled to expire at any time earlier than the tenth business day from
the date that such notice is first so published, sent or given, the Exercise
Offer will be extended until the expiration of such period of ten business
days.
The Company also expressly reserves the right to (i) delay the acceptance of
exercises of any Class A Warrants not therefore accepted for exercise in order
to comply in whole or in part with applicable law, (ii) terminate the Exercise
Offer and not accept for exercise any Class A Warrants not theretofore
accepted for exercise upon the occurrence of any of the conditions specified
under the caption "--Certain Conditions of the Exercise Offer," in which case
the redemption date for the Class A Warrants shall be 30 days after the
Company publishes notification that it has terminated the Exercise Offer and
(iii) amend the Exercise Offer in any respect at any time and from time to
time.
Any extension, delay, termination or amendment will be followed as promptly
as practicable by public announcement thereof, such announcement in the case
of an extension to be issued no later than 9:00 a.m., New York City time, on
the next business day after the previously scheduled Expiration Date. For
purposes of the Exercise Offer, a "business day" means any day, other than a
Saturday, Sunday or Federal holiday, on which the principal office of the
Commission in Washington, D.C. is scheduled to be open for business and
consists of the time period from 12:01 a.m. through 12:00 midnight, New York
City time. Without limiting the manner in which the Company may choose to make
any public announcement, except as provided by applicable law (including Rule
13e-4(e)(2) under the Exchange Act), the Company shall have no obligation to
publish, advertise or otherwise communicate any such public announcement other
than by issuing a release to the Dow Jones News Service.
The Company confirms that if it makes a material change in the terms of the
Exercise Offer or the information concerning the Exercise Offer, or if it
waives a material condition of the Exercise Offer, the Company will extend the
Exercise Offer to the extent required by Rules 13e-4(d)(2) and 13e-4(e)(2)
under the Exchange Act. Such Rules require that the minimum period during
which the Exercise Offer must remain open (to allow for adequate dissemination
to Holders and Holder response) following material changes in the terms of the
Exercise Offer or information concerning the Exercise Offer (other than a
change in percentage of Class A Warrants exercisable, the number of New Class
B Warrants issuable or the exercise prices applicable in the Exercise Offer)
will depend upon the facts and circumstances, including the relative
materiality of such terms or information. The Company confirms that its
reservation of the right to delay issuance to Holders of the applicable shares
of Common Stock and New Class B Warrants in respect of exercise of Class A
Warrants which it has accepted for exercise in the Exercise Offer is limited
by Rule 13e-4(f)(5) under the Exchange Act, which requires that an issuer pay
the consideration offered or return the exercised securities promptly after
the termination or withdrawal of the Exercise Offer.
ACCEPTANCE FOR PAYMENT; PAYMENT OF PURCHASE PRICE
Upon the terms and subject to the conditions of the Exercise Offer
(including, if the Exercise Offer is extended or amended, the terms and
conditions of the Exercise Offer as so extended or amended), the Company will
accept for exercise any and all Class A Warrants validly exercised prior to
the Expiration Date and not withdrawn, as soon as practicable after the
Expiration Date. In all cases, acceptance of exercises of Class A Warrants
pursuant to the Exercise Offer will only be made, and the applicable shares of
Common Stock and New Class B Warrants will only be issued, after timely
receipt by the Warrant Agent of (i) certificates for such Class A Warrants or
confirmation (a "Book-Entry Confirmation") of such Class A Warrants in the
Warrant Agent's account at The Depository Trust Company ("DTC"), the Pacific
Securities Depository Trust Company ("PSDTC") or the Philadelphia Depository
Trust Company ("Philadep") (DTC, PSDTC and Philadep being sometimes
collectively referred to as the "Book-Entry Transfer Facilities" or
individually referred to as a "Book-Entry Transfer Facility") pursuant to the
procedure set forth under the caption "--Procedures for Exercising Class A
Warrants--Book-Entry Exercise," (ii) a properly completed and duly executed
Letter of Transmittal or manually signed facsimile thereof (with any required
signature guarantees) or, in the case of book-entry exercise, an Agent's
Message (as defined below), (iii) a certified or bank check payable to
"Digital Video Systems, Inc." in the amount of either $6.00 or $3.00 per Class
A Warrant exercised in the Exercise Offer
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(depending upon which alternative exercise option is selected by the Holder),
and (iv) any other documents required by the Letter of Transmittal to American
Stock Transfer & Trust Company (the "Warrant Agent").
The term "Agent's Message" means a message, transmitted by a Book-Entry
Transfer Facility to, and received by, the Warrant Agent and forming a part of
a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility
has received an express acknowledgment from the participant in such Book-Entry
Transfer Facility exercising the Class A Warrants which are the subject of
such Book-Entry Confirmation, that such participant has received and agrees to
be bound by the terms of the Letter of Transmittal, and that the Company may
enforce such agreement against such participant.
For purposes of the Exercise Offer, the Company shall be deemed to have
accepted for exercise Class A Warrants as, if and when the Company gives oral
or written notice to the Warrant Agent, as agent for the Holders, of the
Company's acceptance for exercise of such Class A Warrants pursuant to the
Exercise Offer. Subject to the terms and conditions of the Exercise Offer,
issuance of the applicable shares of Common Stock and New Class B Warrants
with respect to Class A Warrants accepted for exercise pursuant to the
Exercise Offer will be made by the Warrant Agent, which will act as agent for
the Holders for the purpose of receiving such securities from the Company and
transmitting such securities to Holders. If any exercised Class A Warrants are
not accepted for exercise for any reason, or if certificates are submitted for
more Class A Warrants than are exercised, then certificates for such Class A
Warrants not accepted for exercise or not exercised will be returned (or, in
the case of Class A Warrants, exercised by book-entry transfer into the
Warrant Agent's account at a Book-Entry Transfer Facility, such Class A
Warrants will be credited to an account maintained at such Book-Entry Transfer
Facility), without expense to the Holder, as soon as practicable, but such
unexercised Class A Warrants will be subject to the redemption that will occur
on the first business day following the Expiration Date, or as soon thereafter
as possible.
If, prior to the Expiration Date, the Company shall increase or decrease the
number of shares of Common Stock or New Class B Warrants issuable to Holders
or the exercise prices applicable in the Exercise Offer, the Company will
issue the increased or decreased number of shares of Common Stock or New Class
B Warrants to, and make applicable the increased or decreased exercise prices
in respect of, all Holders whose Class A Warrants are accepted for exercise
pursuant to the Exercise Offer.
PROCEDURES FOR EXERCISING CLASS A WARRANTS
Valid Exercise. For Class A Warrants to be validly exercised pursuant to the
Exercise Offer, a properly completed and duly executed Letter of Transmittal
or manually signed facsimile thereof (with any required signature guarantees),
together with a certified or bank check payable to "Digital Video Systems,
Inc." in the amount of either $6.00 or $3.00 per Class A Warrant so exercised
in the Exercise Offer (depending upon which exercise option is selected by the
Holder) and any other documents required by the Letter of Transmittal, or,
solely in connection with a book-entry exercise of the Class A Warrants, an
Agent's Message must be received by the Warrant Agent prior to the Expiration
Date at its address set forth on the back cover of this Prospectus/Exercise
Offer, and either the certificates for such Class A Warrants must be delivered
to the Warrant Agent along with the Letter of Transmittal, or such Class A
Warrants must be delivered pursuant to the procedure for book-entry transfer
set forth below and a Book-Entry Confirmation of receipt of such Class A
Warrants must be received by the Warrant Agent, in each case prior to the
Expiration Date. Holders who are unable to comply with the foregoing
procedures prior to the Expiration Date may exercise Class A Warrants pursuant
to the guaranteed delivery procedures set forth below.
IN ORDER FOR A HOLDER TO PARTICIPATE IN THE EXERCISE OFFER, CLASS A WARRANTS
MUST BE VALIDLY EXERCISED PRIOR TO THE EXPIRATION DATE, WHICH IS CURRENTLY
5:00 P.M., NEW YORK CITY TIME, ON THURSDAY, AUGUST 29, 1996.
Book-Entry Exercise. The Warrant Agent will establish accounts with respect
to the Class A Warrants at each of the Book-Entry Transfer Facilities for
purposes of the Exercise Offer within two business days after the date of this
Prospectus/Exercise Offer, and any financial institution that is a participant
in a Book-Entry Transfer
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Facility system may make book-entry exercises of Class A Warrants by causing
the Book-Entry Transfer Facility to exercise such Class A Warrants in the
Warrant Agent's account at such Book-Entry Transfer Facility in accordance
with such Book-Entry Transfer Facility's procedures for such exercise.
However, although exercise of Class A Warrants may be effected through book-
entry at a Book-Entry Transfer Facility, the Letter of Transmittal (or
manually signed facsimile thereof), properly completed and duly executed (with
any required signature guarantees), together with a certified or bank check
payable to "Digital Video Systems, Inc." in the amount of either $6.00 or
$3.00 per Class A Warrant so exercised in the Exercise Offer (depending upon
which exercise option is selected by the Holder) and any other required
documents must, in any case, be transmitted to and received by the Warrant
Agent at its address set forth on the back cover of this Prospectus/Exercise
Offer prior to the Expiration Date, or exercising Holders must comply with the
guaranteed delivery procedures set forth below. DELIVERY OF SUCH DOCUMENTS TO
A BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH SUCH BOOK-ENTRY TRANSFER
FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE WARRANT AGENT.
Signature Guarantees. Signatures on all Letters of Transmittal must be
guaranteed by a firm which is a member of a registered national securities
exchange or of the National Association of Securities Dealers, Inc. or by a
bank, credit union, savings association or other entity which is a member in
good standing of the Securities Transfer Agent's Medallion Program
(collectively, "Eligible Institutions") unless the Class A Warrants exercised
thereby are exercised (i) by a registered Holder of such Class A Warrants
(which term shall include any participant in a Book-Entry Transfer Facility
whose name appears on a security position listing as the owner) who has not
completed the box entitled "Special Issuance Instructions" on the Letter of
Transmittal, or (ii) for the account of an Eligible Institution. See
Instruction 1 of the Letter of Transmittal. If the certificates are registered
in the name of a person other than the signer of the Letter of Transmittal, or
if payment is to be made, or Class A Warrants not exercised or not accepted
for exercise are to be issued, to a person other than the registered Holder,
then the certificates must be endorsed or accompanied by appropriate transfer
powers, in either case signed exactly as the names of the registered Holder
appears on the certificates, and the signatures on the certificates or stock
powers must be guaranteed as aforesaid. (See Instruction 5 of the Letter of
Transmittal.)
Guaranteed Delivery. If a Holder desires to exercise Class A Warrants
pursuant to the Exercise Offer and certificates for such Class A Warrants are
not immediately available, or the procedure for book-entry transfer cannot be
completed on a timely basis, or time will not permit all required documents to
reach the Warrant Agent prior to the Expiration Date, such Class A Warrants
may nevertheless be exercised if all of the following conditions are met:
(i) such exercise is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed Delivery
substantially in the form provided herewith is delivered to the Warrant
Agent in the manner provided below and received by the Warrant Agent prior
to the Expiration Date; and
(iii) the certificates for all exercised Class A Warrants in proper form
for exercise (or Book-Entry Confirmation of exercise of such Class A
Warrants in the Warrant Agent's account at a Book-Entry Transfer Facility
as described above), together with a properly completed and duly executed
Letter of Transmittal (or manually signed facsimile thereof), a certified
or bank check payable to "Digital Video Systems, Inc." in the amount of
either $6.00 or $3.00 per Class A Warrant so exercised in the Exercise
Offer (depending upon which exercise option is selected by the Holder) and
any other documents required by the Letter of Transmittal (or, in the case
of book-entry exercise, an Agent's Message), are received by the Warrant
Agent within five New York Stock Exchange trading days after the date of
execution of the Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
telegram, telex, facsimile transmission or mail, to the Warrant Agent and must
include a guarantee by an Eligible Institution in the form set forth in such
Notice of Guaranteed Delivery. In all cases, issuance of the applicable Common
Stock and New Class B Warrants in respect of Class A Warrants accepted for
exercise will be made only after timely receipt by the Warrant Agent of (i)
certificates for such Class A Warrants (or Book-Entry Confirmation of exercise
of such
21
<PAGE>
Class A Warrants in the Warrant Agent's account at a Book-Entry Transfer
Facility as described above), (ii) a properly completed and duly executed
Letter of Transmittal or manually signed facsimile thereof (with any required
signature guarantees) or, in the case of book-entry exercises, an Agent's
Message, (iii) a certified or bank check payable to "Digital Video Systems,
Inc." in the amount of either $6.00 or $3.00 per Class A Warrant so exercised
in the Exercise Offer (depending upon which exercise option is selected by the
Holder), and (iv) any other documents required by the Letter of Transmittal.
THE METHOD OF DELIVERY OF ALL DOCUMENTS, INCLUDING CERTIFICATES FOR CLASS A
WARRANTS, IS AT THE ELECTION AND RISK OF THE EXERCISING HOLDER. IF DELIVERY IS
BY MAIL, REGISTERED OR CERTIFIED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, IS RECOMMENDED AND SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY
DELIVERY.
Other Requirements. All questions as to the validity, form, eligibility
(including time of receipt) and acceptance for exercise of Class A Warrants
pursuant to any of the procedures described above will be determined in the
sole discretion of the Company, whose determination shall be final and
binding. The Company reserves the absolute right to reject any or all
exercises determined by it not to be in proper form or the acceptance of which
would, in the opinion of the Company's counsel, be unlawful. The Company also
reserves the absolute right to waive any of the conditions of the Exercise
Offer or any defect or irregularity in any exercise with respect to any
particular Class A Warrants of any particular Holder. The Company's
interpretation of the terms and conditions of the Exercise Offer (including
the Letter of Transmittal and the instructions thereto) will be final and
binding. No exercise of Class A Warrants will be deemed to have been validly
made until all defects and irregularities have been cured or waived. Neither
the Company nor the Warrant Agent or any other person will be under any duty
to give notification of any defects or irregularities in exercises nor will
any of them incur any liability for failure to give any such notification.
If, on or after August 29, 1996, the Company should split, combine or
otherwise change the Common Stock or Class A Warrants, or shall disclose that
it has taken any such action or if there shall occur any antidilution
adjustment pursuant to the terms of the Class A Warrants or other adjustment
affecting the exercise price or the number of shares of Common Stock
obtainable upon exercise of the Class A Warrants, then, without prejudice to
the Company's rights set forth under the captions "--Terms of the Exercise
Offer" and "--Certain Conditions of the Exercise Offer," the Company, in its
sole discretion, may make such adjustments in the exercise price, the amount
and nature of the securities issuable upon exercise thereof and other terms of
the Exercise Offer as it deems appropriate to reflect such split, combination
or other change.
WITHDRAWAL RIGHTS
Except as stated herein, exercises of Class A Warrants made pursuant to the
Exercise Offer are irrevocable. Class A Warrants exercised pursuant to the
Exercise Offer may be withdrawn at any time prior to the Expiration Date and,
unless theretofore accepted for exercise by the Company, may also be withdrawn
after August 29, 1996, but all such withdrawn Class A Warrants will be subject
to the redemption that will occur on the first business day following the
Expiration Date, or as soon thereafter as possible. If, for any reason, the
Company is delayed in its acceptance for exercise of any Class A Warrants, or
is unable to accept Class A Warrants for exercise pursuant to the Exercise
Offer then, without prejudice to the Company's rights under the Exercise
Offer, exercised Class A Warrants may be retained by the Warrant Agent on
behalf of the Company and may not be withdrawn, except to the extent that
Exercising Holders are entitled to withdrawal rights as set forth herein.
For a withdrawal to be effective, a written, telegraphic, telex or facsimile
transmission notice of withdrawal must be timely received by the Warrant Agent
at its address set forth on the back cover of this Prospectus/ Exercise Offer.
Any such notice of withdrawal must specify the name of the person who
exercised the Class A Warrants, the name of the registered holder(s), if
different from the name of the person who exercised the Class A Warrants, the
number of Class A Warrants exercised and the number of Class A Warrants to be
withdrawn. If certificates for Class A Warrants to be withdrawn have been
delivered or otherwise identified to the Warrant Agent, the serial numbers
shown on the particular certificates evidencing the Class A Warrants to be
withdrawn and a signed notice of withdrawal with the signature guaranteed by
an Eligible Institution (except in
22
<PAGE>
the case of Class A Warrants exercised by an Eligible Institution) must be
submitted prior to the physical release of the certificates for the Class A
Warrants to be withdrawn. If Class A Warrants have been exercised pursuant to
the procedure for book-entry transfer described under the caption "--
Procedures for Exercising Class A Warrants--Book-Entry Exercise," the notice
of withdrawal must specify the name and number of the account at the
applicable Book-Entry Transfer Facility to be credited with the withdrawn
Class A Warrants.
All questions as to the form and validity (including time of receipt) of
notices of withdrawal will be determined in the sole discretion of the
Company, whose determination shall be final and binding. Neither the Company
nor the Warrant Agent or any other person will be under any duty to give
notification of any defects or irregularities in any notice of withdrawal nor
will any of them incur any liability for failure to give any such
notification.
Any Class A Warrants withdrawn will be deemed not validly exercised for
purposes of the Exercise Offer. However, withdrawn Class A Warrants may be
reexercised at any subsequent time prior to the Expiration Date by following
any of the procedures described under the caption "--Procedures for Exercising
Class A Warrants."
CERTAIN CONDITIONS OF THE EXERCISE OFFER
Notwithstanding any other provision of the Exercise Offer, the Company shall
not be required to accept for exercise any Class A Warrants exercised, or may
terminate and withdraw the Exercise Offer, or may delay the acceptance for
exercise of Class A Warrants pursuant to the Exercise Offer, if at any time on
or after August 29, 1996 and before the acceptance for exercise of any such
Class A Warrants or the payment therefor any one or more of the following
shall occur:
(a) there shall have occurred (i) any general suspension of, or general
limitation on prices for, or trading in, securities on the Nasdaq National
Market (ii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States or any limitation
(whether or not mandatory) by any governmental agency or authority on, or
any other event that adversely affects, the extension of credit by banks or
other financial institutions, (iii) a material change in United States or
any other currency exchange rates or a suspension of or limitation on the
markets therefor, (iv) a commencement of a war, armed hostilities or other
similar international calamity directly or indirectly involving the United
States, or, (v) in the case of any of the foregoing existing at the time of
the commencement of the Exercise Offer, a material acceleration or
worsening thereof; or
(b) any change (or development involving a prospective change) shall have
occurred or been threatened in the business, properties, assets, financial
condition, operations, results of operation or prospects of the Company
that is or may be materially adverse to the Company, or the Company shall
have become aware of any fact that is or may be materially adverse with
respect to the value of the Class A Warrants; or
(c) there shall have been threatened or instituted or there shall be
pending any action, proceeding, order, decree or injunction by or before
any court, government or governmental agency or other regulatory or
administrative authority, domestic or foreign, that (i) challenges the
exercise of Class A Warrants pursuant to the Exercise Offer or otherwise
relates in any manner to the Exercise Offer, (ii) otherwise could
materially adversely affect the business, properties, assets, stock
ownership, liabilities, financial condition, operations, results of
operations or prospects of the Company, or (iii) in the case of any of the
foregoing existing at the time of the commencement of the Exercise Offer,
any development shall have occurred that the Company, in its reasonable
judgement, determines to be adverse; or
(d) any action shall have been taken or any statute, rule, regulation or
order shall have been proposed, enacted, promulgated, enforced or deemed to
be applicable to the Exercise Offer by any court, government or
governmental agency or other regulatory or administrative authority,
domestic or foreign, which would or might prohibit, restrict or delay
consummation of the Exercise Offer or materially impair the contemplated
benefits to the Company of the Exercise Offer; or
23
<PAGE>
(e) a tender or exchange offer with respect to some or all of the Class A
Warrants or Common Stock, or a merger or acquisition proposal for the
Company, shall have been proposed, announced or made by any group or
person, or the Company shall enter into any agreement with respect to a
merger, other business combination, disposition of assets other than in the
ordinary course of business or issuance of securities with any person;
which, in the sole judgment of the Company in any such case under
subparagraphs (a) through (e) above, and regardless of the circumstances
(including any action by the Company) giving rise to any such condition,
makes it inadvisable to proceed with the Exercise Offer or with such
acceptance for exercise.
All the foregoing conditions are for the sole benefit of the Company and may
be asserted by the Company regardless of the circumstances giving rise to such
condition (including any action or inaction by the Company) or may be waived
by the Company in whole or in part at any time and from time to time in its
sole discretion. The failure by the Company at any time to exercise any of the
foregoing rights shall not be deemed a waiver of any such right and each such
right shall be deemed an ongoing right which may be asserted at any time and
from time to time. Any determination by the Company concerning the events
described herein will be final and binding.
WARRANT AGENT
The Warrant Agent is American Stock Transfer & Trust Company. The Warrant
Agent's telephone number is 1-800-937-5449 (Reorganization Department). The
address to which the Warrants, payments of the exercise price of Class A
Warrants and Letters of Transmittal should be mailed or delivered is: 40 Wall
Street, 46th Floor, New York, New York 10005. See the back cover page of this
Prospectus/Exercise Offer for more information concerning contacting the
Warrant Agent.
FEES AND EXPENSES
The Warrant Agent will receive reasonable and customary compensation for its
services and will be reimbursed for certain out-of-pocket expenses estimated
to total $8,500.
The Company will also reimburse brokerage houses and other custodians,
nominees and fiduciaries for their reasonable out-of-pocket expenses in
forwarding copies of this Prospectus/Exercise Offer to the beneficial owners
of Class A Warrants held in their names or in forwarding tenders for their
customers.
The Company does not intend to pay solicitation fees to any third parties in
connection with the Exercise Offer.
The expenses of making the Exercise Offer to be incurred by the Company are
estimated at approximately $500,000.
24
<PAGE>
PURPOSE OF EXERCISE OFFER AND USE OF PROCEEDS
The Company is making the Exercise Offer in order to raise cash by
encouraging holders of the Class A Warrants to make an investment in the
Company. The net proceeds to the Company (after estimated expenses of making
the Exercise Offer of approximately $500,000) will vary, depending upon the
number of Class A Warrants exercised in the Exercise Offer and the alternative
exercise options selected by the respective Holders who exercise their Class A
Warrants. The estimated net proceeds to the Company in the event that 50% of
the Class A Warrants are exercised (with Holders of one-half of the Class A
Warrants using each alternative exercise option) or in the event that all of
the Class A Warrants are exercised (with Holders of 2/3 of the Class A
Warrants using one alternative and Holders of 1/3 of the Class A Warrants
using the other alternative), and assuming that any remaining unexercised
Class A Warrants are redeemed at $.05 per Class A Warrant, will be as follows:
<TABLE>
<CAPTION>
% OF OUTSTANDING % OF OUTSTANDING CLASS
CLASS A WARRANTS A WARRANTS EXERCISED
EXERCISED AT
AT AN EXERCISE PRICE AN EXERCISE PRICE OF
OF $3.00 FOR 2/3 OF A
$6.00 FOR ONE SHARE SHARE OF COMMON STOCK % OF OUTSTANDING CLASS
OF COMMON STOCK AND AND ONE A WARRANTS REDEEMED AT
1.3 NEW CLASS B NEW CLASS B WARRANT A REDEMPTION PRICE OF
WARRANTS PER CLASS A PER $.05 PER CLASS A ESTIMATED NET
WARRANT CLASS A WARRANT WARRANT PROCEEDS
- -------------------- ---------------------- ---------------------- -------------
<S> <C> <C> <C>
66.7% of outstanding 33.3% of outstanding 0 $41,150,000
Class A Warrants Class A Warrants
33.3% of outstanding 66.7% of outstanding 0 $32,820,000
Class A Warrants Class A Warrants
25% of outstanding 25% of outstanding 50% of outstanding $18,034,250
Class A Warrants Class A Warrants Class A Warrants
</TABLE>
The Company anticipates that the net proceeds of the Exercise Offer will be
utilized to expand its engineering capabilities, increase product development
activities, to broaden its Video CD product lines, to expand marketing
activities (including opening sales and support offices in China and
increasing marketing activities in Singapore, India and Eastern Europe) and to
finance increased production and sales of the Company's products should the
Company experience substantial increases in sales. Net offering proceeds also
may be used to finance increased production and sales of the Company's
products should the Company experience substantial increases in sales. Any
remaining net offering proceeds will be added to the Company's working capital
reserve. In the event a substantial number of Class A Warrants are exercised
utilizing the $6.00 exercise price option, a significant portion of the net
offering proceeds will be allocated to the Company's working capital reserves
and may be expended by the Company in the future for purposes not specifically
described herein.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Exercise Offer during the next twelve months. This
estimate is based upon the current status of its business operations, its
current plans, and current economic and industry conditions. Future events,
including changes in economic or competitive conditions or the Company's
business and the results of the Company's sales and marketing activities, may
make shifts in the allocation of funds necessary or desirable. The amounts
actually expended for each purpose set forth above may vary significantly in
the event any of these assumptions prove inaccurate. The Company reserves the
right to change its use of proceeds as unanticipated events or opportunities
may cause the Company to redirect its priorities and reallocate the proceeds
accordingly. The Company may use a portion of the proceeds to acquire other
businesses or technologies or products which are compatible with the Company's
business for the purpose of expanding its business or the Company may enter
into strategic alliances with other such companies. The Company does not
currently have any agreements, commitments or arrangements with respect to any
proposed acquisition or joint venture, and no assurance can be given that any
acquisitions, joint ventures or strategic alliances will be made in the
future.
The Company anticipates, based on currently proposed plans and assumptions
relating to its present operations, that its existing working capital will be
sufficient to satisfy the Company's contemplated cash requirements for at
least the next twelve months and that the net proceeds of the Exercise Offer
would be sufficient to satisfy the contemplated cash requirements for at least
the next twelve months of any additional
25
<PAGE>
activities undertaken by the Company as described above. If the Company's
estimates prove incorrect, the Company may have to seek alternative sources of
financing during such period, including debt or equity financing, and may need
to reduce operating costs or curtail growth plans. No assurance can be given
that such financing could be obtained by the Company on favorable terms, if at
all, and if the Company is unable to obtain needed financing, the Company's
business would be materially adversely affected. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
Prior to their use, the net proceeds of the Exercise Offer will be invested
in short-term, high-grade interest-bearing investments or accounts.
DIVIDEND POLICY
The Company has not, to date, paid any cash dividends on its Common Stock.
The Company has no current plans to pay dividends on its Common Stock and
intends to retain earnings, if any, for working capital purposes. Any future
determination as to the payment of dividends on the Common Stock will depend
upon the results of operations, capital requirements, the financial condition
of the Company and other factors deemed relevant by the Company's Board of
Directors.
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) pro
forma as of March 31, 1996, to give effect to the conversion of the Company's
then outstanding Class A and B Preferred Stock into Common Stock and the
issuance of 4,830,000 Units pursuant to the IPO at an initial offering price
of $5.00 per Unit, the receipt of the net proceeds thereof, and the
application of the net proceeds to repay the Bridge Notes (as defined below)
and related expenses and (ii) as adjusted to reflect different Exercise Offer
scenarios outlined in the notes below and the receipt of the net proceeds
therefrom of approximately $18,034,250, $32,820,000 and $41,150,000,
respectively. See "Purpose of Exercise Offer and Use of Proceeds." This table
should be read in conjunction with the financial statements of the Company and
the notes thereto appearing elsewhere in this Prospectus/Exercise Offer.
<TABLE>
<CAPTION>
AT MARCH 31, 1996
----------------------------------------------------------------------
PRO
ACTUAL FORMA(5) AS ADJUSTED(6) AS ADJUSTED(7) AS ADJUSTED(8)
----------- ----------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Bridge Notes payable,
net of debt discount... $ 6,340,763 $ -- $ -- $ -- $ --
Shareholders' Equity:
Convertible Preferred
Stock, $.0001 par
value, 10,232,948
shares authorized,
3,247,473 shares of
Series A Preferred
Stock and 1,985,475
shares of Series B
Preferred Stock issued
and outstanding,
actual; no shares
issued and outstanding
pro forma; 5,000,000
shares authorized, no
shares issued and
outstanding as
adjusted(1)(2)(3)..... 524 -- -- -- --
Common Stock, $.0001
par value, 60,000,000
shares authorized,
6,725,619 shares
issued and
outstanding, actual;
16,796,658 shares
issued and outstanding
pro forma; and
20,267,491, 23,275,547
and 24,201,102 shares
issued and outstanding
as
adjusted(1)(2)(3)(4).. 672 1,679 2,026 2,327 2,419
Additional paid in
capital(5)............ 9,153,734 29,654,251 47,688,154 62,473,603 70,803,511
Accumulated deficit(6). (7,385,418) (8,964,714) (8,964,714) (8,964,714) (8,964,714)
Foreign currency
translation
adjustments........... (31,486) (31,486) (31,486) (31,486) (31,486)
Deferred compensation.. (150,854) (150,854) (150,854) (150,854) (150,854)
----------- ----------- ----------- ----------- -----------
Total shareholders'
equity............. 1,587,172 20,508,876 38,543,126 53,328,876 61,658,876
----------- ----------- ----------- ----------- -----------
Total capitalization.... $ 7,927,935 $20,508,876 $38,543,126 $53,328,876 $61,658,876
=========== =========== =========== =========== ===========
</TABLE>
- --------
(1) Authorized amounts give effect to the filing of the Company's Amended and
Restated Certificate of Incorporation in January 1996 and the filing of a
certificate of retirement of the outstanding shares of Preferred Stock
that were converted into Common Stock upon the closing of the IPO.
27
<PAGE>
(2) Excludes (i) 14,490,000 shares of Common Stock issuable upon exercise of
outstanding Class A Warrants and Class B Warrants issued as part of the
Units and shares of Common Stock issuable upon exercise of Class B
Warrants underlying such Class A Warrants; (ii) 7,000,000 shares of Common
Stock issuable upon exercise of 3,500,000 outstanding Class A Warrants and
3,500,000 Class B warrants issuable upon exercise of such Class A Warrants
which are registered for resale by the Selling Securityholders; (iii)
1,680,000 shares of Common Stock issuable upon exercise of unit purchase
options and the Class A warrants and Class B Warrants underlying such
options issued to Blair and its designees in the Company's IPO; (iv) up to
2,499,000 shares of Common Stock issuable upon exercise of the maximum
number of Class B warrants issuable in the Exercise Offer in addition to
the 4,830,000 Class B Warrants outstanding prior to the Exercise Offer.
(3) Includes 7,818,232 shares that have been deposited into escrow. See
"Principal Shareholders--Escrow Securities."
(4) Does not include outstanding options to purchase 2,047,222 shares of
Common Stock and options to purchase 234,546 shares of Common Stock
available for grant under the Option Plan (collectively, the "Escrow
Options") which have been deposited and agreed to be deposited into escrow
by the holders thereof and the Company, respectively.
(5) Gives pro forma effect to the conversion of the Company's then outstanding
Class A and B Preferred Stock into Common Stock and the issuance of
4,830,000 Units pursuant to the IPO at an initial offering price of $5.00
per Unit, the receipt of the net proceeds therefrom, and the application
of a portion of the net proceeds to repay the Bridge Notes and related
expenses.
(6) Assumes that 50% of the Class A Warrants are exercised pursuant to the
Exercise Offer and that (i) 25% of the Class A Warrants are exercised
pursuant to the exercise option whereby the Company reduces the exercise
price of Class A Warrants to $6.00 and issues one share of Common Stock
and 1.3 New Class B Warrants per Class A Warrant exercised and, (ii) 25%
of the Class A Warrants are exercised pursuant to the exercise option
whereby the Company reduces the exercise price of Class A Warrants to
$3.00 and issues 2/3 of a share of Common Stock and one New Class B
Warrant per Class A Warrant exercised and, (iii all unexercised Class A
Warrants are redeemed by the Company for $0.05 per Warrant.
(7) Assumes that 100% of the Class A Warrants are exercised pursuant to the
Exercise Offer and that (i) 1/3 of the Class A Warrants are exercised
pursuant to the exercise option whereby the Company reduces the exercise
price of Class A Warrants to $6.00 and issues one share of Common Stock
and 1.3 New Class B Warrants per Class A Warrant exercised and, (ii) 2/3
of the Class A Warrants are exercised pursuant to the exercise option
whereby the Company reduces the exercise price of Class A Warrants to
$3.00 and issues 2/3 of a share of Common Stock and one New Class B
Warrant per Class A Warrant exercised.
(8) Assumes that 100% of the Class A Warrants are exercised pursuant to the
Exercise Offer and that (i) 2/3 of the Class A Warrants are exercised
pursuant to the exercise option whereby the Company reduces the exercise
price of Class A Warrants to $6.00 and issues one share of Common Stock
and 1.3 New Class B Warrants per Class A Warrant exercised and, (ii) 1/3
of the Class A Warrants are exercised pursuant to the exercise option
whereby the Company reduces the exercise price of Class A Warrants to
$3.00 and issues 2/3 of a share of Common Stock and one New Class B
Warrant per Class A Warrant exercised.
BRIDGE FINANCING
In March 1996, the Company completed the bridge financing (the "Bridge
Financing") of an aggregate of $7,000,000 principal amount of bridge notes
(the "Bridge Notes") and 3,500,000 bridge warrants (the "Bridge Warrants") in
which it received net proceeds of approximately $6,055,000 (after expenses of
such offering). The Bridge Notes were repaid in full upon the closing of the
IPO and the Bridge Warrants were exchanged automatically on the closing of the
IPO to Class A Warrants. The Class A Warrants received by the Selling
Securityholders in the foregoing exchange have been registered for resale in
the Registration Statement of which this Prospectus/Exercise Offer forms a
part, subject to the contractual restriction that the Selling Securityholders
have agreed not to exercise their Warrants for a period of one year from the
closing of the IPO and not to sell the Securityholders' Warrants except after
specified periods commencing 90 days after the closing date of the IPO. The
Selling Securityholders will be permitted to exercise their Class A Warrants
pursuant to the Exercise Offer.
28
<PAGE>
INITIAL PUBLIC OFFERING
On May 14, 1996, the Company completed the IPO of 4,200,000 Units, each
consisting of a share of Common Stock, a Class A Warrant and a Class B
Warrant, priced at $5.00 per Unit. On May 22, 1996, the Underwriter exercised
its over-allotment option to purchase an additional 630,000 Units at $5.00 per
Unit. The Company received approximately $20,500,000 of net offering proceeds
after deducting underwriting discounts and commissions and other expenses of
the IPO.
PRICE RANGE OF SECURITIES
The Company's Common Stock, Class A Warrants, Class B Warrants and Units
have traded separately on the Nasdaq National Market and the Company's Units
are listed on the Nasdaq SmallCap Market under the symbols DVID, DVIDW, DVIDZ
and DVIDU, respectively, since May 9, 1996, the date of the IPO. The following
table sets forth the high and low last sale prices for the Company's
securities for the period commencing May 9, 1996 as reported by the Nasdaq
National Market and the Nasdaq SmallCap Market, respectively. These prices do
not reflect retail mark-ups, markdowns or commissions.
<TABLE>
<CAPTION>
HIGH LOW
------ -----
<S> <C> <C>
COMMON STOCK
May 9, 1996 through June 30, 1996.............................. $12.00 $8.00
CLASS A WARRANTS
May 9, 1996 through June 30, 1996.............................. $ 7.50 $3.25
CLASS B WARRANTS
May 9, 1996 through June 30, 1996.............................. $ 4.00 $1.50
UNITS
May 9, 1996 through June 30, 1996.............................. $21.00 $8.00
</TABLE>
The closing sales prices of these securities as of July 22, 1996 (two days
prior to announcement of the Exercise Offer) as reported by the Nasdaq
National Market and the Nasdaq SmallCap Market, respectively, were $9.06 per
share of Common Stock, $6.00 per Class A Warrant, $3.38 per Class B Warrant
and $17.75 per Unit.
The closing sales prices of these securities as of July 12, 1996 as reported
by the Nasdaq National Market and the Nasdaq SmallCap Market, respectively,
were $9.00 per share of Common Stock, $6.50 per Class A Warrant, $3.41 per
Class B Warrant and $18.00 per Unit.
As of July 22, 1996, there were 31, 198 and 13 record holders of the Common
Stock, Class A Warrants and Class B Warrants, respectively.
29
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Company's financial statements and related notes thereto and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus/Exercise Offer. The
statement of operations data for the two years in the period ended December
31, 1995, and the balance sheet data at December 31, 1995 are derived from the
audited financial statements of the Company included elsewhere in this
Prospectus/Exercise Offer. The statement of operations data for the three-
month periods ended March 31, 1995 and 1996 and the balance sheet data at
March 31, 1996 are derived from the unaudited interim financial statements of
the Company included elsewhere in this prospectus and include, in the opinion
of the Company, all adjustments consisting of all normal recurring adjustments
necessary for a fair presentation of the Company's results of operations for
those periods and financial position at that date.
STATEMENT OF OPERATIONS DATA:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER THREE-MONTH PERIOD
31, ENDED MARCH 31,
------------------------ ----------------------
1994 1995 1995 1996
----------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product revenue............ $ 6,553,987 $ 1,927,015 $ 347,396 $ 523,729
Development and services
revenue................... 1,254,646 1,021,816 943 6,839
Component revenue.......... -- 572,000 -- 856,300
----------- ----------- --------- -----------
Total revenue.............. 7,808,633 3,520,831 348,339 1,386,868
Cost of product revenue...... 5,963,959 2,274,638 401,573 586,895
Cost of development and serv-
ice revenue................. 954,531 585,282 193 27,951
Cost of component revenue.... -- 495,000 -- 801,000
----------- ----------- --------- -----------
Gross profit................. 890,143 165,911 (53,427) (28,978)
Operating expenses:
Research and development... 1,550,248 1,257,833 364,803 365,839
Sales and marketing........ 602,818 548,573 119,388 130,735
General and administrative. 859,129 1,513,636 257,572 385,652
----------- ----------- --------- -----------
Total operating expenses... 3,012,195 3,320,042 741,763 882,226
----------- ----------- --------- -----------
Loss from operations......... (2,122,052) (3,154,131) (795,190) (911,204)
Other income (expense), net.. 35,154 (80,312) (8,350) (449,481)
Gain (loss) on investments in
affiliates (1994 gain was
from a related party)....... 350,000 (1,248,868) -- --
----------- ----------- --------- -----------
Loss before benefit for in-
come taxes.................. (1,736,898) (4,483,311) (803,540) (1,360,685)
Benefit for income taxes..... (83,237) -- -- --
----------- ----------- --------- -----------
Net loss..................... $(1,653,661) $(4,483,311) (803,540) (1,360,685)
=========== =========== ========= ===========
Net loss per share(1)........ $ (.39) $ (1.06) $ (.19) $ (.33)
=========== =========== ========= ===========
Weighted average common
shares outstanding(1)....... 4,195,148 4,211,897 4,227,503 4,166,270
=========== =========== ========= ===========
Pro forma net loss per
share(1).................... $ (.84) $ (.15) $ (.26)
=========== ========= ===========
Shares used in computing pro
forma net loss per share(1). 5,337,688 5,353,294 5,292,061
=========== ========= ===========
</TABLE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
MARCH 31, 1996
---------------------------------------------------------------
PRO AS AS AS
ACTUAL FORMA(1) ADJUSTED(2) ADJUSTED(3) ADJUSTED(4)
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Working capital......... $ 953,833 $19,788,537 $37,811,891 $52,608,537 $60,938,537
Total assets............ 9,403,396 21,897,337 39,920,691 54,717,337 63,047,337
Total liabilities....... 7,816,224 1,475,461 1,475,461 1,475,461 1,475,461
Accumulated deficit..... (7,385,418) (8,964,714) (8,964,714) (8,964,714) (8,964,714)
Total shareholders'
equity................. 1,587,172 20,508,876 38,532,230 53,328,876 61,658,876
</TABLE>
30
<PAGE>
- --------
(1) Gives pro forma effect to the conversion of the Company's then outstanding
Class A and B Preferred Stock into Common Stock and the issuance of
4,830,000 Units pursuant to the IPO at an initial offering price of $5.00
per Unit, the receipt of the net proceeds therefrom, and the application
of a portion of the net proceeds to repay the Bridge Notes and related
expenses.
(2) Assumes that 50% of the Class A Warrants are exercised pursuant to the
Exercise Offer and that (i) 25% of the Class A Warrants are exercised
pursuant to the exercise option whereby the Company reduces the exercise
price of Class A Warrants to $6.00 and issues one share of Common Stock
and 1.3 New Class B Warrants per Class A Warrant exercised and, (ii) 25%
of the Class A Warrants are exercised pursuant to the exercise option
whereby the Company reduces the exercise price of Class A Warrants to
$3.00 and issues 2/3 of a share of Common Stock and one New Class B
Warrant per Class A Warrant exercised and, (iii) all unexercised Class A
Warrants are redeemed by the Company for $0.05 per Warrant.
(3) Assumes that 100% of the Class A Warrants are exercised pursuant to the
Exercise Offer and that (i) 1/3 of the Class A Warrants are exercised
pursuant to the exercise option whereby the Company reduces the exercise
price of Class A Warrants to $6.00 and issues one share of Common Stock
and 1.3 New Class B Warrants per Class A Warrant exercised and, (ii) 2/3
of the Class A Warrants are exercised pursuant to the exercise option
whereby the Company reduces the exercise price of Class A Warrants to
$3.00 and issues 2/3 of a share of Common Stock and one New Class B
Warrant per Class A Warrant exercised.
(4) Assumes that 100% of the Class A Warrants are exercised pursuant to the
Exercise Offer and that (i) 2/3 of the Class A Warrants are exercised
pursuant to the exercise option whereby the Company reduces the exercise
price of Class A Warrants to $6.00 and issues one share of Common Stock
and 1.3 New Class B Warrants per Class A Warrant exercised and, (ii) 1/3
of the Class A Warrants are exercised pursuant to the exercise option
whereby the Company reduces the exercise price of Class A Warrants to
$3.00 and issues 2/3 of a share of Common Stock and one New Class B
Warrant per Class A Warrant exercised.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
financial statements and notes thereto appearing elsewhere in this
Prospectus/Exercise Offer.
GENERAL
The Company was founded in October 1992 by Dr. Edmund Sun to develop digital
video compression and decompression systems. In the first quarter of 1993, the
Company entered into agreements with Hyundai Electronics Industries Co., Ltd.
("Hyundai") to develop karaoke-related digital video products and the Company
entered into a joint venture called Anhui Wanyan Electronic Systems, Co. Ltd.
("Wyan") for the purpose of developing, producing and selling digital
audiovisual products. These collaborations with Hyundai and Wyan provided a
portion of the funding for the Company's development of its consumer and
commercial Video CD players.
The Company generated approximately $6,410,000 of revenues from product
sales, primarily Video CD players, to related parties that included Hyundai
and Wyan in the year ended December 31, 1994 ("1994"). In the year ended
December 31, 1995 ("1995"), the Company recorded product revenues of
approximately $490,000 to related parties. The Company does not expect to
record significant product revenues from these related parties in the future
due to the Company's efforts, which in 1995 began to be directed at marketing
Video CD players to unaffiliated third parties. Product revenue from sales of
Video CD players and (to a lesser extent from sales of Video CD encoding
systems), to unaffiliated third parties increased from approximately $144,000
in 1994 to approximately $1,437,000 in 1995 which represented an increase of
approximately $1,293,000 from 1994 to 1995.
The Company increasingly focused its efforts during 1995 upon
commercializing its products in an attempt to meet the significant growth in
demand for digital video products. However, as a result, at least in part, of
insufficient working capital to expand its operations to meet such demand, the
Company has recognized limited revenues from sales of its products to date.
The Company anticipates that the continued increase in the demand for digital
video products may enable it to generate substantial revenue growth in 1996.
The Company anticipates that its revenues in calendar 1996 will be derived
largely from sales of its Video CD players, parts and decoder boards, sales of
MPEG encoding board sets, the marketing of which commenced in the second
quarter of 1996, and sales of network video systems to be released during the
second half of 1996.
In April 1996 the Company elected to change its year end from December 31 to
March 31. Accordingly, the Company's next fiscal year will end March 31, 1997.
THREE-MONTH PERIOD ENDED MARCH 31, 1996 COMPARED TO THREE-MONTH PERIOD ENDED
MARCH 31, 1995
NET REVENUES AND COSTS OF REVENUES. Total revenues increased approximately
$1,039,000 or 298% from approximately $348,000 in the three month period ended
March 31, 1995 to approximately $1,387,000 in the three-month period ended
March 31, 1996. This increase was due to increases in unit sales of Video CD
players and components. The gross profit percentage in the three month periods
ended March 31, 1995 and March 31, 1996 were both negative, due to the fact
that the Company was not able to produce products in quantities which could
result in greater economies of scale.
Research and development expenses remained consistent in the March 31, 1996
quarter at approximately $366,000 as compared to the March 31, 1995 quarter
expenses of approximately $365,000. As a percentage of net sales, research and
development expenses decreased from 105% in the March 31, 1995 quarter to 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.
32
<PAGE>
Sales and marketing expenses increased 10% in the March 31, 1996 quarter to
approximately $131,000 from approximately $119,000 in the comparable quarter
of 1995. As a percentage of net sales, sales and marketing expenses decreased
from 34% in the March 31, 1995 quarter to 9% in the comparable quarter of
1996. This decrease is due primarily to the increase in net sales for the 1996
period being compared.
General and administrative expenses increased 50% to approximately $386,000,
up approximately $128,000 in the March 31, 1996 quarter compared to the March
31, 1995 quarter. This increase in total dollars is 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
net sales, general and administrative expenses decreased from 74% in the March
31, 1995 quarter to 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 increased by approximately $440,000 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 Bridge Financing which closed in the March 31, 1996
quarter. The Company will incur an additional charge of approximately
$1,600,000 in the quarter ending June 30, 1996 related to the Bridge Financing
for which the Bridge Notes were repaid in May of 1996 from proceeds of the
Company's IPO.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
NET REVENUES AND COSTS OF REVENUES. Total revenues decreased approximately
$4,288,000 or 55% from approximately $7,809,000 in 1994 to approximately
$3,521,000 in 1995. This decrease was due to the decrease in product revenues
generated from sales to related parties, which decreased from approximately
$6,410,000 in 1994 to approximately $490,000 in 1995 as these related parties
increased the production capability at their own manufacturing facilities.
This decrease was partially offset by increases in product revenues generated
from sales to unaffiliated third parties, which represented approximately
$144,000 of total product revenues in 1994 as compared to approximately
$1,437,000 in 1995, as well as an increase in component revenue from none in
1994 to approximately $572,000 in 1995.
Product revenues, including revenues from sales of Video CD players and
Video CD encoding systems, decreased by approximately $4,627,000 (or 71%) from
approximately $6,554,000 in 1994 to approximately $1,927,000 in 1995. This
decrease was attributable to the decrease in sales made to Hyundai and Wyan in
1995 compared to sales to these entities in 1994 as described above. The cost
of such revenues decreased by approximately $3,689,000 (or 62%) from
approximately $5,964,000 in 1994 to approximately $2,275,000 in 1995, due to
reduced product revenues. However, the cost of product revenues did not
decrease to the same extent as the decrease in product revenues, because the
Company was required to increase its manufacturing expenses. Such expenses
increased in connection with the introduction of a new Video CD player due to
start-up manufacturing costs associated with the production of such players.
In addition, the Company was not able to produce products in quantities which
could result in greater economies of scale, although there can be no assurance
that unit costs will decrease if Video CD players, and to a lesser extent,
MPEG encoding board sets, are produced in greater quantities.
Development and service revenues, primarily from the development of
customized Video CD encoding and encoding systems, decreased by approximately
$233,000 (or 19%) from approximately $1,255,000 in 1994 to approximately
$1,022,000 in 1995. The cost of such revenues decreased by approximately
$370,000 (or 39%) from approximately $955,000 in 1994 to approximately
$585,000 in 1995. This decrease was primarily the result of the Company
incurring a significant portion of the costs associated with achieving certain
milestones in 1994 under the Company's agreements with Hyundai, with the
related development revenue recognized in 1995 upon completion of such
milestones. Development and service revenues in 1994 were generated primarily
from a development agreement with Wyan pursuant to which the Company helped
establish an assembly plant in China and from the delivery to Wyan of a
customized Video CD encoding system. In 1995, the development and service
revenue recorded was primarily from agreements with Hyundai in which the
Company achieved certain product development milestones. See "Business--
Agreements with Hyundai."
33
<PAGE>
Component revenues derived from sales of certain inventory parts in excess
of current manufacturing needs were approximately $572,000 in 1995, and were
made to generate working capital. No such sales were made in 1994.
OPERATING EXPENSES. Total operating expenses increased by approximately
$308,000 (or 10%) from approximately $3,012,000 in 1994 to approximately
$3,320,000 in 1995. This increase resulted primarily from the Company's
increased general and administrative expenses in 1995 described below. The
increase in total operating expenses was partially offset by decreases in
research and development and sales and marketing expenses.
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 by approximately $292,000 (or
19%) from approximately $1,550,000 in 1994 to approximately $1,258,000 in 1995
primarily as a result of expenses incurred in 1994 for the development of the
CDV340 Video CD player which was completed in May 1995. The Company does not
expect further decreases in research and development expenses in absolute
dollars or as a percentage of revenues in calendar 1996.
Sales and marketing expenses consist primarily of personnel and consulting
costs involved in the sales process, including sales commissions. Sales and
marketing expenses decreased 9% from approximately $603,000 for 1994 to
approximately $549,000 for 1995. This decrease is attributable to a reduction
in the sales force in 1995 as a result of the decrease in sales activity in
1995 as compared to 1994. The Company intends to increase its investment in
sales and marketing and expects these expenses to increase in absolute dollars
and as a percentage of revenues in calendar 1996.
General and administrative expenses, which consist of administrative
salaries and benefits, insurance and other business support costs, increased
in 1995 over the same period in 1994 primarily due to an increase in personnel
at the Company's facilities in Taiwan. The Company expects further increases
in these expenses in calendar 1996.
OTHER INCOME (EXPENSE), NET. Other income (expense), net represents interest
earned by the Company on its cash and cash equivalents, offset by interest
expense primarily from shareholder notes payable. The Company will incur
approximately $1,995,000 in interest expense and deferred financing charges as
a result of the Bridge Financing that was completed in March 1996.
INVESTMENTS IN AFFILIATES. Investments in affiliates consist of the
investments made by the Company in Wyan and Excodi Limited ("Excodi") for the
purpose of establishing manufacturing capability in mainland China. During
1993 and 1994, the Company made investments totaling approximately $920,000 in
these companies.
During 1994, the Company sold an equity interest in Wyan to Hyundai for
approximately $350,000 and recognized this revenue as a gain on investment in
affiliate. The Company abandoned its investments in Wyan and Excodi in 1995
due to the lack of working capital and other funding sources available to
these enterprises and, to a lesser extent, the working capital deficiency of
the Company. As a result, the Company wrote off an aggregate of approximately
$920,000 of investments in affiliates and an aggregate of approximately
$327,000 in receivables from Wyan and Excodi in 1995. The Company will
continue to seek opportunities to manufacture its products through
subcontractors and, as a result, the Company may make additional investments
in companies and joint ventures located in the Asia-Pacific region. See Note 8
of Notes to Financial Statements.
BENEFIT FOR INCOME TAXES. The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." The Company incurred a net loss and
consequently paid no federal or state income taxes in 1995. In 1994, the
Company recorded a benefit for income taxes as a result of the refundability
of taxes that were paid in previous years. At December 31, 1995,
34
<PAGE>
the Company had approximately $3,440,000 in federal net operating loss
carryforwards and approximately $550,000 in state net operating loss
carryforwards which expire in various years beginning in calendar year 1999 if
not utilized.
Due to the "change in ownership" provisions of the Tax Reform Act of 1986,
the availability of the Company's net operating loss carryforwards will be
subject to an annual limitation in future periods if a change of ownership for
income tax purposes should occur over a three year period, which could
substantially limit the eventual tax utilization of these carryforwards.
The Company has established a valuation allowance against its deferred tax
assets due to the uncertainty surrounding the realization of such assets.
Management evaluates on a quarterly basis the recoverability of the deferred
tax assets and the level of the valuation allowance. If it is determined that
it is more likely than not that deferred tax assets are realizable, then at
such time the valuation allowance will be appropriately reduced. See Note 5 of
Notes to Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
From its inception until 1996, the Company funded its operations and
investments primarily through the private sale of equity securities and
borrowings from Dr. Sun, the Company's founder, and Hyundai. Financing
activities in 1994 provided the Company with approximately $4,148,000,
primarily from funds borrowed from, and preferred stock sold to, Hyundai.
Financing activities in 1995 provided the Company with approximately
$3,475,000, primarily from funds borrowed from Dr. Sun, which loans were
subsequently converted to preferred stock, and from preferred stock sold to
Hyundai. See "Certain Transactions." Net cash used in operating activities was
approximately $3,158,000 and approximately $2,482,000 during 1994 and 1995,
respectively. For such periods, net cash used in operating activities resulted
primarily from net losses and in 1994 from repayment of advances from a
related party. Net cash used in investing activities was approximately
$1,167,000 and approximately $114,000 in 1994 and 1995, respectively. Net cash
used in investing activities in 1994 was primarily from acquisitions of
property and equipment and investments in affiliates and net cash used in
investing activities in 1995 was primarily from acquisitions of property and
equipment. Additionally, cash and cash equivalents increased as a result of
the release of restricted cash used to secure a line of credit that expired in
June 1995.
As of March 31, 1996 the Company had working capital of $954,000
(approximately $19,789,000 on a pro forma basis as a result of the IPO and
repayment of the Bridge Notes) 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 $991,000 in the comparable period in 1995.
In January and March 1996, the Company received $6,055,000 from the issuance
of Bridge Notes and Bridge Warrants, net of issuance costs. The proceeds from
the Bridge Financing have been used for inventory and working capital
purposes, including general and administrative expenses and expenses of the
IPO. On May 14, 1996, the Company completed the IPO which consisted of
4,200,000 Units of common stock, Class A warrants and Class B warrants, priced
at $5.00 per unit. On May 22, 1996, The Underwriter exercised its over-
allotment 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 $20,501,000 after deducting underwriting discounts and
commissions and other expenses of the offering. The Company repaid in full the
Bridge Notes and related expenses with a portion of the proceeds received from
the IPO.
Except for existing facility and office equipment operating lease
obligations that will require total payments of approximately $429,000 in
calendar 1996 and 1997, the Company has no material capital expenditure
commitments.
The Company anticipates, based on currently proposed plans and assumptions
relating to its present operations, that its existing working capital will be
sufficient to satisfy the Company's contemplated cash
35
<PAGE>
requirements for at least the next twelve months and that the net proceeds of
the Exercise Offer would be sufficient to satisfy the contemplated cash
requirements for at least the next twelve months of any additional activities
undertaken by the Company, such as any increases in engineering capabilities,
product development activities to broaden Video CD product lines, expansion of
marketing activities (including opening sales and support offices in China and
increasing marketing activities in Singapore, India and Eastern Europe). Net
offering proceeds also may be used to finance increased production and sales
of the Company's products should the Company experience substantial increases
in sales. In the event a substantial number of Class A Warrants are exercised
utilizing the $6.00 exercise price option, a significant portion of the net
offering proceeds will be allocated to the Company's working capital reserves
and may be expended by the Company in the future for purposes not specifically
described herein. If the Company's estimates prove incorrect, the Company may
have to seek alternative sources of financing during such period, including
debt or equity financing, and may need to reduce operating costs or curtail
growth plans. No assurance can be given that such financing could be obtained
by the Company on favorable terms, if at all, and if the Company is unable to
obtain needed financing, the Company's business would be materially adversely
affected.
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROW SECURITIES
In the event the Company attains any of the earnings or stock price
thresholds required for the release of all or a portion of the Escrow
Securities, the release of the Escrow Securities to Company officers,
directors, employees or consultants will be treated, for financial reporting
purposes, as compensation expense of the Company. Accordingly, the Company
will, in the event of the release of any or all of the Escrow Securities,
recognize during the period that the earnings or stock price thresholds are
met a substantial non-cash charge to earnings that would increase the
Company's loss or reduce or eliminate the Company's net income, if any, for
financial reporting purposes for the period or periods during which such
securities are, or become probable of being, released from escrow. The amount
of this charge will be equal to the fair market value of such securities on
the date of release from escrow. Although the amount of compensation expense
recognized by the Company will not affect the Company's total shareholders'
equity, it may have a depressive effect on the market price of the Company's
securities.
SEASONALITY
The Company's business in China and Taiwan is somewhat seasonal, with
revenue in January and February generally being lower due to the Chinese New
Year.
36
<PAGE>
BUSINESS
OVERVIEW
The Company develops, manufactures and markets digital video compression and
decompression hardware and software for entertainment, business and
educational uses. The Company has developed proprietary digital video
compression and decompression technology that it believes will enable it to
offer products with a wide range of features at competitive prices. The
Company's current primary focus is on the manufacturing and marketing of a
digital video compact disc ("Video CD") player incorporating the Company's
technology primarily for consumer and commercial entertainment applications.
The Company markets its Video CD players and Video CD components largely to
electronics manufacturers in China and Taiwan. The market for Video CD players
has recently developed in these countries as more consumer entertainment
products have been encoded onto Video CDs and Video CD players have become
more affordable.
INDUSTRY BACKGROUND
Since the 1930s, video images have been transmitted and stored almost
exclusively using analog formats. Digital video, however, unlike analog video,
can be compressed, which allows for increased storage capability and
transmission efficiencies as well as the ability to transmit and reproduce
video images without perceptible image degradation. Digital video also permits
superior editing capabilities because of its greater compatibility with
computers.
Because a standard for video compression is required in order for compressed
video to be shared among various products, a number of industry leaders in
consumer electronics, computers and communications joined together through the
International Standards Organization (the "ISO") to define a standard for
compression of audio and video to CD-ROM called MPEG (Motion Picture Experts
Group)-I. MPEG-I was adopted by the ISO in 1991. In 1994, the ISO adopted a
standard for compression of audio and video to broadcast systems called MPEG-
II. MPEG-II permits better picture resolution than MPEG-I, but requires about
four times as much data. Video CDs store information in MPEG format. They are
the same size as audio CDs, about 120 millimeters in diameter and 1.2
millimeters in thickness, but allow up to 74 minutes of video and audio
storage. Although the picture quality of the current generation of Video CDs
produced in accordance with MPEG-I standards is not as good as that of laser
discs (and is about comparable to that of video cassette tapes), the smaller
discs (i) allow superior interactive multimedia features because the machine
players can more quickly find the desired audio and video segments, and (ii)
can be produced more cost effectively in large quantities than laser discs or
video cassettes, with current production costs of approximately $1.00 per
Video CD, versus $9.00 per laser disc and $2.00 per video cassette. Moreover,
the new generation of MPEG-II compression technology is expected to allow the
picture quality of Video CDs to be comparable to that of laser discs.
In December 1995, a format for a new Video CD was agreed to by those
manufacturers and entertainment companies aligned with Sony Electronics, Inc.
("Sony") and Philips on the one side and Toshiba Corporation ("Toshiba") and
Time Warner on the other. This new disc, sometimes called a Super Density
Disc, Digital Video Disc or Digital Versatile Disc (collectively, "DVD"), will
be the same size as a current Video CD, but will hold about seven to eight
times as much information on a single-sided, single-layer DVD as a current
Video CD and deliver such information eight times as rapidly. DVD is expected
to provide enough storage space to allow up to approximately 135 minutes of
video and audio in MPEG-II format and will cost approximately $1.50 per disc
to produce.
The amount of entertainment media available on Video CDs, including movies,
karaoke and games, has increased from several hundred titles in 1994 to over
2,000 in 1995, with more than 200 titles available in the United States and
1,800 titles available worldwide.
VIDEO CD PLAYER MARKET
A Video CD player looks like an audio CD player except that it plays both
video and audio. Like a video cassette recorder ("VCR") and laser disc player,
a Video CD player, in addition to the basic play feature, generally has
special effects capabilities such as slow motion, fast forward and reverse.
For markets in Asia,
37
<PAGE>
Video CD players are also often equipped with karaoke features such as digital
"echo" and the ability to change the key in which the music is played. As with
a laser disc player, a Video CD player can play video and audio, and can
access tracks randomly, but unlike a VCR, a Video CD player cannot record
material.
The Video CD player market is growing rapidly in China, Japan and Taiwan
because more consumer entertainment products are being encoded into Video CDs
and Video CD players are becoming more affordable to more consumers at a
current retail cost for a basic player of as low as about $300. The Video CD
player industry in the United States is still in its infancy. The Company has
just recently begun making sales of Video CD players in the United States.
Phillips has sold its CD-I (a format for Video CDs before MPEG-I was approved)
players and titles in the United States for several years with little success.
Because a large market for consumer entertainment uses of Video CD players
does not exist in the United States, the Company's initial marketing focus in
the United States will be for the use of its products in educational and
business applications.
VIDEO ENCODING/AUTHORING MARKET
Video encoding is the process of compressing audio and video data and
recording the resulting MPEG data into files for storage, such as on a Video
CD. The video and audio material can be from analog sources such as video
cassettes or from other digital sources. A mainframe or personal computer
("PC") is used in conjunction with MPEG encoding hardware to compress audio
and video into an MPEG-formatted file. The authoring process consists of
ordering, organizing, and editing one or more MPEG files, together with
control and other information into a coherent Video CD title. The resulting
files are then copied onto a recordable Video CD with a Video CD recorder. In
order to mass produce Video CD titles, a pre-master CD is made by recording a
gold CD. A glass master CD is then made from the pre-master and taken to a
company that presses Video CDs, such as 3M or Sanyo, for mass production.
A Video CD encoding system generally costs at least $20,000 and can encode
in real time (i.e., encoding one hour of material takes about one hour) which
allows about three Video CDs to be encoded in an eight-hour workday (including
time to check the compressed material prior to recording it onto a Video CD).
As owners of materials displayed on video cassettes and laser discs are
realizing that such materials also can be sold in Video CD format, the demand
for video encoding is growing in China and Japan.
COMPANY PRODUCTS
The Company's current products, other than the ENC200 encoding system
described below, are based upon MPEG-I compression. The Company, however, is
in the process of developing additional products based on MPEG-II compression.
VIDEO CD PLAYERS
Consumer. The Company currently manufactures and markets Video CD players
and Video CD player components, including individual decoding circuit boards
and complete kits containing substantially all of the parts necessary to
assemble a Video CD player. The Company primarily sells these products to
manufacturers of Video CD players. See "--Manufacturing." The Company or such
manufacturers then produce the Video CD players and resell such players to
dealers or end users. The current suggested retail price for the Company's
current model Video CD player (the CDV350) is $350. Its features include
karaoke functions, the ability to play audio CDs in addition to Video CDs, on-
screen control features, the ability to access tracks randomly, surround
sound, slow motion and frame-by-frame advance, shuffle/program track playback,
time search and a computer interface (a feature currently available only with
the Company's Video CD player). The Company sold 3,750 of its CDV350 and prior
models of consumer Video CD players in 1995 and 12,404 completed CVD350
players and Video CD player components during the first six months of 1996.
Commercial. The CDV3300 and 3600 Commander Juke Box Systems are each a
combination of a Video CD changer controller and a Video CD player designed
for sale to bars, restaurants and cafes for karaoke. The
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market for karaoke machines in Asia is currently estimated to be several
billion dollars per year. The CDV3300 controls a Video CD autochanger that has
a 100-disc capacity. The CDV3600 has a 360-disc capacity and has a second
player that allows the queuing of Video CDs and selection of song titles. The
CDV3300 and CDV3600 can be upgraded to handle multiple changer units for
increased capacity. The dealer price of the CDV3300 is $3,300, and the dealer
price of the CDV3600 is $3,600. The Company sold 60 Commander Juke Box Systems
in 1995 and 2 of these systems during the first six months of 1996.
VIDEO CD ENCODING SYSTEMS
The Company's encoding systems are PC-based MPEG compression systems
designed to provide turnkey solutions for all of the hardware and software
required to edit and compress video material and encode Video CDs.
MPEG Encoding Board Set. The Company has developed a video encoding board
set that will be compatible with certain PCs and allow the user to encode
video material without purchasing an entire encoding system. This encoding
board set is targeted at original equipment manufacturers and distributors who
will integrate it with other parts of an encoding system. The Company
commenced marketing of encoding board set in the second quarter of 1996 and
had sold four units as of June 30, 1996.
ENC50 Encoding System. The ENC50 encoding system is a turnkey system which
features digital video and audio inputs, advanced video preprocessing and
compression, real-time video/audio MPEG-I compression and multiplexing
(linking together video and audio), Video CD track composition, disc pre-
mastering and master disc writing. This system is targeted at quality-
conscious video producers who are converting large quantities of video
material to Video CD. These include movie studios, karaoke producers,
educational institutions, corporate and other video production studios. The
ENC50 encoding system is sold to dealers for approximately $25,000. The
Company sold two ENC50 Encoding Systems in 1995. As of June 30, 1996, the
Company had sold two ENC50 Encoding Systems.
ENC200 Encoding System. The ENC200 encoding system is used for the encoding
of MPEG-II-based Video CDs and Video-On-Demand ("VOD") servers. It performs
real-time MPEG-II video and audio compression and contains all of the hardware
and software required to perform compression, multiplexing and disc pre-
mastering. The ENC200 encoding system is targeted at the same customer base as
the ENC50 encoding system and is designed as an upgrade path for existing
ENC50 encoding system customers, but its efficacy also extends to those
working with MPEG-II VOD and broadcast video archiving. To date, the Company
has sold two ENC200 encoding systems for an average price of approximately
$150,000, with these sales occurring prior to 1996.
Video CD Encoding Kiosk. The Company's Video CD encoding kiosk ("Encoding
Kiosk") is a customer-operated Video CD authoring system packaged in an
automatic teller machine-type kiosk enclosure. Through a simple touch-screen
interface, a photoshop operator or the walk-up customer is provided with
instructions in order to produce Video CDs. This product has custom
application software and system configurations for each application. The
application software eliminates the need for an experienced multimedia
production operator and enables a customer to generate an interactive Video CD
to take home. The Encoding Kiosk can be used in karaoke bars, photoshops and
video studios for conversion of live and pre-recorded video and still
photography into Video CDs. The Company recently began marketing the Encoding
Kiosk at the Multimedia Show in Beijing in April 1996. The Company expects
that the Encoding Kiosk will be sold to end users for approximately $16,000.
The Company has orders for different configurations of the Encoding Kiosk and
anticipates working with customers to supply units in during the second half
of 1996.
NETWORK VIDEO SYSTEMS
The Company's Multimedia-On-Demand ("MOD") systems provide interactive
networked video services across a high-bandwidth network and can be designed
for use in entertainment, education and business. The core
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of each system is a low-cost, real-time video server which delivers video and
other information to users across a network. In addition to supporting a
library of immediately accessible video items on such server, the system
supports one or more 360-disc Video CD jukebox systems which allow for large
amounts of additional video material to be stored and accessed as required.
The MOD systems were specifically designed by the Company to be flexible. By
changing the video content and modifying the user interface, the MOD system
can easily be changed for different applications (e.g., movies and karaoke for
entertainment purposes; video training materials, research materials and
interactive testing for educational purposes; and video training materials,
research materials, internet access, and archiving for business purposes).
The Company began marketing its MOD system in the United States at the
convention for the National Association of Broadcasters and in Beijing at the
Multimedia Show, both in April 1996.
A management server controls and manages the video server. The management
server runs in conjunction with a standard world-wide web server and provides
the ability to create and maintain databases and graphical user interfaces.
The user can access the network video system through a PC-compatible platform
using the Company's proprietary browser. Menus and other user pages are
displayed on a television or a PC monitor. The user can use a remote control
device, keyboard or bar-code reader to make selections. The existing system is
designed to operate over local area networks using Ethernet (a hardware and
software protocol for a type of networking). In addition, because the
Company's video server is functionally compatible with Internet World Wide Web
servers and browsers and uses Hyper Text Markup Language or HTML, which is the
most commonly used language on the Internet, as the basis for all control and
management functions, the Company anticipates that it will be able to adapt
its system for uses over the Internet. In the future the Company intends to
develop additional networking capability to enable it to work over digital
cable TV systems, and also Asynchronous Transfer Mode networks.
The Company has developed and is further enhancing the capabilities of its
multiroom karaoke video system. The multiroom karaoke video system provides a
multimedia delivery system for commercial karaoke establishments. It enables
up to 20 rooms to share a common song library of over 10,000 songs. The system
is based around a single multimedia server which controls access to a Video CD
jukebox, video delivery and song selection. In each room there is a user
terminal for song catalog browsing, song selection and video delivery. The
user terminals are connected to the server through ethernet connections that
provide communications for both song selection and video delivery. This system
is being developed in connection with a contract that the Company has entered
into with Hyundai. See "--Agreements with Hyundai."
MPEG-II PRODUCTS
The Company is currently under contract with Hyundai to develop an MPEG-II
compressor for encoding MPEG-II titles, a DVD authoring system, and an MPEG-II
Transport Multiplexor which reformats MPEG elementary streams for broadcast
channels. However, all of these development projects cannot be completed until
the Company receives the final specifications for the DVD format from Toshiba.
The Company, however, is continuing with the development of MPEG-II 1/2D1 for
its MPEG Encoding Board Set. See "--Agreements with Hyundai."
CUSTOMIZED SYSTEMS
The Company plans to continue to customize and combine aspects of its
digital video systems for specific applications. The specific adaptations of a
system depend on the needs and uses of the specific customer or strategic
partner. Such customer or partner may have concerns about security of video
material, ability to measure use, ease of accessibility, etc. The Company has
contemplated or is customizing some of its systems for educational uses,
kitchen products, entertainment delivery for hotels and cruise ships, karaoke,
video delivery over the Internet and corporate training.
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STRATEGY
The Company's strategy is to market and sell its digital video products in
selected markets not already broadly developed by the major consumer
electronic manufacturers. The Company's longer-term objective is to develop
specific applications for the Company's products, such as for karaoke,
educational and business uses, including classroom teaching, consumer product
education and corporate training, and video delivery over the Internet. The
Company also may offer entertainment delivery systems for the hospitality
industry, including hotels and cruise ships. To implement its strategy, the
Company has assembled a highly experienced research and development team and
may seek to enter into strategic partnerships or other collaborative
arrangements with other companies to develop and market new products.
The Company's goal is to become a technology leader in rapidly growing
digital video markets by continuing to develop novel uses for digital video
technology, while reducing the cost of existing uses in order to remain
competitive. The combination of the encoding of a sufficient number of
entertainment titles on Video CD and the reduction of the cost of Video CD
players to be comparable with video cassette players has made such Video CD
players a competitive product in certain foreign markets, such as China,
Korea, Japan and Taiwan. As a result, the Video CD player market has become
the first rapidly growing digital video market in which the Company will
attempt to increase its sales. In order to remain a competitive supplier of
products for this market, the Company will strive to reduce its cost of
producing Video CD players.
The Company's proprietary technology for a Video CD player is incorporated
into the decoder board and its design and not in the Video CD drive, the
casing of the Video CD player or other parts of a Video CD player.
Accordingly, in order to maximize the economic return on its proprietary
technology and reduce its internal manufacturing requirements for Video CD
players, the Company's goal is to ultimately sell only decoder boards to other
manufacturers, who will obtain the rest of the parts of the Video CD player
from other suppliers and manufacture such players. The Company may also
utilize this manufacturing and marketing strategy for other products that it
develops, where appropriate.
The Company intends to implement this strategy by initially selling
manufacturers complete Video CD players, progressing to selling them
manufacturing kits that contain the component parts of a Video CD player but
require some minor assembly and eventually only selling them the decoder
boards.
The Company's product development efforts attempt to adapt digital video
technology to satisfy an existing need with a product that is superior in
either features, cost effectiveness or some combination of the two, which then
provides the consumer with a greater perceived value than the alternative
products. For example, the Company believes that it can provide the same
services as many existing information kiosks at a lower cost. Because many
such kiosks currently use computers, they employ hardware with excess
capability. By using equipment that serves only the required purposes of an
information kiosk, the Company believes it can provide the same service at a
lower initial cost, with higher reliability and with lower support costs.
The Company may also seek to develop complementary technologies in order to
exploit synergies between markets for its products. The Company believes that
the encoding products it has produced have helped create more titles on Video
CDs. This, in turn, has led to increased sales of Video CD players.
The Company has in the past utilized, and will seek in the future to enter
into, strategic partnerships or other collaborative arrangements with other
companies to develop and market specific new applications for digital video
technology. See "--Agreements with Hyundai."
MANUFACTURING
The bulk of the Company's current manufacturing consists of producing Video
CD players. A Video CD player generally is composed in part of a decoder
board, a Video CD drive which spins and reads the Video CD, casing for the
Video CD player and a connector to a power source. The Company uses a number
of
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subcontractors in Taiwan to manufacture most of the decoder boards. The
Company then adds a C-Cube chip to such board in order to complete its
manufacture. The Company primarily obtains its Video CD drives, directly or
indirectly, from Philips. Although the Company has not had and does not
anticipate having difficulty obtaining Video CD drives in the future, the
Company has modified its Video CD player to be compatible with Video CD drives
produced by Sony. The Company purchases the other parts of the Video CD player
from third-party vendors and assembles the Video CD players at its facilities
in Taiwan.
The Company primarily sells Video CD player components to other companies
that manufacture Video CD players. The Company initially sells a manufacturer
complete Video CD players to enable it to become familiar with such player. As
a manufacturer becomes more familiar with the Company's Video CD player, the
Company sells such manufacturer manufacturing kits that contain all the parts
necessary to assemble a Video CD player. Eventually parts are removed from the
kits as a manufacturer learns to obtain such parts on its own. The Company's
ultimate goal is to sell a manufacturer only decoder boards. As a result, the
Company does not anticipate a need to greatly expand its manufacturing
capability even if orders for its Video CD player products increase greatly.
To the extent that future demand for the Company's Video CD player products
exceeds its manufacturing capability, the Company anticipates that it will
continue to subcontract out virtually all of its large scale manufacturing by
engaging manufacturing subcontractors. Because the Company anticipates that a
substantial portion of its sales of Video CD players for the foreseeable
future will occur in China, the Company is currently considering the use of
one or more subcontractors in Shenzhen, China.
The design work, prototype manufacturing and the assembly of integrated
products such as network multimedia systems and the Video CD encoding systems
and kiosks, as well as commercial Video CD players, occur at the Company's
headquarters in Santa Clara, California. Because most of these products have a
short enough production cycle relative to a customer's need for such products,
the Company manufactures them as orders are received. Accordingly, the Company
generally does not maintain inventory for such products or have a backlog of
orders.
MARKETING AND DISTRIBUTION
The Company's representatives attend trade and industry shows to try to
increase awareness of and interest in digital video technology and the
Company's products. The Company also employs six full-time sales
representatives based in Santa Clara, California, Taipei, Taiwan, and Japan to
sell its products and anticipates that it will hire additional sales personnel
with a portion of the proceeds of the Exercise Offer. With respect to sales of
its Video CD players, the Company either licenses the right to manufacture the
players and sells component parts (with the licensed manufacturers then
selling the assembled Video CD players to dealers or end users) or sells
assembled players directly to dealers. The majority of the Company's customers
for Video CD players and components are manufacturers of related products,
such as audio compact disc players, and none of the Company's customers, other
than Hyundai, accounted for more than 10% of the Company's revenues in 1995.
The Company distributes its encoding systems through independent sales
representatives who sell them directly to end users. The Company intends to
use a portion of the proceeds from the Exercise Offer to establish additional
sales offices in China, Europe, and possibly other areas.
SUPPLIERS
A programmable MPEG-I or MPEG-II decoder or encoder chip is an integral part
of the Company's products. The Company currently obtains all of such chips
from C-Cube, which is the only source for such chips at this time. The Company
has no contractual right to obtain or obligation to purchase a specified
number of chips from C-Cube. In April 1996, C-Cube substantially increased its
capacity to supply chips. However, there can be no assurance that the
Company's allocation will increase sufficiently to meet the Company's needs.
In addition, any increase in the supply of chips may allow the Company's
existing competitors to produce more competing products or encourage new
competitors to produce Video CD products.
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Although some MPEG decoder chips are produced by other companies, such chips
are only now becoming available at competitive prices and the Company would be
required to do substantial design work at its own expense in order to
incorporate such chips in its products.
AGREEMENTS WITH HYUNDAI
In March 1993, the Company and Hyundai Electronics International Co., Ltd.
("Hyundai") entered into two five-year agreements (the "1993 Hyundai
Agreements") pursuant to which the Company agreed to deliver to Hyundai (i) a
consumer karaoke Video CD player with the technical information for the Korean
market by the August 1993, in exchange for $300,000 and 3% of net sales, (ii)
a karaoke Video CD jukebox with all technical information for the Korean
market by October 1993, in exchange for $350,000 and 3% of net sales, (iii) a
complete set of encoding machines by July 1993 in exchange for $700,000 and
(iv) a karaoke network system for 20 rooms with technical information by the
end of 1993 in exchange for $300,000. The 1993 Hyundai Agreements granted
Hyundai (i) the exclusive right to manufacture, use, sell and otherwise
transfer or dispose of the karaoke-related products in Korea and (ii) the non-
exclusive right to do so in other countries. Between 1993 and 1995, the
Company delivered to Hyundai karaoke players, karaoke jukeboxes and an
encoding machine in exchange for total payments of $1,250,000 pursuant to the
1993 Hyundai Agreements. Delivery of the karaoke network system was not made
pursuant to the 1993 Hyundai Agreements and is now covered by an agreement
entered into in 1995 between the Company and Hyundai that is described below.
Hyundai has not paid the Company any royalties to date under the 1993 Hyundai
Agreements.
During 1994, the Company manufactured 6,000 consumer karaoke players for
Hyundai for an aggregate purchase price that included the 3% royalty relating
to such players provided for in the 1993 Hyundai Agreements. In 1994, the
Company and Hyundai amended the 1993 Hyundai Agreements and agreed to a
manufacturing relationship whereby the Company granted Hyundai the right to
manufacture a karaoke jukebox commander and cancelled the Company's right to
receive the 3% royalty relating to sales of the karaoke jukebox under the 1993
Hyundai Agreements in exchange for Hyundai agreeing to sell such karaoke
jukebox commanders to the Company at a preferential price. Hyundai thereafter
redesigned the consumer karaoke player to reduce the size of its boards and
utilized a new chip from C-Cube. Hyundai has taken the position that its
redesigned consumer karaoke Video CD players are not subject to the royalty
provisions of the 1993 Hyundai Agreements. The Company is evaluating Hyundai's
position with respect to such players.
In April 1995, the Company and Hyundai entered into a second Technical
Assistance and License Agreement (the "1995 Hyundai Technical Assistance and
License Agreement") pursuant to which the Company granted Hyundai an
exclusive, perpetual royalty-free right to manufacture, use, sell and
otherwise transfer or dispose of an MPEG-II compressor and a network video
distribution system in Korea and a non-exclusive, perpetual royalty-free right
to use, lease, sell and otherwise transfer or dispose of the MPEG-II
compressor and network video distribution system in other countries in
exchange for $1,500,000. Pursuant to the 1995 Hyundai Technical Assistance and
License Agreement, Hyundai paid the Company $750,000 in May 1995. Such
agreement provides for additional progress payments aggregating up to $750,000
if products relating to MPEG-II compression (and related products including a
DVD player) and network video distribution systems are delivered by certain
specified dates. If such schedules are not met, such agreement provides for
penalties which reduce the amounts due to the Company. Although certain of
these deadlines were not met, the Company and Hyundai mutually agreed to
extend such deadlines until June 1996 for the network video distribution
systems (which were delivered in June 1996) and indefinitely for the MPEG-II
compression products depending upon when final DVD specifications are
released.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
The Company has previously used confidentiality and non-disclosure
agreements with its employees, suppliers and distributors to protect its
proprietary products and has integrated a majority of its intellectual
property into complex devices to help protect against reverse engineering. The
Company intends to file patent
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applications in the United States and other countries covering some of the
technologies that relate to its network video systems. There can be no
assurance, however, that patents will be granted for any of these technologies
or that any patent claims allowed will be sufficiently broad so as to provide
meaningful patent protection for the Company or that even if obtained, that
such patent claims will be enforced, especially in foreign jurisdictions such
as China. There are few barriers to entry into the market for the Company's
products. There can be no assurance, therefore, that any of the Company's
competitors, many of whom have far greater resources than the Company, will
not independently develop technologies that are substantially equivalent or
superior to the Company's technology. Further, the Company distributes its
products in countries where intellectual property laws are not well developed
or are poorly enforced. Legal protections of the Company's rights may be
ineffective in such countries, and software developed in such countries may
not be protectable in jurisdictions where protection is ordinarily available.
Software piracy and ineffective legal protection of the Company's software in
foreign jurisdictions, such as China, may cause substantial losses of sales by
the Company, which could have a material adverse effect on the Company's
operating results and financial condition.
Although the Company has taken and will continue to take steps that it
considers appropriate to protect its proprietary products, the Company
believes its future success will be dependent primarily on its ability to
rapidly bring to market products incorporating technological advances and then
reducing the cost of producing these products rather than on establishing
patent protection for these products.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has devoted a substantial portion of its
resources to research and product development focusing on digital video
compression and decompression hardware and software systems. During the years
ended December 31, 1994 and 1995, the Company incurred research and
development expenses of $1,550,000 and $1,258,000, respectively.
Research and development expenses remained consistent in the March 31, 1995
quarter at approximately $365,000 as compared to the March 31, 1996 quarter at
approximately $366,000. As a percentage of net sales, research and development
expenses decreased from 105% in the March 31, 1995 quarter to 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.
The Company currently anticipates that during the next 12 months its
research and development efforts will focus primarily upon reducing the costs
of its products, particularly the components of the Video CD players and
developing specific uses for its network video systems. The Company also
anticipates that its research and product development personnel will be
increasingly utilized to support the sales and marketing efforts of the
Company in connection with customizing product applications for specific
customers. There can be no assurance, however, that research and development
efforts with respect to such products will progress as anticipated, that the
Company will be able to reduce costs sufficiently to be able to compete with
others marketing similar products or that new uses for network video will be
able to be developed on a timely basis, if at all.
COMPETITION
The Company's products compete with alternative methods of displaying audio
and video such as video cassette players, laser discs, multimedia computers
and game machines, as well as with other companies' products that use similar
technologies. Although the large video entertainment markets throughout the
world are currently served primarily by VHS video cassettes and laser discs,
the Company believes that Video CDs and newer digital video disc formats may
be able to effectively compete for these markets in the future. Most of the
Company's competitors and potential competitors are substantially larger in
size, such as Sony and Toshiba and have far greater financial, technical,
marketing, customer service and other resources than the Company.
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Certain of the Company's potential competitors may have technological
capabilities or other resources that would allow them to develop alternative
products which could compete with the Company's products. Potential
competitors may begin operations or expand their existing operations into the
Company's proposed markets before the Company is able to successfully market
its products. There can be no assurance that future technological advances
will not result in improved products or services that could adversely affect
the Company's business. Competition in the electronics industry also extends
to attracting and retaining qualified technical and marketing personnel, and
there can be no assurance that the Company will be successful in attracting
and retaining such qualified personnel.
As part of its business strategy to focus on niche markets not yet broadly
developed by the major consumer electronics manufacturers and to compete at
least in part on the basis of product price, the Company has in the past and
will likely in the future have a more limited range of products than many of
its competitors who will offer more products that attempt to cater to a number
of price points for customers. This may adversely affect the Company's ability
to compete for product sales.
With respect to the sale of Video CD players, the Company competes with
numerous companies, including large consumer electronics companies with strong
brand name recognition such as Hyundai, Samsung, Panasonic, and Sony. In
addition, many of these companies manufacture Video CD players on a larger
scale than the Company and accordingly may be able to better take advantage of
the lower costs associated therewith. However, the Company avoids competing
directly with these larger electronics companies by generally attempting to
sell components of Video CD players to manufacturers instead of end users.
Nevertheless, the Company still indirectly competes with these larger
electronics companies for sales of Video CD players to end users. Such
competition generally occurs on the basis of price and features. There can be
no assurance that such other electronics companies will not price their Video
CD players below the price of players offered by manufacturers who are
customers of the Company or offer products with more desirable features,
thereby reducing demand for the Company's products.
Although CD-ROM equipped computers are capable of playing Video CDs, they
require the addition of a MPEG decoder in either software or hardware form in
order to enable playback. The Company believes that computers and interactive
games on CD are more likely to contribute to the overall market growth rather
than compete with Video CD players because they encourage the creation of more
material that can be used with Video CD players.
The Company's competition in the area of encoding systems includes
Microboards, Inc. of America ("Microboards"), FutureTel, Inc., Optibase, Inc.,
Sigma Designs, Inc., IPC Technologies, Inc., Smart & Friendly, High Technology
Distributing, Inc., and Optivision, Inc. Microboards, in particular, offers a
Video CD authoring capability that competes favorably with the authoring
capability that is part of the Company's ENC50 encoding system. However, the
Company's ENC50 provides a complete system for encoding, whereas the
Microboards authoring system still requires the user to purchase other
components used in the encoding process and put them together (i.e., the user
must handle compatibility problems between components). The Company depends on
its existing product performance features and price advantages in competing
with other system level product manufacturers, and a failure to maintain such
advantages could have a material adverse effect upon the Company's ability to
continue to compete in this area.
The Company's ENC200 product currently competes with products marketed by
Toshiba, Sony and Japan Victor Corporation (JVC), although those products are
sold for substantially higher prices than the ENC200. In the VOD server area
the ENC200 competes with products marketed by various companies, including
Divicom, Vela Research, Home Shopping Network, Hewlett-Packard Co., Silicon
Graphics, Inc. and N-Cube. The Company believes that the ENC200 is competitive
with these other products based on price and the video compression quality of
the product.
In the area of networked multimedia-on-demand systems, the Company competes
with Starlight Networks, Inc. and the Network Connection as well as other
sources for networked systems. The Company competes with these other companies
based on cost quality, reliability and speed of video delivered. There can be
no assurance that the Company will be able to compete favorably against
products offered by its competitors in the future.
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FACILITIES
The Company's corporate headquarters are located in Santa Clara, California,
where it subleases approximately 13,566 square feet of general office space
from an unaffiliated lessor. The term of the sublease expires in December
1997. However, if the master lease is terminated for any reason pursuant to
its terms, the Company's sublease will also terminate. The annual rent is
currently $155,000 and will increase to $164,000 in December 1996. In
addition, the Company pays a ratable share (currently $24,000 annually) of
property taxes, insurance premiums, maintenance and other common area expenses
of the premises. All such amounts are payable monthly. The Company has a right
to request an extension on the lease for an additional six months upon terms
substantially similar to those of the existing lease.
The Company has a branch office in Taipei, Taiwan, where it leases
approximately 12,000 square feet of general office space from an unaffiliated
lessor. The lease expires in September 1996. The annual rent is currently
$128,000. In addition, the Company pays a ratable share (currently $30,000
annually) of property taxes, maintenance and other common area expenses of the
premises. All such amounts are payable monthly. The Company has an option to
extend the lease for an additional two years upon terms substantially similar
to those of the existing lease.
The Company has a sales representative office in Hong Kong, where it leases
approximately 862 square feet of general office space from an unaffiliated
lessee. The lease expires in May 1998. The annual rent is currently $15,000.
In addition the Company pays a ratable share (currently $3,000 annually) of
property taxes, maintenance and other common area expenses on the premises.
All such amounts are payable monthly.
The Company has excess space available to it in its current facilities,
which the Company believes will allow for substantial expansion of its
business and be sufficient for at least the next 24 months.
EMPLOYEES
As of June 30, 1996, the Company had 62 full-time employees (28 in Santa
Clara and 34 in Taiwan), of whom 5 are management personnel, 40 are research
and development personnel, 6 are marketing representatives, 5 are operations
personnel and 6 are accounting personnel. The Company believes that its
relations with its employees are good. The Company is not a party to any
collective bargaining agreement. Competition for employees in the Company's
industry is intense, and there can be no assurance that the Company will be
able to attract or retain other highly qualified personnel in the future.
LEGAL PROCEEDINGS
The Company is not a party to any litigation.
46
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following are the executive officers and directors of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<C> <C> <S>
Edmund Y. Sun 47 Chairman of the Board and Chief Executive Officer
Robert B. Pfannkuch 60 President and Director
Janis P. Gemignani 48 Chief Financial Officer, Vice President,
Secretary and Director
Sung Hee Lee 41 Director
Sanford Sigoloff 64 Director
Philip B. Smith 60 Director
Joseph F. Troy 57 Director
</TABLE>
EDMUND Y. SUN has served as the Company's Chairman of the Board, President
and Chief Executive Officer since its inception in October 1992 and is the
founder of the Company. Dr. Sun ended his term as the President of the Company
following the completion of the IPO. Dr. Sun founded C-Cube Microsystems Inc.,
a public company involved in the development of full-color still and motion
picture compression technology, and was its Chief Executive Officer from March
1989 to September 1991, and Chairman of the Board from August 1988 until April
1993. Dr. Sun was also a founder, Vice President, and Chief Technical Officer
of Weitek Corporation, a public company involved in high-speed three-
dimensional shaded graphics systems and the use of high speed chips in various
computer applications. Dr. Sun is a director of CSS Laboratories, Inc., a
privately-held company involved in computer hardware. Dr. Sun has a Ph.D. in
Applied Physics, and an M.S. in Electrical Engineering from the California
Institute of Technology, and a B.S. in Electrophysics from the National Chiao-
Tung University in Taiwan.
ROBERT B. PFANNKUCH has served as the President and a director of the
Company since the closing of the IPO. From March 1996 to May 1996 he served as
a consultant to the Company. Mr. Pfannkuch has been the President of
Telefuture Partners, a consulting firm, since January 1990. He was the
Chairman and Chief Executive Officer of Rank Video Services America (formerly
Bell & Howell/Columbia Pictures/Paramount Video Services) from 1981 to January
1990. From 1974 to 1981, he was the President of Bell & Howell Video Group and
Vice President of Bell & Howell. Mr. Pfannkuch received a B.S. from the
University of Connecticut.
JANIS P. GEMIGNANI has served as the Chief Financial Officer, Vice
President, Secretary and a director of the Company since August 1995. She was
a co-founder and from 1984 to August 1995, Chief Financial Officer of Vertical
Software, Inc., a value-added reseller of computer hardware and software
located in Houston, Texas. Ms. Gemignani earned her B.A. degree with honors
from the University of West Florida. She is a Certified Public Accountant.
SUNG HEE LEE has been a director of the Company since March 1994. Mr. Lee
founded and has been the Director of the Multimedia Business Division of
Hyundai Electronics Industries Company, Ltd. ("Hyundai") since March 1993.
From May 1991 until March 1993, Mr. Lee served as a Senior Manager of the
Marketing Department of Hyundai's Information Systems Business Sector. From
January 1989 until May 1991, he served as a Senior Manager of Hyundai's
Computer Export Department. He was also responsible for establishing the
Hyundai Electronics America subsidiary in the United States. Mr. Lee is a
member of the Board of Directors of Wanyan Electronics Co., Ltd., in China. He
received his M.S. in Industrial Engineering from the Korea Advanced Institute
of Science & Technology.
47
<PAGE>
SANFORD C. SIGOLOFF became a director of the Company in June 1996. Mr.
Sigoloff has been Chairman of the Board, President and Chief Executive Officer
of Sigoloff & Associates, Inc. (a management consulting company) since 1989.
He served as Chief Executive Officer of L.J. Hooker Corporation (a retail
conglomerate) from August 1989 to June 1992. From March 1982 until 1988 Mr.
Sigoloff served as Chairman of the Board, President and Chief Executive
Officer of Wickes Companies, Inc. (a furniture retail chain). Mr. Sigoloff is
a director of Sun America, Inc., Kaufman and Broad Home Corporation, Wickes
plc-London, England and Movie Gallery, Inc. which are public companies. Mr.
Sigoloff is an adjunct full professor at the John E. Anderson Graduate School
of Management at the University of California at Los Angeles.
PHILIP B. SMITH became a director of the Company in November 1995. Mr. Smith
has been a Vice Chairman of the Board of Spencer Trask Securities Incorporated
since 1991. He was formerly a Managing Director of Prudential Securities in
their merchant banking division from 1985 to 1991. Mr. Smith is a founding
General Partner of Lawrence Venture Associates, a venture capital limited
partnership headquartered in New York City and was the General Partner from
1984 to 1985. From 1981 to 1984, he served as Executive Vice President and
Group Executive of the international banking and worldwide corporations group
at Irving Trust Company. Prior to joining Irving Trust Company, he was at
Citibank for 15 years, where he founded Citicorp Venture Capital and was its
President and Chief Executive Officer. Since 1988, Mr. Smith has also been the
managing general partner of Private Equity Partnership, L.P. Mr. Smith is a
director of Movie Gallery, Inc., American Family Restaurants, Inc. and
StarPress, Inc. (formerly Great Bear Technology Inc.), all publicly-held
companies. Mr. Smith is an adjunct professor at Columbia University Graduate
School of Business. He holds a B.S.E. from Princeton University and a M.B.A.
from Harvard University.
JOSEPH F. TROY has served as a director of the Company since the closing of
the IPO. Mr. Troy is the founder and has been a member of the law firm of Troy
& Gould Professional Corporation since May 1970. He is a director of Movie
Gallery, Inc. and Amerigon Incorporated, both publicly-held companies. He
holds a B.A. from Yale University and an LL.B. from Harvard University.
Directors serve until the next annual meeting or until their successors are
elected or appointed. Officers are elected by and serve at the discretion of
the Board of Directors. There are no family relationships among the officers
or directors of the Company.
KEY EMPLOYEES:
The following individuals are additional key employees of the Company:
JAMES A. MUNRO has served as the Director of Engineering of the Company
since July 1995. From 1978 to July 1995, Mr. Munro served in a number of
different managerial positions with Wyse Technology, Inc. in San Jose,
California, the most recent being as product marketing manager for X-
Terminals. From 1978 to 1983, he was a Marketing Manager and Director of
Engineering at Zentec Corporation, which was a publicly-traded computer
hardware company in Santa Clara, California. He holds a B.S.E.E. from
Manchester University in England.
ED MARTINI has served as the Project Manager of Network Video for the
Company since January 1993. Mr. Martini was previously the engineering liaison
to C-Cube from Sun Microsystems, Inc. and worked in various engineering
capacities with Sun Microsystems, Inc. from May 1987 to January 1993. Mr.
Martini has a B.S. from California Polytechnic State University at San Luis
Obispo.
BOARD COMMITTEES AND DESIGNATED DIRECTORS
The Board of Directors has the following committees: Compensation, Option,
Audit and Risk Management. The Compensation Committee makes recommendations to
the Board concerning salaries and incentive compensation for officers and
employees of the Company. The members of the Compensation Committee are
48
<PAGE>
Dr. Sun, Mr. Smith and Mr. Troy. The Option Committee administers the Option
Plan. The members of the Option Committee are Dr. Sun and Mr. Lee. The Audit
Committee reviews the results and scope of the audit and other accounting
related matters. The members of the Audit Committee are Mr. Lee, Mr. Smith and
Mr. Troy. The Risk Management Committee establishes systems and policies to
supervise and manage the Company's risk of doing business outside the United
States. The members of the Risk Management Committee are Mr. Smith and Ms.
Gemignani.
The Company has agreed for a period of five years commencing on May 9, 1996,
if requested by the Underwriter, to nominate a designee of the Underwriter who
is reasonably acceptable to the Company to the Company's Board of Directors.
The Underwriter to date has not designated a director.
Sung Hee Lee serves as the representative of Hyundai on the Company's Board
of Directors.
DIRECTOR COMPENSATION
Directors who are employees of the Company receive no compensation for
serving on the Board of Directors.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company for
its fiscal year ended December 31, 1995 to Edmund Sun, Chief Executive Officer
and then President of the Company. Robert Pfannkuch became President of the
Company in May 1996. No other executive officer of the Company received salary
and bonus in excess of $100,000 in such fiscal year:
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
-------------------------------
FISCAL YEAR ENDED
NAME AND PRINCIPAL POSITION DECEMBER 31, ANNUAL SALARY
--------------------------- ----------------- -------------
<S> <C> <C>
Edmund Sun, Chairman of the Board, Chief
Executive Officer and President........ 1995 $125,485
</TABLE>
- --------
(1) The compensation described in this table does not include medical
insurance, retirement benefits and other benefits received by the
foregoing executive officer which are available generally to all employees
of the Company and certain perquisites and other personal benefits
received by the foregoing executive officer of the Company, the value of
which did not exceed the lesser of $50,000 or 10% of the executive
officer's cash compensation in the table.
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company entered into an employment agreement (the "Sun Employment
Agreement") with Dr. Sun, the Company's founder, Chairman of the Board and
Chief Executive Officer, in March 1996. The term of the Sun Employment
Agreement commenced on May 14, 1996 (the date of the closing of the IPO) and
will expire on March 31, 2001; provided, however, that the Sun Employment
Agreement can be terminated by either party after March 31, 1999, if all of
the Escrow Securities have been released. The Sun Employment Agreement
provides that in consideration for Dr. Sun's services, he is to be paid a
salary of $160,000 during the first year of the agreement. In addition, he
will receive increases in salary and bonuses as deemed appropriate by the
Board of Directors.
The Company entered into a Consulting and Employment Agreement dated as of
March 15, 1996 with Robert B. Pfannkuch, pursuant to which Mr. Pfannkuch
became a director and the President of the Company on May 15, 1996 (the day
following the closing of the IPO). Upon entering into such agreement, Mr.
Pfannkuch received five-year options to purchase 750,000 shares of Common
Stock at $3.50 per share, of which options to purchase 500,000 shares are
Escrow Securities. See "Principal Shareholders--Escrow Securities." One-fourth
of such options will vest and become exercisable after Mr. Pfannkuch has been
the President of the Company
49
<PAGE>
for one year, and the balance will vest and become exercisable at the rate of
11,719 per month, subject to acceleration of this vesting schedule or
forfeiture of these options under certain circumstances. Mr. Pfannkuch
receives a salary of $150,000 as President of the Company. He is allowed to
serve as a consultant to other companies if the terms of any such agreements
are disclosed to the Company's Board of Directors, and the Board determines
that such other companies do not compete in any manner with the business of
the Company. Mr. Pfannkuch's employment as President is renewable on a yearly
basis by mutual agreement of the parties.
In February 1996, the Company entered into a consulting agreement with
Intermarkt (U.S.A.) LLC ("Intermarkt") and a principal and consultant to
Intermarkt. The agreement expires on January 31, 1998. Pursuant to the
agreement, such principals will perform certain consulting services, at a
minimum of one week per month, for the Company, including without limitation,
executive recruiting, searches for strategic partners, foreign distribution
arrangement searches, and licensees for the Company's technology and services
and other operations and market research activities. The agreement provides
that the Company will pay Intermarkt $10,000 per month in consideration for
consulting services. The agreement provides for additional contingent success
fees. Pursuant to the consulting agreement and as additional consideration for
the consulting services, the Company entered into a Stock Option Agreement
dated February 1, 1996 with Intermarkt, whereby the Company granted Intermarkt
an option to purchase up to 200,000 shares of Common Stock at an exercise
price of $5.00 per share, which option is exercisable for five years
commencing February 1, 1996. All such options are Escrow Options. See
"Principal Shareholders--Escrow Securities."
STOCK OPTION PLAN
In October 1993, the Board of Directors approved the Company's 1993 Stock
Option Plan, which plan was subsequently approved by the Company's
shareholders in March 1994. In April 1996, the Board of Directors and the
shareholders of the Company approved the 1993 Amended and Restated Stock
Option Plan (as amended, the "Option Plan"), which effected certain amendments
to the 1993 Stock Option Plan. The Option Plan provides for the grant of
options to officers, directors, other key employees and consultants of the
Company to purchase up to an aggregate of 3,762,530 shares of Common Stock.
The Option Plan is administered by the Board of Directors or a committee of
the Board and is currently administered by the Option Committee of the Board
of Directors, which has complete discretion to select the optionee and to
establish the terms and conditions of each option, subject to the provisions
of the Option Plan. Options granted under the Option Plan may be "incentive
stock options" as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), or nonqualified options, and will be designated as
such.
The exercise price of incentive stock options may not be less than 100% of
the fair market value of the Company's Common Stock as of the date of grant
(110% of the fair market value if the grant is to an employee who owns more
than 10% of the total combined voting power of all classes of capital stock of
the Company). The Code currently limits to $100,000 the aggregate value of
Common Stock that may be acquired in any one year pursuant to incentive stock
options under the Option Plan or any other option plan adopted by the Company.
Nonqualified options may be granted under the Option Plan at an exercise price
less than the fair market value of the Common Stock on the date of grant.
Nonqualified options also may be granted without regard to any restriction on
the amount of Common Stock that may be acquired pursuant to such options in
any one year.
In general, upon termination of employment of an optionee, all options
granted to such person which were not exercisable on the date of such
termination would immediately terminate, and any options that are exercisable
would terminate 90 days (six months in the case of termination by reason of
death or disability) following termination of employment.
Options may not be exercised more than ten years after the grant (five years
after the grant if the grant is an incentive stock option to an employee who
owns more than 10% of the total combined voting power of all classes of
capital stock of the Company). Options granted under the Option Plan are not
transferable and may be exercised only by the respective grantees during their
lifetime or by their heirs, executors or administrators in the event of death.
Under the Option Plan, shares subject to cancelled or terminated options are
reserved for
50
<PAGE>
subsequently granted options. The number of options outstanding and the
exercise price thereof are subject to adjustment in the case of certain
transactions such as mergers, recapitalizations, stock splits or stock
dividends. The Option Plan is effective for ten years, unless sooner
terminated or suspended.
As of the date of this Prospectus/Exercise Offer, options to purchase
2,811,663 shares are outstanding at exercise prices ranging from $.14 to $3.50
per share, options to purchase 579,189 shares have been exercised at $.14 per
share and options to purchase 371,679 are available for grant under the Option
Plan.
In July 1995, the Company granted Janis Gemignani, a director and the Chief
Financial Officer of the Company, options to purchase 238,646 shares of Common
Stock at $.14 per share under the Option Plan. In October 1995, the Company
granted Phil Smith, a director of the Company, options to purchase 136,608
shares of Common Stock at $.14 per share under the Option Plan. In March 1996,
the Company granted Robert Pfannkuch, a director and President of the Company,
options to purchase 750,000 shares of Common Stock at $3.50 per share under
the Option Plan. In April 1996, the Company granted Joseph F. Troy, a director
of the Company, options to purchase 136,608 shares of Common Stock at $3.50
per share.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation eliminates in certain
circumstances the liability of directors of the Company for monetary damages
for breach of their fiduciary duty as directors. This provision does not
eliminate the liability of a director (i) for breach of the director's duty of
loyalty to the Company or its shareholders, (ii) for acts or omissions by the
director not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for willful or negligent declaration of an
unlawful dividend, stock purchase or redemption, or (iv) for transactions from
which the director derived an improper personal benefit. Such limitation of
liability does not affect the availability of equitable remedies such as
injunctive relief or rescission.
The Company believes that it is the position of the Commission that insofar
as the foregoing provision may be invoked to disclaim liability for damages
arising under the Securities Act, the provision is against public policy as
expressed in the Securities Act and is therefore unenforceable. Such
limitation of liability also does not affect the availability of equitable
remedies such as injunctive relief or rescission.
The Company has entered into indemnification agreements ("Indemnification
Agreement(s)") with each of its directors and officers. Each such
Indemnification Agreement provides that the Company will indemnify the
indemnitee against expenses, including reasonable attorneys' fees, judgements,
penalties, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with any civil or criminal action or
administrative proceeding arising out of his performance of his duties as a
director or officer, other than an action instituted by the director or
officer. Such indemnification is available if the indemnitee acted in good
faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company, and, with respect to any criminal action, had
no reasonable cause to believe his conduct was unlawful. The Indemnification
Agreements also require that the Company indemnify the director or other party
thereto in all cases to the fullest extent permitted by applicable law. Each
Indemnification Agreement permits the director or officer that is party
thereto to bring suit to seek recovery of amounts due under the
Indemnification Agreement and to recover the expenses of such a suit if he is
successful.
51
<PAGE>
CERTAIN TRANSACTIONS
During 1993, the Company invested $250,000 in Anhui Wanyan Electronic
Systems, Co., Ltd. ("Wyan"), a company located in the People's Republic of
China. Wyan was formed for the purpose of developing, manufacturing, and
marketing digital audiovisual products. The Company had the right to make an
additional $2,000,000 cash investment in Wyan. In connection therewith, in
September 1994, the Company sold its right to purchase a $1,650,000 interest
in Wyan to Hyundai for $350,000. At the time of such sale, Hyundai owned
3,247,473 shares of the Company's then outstanding Series A Preferred Stock.
The Company also purchased approximately $809,000 and $1,900,000 of
inventory from C-Cube during 1995 and 1994, respectively. The Company acquired
fixed assets from C-Cube for total payments of approximately $8,000 in 1994.
Dr. Edmund Sun, the founder, Chairman of the Board and Chief Executive Officer
of the Company, is the founder and a significant shareholder of C-Cube.
In July 1993, the Company advanced $108,000 to Dr. Edmund Sun, of which
$54,000 was repaid in July 1993. The balance was repaid in September 1994
through an offset against a total of $60,000 in commissions owed to Dr. Sun
for the sale of a $700,000 encoding system to Hyundai. The percentage amount
of this commission was no more than the amount given to the Company's other
salespeople.
In December 1994, the Company purchased all of the assets of Sunny Rich
Enterprises, Ltd. ("Sunny Rich") which owned a majority of the Company's
outstanding Common Stock at that time. Sunny Rich was wholly owned by Dr. Sun.
The Company issued 6,215,751 shares of its Common Stock to Sunny Rich as
consideration for such assets, which principally consisted of 6,199,720 shares
of the Company's Common Stock. Sunny Rich then liquidated and Dr. Sun became
the owner of all such shares.
In February 1995, the Company borrowed $500,000 from Dr. Sun. The loan was
secured by the assets of the Company and bore interest at the prime rate plus
1% per annum. In October 1995, the Company amended the terms of the loan to
allow for additional borrowings of $1,500,000 at the same interest rate. In
December 1995, Dr. Sun converted the $2,000,000 of principal plus
approximately $57,000 of accrued interest into 1,335,949 shares of Series B
Preferred Stock of the Company at $1.54 per share. These shares were converted
into 1,335,949 shares of Common Stock upon the closing of the IPO.
Hyundai purchased 3,247,473 shares of Series A Preferred Stock for
approximately $5,000,000 and 649,526 shares of Series B Preferred Stock for
approximately $1,000,000 from the Company in January 1994 and April 1995,
respectively. In connection with such purchases, Hyundai was given the right
to designate a director, a right of first refusal relating to sales of the
Company's securities and certain registration rights. Such right of first
refusal terminated in connection with the IPO and Hyundai has waived its
registration rights for 13 months following the closing of the IPO. See
"Description of Securities--Registration Rights." Hyundai's Series A Preferred
Stock and the Series B Preferred Stock were converted into 3,896,999 shares of
Common Stock upon the closing of the IPO.
Hyundai and the Company entered into the 1993 Hyundai Agreements relating to
the Company's development of a consumer karaoke player, a karaoke jukebox,
encoding machines and a karaoke network system. The 1993 Hyundai Agreements
were subsequently amended in 1994 in connection with the Company and Hyundai
agreeing to a manufacturing relationship for karaoke jukebox players. The
Company and Hyundai subsequently entered into the 1995 Hyundai Technical
Assistance and License Agreement which subsumed part of the agreements entered
into in 1993 and obligated the Company to develop MPEG-II compressor products.
See "Business--Agreements with Hyundai."
In March 1996, the Company entered into an employment agreement with Dr. Sun
and a consulting and employment agreement with Robert Pfannkuch. See
"Management--Employment and Consulting Agreements."
The Company anticipates that the above transactions were, and any future
transactions between the Company and any affiliate thereof will be, on terms
no less favorable to the Company than those that are generally available from
unaffiliated third parties.
52
<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of June 30, 1996 by (i) each person
who is known by the Company to own beneficially more than 5% of the Company's
outstanding Common Stock; and (ii) each of the Company's directors, nominees
and executive officers; and (iii) all officers and directors of the Company as
a group.
<TABLE>
<CAPTION>
PERCENT PERCENT
OF OF
AMOUNT AND OWNERSHIP OWNERSHIP
NATURE OF BEFORE AFTER
BENEFICIAL EXERCISE EXERCISE
NAME AND ADDRESS(1) OWNERSHIP(2) OFFER OFFER
------------------- ------------ --------- ---------
<S> <C> <C> <C>
Edmund Y. Sun.............................. 7,892,730(3) 44.0% 31.4%
Janis P. Gemignani......................... 70,356(4) * *
Sung Hee Lee............................... 0(5) 0 0
Philip B. Smith............................ 0(6) 0 0
Robert B. Pfannkuch........................ 750(7) * *
Sanford Sigoloff........................... 0 0 0
Joseph F. Troy............................. 0(6) 0 0
Hyundai Electronics Industries Company,
Ltd. ..................................... 3,896,997(8) 23.2 15.5
10th Floor, Boram Building
705-19, Yeeksam-dong
Kongnam-Ku, Seoul, Korea
All executive officers and directors as
a group (7 persons)....................... 7,963,836 47.4 31.7
</TABLE>
- --------
*Less than one percent.
(1) Except as otherwise indicated, the address of each principal shareholder
is c/o the Company at 2710 Walsh Avenue, Santa Clara, California 95051.
(2) Includes the Escrow Securities of such individual or entity. See "--Escrow
Securities." Nature of beneficial ownership of securities is direct and
arises from sole voting power and sole investment power, subject to
community property laws where applicable. Shares underlying options to
purchase Common Stock exercisable within 60 days are deemed to be
outstanding for purposes of calculating the number of shares owned by the
holders of such options.
(3) Includes 280,334 shares owned by Dr. Sun's sons, 21,564 shares owned by
Dr. Sun's sister and 351,807 shares that Dr. Sun is entitled to vote
pursuant to a proxy held by him.
(4) Includes options to purchase 69,606 shares of Common Stock. Excludes
options to purchase 164,040 shares of Common Stock which are not
exercisable within 60 days.
(5) Although Mr. Lee serves as Hyundai's representative on the Company's Board
of Directors, he does not have any right to vote or dispose of such
shares.
(6) Excludes options to purchase 136,608 shares of Common Stock which are not
exercisable within 60 days.
(7) Excludes options to purchase 750,000 shares of Common Stock which are not
exercisable within 60 days.
(8) Mong Hun Chung is the Chairman and largest individual shareholder of
Hyundai and may be considered a beneficial owner of such shares.
ESCROW SECURITIES
In connection with the IPO, the holders of the Company's Common Stock and
options to purchase Common Stock placed 7,818,232 shares and options to
purchase 2,047,222 shares and the Company has placed options issuable under
the Option Plan to purchase 234,546 shares of Common Stock into escrow
pursuant to an escrow agreement ("Escrow Agreement") with American Stock
Transfer and Trust, as escrow agent. The Escrow Securities are not assignable
or transferable; however, the Escrow Shares may be voted. Holders of any
options in escrow may exercise their options prior to their release from
escrow; however, the shares issuable upon any such exercise will continue to
be held in escrow as Escrow Shares pursuant to the Escrow Agreement.
53
<PAGE>
(a) Of the Escrow Securities, one-half (representing 5,050,000 shares of
issued or issuable shares of Common Stock) will be released from escrow, on a
pro rata basis, if, and only if, one or more of the following conditions are
met:
(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings as audited and determined by the
Company's independent public accountants (the "Minimum Pretax Income")
amounts to at least $10.0 million for the fiscal year ending March 31,
1997;
(ii) the Minimum Pretax Income amounts to at least $15.0 million for the
fiscal year ending March 31, 1998;
(iii) the Minimum Pretax Income amounts to at least $23.0 million for the
fiscal year ending March 31, 1999;
(iv) the Minimum Pretax Income amounts to at least $31.0 million for the
fiscal year ending on March 31, 2000;
(v) the Minimum Pretax Income amounts to at least $39.0 million for the
fiscal year ending on March 31, 2001;
(vi) commencing on May 9, 1996 and ending 18 months after May 9, 1996,
the bid price of the Company's Common Stock averages in excess of $24.00
per share (subject to adjustment in the event of any reverse stock splits
or other similar events) for 60 consecutive business days;
(vii) commencing 18 months after May 9, 1996 and ending 36 months after
May 9, 1996, the bid price averages in excess of $48.00 per share (subject
to adjustment in the event of any reverse stock splits or other similar
events) for 90 consecutive business days; or
(viii) during the periods specified in (vi) or (vii) above, the Company
is acquired by or merged into another entity in a transaction in which the
value of the per share consideration received by the shareholders of the
Company on the date of such transaction or at any time during the
applicable period set forth in (vi) or (vii), respectively, equals or
exceeds the applicable levels set forth in (vi) or (vii), respectively.
(b) The remaining Escrow Securities (representing 5,050,000 shares of issued
or issuable shares of Common Stock) will be released from escrow, on a pro
rata basis, if, and only if, one or more of the following conditions is met:
(i) the Minimum Pretax Income amounts to at least $15.0 million for the
fiscal year ending on March 31, 1997;
(ii) the Minimum Pretax Income amounts to at least $21.0 million for the
fiscal year ending on March 31, 1998;
(iii) the Minimum Pretax Income amounts to at least $32.0 million for the
fiscal year ending on March 31, 1999;
(iv) the Minimum Pretax Income amount to at least $42.0 million for the
fiscal year ending on March 31, 2000;
(v) the Minimum Pretax Income amount to at least $53.0 million for the
fiscal year ending on March 31, 2001;
(vi) commencing on May 9, 1996 and ending 18 months after May 9, 1996,
the bid price of the Company's Common Stock averages in excess of $48.00
per share (subject to adjustment in the event of any reverse stock splits
or other similar events) for 60 consecutive business days;
(vii) commencing 18 months after May 9, 1996 and ending 36 months after
May 9, 1996, the bid price averages in excess of $96.00 per share (subject
to adjustment in the event of any reverse stock splits or other similar
events) for 90 consecutive business days; or
54
<PAGE>
(viii) during the periods specified in (vi) or (vii) above, the Company
is acquired by or merged into another entity in a transaction in which the
value of the per share consideration received by the shareholders of the
Company on the date of such transaction or at any time during the
applicable period set forth in (vi) or (vii), respectively, equals or
exceeds the applicable levels set forth in (vi) or (vii), respectively.
Holders of Escrow Securities have agreed not to sell, transfer, hypothecate,
negotiate, pledge, assign, encumber or otherwise dispose of any or all of the
Escrow Securities unless and until (A) the Company shall have given notice
that the conditions for the release of the Escrow Securities set forth in
Paragraphs (a) and (b) above are met; or (B) such disposition is (i) proposed
in connection with an agreement by which the Company is to be acquired by or
merged into another entity in which the consideration paid by the acquiror per
share of the Company's stock is no less than 80% of the minimum consideration
required by Paragraphs (a)(vi) and (vii) above as to a disposition of up to
50% of the Escrow Securities or by Paragraphs (b)(vi) and (vii) above as to a
disposition of up to 100% of the Escrow Securities and (ii) approved by at
least 80% of the votes cast, in person or by proxy, by holders of the Common
Stock eligible to vote on such matter excluding the shares held by the holders
of the Escrow Securities, provided that the holders of at least 50% of the
Common Stock (excluding the shares held by the holders of the Escrow
Securities) actually vote on such matter, in person or by proxy, or are
present, in person or by proxy, at the meeting at which the vote takes place.
If the Company is acquired by or merges into another company that thereafter
owns all of the outstanding stock of the Company except for the Escrow
Securities, at any time from and after the consummation of the merger or
acquisition, holders of Escrow Securities desiring to dispose of their Escrow
Securities will be permitted to do so if the acquiror gives notice as to
conditions being met in Paragraphs (a) and (b) above or consents in writing to
the disposition, but no vote or consent of the former shareholders of the
Company will be required.
The Minimum Pretax Income amounts set forth above (i) shall be calculated
exclusively of any extraordinary earnings, including, but not limited to, any
charge to income resulting from release of the Escrow Securities and (ii)
shall be increased proportionately, with certain limitations, in the event
additional shares of Common Stock or securities convertible into, exchangeable
for or exercisable into Common Stock are issued after completion of the IPO.
The bid price amounts set forth above are subject to adjustment in the event
of any stock splits, reverse stock splits or other similar events.
Any money, securities, rights or property distributed in respect of the
Escrow Securities, including any property distributed as dividends or pursuant
to any stock split, merger, recapitalization, dissolution, or total or partial
liquidation of the Company, shall be held in escrow until release of the
Escrow Securities. If none of the applicable Minimum Pretax Income or bid
price levels set forth above have been met by July 15, 2001, the Escrow
Securities, as well as any dividends or other distributions made with respect
thereto, will be cancelled and contributed to the capital of the Company. The
Company expects that the release of the Escrow Securities to officers,
directors, employees and consultants of the Company will be deemed
compensatory and, accordingly, will result in a substantial charge to
reportable earnings, which would equal the fair market value of such shares on
the date of release. Such charge could substantially increase the loss or
reduce or eliminate the Company's net income for financial reporting purposes
for the period or periods during which such shares are, or become probable of
being, released from escrow. Although the amount of compensation expense
recognized by the Company will not affect the Company's total shareholders'
equity, it may have a negative effect on the market price of the Company's
securities.
The Minimum Pretax Income and bid price levels set forth above were
determined by negotiation between the Company and the Underwriter and should
not be construed to imply or predict any future earnings by the Company or any
increase in the market price of its securities.
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<PAGE>
CONCURRENT OFFERINGS
The registration statement of which this Prospectus/Exercise Offer forms a
part also includes a prospectus with respect to an offering of the Class A
Warrants of the Selling Securityholders by the holders thereof (to the extent
not exercised in the Exercise Offer). The Class A Warrants held by the Selling
Securityholders are comprised of 3,500,000 Class A Warrants, 3,500,000 Class B
Warrants issuable upon exercise of these Class A Warrants and 7,000,000 shares
of Common Stock issuable upon exercise of these Class A Warrants and Class B
Warrants, which may be sold in the open market, in privately negotiated
transactions, or otherwise directly by the holders thereof.
The registration statement of which this Prospectus/Exercise Offer forms a
part also includes a prospectus with respect to an offering of (i) 4,830,000
shares of Common Stock of the Company issuable upon the exercise of the Class
A Warrants sold in the IPO (to the extent not exercised in the Exercise
Offer), (ii) 4,830,000 redeemable Class B Warrants which are issuable upon the
exercise of the Class A Warrants, (iii) 4,830,000 shares of Common Stock
issuable upon exercise of the Company's outstanding Class B Warrants, and (iv)
a maximum 2,499,000 shares of Common Stock issuable upon exercise of the New
Class B Warrants that are in excess of the total number of Class B Warrants
that would be issuable upon exercise of all of the outstanding Class A
Warrants exclusive of the Exercise Offer.
The Company will not receive any proceeds from the sale of any of the
Warrants of the Selling Securityholders. Sales of the Selling Securityholder
securities or the potential of such sales may have an adverse effect on the
market price of the Company's securities.
DESCRIPTION OF SECURITIES
The following description of the capital stock of the Company and certain
provisions of the Company's Amended and Restated Certificate of Incorporation
and Bylaws is a summary and is qualified in its entirety by the provisions of
the Amended and Restated Certificate of Incorporation and Bylaws, which have
been filed as exhibits to the Company's Registration Statement, of which this
Prospectus/Exercise Offer is a part.
The authorized capital stock of the Company currently consists of 60,000,000
shares of Common Stock, $.0001 par value, and 5,000,000 shares of Preferred
Stock, $.0001 par value. As of the date of this Prospectus/Exercise Offer,
there were 16,796,658 shares of Common Stock outstanding.
UNITS
Each Unit sold by the Company in the IPO consisted of one share of Common
Stock, one Class A Warrant and one Class B Warrant. Each Class A Warrant
entitles the holder thereof to purchase one share of Common Stock and one
Class B Warrant, and each Class B Warrant entitles the holder thereof to
purchase one share of Common Stock. The Common Stock and Warrants included in
the Units were immediately transferable separately upon issuance.
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders. The holders of
Common Stock are not entitled to cumulative voting rights with respect to the
election of directors, and as a consequence, minority shareholders will not be
able to elect directors on the basis of their votes alone. Subject to
preferences that may be applicable to any shares of Preferred Stock issued in
the future, holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefore. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preference of any then outstanding Preferred Stock.
Holders of Common Stock have no preemptive rights and no right to convert
their Common
56
<PAGE>
Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon exercise of
any Class A Warrants or Class B Warrants will be, fully paid and
nonassessable.
REDEEMABLE WARRANTS
The following is a brief summary of certain provisions of the Warrants, but
such summary does not purport to be complete and is qualified in all respects
by reference to the actual text of the Warrant Agreement between the Company
and American Stock Transfer and Trust Company (the "Transfer and Warrant
Agent"). A copy of the Warrant Agreement, as amended, has been filed as an
exhibit to the Registration Statement of which this Prospectus/Exercise Offer
is a part.
CLASS A WARRANTS
The holder of each Class A Warrant is entitled, upon payment of the exercise
price of $6.50, to purchase one share of Common Stock and one Class B Warrant.
Unless previously redeemed, the Class A Warrants are exercisable at any time
after issuance until May 8, 2001, provided that at such time a current
prospectus relating to the underlying Common Stock and the Class B Warrants is
in effect and the underlying Common Stock and the Class B Warrants are
qualified for sale or exempt from qualification under applicable state
securities laws. The Class A Warrants are immediately transferable separately
from the Common Stock and the Class B Warrants issued with such Class A
Warrants as part of the Units. The Class A Warrants are subject to redemption,
as described below. Pursuant to the Exercise Offer and subject to the terms
and conditions contained therein, the terms of the Class A Warrants exercised
on or prior to the Expiration Date have been modified to provide Holders two
alternative exercise options in lieu of the existing terms of the Class A
Warrants (described above). The two alternatives from which each Holder may
choose provide for the Company either (i) to reduce the exercise price of
Class A Warrants to $6.00 and to issue one Share of Common Stock and 1.3
redeemable New Class B Warrants or (ii) to reduce the exercise price of Class
A Warrants to $3.00 and to issue 2/3 of a share of Common Stock and one New
Class B Warrant for each Class A Warrant so exercised. These two alternative
exercise options will be available to each Holder only if such Holder
exercises his or her Class A Warrants prior to the Expiration Date.
CLASS B WARRANTS AND NEW CLASS B WARRANTS
The terms of the Class B Warrants and New Class B Warrants are identical.
The holder of each Class B Warrant and New Class B Warrant is entitled, upon
payment of the exercise price of $8.75, to purchase one share of Common Stock.
Unless previously redeemed, the Class B Warrants are exercisable at any time
after issuance until May 8, 2001, provided that at such time a current
prospectus relating to the underlying Common Stock is then in effect and the
underlying Common Stock is qualified for sale or exempt from qualification
under applicable state securities laws. The Class B Warrants are transferable
separately from the Common Stock, and the Class B Warrants underlying the
Class A Warrants will be transferable separately from the Common Stock
received upon exercise of the Class A Warrants. The Class B Warrants and New
Class B Warrants are subject to redemption, as described below.
REDEMPTION
Commencing on May 9, 1996, the Class A Warrants are subject to redemption by
the Company, upon 30 days written notice, at a price of $.05 per Warrant, if
the average closing bid price of the Common Stock for any 30 consecutive
trading days ending within 15 days of the date on which the notice of
redemption is given shall have exceeded $9.10 per share. The Class B Warrants
and New Class B Warrants are subject to redemption by the Company commencing
May 9, 1997, upon 30 days written notice, at a price of $.05 per Warrant, if
the average closing bid price of the Common Stock for any 30 consecutive
trading days ending within 15 days of the date on which the notice of
redemption is given shall have exceeded $12.25 per share. Holders of Warrants
will automatically forfeit their rights to purchase the shares of Common Stock
issuable upon exercise of such Warrants unless the Warrants are exercised
before the close of business on the business day immediately prior to
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<PAGE>
the date set for redemption. All of the outstanding Warrants of a class,
except for those underlying the Unit Purchase Option, must be redeemed if any
of that class are redeemed. A notice of redemption shall be mailed to each of
the registered holders of the Warrants by first class mail, postage prepaid,
upon 30 days' notice before the date fixed for redemption. The notice of
redemption shall specify the redemption price, the date fixed for redemption,
the place where the Warrant certificates shall be delivered, and that the
right to exercise the Warrants shall terminate at 5:00 p.m. (New York City
time) on the business day immediately preceding the date fixed for redemption.
THE COMPANY HAS SATISFIED THE CONDITIONS CONTAINED IN THE CLASS A WARRANTS
TO REDEEM ALL OF THE CLASS A WARRANTS FOR $.05 PER WARRANT AND HAS CALLED THE
CLASS A WARRANTS FOR REDEMPTION. ANY CLASS A WARRANTS NOT EXERCISED PURSUANT
TO THE EXERCISE OFFER WILL BE REDEEMED BY THE COMPANY FOR $.05 PER WARRANT ON
THE FIRST BUSINESS DAY FOLLOWING THE EXPIRATION DATE, OR AS SOON THEREAFTER AS
POSSIBLE.
GENERAL
Except as otherwise provided under the caption "The Exercise Offer--
Procedures for Exercising Class A Warrants" for exercises in connection with
the Exercise Offer, the Warrants may be exercised upon surrender of the
certificate or certificates therefore on or prior to the expiration or the
redemption date (as explained above) at the offices of the Company's warrant
agent (the "Warrant Agent") with the form of "Election to Purchase" on
the reverse side of the certificate or certificates completed and executed as
indicated, accompanied by payment (in the form of a certified or cashier's
check payable to the order of the Company) of the full exercise price for the
number of Warrants being exercised. Shares issued upon exercise of Warrants
will be fully paid and non-assessable.
The Warrants contain provisions that protect the holders thereof against
dilution by adjustment of the exercise price per share and the number of
shares issuable upon exercise thereof upon the occurrence of certain events,
including issuances of Common Stock (or securities convertible, exchangeable
or exercisable into Common Stock) at less than market value, stock dividends,
stock splits, mergers, sale of substantially all of the Company's assets, and
for other extraordinary events; provided, however, that no such adjustment
shall be made upon, among other things, (i) the issuance or exercise of
options or other securities under the Company's Option Plan or other employee
benefit plans or (ii) the sale or exercise of outstanding options or warrants
outstanding prior to the issuance of the Warrants or the Warrants themselves.
The Company is not required to issue fractional shares of Common Stock, and
in lieu thereof will make a cash payment based upon the current market value
of such fractional shares. The holder of the Warrants will not possess any
rights as a shareholder of the Company unless and until he exercises the
Warrants.
The Warrants do not confer upon holders any voting or any other rights as
shareholders of the Company.
PREFERRED STOCK
Shares of Preferred Stock may be issued without shareholder approval. The
Board of Directors is authorized to issue such shares in one or more series
and to fix the rights, preferences, privileges, qualifications, limitations
and restrictions thereof, including dividend rights and rates, conversion
rights, voting rights, terms of redemption, redemption prices, liquidation
preferences and the number of shares constituting any series or the
designation of such series, without any vote or action by the shareholders. No
shares of Preferred Stock are currently outstanding and the Company has no
present intention to issue any shares of Preferred Stock. Any Preferred Stock
to be issued could rank prior to the Common Stock with respect to dividend
rights and rights on liquidation. The Board of Directors, without shareholder
approval, may issue Preferred Stock with voting and conversion rights which
could adversely affect the voting power of holders of Common Stock and
discourage, delay or prevent a change in control of the Company.
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UNIT PURCHASE OPTION
In connection with the IPO, the Company granted to the Underwriter the Unit
Purchase Option to purchase up to 420,000 Units. The Units issuable upon
exercise of the Unit Purchase Option will, when so issued, be identical to the
Units. The Unit Purchase Option cannot be transferred, sold, assigned or
hypothecated for two years, except to any officer of the Underwriter or
members of the selling group or their officers. The Unit Purchase Option is
exercisable during the three-year period commencing on May 9, 1998 at an
exercise price of $6.50 per Unit (130% of the initial public offering price)
subject to adjustment in certain events. The holders of the Unit Purchase
Option have certain demand and piggyback registration rights. See "--
Registration Rights."
REGISTRATION RIGHTS
The Company has granted certain demand and piggy-back registration rights to
Hyundai, with respect to the 3,896,999 shares of Common Stock issued upon
conversion of the shares of Preferred Stock owned by Hyundai upon the closing
of the IPO. Such rights have been waived by Hyundai for a period of 13 months
following completion of the IPO. In addition, the holders of the Unit Purchase
Option will have demand and piggy-back registration rights relating to their
options and the underlying securities.
TRANSFER AGENT AND WARRANT AGENT
American Stock Transfer & Trust Company, New York, New York, serves as
Transfer Agent for the shares of Common Stock and Warrant Agent for the
Warrants.
BUSINESS COMBINATION PROVISIONS
The Company is subject to a Delaware statute regulating "business
combinations," defined to include a broad range of transactions, between
Delaware corporations and "interested shareholders," defined as persons who
have acquired at least 15% of a corporation's stock. Under the law, a
corporation may not engage in any business combination with any interested
shareholder for a period of three years from the date such person became an
interested shareholder unless certain conditions are satisfied. The statute
contains provisions enabling a corporation to avoid the statute's
restrictions.
The Company has not sought to "elect out" of the Delaware statute and,
therefore, the restrictions imposed by such statute will apply to the Company.
SHARES ELIGIBLE FOR FUTURE SALE
On June 30, 1996 the Company had outstanding 16,796,658 shares of Common
Stock. Of these shares, the 4,830,000 shares sold in the IPO are freely
transferable without restriction or registration under the Securities Act,
unless held by persons deemed to be "affiliates" of the Company (as that term
is defined in Rule 144 under the Securities Act ("Rule 144")). The remaining
11,966,658 shares of Common Stock outstanding as of June 30, 1996 were
"restricted securities" within the meaning of Rule 144 (the "Restricted
Shares") and may not be sold unless they are registered under the Securities
Act or sold pursuant to Rule 144 or another exemption from registration.
Pursuant to Rule 144, 9,573,326 of these restricted shares will be eligible
for resale commencing August 8, 1996. However, all of the current
shareholders, executive officers and directors of the Company have agreed that
they will not sell any of the Company's securities owned by them prior to June
9, 1997 without the consent of the Underwriter.
Holders of Restricted Shares must comply with the requirements of Rule 144
in order to sell their shares in the open market without violating the
Securities Act. In general, under Rule 144 as currently in effect, a person
(or persons whose shares are aggregated), including an affiliate of the
Company, who has beneficially owned shares for at least two years is entitled
to sell in the open market within any three-month period a number of
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shares that does not exceed the greater of (i) 1% of the then-outstanding
shares of the Company's Common Stock or (ii) the average weekly public trading
volume during the four calendar weeks preceding such sale. The holding period
of shares of a non-affiliate for this purpose includes the holding period of
all prior non-affiliate holders, provided that if an affiliate has held such
shares at any time, the holding period shall commence upon the sale to a non-
affiliate by the last affiliate to hold the shares. Sales under Rule 144 are
also subject to certain limitations on the manner of sale, notice
requirements, and availability of current public information about the
Company. A non-affiliate who holds restricted securities and who has not been
affiliated with the Company during the three-month period preceding the
proposed sale thereof may sell such securities without regard to the
conditions imposed by Rule 144 if at least three years have elapsed from the
sale of such securities by the Company or any affiliate. As defined in Rule
144, an "affiliate" of an issuer is a person that directly or indirectly
controls, or is controlled by, or is under common control with the issuer of
the securities. The foregoing is a summary of the provisions of Rule 144 and
is not intended to be complete.
Under Rule 701 of the Securities Act, persons who purchase shares upon
exercise of options granted prior to May 9, 1996 are entitled to sell such
shares after August 8, 1996 in reliance on Rule 144, without having to comply
with the holding period requirements of Rule 144 and, in the case of non-
affiliates, without having to comply with the public information, volume
limitation or notice provisions of Rule 144. Affiliates are subject to Rule
144 restrictions after this 90-day period, but without a holding period. If
all the requirements of Rule 701 are met, an aggregate of 681,055 shares
subject to outstanding vested stock options may be sold pursuant to such rule
at the end of this 90-day period.
Pursuant to registration rights acquired in the Bridge Financing, the
Company has, in the registration statement of which this Prospectus/Exercise
Offer forms a part, registered for resale on behalf of the Selling
Securityholders, the Selling Securityholders' Securities subject to the
contractual restriction that the Selling Securityholders agreed (i) not to
exercise the Selling Securityholders' Warrants for a period of one year from
the closing of the IPO (May 14, 1996) unless such securities are subject to a
notice of redemption delivered by the Company, and (ii) not to sell the
Selling Securityholders' Warrants except pursuant to the restrictions set
forth below:
<TABLE>
<CAPTION>
PERCENTAGE ELIGIBLE
LOCK-UP PERIOD FOR RESALE
-------------- -------------------
<S> <C>
Up to 90 days after IPO............................... 0%
Between 91 and 150 days after IPO..................... 25%
Between 151 and 210 days after IPO.................... 50%
Between 211 and 270 days after IPO.................... 75%
After 270 days after IPO.............................. 100%
</TABLE>
The Underwriter also has demand and "piggy-back" registration rights with
respect to the securities underlying the Unit Purchase Option. The Company has
granted demand and "piggy-back" registration rights to the holder of 3,896,999
shares of Common Stock issued upon conversion of certain shares of outstanding
Preferred Stock upon the closing of the IPO. See "Description of Securities--
Registration Rights."
No predictions can be made of the effect, if any, that sales of Common Stock
or the availability of Common Stock for sale will have on the market price of
such securities prevailing from time to time. Nevertheless, sales of
substantial amounts of Common Stock in the public market could adversely
affect prevailing market prices.
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PLAN OF DISTRIBUTION
Blair & Co. has been making a market in the Company's securities. Rule 10b-6
may prohibit Blair & Co. from engaging in any market making activities with
regard to the Company's securities for the period from nine business days (or
such other applicable period as Rule 10b-6 may provide) prior to any
solicitation by the Underwriter of the exercise of Warrants until the later of
the termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriter may have to receive a fee for the
exercise of Warrants following such solicitation. As a result, Blair & Co. may
be unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable in the event that the Underwriter
determines to solicit the Warrants. As of June 30, 1996, there were 10 market
makers in the Company's securities.
Pursuant to the Warrant Agreement, the Company has agreed not to solicit
Warrant exercises other than through the Underwriter, unless the Underwriter
declines to make such solicitation. Upon any exercise of the Warrants after
May 8, 1997, the Company will pay the Underwriter a fee of 5% of the aggregate
Warrant exercise price with respect to the Class A Warrants and 8% of the
aggregate exercise price with respect to the Class B Warrants, if (i) the
market price of the Company's Common Stock on the date the Warrants are
exercised is greater than the then exercise price of the Warrants; (ii) the
exercise of the Warrants was solicited by a member of the NASD as designated
in writing on the Warrant Certificate subscription form; (iii) the Warrants
are not held in a discretionary account; (iv) disclosure of compensation
arrangements was made both at the time of the offering and at the time of
exercise of the Warrants; and (v) the solicitation of exercise of the Warrant
was not in violation of Rule 10b-6 promulgated under the Exchange Act. The
Company will not pay any fees or commissions to any third party for soliciting
the exercise of Class A Warrants in connection with the Exercise Offer.
In connection with the IPO, the Company sold to the Underwriter or its
designees, for nominal consideration, the Unit Purchase Option to purchase up
to 420,000 Units substantially identical to the Units sold in the IPO, except
that the warrants included therein are not subject to redemption by the
Company unless, on the redemption date, the Unit Purchase Option has been
exercised and the underlying warrants are outstanding. The Unit Purchase
Option is exercisable during the three-year period commencing May 9, 1998 at
an exercise price of $6.50 per Unit, subject to adjustment in certain events,
and the Unit Purchase Option and the underlying securities are not
transferable prior to May 9, 1998 except to officers of the Underwriter or to
members of the selling group in the IPO. The Unit Purchase Option includes a
provision permitting the Underwriter or its designees to elect a cashless
exercise. The Company has agreed to register during the three-year period
commencing May 9, 1997 on two separate occasions, the securities issuable upon
exercise thereof under the Securities Act, the initial such registration to be
at the Company's expense and the second at the expense of the holders. The
Company has also granted certain "piggy-back" registration rights to holders
of the Unit Purchase Option.
The Underwriter has the right to designate one director to the Company's
Board of Directors for a period of five years from the completion of the IPO,
although it has not yet selected any such designee. Such designee may be a
director, officer, partner, employee or affiliate of the Underwriter.
During the five-year period from May 9, 1996, in the event the Underwriter
originates financing or a merger, acquisition, or transaction to which the
Company is a party, the Underwriter will be entitled to receive a finder's fee
in consideration for origination of such transaction. The fee is based on a
percentage of the consideration paid in the transaction, ranging from 6% of
the first $5,000,000 to 2% of any consideration in excess of $13,000,000.
The Underwriter acted as placement agent in connection with the Bridge
Financing in January and March 1996 and received a placement agent fee of
$700,000 and a non-accountable expense allowance of $210,000.
The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co. The investigation appears to be
broad in scope, involving numerous aspects of the Underwriter's compliance
with the Federal securities laws and compliance with the Federal securities
laws by issuers whose
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securities were underwritten by the Underwriter and Blair & Co., or in which
the Underwriter or Blair & Co. made over-the-counter markets, persons
associated with the Underwriter or Blair & Co., such issuers and other
persons. The Company has been advised by the Underwriter that the
investigation has been ongoing since at least 1989 and that it is cooperating
with the investigation. The Underwriter cannot predict whether this
investigation will ever result in any type of formal enforcement action
against the Underwriter or Blair & Co. or, if so, whether any such action
might have an adverse effect on the Company's securities. An unfavorable
resolution of the Commission's investigation could have the effect of limiting
such firm's ability to make a market in the Company's securities, which could
affect the liquidity or price of such securities.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Troy & Gould Professional Corporation, Los Angeles, California.
Joseph F. Troy, a member of Troy & Gould Professional Corporation, became a
director of the Company upon the closing of the IPO and received options to
purchase 136,608 shares of Common Stock at $3.50 per share. Troy & Gould
Professional Corporation owns 10,000 Units, and certain shareholders of that
firm own in the aggregate 400 shares of Common Stock, 600 Class A Warrants and
1,000 Class B Warrants.
EXPERTS
The financial statements of Digital Video Systems, Inc. at December 31, 1995
and for each of the two years in the period ended December 31, 1995, appearing
in this Prospectus/Exercise Offer and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report
thereon appearing elsewhere herein, and are included in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing.
ADDITIONAL INFORMATION
The Company has filed a Registration Statement on Form SB-2 under the
Securities Act with the Commission in Washington, D.C. with respect to the
securities offered hereby. This Prospectus/Exercise Offer, which is part of
the Registration Statement, does not contain all of the information set forth
in the Registration Statement and the exhibits thereto. For further
information with respect to the Company and the Securities offered hereby,
reference is hereby made to the Registration Statement and such exhibits,
which may be inspected without charge at the office of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the
Commission located at Seven World Trade Center, 13th Floor, New York, New York
10048 and at 500 West Madison (Suite 1400), Chicago, Illinois 60661. Copies of
such material may also be obtained at prescribed rates from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. Statements contained in this Prospectus/Exercise Offer as to the
contents of any contract or other document referred to are not necessarily
complete and in each instance reference is made to the copy of such contract
or document filed as an exhibit to the Registation Statement, each such
statement being qualified in all respects by such reference.
The Company is subject to the reporting requirements of the Exchange Act,
and in accordance therewith files reports and other information with the
Commission. Reports and other information filed by the Company with the
Commission can be inspected and copied at the public reference facilities
maintained by the Commission at the following addresses: New York Regional
Office, Seven World Trade Center, New York, New York 10048; and Chicago
Regional Office, Northwestern Atrium Center, 500 West Madison Street, Chicago,
Illinois 60661-2511. Copies of such material can be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549 at prescribed rates. The Common Stock, Class A Warrants and Class B
Warrants are quoted on the Nasdaq National Market and the Units are quoted on
the Nasdaq Small-Cap Market. Reports, proxy statements and other information
concerning the Company may be inspected at the National Association of
Securities Dealers, Inc. at 1735 K Street, N.W., Washington, D.C. 20006.
62
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DIGITAL VIDEO SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Report of Ernst & Young LLP, Independent Auditors......................... F-2
Balance Sheets............................................................ F-3
Statements of Operations.................................................. F-4
Statements of Stockholders' Equity........................................ F-5
Statements of Cash Flows.................................................. F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Digital Video Systems, Inc.
We have audited the accompanying balance sheet of Digital Video Systems,
Inc. as of December 31, 1995, and the related statements of operations,
stockholders equity, and cash flows for each of the two years in the period
ended December 31, 1995. Our audits also included the financial statement
schedules listed in the index at Item 16(b). These financial statements and
schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule 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 Digital Video Systems,
Inc. at December 31, 1995, and the results of its operations and its cash
flows for each of the two years in the period ended December 31, 1995, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Walnut Creek, California Ernst & Young LLP
February 9, 1996, except for
Note 11, as to which the date is
May 22, 1996
F-2
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
EQUITY AT
DECEMBER 31, MARCH 31, MARCH 31,
1995 1996 1996
------------ ----------- -------------
(UNAUDITED) (UNAUDITED)
(NOTE 6)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 1,218,920 $ 4,658,845
Accounts receivable, net of allowance
of $0 and $249,810, respectively.... 169,185 534,969
Accounts receivable from affiliate,
net of allowance of $239,516........ -- --
Inventories.......................... 673,775 1,925,600
Prepaid expenses and other current
assets.............................. 300,407 818,584
Deferred financing charges........... -- 832,059
----------- -----------
Total current assets............... 2,362,287 8,770,057
Property and equipment, net............ 558,087 537,584
Other assets........................... 49,295 95,755
----------- -----------
Total assets....................... $ 2,969,669 $ 9,403,396
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................... $ 414,344 $ 1,092,082
Accrued liabilities.................. 506,118 383,379
Bridge loan payable.................. -- 6,340,763
----------- -----------
Total current liabilities.......... 920,462 7,816,224
Commitments
Stockholders equity:
Convertible preferred stock, $0.0001
par value:
10,232,948 shares authorized,
5,232,948 shares issued and
outstanding at December 31, 1995 and
March 31, 1996; aggregate
liquidation preference of
$8,058,739; none outstanding pro
forma--unaudited.................... 524 524 $ --
Common stock, $0.0001 par value:
60,000,000 shares authorized,
6,627,688 and 6,725,619 shares
issued and outstanding at December
31, 1995 and March 31, 1996;
11,958,567 shares issued and
outstanding pro forma--unaudited.... 662 672 1,196
Additional paid-in capital............ 8,265,120 9,153,734 9,153,734
Accumulated deficit................... (6,024,733) (7,385,418) (7,385,418)
Foreign currency translation
adjustments.......................... (30,616) (31,486) (31,486)
Deferred compensation................. (161,750) (150,854) (150,854)
----------- ----------- -----------
Total stockholders equity.......... 2,049,207 1,587,172 $ 1,587,172
----------- ----------- ===========
Total liabilities and stockholders
equity............................ $ 2,969,669 $ 9,403,396
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------ ----------------------
1994 1995 1995 1996
----------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue:
Product revenue (including
$6,410,000, $490,000,
$15,000 and $0 from
related parties
and affiliates for the
years ended December 31,
1994 and 1995 and the
three-month period ended
March 31, 1995 and 1996,
respectively)............ $ 6,553,987 $ 1,927,015 $ 347,396 $ 523,729
Development and services
revenue, (including
$636,000 and $1,000,000
from affiliates and
related parties for the
years ended December 31,
1994 and 1995,
respectively, none for
the three-month periods
ended March 31, 1995
and 1996)................ 1,254,646 1,021,816 943 6,839
Component revenue......... -- 572,000 -- 856,300
----------- ----------- --------- -----------
Total revenue........... 7,808,633 3,520,831 348,339 1,386,868
Cost of product revenue
(including $1,900,000,
$224,000, $0 and $260,000
purchased from a related
party for the years ended
December 31, 1994 and 1995
and the three-month period
ended March 31, 1995 and
1996, respectively)........ 5,963,959 2,274,638 401,573 586,895
Cost of development and
service revenue............ 954,531 585,282 193 27,951
Cost of component revenue
purchased from related
party...................... -- 495,000 -- 801,000
----------- ----------- --------- -----------
Gross profit................ 890,143 165,911 (53,427) (28,978)
Operating expenses:
Research and development.. 1,550,248 1,257,833 364,803 365,839
Sales and marketing....... 602,818 548,573 119,388 130,735
General and
administrative........... 859,129 1,513,636 257,572 385,652
----------- ----------- --------- -----------
Total operating
expenses............... 3,012,195 3,320,042 741,763 882,226
----------- ----------- --------- -----------
Loss from operations........ (2,122,052) (3,154,131) (795,190) (911,204)
Interest expense............ (17,055) (99,248) (8,350) (452,724)
Interest income and other... 52,209 18,936 3,243
Gain (loss) on investments
in affiliates (1994 gain
was from a related party).. 350,000 (1,248,868) -- --
----------- ----------- --------- -----------
Loss before benefit for in-
come taxes................. (1,736,898) (4,483,311) $(803,540) (1,360,685)
Benefit for income taxes.... (83,237) -- -- --
----------- ----------- --------- -----------
Net loss.................... $(1,653,661) $(4,483,311) $(803,540) $(1,360,685)
=========== =========== ========= ===========
Net loss per share.......... $ (.39) $ (1.06) $ (.19) $ (.33)
=========== =========== ========= ===========
Weighted average common
shares outstanding......... 4,195,148 4,211,897 4,227,503 4,166,270
=========== =========== ========= ===========
Pro forma net loss per
share...................... $ (.84) $ (.15) $ (.26)
=========== ========= ===========
Shares used in computing pro
forma net loss per share... 5,337,668 5,353,294 5,292,061
=========== ========= ===========
</TABLE>
See accompanying notes.
F-4
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE RETAINED NOTE
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS CUMULATIVE RECEIVABLE TOTAL
---------------- ------------------ PAID-IN (ACCUMULATED TRANSLATION FROM DEFERRED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS STOCKHOLDER COMPENSATION EQUITY
--------- ------ ---------- ------ ---------- ------------ ----------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1993............ -- $-- 6,199,720 $620 $ 380 $ 112,239 $ (5,048) $ -- $ -- $ 108,191
Sale of Series A
preferred
stock, net of
issuance costs. 3,247,473 325 -- -- 4,976,520 -- -- -- -- 4,976,845
Issuance of
common stock
for acquisition
of Sunny Rich
assets......... -- -- 6,215,751 -- -- -- -- -- -- --
Shares of common
stock
reacquired and
canceled in
conjunction
with
acquisition of
Sunny Rich
assets......... -- -- (6,199,720) -- -- -- -- -- -- --
Sale of common
stock for cash
and note
receivable..... -- -- 118,085 13 16,415 -- -- (15,000) -- 1,428
Translation
adjustment..... -- -- -- -- -- -- 7,261 -- -- 7,261
Net loss........ -- -- -- -- -- (1,653,661) -- -- -- (1,653,661)
--------- ---- ---------- ---- ---------- ----------- -------- -------- --------- -----------
Balance at
December 31,
1994............ 3,247,473 325 6,333,836 633 4,993,315 (1,541,422) 2,213 (15,000) -- 3,440,064
Sale of Series B
preferred
stock, net of
issuance costs. 1,985,475 199 -- -- 3,056,608 -- -- -- -- 3,056,807
Exercise of
common stock
options........ -- -- 355,086 35 49,365 -- -- -- -- 49,400
Repayment on
note receivable
from
stockholder.... -- -- -- -- -- -- -- 6,482 -- 6,482
Cancellation of
common stock
and note
receivable..... -- -- (61,234) (6) (8,512) -- -- 8,518 -- --
Translation
adjustment..... -- -- -- -- -- -- (32,829) -- -- (32,829)
Deferred
compensation
resulting from
grants of
options........ -- -- -- -- 174,344 -- -- -- (174,344) --
Amortization of
deferred
compensation... -- -- -- -- -- -- -- -- 12,594 12,594
Net loss........ -- -- -- -- -- (4,483,311) -- -- -- (4,483,311)
--------- ---- ---------- ---- ---------- ----------- -------- -------- --------- -----------
Balance at
December 31,
1995............ 5,232,948 524 6,627,688 662 8,265,120 (6,024,733) (30,616) -0- (161,750) 2,049,207
Exercise of
common stock
options
(unaudited).... -- -- 97,931 10 13,614 -- -- -- -- 13,624
Warrants issued
in connection
with bridge
notes
(unaudited).... -- -- -- -- 875,000 -- -- -- -- 875,000
Translation
adjustment
(unaudited).... -- -- -- -- -- -- (870) -- -- (870)
Amortization of
deferred
compensation
(unaudited).... -- -- -- -- -- -- -- -- 10,896 10,896
Net loss
(unaudited).... -- -- -- -- -- (1,360,685) -- -- -- (1,360,685)
--------- ---- ---------- ---- ---------- ----------- -------- -------- --------- -----------
Balance at March
31, 1996
(unaudited)..... 5,232,948 $524 6,725,619 $672 $9,153,734 $(7,385,418) $(31,486) $ 0 $(150,854) $ 1,587,172
========= ==== ========== ==== ========== =========== ======== ======== ========= ===========
</TABLE>
See accompanying notes.
F-5
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------ ----------------------
1994 1995 1995 1996
----------- ----------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss..................... $(1,653,661) $(4,483,311) $(803,540) $(1,360,685)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization.............. 190,038 249,364 60,142 56,289
Amortization of deferred
compensation.............. -- 12,594 -- 10,896
Amortization and accretion
related to bridge notes... -- -- -- 328,704
Interest expense on
convertible notes payable. -- 56,807 -- --
Loss on disposition of
property and equipment.... 21,977 8,418 -- --
Increase (decrease) in
accumulated translation
adjustments............... 7,261 (32,829) 49,906 (870)
Loss on write-off of
investments in affiliate.. -- 1,248,868 -- --
Changes in operating assets
and liabilities:
Accounts receivable....... (174,130) (39,195) 257,156 (365,784)
Accounts receivable from
affiliate................ 413,133 -- -- --
Inventories............... (18,768) 384,408 (68,640) (1,251,825)
Prepaid expenses and other
current assets........... (62,358) (96,788) (51,931) (518,177)
Deferred income taxes..... 57,054 -- -- --
Other assets.............. (17,849) 11,312 -- (46,460)
Accounts payable.......... (152,298) (57,619) (117,957) 677,738
Accrued liabilities....... 69,682 255,914 (316,249) (122,739)
Advances from related
party.................... (1,212,976) -- -- --
Deferred revenue from
related party............ (451,143) -- -- --
Income taxes payable...... (173,821) -- -- --
----------- ----------- --------- -----------
Net cash used in operating
activities.................. (3,157,859) (2,482,057) (991,112) (2,592,913)
INVESTING ACTIVITIES
Acquisition of property and
equipment................... (576,050) (114,487) (64,016) (35,786)
Proceeds from disposition of
property and equipment...... 78,866 -- -- --
Investments in affiliates.... (670,000) -- -- --
----------- ----------- --------- -----------
Net cash used in investing
activities.................. (1,167,184) (114,487) (64,016) (35,786)
FINANCING ACTIVITIES
Proceeds from bridge notes... -- -- -- 6,055,000
Proceeds from line of credit. 600,000 -- 581,650 --
Repayment on line of credit.. -- (600,000) (100,000) --
Increase (decrease) in
restricted cash............. (930,414) 1,018,990 (34,362) --
Proceeds from issuance of
common stock................ 1,428 49,400 -- 13,624
Proceeds from note payable to
stockholder................. 1,000,000 2,000,000 500,000 --
Proceeds from sale of
preferred stock, net of
notes payable converted to
preferred stock and of
issuance costs.............. 3,476,845 1,000,000 -- --
Proceeds from note receivable
from stockholder............ -- 6,482 15,000 --
----------- ----------- --------- -----------
Net cash provided by
financing activities........ 4,147,859 3,474,872 962,288 6,068,624
----------- ----------- --------- -----------
Net (decrease) increase in
cash and cash equivalents... (177,184) 878,328 (92,840) 3,439,925
Cash and cash equivalents at
beginning of period......... 517,776 340,592 340,592 1,218,920
----------- ----------- --------- -----------
Cash and cash equivalents at
end of period............... $ 340,592 $ 1,218,920 $ 247,752 $ 4,658,845
=========== =========== ========= ===========
SUPPLEMENTAL DISCLOSURES OF
NONCASH INVESTING/FINANCING
ACTIVITIES
Conversion of notes payable
to preferred stock.......... $ 1,500,000 $ 2,056,807 -- --
Deferred financing fees on
bridge notes................ -- -- -- $ 945,000
Warrants issued pursuant to
bridge notes................ -- -- -- $ 875,000
</TABLE>
See accompanying notes.
F-6
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES
The Company
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 Company currently buys its compression and decompression computer chips,
an important component of its product, from one supplier which is a related
party. The Company has designed its products contemplating the use of this
supplier's chips, and there can be no assurance that any other company will be
able to create chips that are substantially equivalent or that any such chips
can be successfully integrated into the Company's product. The Company's
inability to obtain a sufficient quantity of chips would affect operating
results adversely.
Interim Results
The accompanying balance sheet as of March 31, 1996 and the statements of
operations, stockholders' equity and cash flows for the three-month periods
ended March 31, 1995 and 1996 is unaudited. In the opinion of management, the
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, necessary for the fair statement of the results of interim
periods. The data enclosed in these notes to the financial statements for
these periods is unaudited.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less at the date of purchase to be cash equivalents. The Company is
exposed to credit risk in the event of default by the financial institutions
to the extent of amounts recorded on the balance sheet.
In accordance with Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," the
Company has classified its investment in a money market fund as available-for-
sale. Available-for-sale securities are carried at fair value, with unrealized
gains and losses reported as a separate component of shareholders' equity when
material. Realized gains and losses and declines in value judged to be other
than temporary on available-for-sale securities are included in interest
income and expense.
Revenue Recognition
Revenues from product and component sales are recognized upon shipment.
The Company also has development agreements under which it receives fees for
certain rights to technology and product prototypes developed. The Company
recognizes revenue under these agreements based upon the completion of
specified milestones in accordance with the agreement terms typically as costs
are incurred. Revenues recognized under development agreements were
approximately $636,000 and $1,000,000, for the years
F-7
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
ended December 31, 1994 and 1995, respectively (none for the three-month
periods ended March 31, 1995 and 1996). Costs related to development revenues
totaled approximately $266,000 and $585,000 for the years ended December 31,
1994 and 1995, respectively, and are included in cost of development and
service revenues in the accompanying statements of operations.
Service revenues are recognized ratably over the contractual period or as
the services are performed.
Inventories
Inventories are comprised principally of raw materials and work in progress
and are stated at the lower of actual cost (first-in, first-out method) or
market.
Property, Equipment and Leasehold Improvements
Property, equipment and leasehold improvements are stated at cost.
Depreciation and amortization are computed using the straight-line method over
the assets estimated useful lives of two to five years.
Foreign Currency Translation
The Company uses the New Taiwan dollar as its functional currency for the
Company's Taiwan branch operations. Translation adjustments, which result from
the process of translating foreign currency financial statements into U.S.
dollars, are included as a separate component of stockholders' equity.
Concentration of Credit Risk
The Company primarily sells its products to original equipment manufacturers
and product distribution companies located in the Far East. The Company
performs ongoing credit evaluations of its customers' financial position and
generally requires no collateral. The Company maintains reserves for potential
credit losses, and such losses have been within management's expectations.
Software Development Costs
Software development costs have been accounted for in accordance with
Statement of Financial Accounting Standards No. 86, "Accounting for the Costs
of Computer Software to be Sold, Leased or Otherwise Marketed." The Company's
products include a software component. The Company has expensed all software
development costs to date as such development costs have been incurred prior
to the Company's products attaining technological feasibility.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 "Accounting for Stock-Based Compensation." The statement is effective
for fiscal years beginning after December 15, 1995. Under Statement No. 123,
stock-based compensation expense is measured using either the intrinsic-value
method as prescribed by Accounting Principle Board Opinion No. 25 or the fair
value method described in Statement No. 123. Companies choosing the intrinsic-
value method will be required to disclose the pro forma impact of the fair
value method on net income and earnings per share. The Company plans to
implement the standard in 1996 using the intrinsic-value method; there will be
no effect of adopting the standard on the Company's financial position and
results of operations.
F-8
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 and from stock options 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 anticipated 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 estimated initial public offering
price). 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 will automatically convert upon completion of the offering
(using the if-converted method) from the original date of issuance.
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.
Current Year Presentation
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation. The statement of
operations for the year ended December 31, 1994 reflects the effect of the
restatement of the Company's ending inventory balance as of December 31, 1993.
The effect of this restatement was to decrease cost of goods sold by $92,299
for the period ending December 31, 1994.
F-9
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 2 -- BALANCE SHEET COMPONENTS
Inventories, property and equipment, and accrued liabilities consist of the
following at December 31, 1995:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1995 1996
------------ ----------
<S> <C> <C>
Inventories:
Raw materials................................... $657,153 $ 741,714
Work in progress................................ -- 1,015,574
Finished goods.................................. 16,622 168,312
-------- ----------
$673,775 $1,925,600
======== ==========
Property and equipment:
Machinery and computer equipment................ $697,819 $ 696,003
Furniture and fixtures.......................... 221,194 218,452
-------- ----------
919,013 914,455
Accumulated depreciation........................ 360,926 376,871
-------- ----------
$558,087 $ 537,584
======== ==========
Accrued liabilities:
Accrued warranty and related expenses........... $101,376 $ 101,376
Payroll and related expenses.................... 89,227 52,654
Accrued expenses................................ 315,515 229,349
-------- ----------
$506,118 $ 383,379
======== ==========
</TABLE>
NOTE 3 -- COMMITMENTS
The Company leases its facilities and certain office equipment under
noncancelable leases which require the Company to pay operating costs,
including property taxes, insurance and maintenance. Future minimum lease
payments under these operating leases at December 31, 1995 are as follows:
<TABLE>
<S> <C>
1996.............................................................. $257,475
1997.............................................................. 171,311
--------
$428,786
========
</TABLE>
Rent expense charged to operations was approximately $181,000, $182,000,
$45,000 and $71,000 for the years ended December 31, 1994 and 1995 and the
three-month periods ended March 31, 1995 and 1996, respectively.
NOTE 4 -- NOTES PAYABLE TO STOCKHOLDERS
In February 1995, the Company entered into a secured promissory note
agreement ("Agreement") with its president and the Company's majority
stockholder ("purchaser"). The purchaser agreed to lend the Company the
principal sum of $500,000 at prime plus 1% per annum. In October 1995, the
Company amended the Agreement to allow for additional borrowings of
$1,500,000, at prime rate plus 1%. In December 1995, the Company exchanged
1,335,949 shares of Series B convertible preferred stock at $1.54 per share
for settlement of the $2,000,000 in shareholder notes plus accrued interest of
approximately $57,000.
F-10
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 4 -- NOTES PAYABLE TO STOCKHOLDERS--(CONTINUED)
During 1993, the Company issued $500,000 of convertible notes payable to
Hyundai Electronics Industries Co., Ltd. (Hyundai). In addition, the Company
issued two convertible notes payable to Hyundai for a total of $1,000,000
during fiscal 1994. In March 1994, the Company sold 3,247,473 shares of Series
A convertible preferred stock to Hyundai at a price of $1.54 per share,
resulting in gross proceeds of approximately $5,000,000. The convertible notes
payable totaling $1,500,000 plus accrued interest of approximately $17,000
were converted into preferred stock.
NOTE 5 -- INCOME TAXES
For financial reporting purposes, loss before benefit for income taxes
includes the following components for December 31:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
United States...................................... $ 750,447 $2,776,978
Foreign............................................ 986,451 1,706,333
---------- ----------
Total.............................................. $1,736,898 $4,483,311
========== ==========
The benefit for income taxes at December 31 consists of the following:
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Federal:
Current.......................................... $ (140,291) $ --
Deferred......................................... 36,769 --
---------- ----------
Foreign:
Deferred......................................... 20,285 --
---------- ----------
Total.............................................. $ (83,237) $ --
========== ==========
</TABLE>
The differences between the benefit for income taxes and the amount computed
at the U.S. statutory income tax rate at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Tax at U.S. statutory rate....................... $(590,545) $(1,524,326)
Investment valuation............................. -- 312,800
Change in valuation allowance.................... 495,222 1,291,117
Other, net....................................... 12,086 (79,591)
--------- -----------
Benefit for income taxes......................... $ (83,237) $ --
========= ===========
</TABLE>
F-11
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 5 -- INCOME TAXES--(CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets at December 31 are as follows:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............... $ 240,531 $ 1,202,610
Inventory valuation accounts................... 161,742 248,444
Reserves and other accrued expenses not yet
deductible for taxes.......................... 123,682 268,118
Other.......................................... 21,192 119,092
--------- -----------
Total deferred tax assets...................... 547,147 1,838,264
Valuation allowance for deferred tax assets.... (547,147) (1,838,264)
--------- -----------
Net deferred tax assets........................ $ -- $ --
========= ===========
</TABLE>
For federal and state tax purposes, the Company has net operating loss
carryforwards of approximately $3,440,000 and $550,000, respectively, which
will expire in various years beginning with 1999 if not utilized.
Due to the "change in ownership" provisions of the Tax Reform Act of 1986,
the availability of the Company's net operating loss and credit carryforwards
will be subject to an annual limitation in future periods if a change of
ownership of more than 50% should occur over a three year period. Such a
change could substantially limit the eventual tax utilization of these
carryforwards.
NOTE 6 -- STOCKHOLDERS' EQUITY
Convertible Preferred Stock
Authorized and outstanding preferred stock and its principal terms are as
follows at December 31, 1995:
<TABLE>
<CAPTION>
PER SHARE
----------------------
DIVIDEND LIQUIDATION
SERIES AUTHORIZED OUTSTANDING PREFERENCE PREFERENCE
------ ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
A 3,247,473 3,247,473 $.123 $1.540
B 1,985,475 1,985,475 .123 $1.540
Undesignated 5,000,000 -- -- --
---------- ---------
10,232,948 5,232,948
========== =========
</TABLE>
The stockholders of the Series A and B convertible preferred stock are
entitled to annual noncumulative dividends when and if declared by the Board
of Directors in preference and in priority to the payment of dividends on
shares of common stock. No dividends have been declared through December 31,
1995.
If liquidation occurs, any remaining assets subsequent to the distribution
of the liquidation preference on the preferred stock would be distributed pro
rata between the common and preferred shares on an as-converted basis after
the holders of common stock receive an amount per share equal to $1,500,000
divided by the number of shares of common stock then outstanding.
F-12
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 6 -- STOCKHOLDERS' EQUITY--(CONTINUED)
Preferred stockholders have the right at any time after the date of issuance
to convert their shares into a like number of shares of common stock on a one-
for-one basis, subject to adjustments for dilution. The preferred stock
automatically converts into common stock, at the then applicable conversion
rate, upon a public offering of the Company's common stock at a price per
share of not less than $5.00, subject to adjustment for dilution, or with
aggregate proceeds in excess of $10,000,000.
The holders of Series A and B preferred stock are entitled to voting rights
equivalent to the number of common shares into which their shares are
convertible. The holders of preferred stock are entitled to elect one
director.
Stock Option Plan
The Company's 1993 Stock Option Plan (the "Plan") provides for the granting
of incentive stock options and nonstatutory stock options to employees,
directors, and consultants of the Company at prices ranging from 85% to 110%
(depending on the type of grant) of the fair value of the common stock on the
grant date as determined by the Board of Directors. Shares will generally vest
ratably over a four-year period commencing as of the date of grant. The
Company has reserved 3,139,361 shares of common stock for issuance under the
Plan. The options granted under the Plan are exercisable over a maximum term
of ten years from the date of grant and are subject to various restrictions as
to resale and right of repurchase by the Company.
During fiscal 1995 the Company issued options to purchase shares of common
stock and recorded deferred compensation of approximately $174,000 for
financial reporting purposes with respect to such option grants to reflect the
difference between the exercise price and deemed fair value, for financial
statement presentation purposes, of the Company's common shares. Deferred
compensation is being amortized over the vesting period (approximately $13,000
for the year ended December 31, 1995 and $11,000 for the three-month period
ended March 31, 1996).
Information with respect to the Plan is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
--------------------
AVAILABLE NUMBER OF PRICE PER
FOR GRANT SHARES SHARE
---------- --------- ---------
<S> <C> <C> <C>
Balance at December 31, 1993............. 2,695,530 -- $ --
Decrease in shares authorized.......... (333,732) -- $ --
Options granted........................ (2,018,926) 2,018,926 $0.14
Options exercised...................... -- (118,085) $0.14
Options canceled....................... 309,500 (309,500) $0.14
---------- ---------
Balance at December 31, 1994............. 652,372 1,591,341 $0.14
Increase in shares authorized.......... 1,250,734 -- $0.14
Options granted........................ (997,379) 997,379 $0.14
Options exercised...................... -- (355,086) $0.14
Options canceled....................... 319,464 (319,464) $0.14
---------- ---------
Balance at December 31, 1995............. 1,225,191 1,914,170 $0.14
========== =========
</TABLE>
As of December 31, 1995, 561,386 options were vested.
F-13
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 6 -- STOCKHOLDERS' EQUITY--(CONTINUED)
On February 1, 1996, the Board of Directors authorized a grant of 200,000
common stock options to a consultant. The options, which are not included in
the above Plan, have an exercise price of $5.00 per share and vest 50% each
year after the grant date.
NOTE 7 -- ASSET ACQUISITION FROM SUNNY RICH ENTERPRISES, LTD.
The Company was established as a wholly owned subsidiary of Sunny Rich
Enterprises, Ltd. (Sunny Rich), a holding company owned by the president of
the Company. Effective December 29, 1994, the Company acquired all of the
assets of Sunny Rich in exchange for 6,215,751 shares of its common stock. The
assets of Sunny Rich acquired by the Company principally comprised 6,199,720
outstanding shares of the Company's common stock. The Company did not assume
any of Sunny Rich's debts, liabilities, or obligations. Sunny Rich was then
liquidated, and the common stock was distributed to the stockholders' of Sunny
Rich. The net effect of the above transaction was a transfer of shares from
Sunny Rich to the Company's president thus making the Company's president the
majority stockholder.
NOTE 8 -- INVESTMENTS IN AFFILIATES
During 1993, the Company made a $250,000 investment in Anhui Wanyan
Electronic Systems, Co., Ltd. (Wyan), a company located in the People's
Republic of China, which was formed for the purpose of developing,
manufacturing, and marketing digital audiovisual products. During 1994, the
Company sold a subscription to purchase additional shares of Wyan's common
stock to another related party for $350,000 and recognized a corresponding
gain on the sale of the subscription investment. The Company invested this
$350,000 along with an additional $250,000 into Wyan in 1994. The investment
represented less than a 20% ownership of Wyan's equity and was recorded at
cost. The Company was also to receive an additional equity interest in Wyan in
exchange for technology to be transferred in connection with the development
of several products.
The Company did not transfer any technology and in March 1995, Wyan and the
Company agreed to terminate the technology exchange. As a result of the
Company's decision to discontinue financial and technical support to Wyan and
Wyan's insufficient working capital, management wrote off its entire
investment in Wyan and related accounts receivable of approximately $850,000
and $23,000, respectively.
The Company recognized revenues from Wyan of approximately $4,058,000 and
$636,000 for product sales and development and services, respectively, during
1994. The Company also had accounts receivable from Wyan for inventory
purchased of approximately $347,000 at December 31, 1994.
During 1994, the Company invested $70,000 in a joint venture agreement for
the purpose of manufacturing and distributing certain of its products in the
Far East. Included in product revenues is $2,000 and $365,000 from sales to
this affiliate in 1994 and 1995, respectively. In 1995, due to the joint
venture's lack of working capital, the Company's investment in this venture
and related accounts receivable of approximately $306,000 were written off and
charged to operations as a loss on investment in affiliate.
F-14
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Company purchased approximately $1,900,000, $809,000, $0 and $1,515,000
of inventory from a company that is a related party in the year ended December
31, 1994 and 1995 and the three-month periods ended March 31, 1995 and 1996,
respectively. The Company also acquired fixed assets from this company for
total payments of approximately $8,000 in 1994. The president of the Company
is a significant stockholder of this company.
During April 1995, the Company entered into a technical development and
assistance agreement with Hyundai (see Note 4) for a total value of
$1,500,000. The agreement requires the Company to develop and deliver certain
prototypes and applications to Hyundai based on the delivery schedule
specified in the agreement. The Company received an initial payment of
$750,000 from the contract in May 1995 and will receive the remaining amounts
based on the achievement of certain milestones identified in the contract.
During 1995, the Company recognized development revenues of $1,000,000 and
product revenues of $125,000 from sales to Hyundai ($2,350,000 in product
revenues in 1994).
During July 1995, the Company sold 649,526 shares of Series B convertible
preferred stock to Hyundai at a price per share of $1.54 resulting in gross
proceeds to the Company of approximately $1,000,000.
NOTE 10 -- SEGMENT INFORMATION
The Company operates in one business segment, which includes developing,
producing, and marketing digital video systems. The following table summarizes
the Company's operations from its headquarters located in Santa Clara,
California ("United States") and its branch office in Taipei, Taiwan
("Taiwan"):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
---------------------------------------------------
UNITED ADJUSTMENTS/
STATES TAIWAN ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue from unaffiliated
customers................. $ 329,996 $ 433,163 $ -- $ 763,159
Revenue from related
parties and affiliates.... 619,250 6,426,224 -- 7,045,474
----------- ----------- --------- -----------
Total revenue.............. $ 949,246 $ 6,859,387 $ -- $ 7,808,633
=========== =========== ========= ===========
Loss from operations....... $(1,132,744) $ (989,308) $ -- $(2,122,052)
=========== =========== ========= ===========
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
---------------------------------------------------
UNITED ADJUSTMENTS/
STATES TAIWAN ELIMINATIONS CONSOLIDATED
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenue from unaffiliated
customers................. $ 743,680 $ 1,286,708 $ -- $ 2,030,388
Revenue from related
parties and affiliates.... 1,124,810 365,633 -- 1,490,443
----------- ----------- --------- -----------
Total revenue.............. $ 1,868,490 $ 1,652,341 $ -- 3,520,831
=========== =========== ========= ===========
Loss from operations....... $(1,448,546) $(1,705,585) $ -- $(3,154,131)
=========== =========== ========= ===========
Identifiable assets........ $ 910,491 $ 2,251,412 $(192,234) $ 2,969,669
=========== =========== ========= ===========
</TABLE>
Export sales, representing sales from the United States to customers in
foreign countries, were approximately $328,000 and $674,000 of total United
States revenue from unaffiliated customers and $619,250 and $1,124,810 from
related parties and affiliates for the years ended December 31, 1994 and 1995,
respectively.
F-15
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT MARCH 31, 1996 AND FOR THE THREE-MONTH PERIODS
ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
NOTE 11 -- SUBSEQUENT EVENTS
Private Placement
In March 1996, the Company completed a $7,000,000 private placement of 140
units at $50,000 per unit. Each unit consists of a $50,000 face value
promissory note bearing 10% interest and due in January and March 1997, and
25,000 warrants which initially enable 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. The debt discount and selling commissions and expenses will be
expensed using the interest method over the terms of the notes.
Initial Public Offering and Related Matters
In February 1996, the Board of Directors authorized management of the
Company to file a registration statement for its initial public offering (the
"IPO") of Units with the Securities and Exchange Commission and authorized the
amendment and restatement of the Certificate of Incorporation. On May 14,
1996, the Company closed the IPO which consisted of 4,200,000 Units, each
consisting of a share of Common Stock, a Class A Warrant and a Class B
Warrant, priced at $5.00 per Unit. On May 22, 1996, the Underwriter exercised
its over-allotment option to purchase an additional 630,000 Units at $5.00 per
Unit. The Company received approximately $20,501,000 of net offering proceeds
after deducting underwriting discounts and commissions and other expenses of
the IPO.
Escrow Securities
In April 1996, the holders of the Company's common and preferred stock, and
holders of options to purchase common stock pursuant to the Company's 1993
stock option plan, placed, on a pro rata basis, 7,812,948 of their shares and
options to purchase 1,852,697 shares of common stock, respectively, into
escrow, and a holder of an option to purchase 200,000 shares of Common Stock
outside the Company's 1993 stock option plan placed all of such options into
escrow. Additionally, 234,355 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. Based on this agreement, 7,748,967
shares of the Company's common and preferred stock and 1,250,563 options to
purchase common stock that were outstanding as of December 31, 1995 have been
placed into escrow pursuant to this agreement. Additionally, at December 31,
1995, 800,470 options available for future grant will be subject to escrow
upon grant.
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.
F-16
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS/EXERCISE OFFER, AND IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS/EXERCISE OFFER DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION IN
WHICH SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF
THIS PROSPECTUS/EXERCISE OFFER NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus/Exercise Offer Summary......................................... 3
Risk Factors.............................................................. 9
The Exercise Offer........................................................ 18
Purpose of Exercise Offer and Use of Proceeds............................. 25
Dividend Policy........................................................... 26
Capitalization............................................................ 27
Price Range of Securities................................................. 29
Selected Financial Data................................................... 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 32
Business.................................................................. 37
Management................................................................ 47
Certain Transactions...................................................... 52
Principal Shareholders.................................................... 53
Concurrent Offerings...................................................... 56
Description of Securities................................................. 56
Shares Eligible for Future Sale........................................... 59
Plan of Distribution...................................................... 60
Legal Matters............................................................. 62
Experts................................................................... 62
Additional Information.................................................... 62
Index to Financial Statements............................................. F-1
</TABLE>
---------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIGITAL VIDEO SYSTEMS, INC.
---------------
PROSPECTUS/ EXERCISE OFFER
---------------
Facsimile copies of the Letter of Transmittal will be accepted. The Letter of
Transmittal, payments of the exercise price for Class A Warrants and
certificates for Class A Warrants and any other required documents should be
sent or delivered by each stockholder or his broker, dealer, commercial bank,
trust company or other nominee to the Warrant Agent at one of its addresses
set forth below:
Warrant Agent:
American Stock
Transfer & Trust Company
By Mail or Hand Delivery:
American Stock
Transfer & Trust
Reorganization Department
40 Wall Street
46th Floor
New York, New York 10005
1-(800) 937-5449
By Facsimile
Transmission:
(718) 234-2700
Any questions and requests for assistance or additional copies of this
Prospectus/Exercise Offer, the Letter of Transmittal and the Notice of
Guaranteed Delivery may be directed to the Warrant Agent at the telephone
number and address above. You may also contact your local broker, dealer,
commercial bank or trust company for assistance concerning the Exercise Offer.
To confirm delivery of your Class A Warrants, you are directed to contact the
Warrant Agent.
July , 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ALTERNATE OFFERING #2 PAGES
PROSPECTUS
DIGITAL VIDEO SYSTEMS, INC.
4,830,000 SHARES OF COMMON STOCK
UNDERLYING REDEEMABLE CLASS A WARRANTS
9,660,000 SHARES OF COMMON STOCK
UNDERLYING REDEEMABLE CLASS B WARRANTS
2,499,000 SHARES OF COMMON STOCK
UNDERLYING ADDITIONAL REDEEMABLE CLASS B WARRANTS
This Prospectus relates to (i) 4,830,000 shares of common stock, $0.0001 par
value (the "Common Stock"), of Digital Video Systems, Inc., a Delaware
corporation (the "Company"), issuable upon exercise of the Company's
outstanding redeemable Class A Warrants (the "Class A Warrants"), (ii)
4,830,000 shares of Common Stock issuable upon exercise of the Company's
redeemable Class B Warrants (the "Class B Warrants" and, together with the
Class A Warrants and the Additional Class B Warrants, as hereinafter defined,
the "Warrants"), which are issuable upon exercise of the Company's outstanding
Class A Warrants, (iii) 4,830,000 shares of Common Stock issuable upon
exercise of the Company's outstanding Class B Warrants, and (iv) 2,499,000
shares of Common Stock issuable upon exercise of the Company's outstanding
Additional Class B Warrants.
Each Class A Warrant entitles the holder to purchase one share of Common
Stock and one Class B Warrant at an exercise price of $6.50, subject to
adjustment, at any time until May 8, 2001. Each Class B Warrant and Additional
Class B Warrant entitles the holder to purchase one share of Common Stock at
an exercise price of $8.75, subject to adjustment, at any time until May 8,
2001. Commencing May 9, 1996, the Class A Warrants, and commencing on May 9,
1997, the Class B Warrants and Additional Class B Warrants are subject to
redemption by the Company at a redemption price of $.05 per Warrant on 30
days' written notice, provided the closing bid price of the Common Stock
averages in excess of $9.10 per share with respect to the Class A Warrants and
$12.25 per share with respect to the Class B Warrants and Additional Class B
Warrants, for any 30 consecutive trading days ending within 15 days of the
notice of redemption. On July 22, 1996, the closing bid price of the Common
Stock was $9.06 per share. See "Description of Securities" and "Price Range of
Securities."
The Company's Class A Warrants and Class B Warrants described above were
issued in connection with the Company's initial public offering (the "IPO")
which was underwritten by D. H. Blair Investment Banking Corp. (the
"Underwriter"). On May 14, 1996, the Company completed the IPO which consisted
of 4,200,000 Units (the "Units"), each Unit consisting of one share of Common
Stock, one Class A Warrant and one Class B Warrant. On May 22, 1996, the
Company completed the sale of an additional 630,000 Units upon the Underwriter
for the IPO exercising its over-allotment option to purchase these Units. The
components of the Units were transferrable separately upon issuance. The
Common Stock, Class A Warrants and Class B Warrants are listed on the Nasdaq
National Market under the symbols "DVID," "DVIDW" and "DVIDZ," respectively,
and the Units are listed on the Nasdaq Small Cap Market under the symbol
"DVIDU."
On July , 1996, the Company commenced an Exercise Offer pursuant to which
the Company offered to the holders (the "Holders") of Class A Warrants
(including the Selling Securityholder Warrants described below) who exercised
their Class A Warrants pursuant to such Exercise Offer two alternative
exercise options in lieu of the existing terms of the Class A Warrants (which
provide for the issuance of one share of Common Stock and one Class B Warrant
for each Class A Warrant exercised at an exercise price of $6.50). The two
alternatives from which each Holder could choose provided for the Company
either (i) to reduce the exercise price of Class A Warrants to $6.00 and to
issue one share of Common Stock and 1.3 Class B Warrants or (ii) to
The date of this Prospectus is , 1996.
ALT 2-1
<PAGE>
reduce the exercise price of Class A Warrants to $3.00 and to issue 2/3 of a
share of Common Stock and one Class B Warrant for each Class A Warrant so
exercised. The two alternative exercise options were available to each Holder
only if such Holder exercised his or her Class A Warrants prior to 5:00 P.M.,
New York City time on August 29, 1996, unless such date was extended by the
Company (such date with any such extension being referred to as the
"Expiration Date"). Those Class B Warrants issued pursuant to the Exercise
Offer that are in excess of the number of Class B Warrants that would have
otherwise been issued under the original terms of the Class A Warrants are
sometimes referred to herein as the "Additional Class B Warrants." The terms
of the Additional Class B Warrants are identical to the terms of the Class B
Warrants that were previously outstanding as well as the other Class B
Warrants issued pursuant to the Exercise Offer, and unless the context
otherwise requires, references herein to the Class B Warrants shall include
the Additional Class B Warrants.
Pursuant to the Exercise Offer, (i) Class A Warrants were exercised
pursuant to the first alternative described above, with shares of Common
Stock and Class B Warrants being issued and with the Company receiving
gross proceeds of $ and (ii) Class A Warrants were exercised pursuant to
the second alternative described above, with shares of Common Stock and
Class B Warrants being issued and with the Company receiving gross
proceeds of $ . Pursuant to a notice of redemption issued on July , 1996,
the Company redeemed the remaining unexercised Class A Warrants for $0.05
per warrant on the first business day following the Expiration Date at a total
cost of $ . See "Recent Exercise Offer and Concurrent Offering."
The Company has registered for resale by certain securityholders (the
"Selling Securityholders") 3,500,000 Class A Warrants (the "Selling
Securityholders Warrants") and the Common Stock and Class B Warrants
underlying the Selling Securityholders Warrants and the Common Stock issuable
upon exercise of such Class B Warrants. Sales of the Selling Securityholder
Warrants or the underlying securities, or the potential of such sales, may
have an adverse effect on the market price of the securities offered hereby.
See "Recent Exercise Offer and Concurrent Offering."
ALT 2-2
<PAGE>
USE OF PROCEEDS
The Company anticipates that the net proceeds of the Exercise Offer will be
utilized to expand its engineering capabilities, increase product development
activities to broaden its Video CD product lines, and to expand marketing
activities (including opening sales and support offices in China and
increasing marketing activities in Singapore, India and Eastern Europe). Net
offering proceeds also may be used to finance increased production and sales
of the Company's products should the Company experience substantial increases
in sales. Any remaining net offering proceeds will be added to the Company's
working capital reserve. In the event a substantial number of Class A Warrants
are exercised utilizing the $6.00 exercise price option, a significant portion
of the net offering proceeds will be allocated to the Company's working
capital reserves and may be expended by the Company in the future for purposes
not specifically described herein.
ALT 2-3
<PAGE>
PLAN OF DISTRIBUTION
Holders of outstanding Warrants can exercise their Warrants for the
applicable underlying securities upon payment of the exercise prices therefor
to the Company. The Company has agreed not to solicit Warrant exercises other
than through the Underwriter, unless the Underwriter declines to make such
solicitation. The Company will not pay any fees or commissions to any third
party in connection with effecting the Exercise Offer. Upon any exercise of
the Warrants after May 8, 1997, the Company will pay the Underwriter a fee of
5% of the aggregate exercise price with respect to the Class A Warrants and 8%
of the aggregate exercise price with respect to the Class B Warrants if (i)
the market price of the Company's Common Stock on the date of the Warrants are
exercised is greater than the then exercise price of the Warrants; (ii) the
exercise of the Warrants was solicited by a member of the NASD; (iii) the
Warrants are not held in a discretionary account; (iv) disclosure of
compensation arrangements was made both at the time of the offering and at the
time of exercise of the Warrants; and (v) the solicitation of exercise of the
Warrant was not in violation of Rule 10b-6 promulgated under the Securities
Exchange Act of 1934, as amended.
On July , 1996, the Company commenced an Exercise Offer pursuant to which
the Company offered to Holders of Class A Warrants who exercised their Class A
Warrants pursuant to such Exercise Offer, two alternative exercise options in
lieu of the existing terms of the Class A Warrants (described herein). The two
alternatives from which each Holder could choose provided for the Company
either (i) to reduce the exercise price of Class A Warrants to $6.00 and to
issue one share of Common Stock and 1.3 Class B Warrants or (ii) to reduce the
exercise price of Class A Warrants to $3.00 and to issue 2/3 of a share of
Common Stock and one Class B Warrant for each Class A Warrant so exercised.
These alternative exercise options were available to each Holder only if such
Holder exercised his or her options prior to the Expiration Date. See "Recent
Exercise Offer and Concurrent Offering." The Underwriter did not receive any
fee in respect of the exercise of Class A Warrants made in connection with the
Exercise Offer. The terms of the New Class B Warrants are identical to the
terms of the Class B Warrants. Pursuant to the Exercise Offer (i) Class A
Warrants were exercised pursuant to the first alternative described above,
with shares of Common Stock and Class B Warrants being issued and with
the Company receiving gross proceeds of $ and (ii) Class A Warrants were
exercised pursuant to the second alternative described above, with shares
of Common Stock and Class B Warrants being issued and with the Company
receiving gross proceeds of $ . The Company redeemed all of the remaining
unexercised Class A Warrants for $.05 per Warrant on the first business day
following the Expiration Date at a total cost of $ .
As of June, 1996, there were 10 market makers in the Company's securities.
Blair & Co., which is substantially owned by family members of J. Morton
Davis, the sole stockholder of the parent company and sole stockholder of
Blair & Co., currently makes a market in the Company's securities. Rule 10b-6
may prohibit Blair & Co. from engaging in any market making activities with
regard to the Company's securities for the period from nine business days (or
such other applicable period as Rule 10b-6 may provide) prior to any
solicitation by the Underwriter of the exercise of Warrants until the later of
the termination of such solicitation activity or the termination (by waiver or
otherwise) of any right that the Underwriter may have to receive a fee for the
exercise of Warrants following such solicitation. As a result, Blair & Co. may
be unable to provide a market for the Company's securities during certain
periods while the Warrants are exercisable.
In connection with the IPO, the Company sold to Blair and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 420,000
Units substantially identical to the Units sold in the IPO, except that the
warrants included therein are not subject to redemption by the Company unless,
on the redemption date, the Unit Purchase Option has been exercised and the
underlying warrants are outstanding. The Unit Purchase Option is exercisable
during the three-year period commencing May 9, 1998 at an exercise price of
$6.50 per Unit, subject to adjustment in certain events, and the Unit Purchase
Option and the underlying securities are not transferable until May 9, 1998,
except to officers of the Underwriter or to members of the selling group. The
Unit Purchase Option includes a provision permitting the Underwriter or its
designees to elect a cashless exercise. The Company has agreed to register
during the three-year period commencing May 9, 1997, on two separate
occasions, the securities issuable upon exercise thereof under the Securities
Act, the initial such registration to be at the Company's expense and the
second at the expense of the holders. The Company has also granted certain
"piggy-back" registration rights to holders of the Unit Purchase Option.
ALT 2-4
<PAGE>
The Underwriter has the right to designate one director to the Company's
Board of Directors for a period of five years from the completion of the IPO.
Such designee may be a director, officer, partner, employee or affiliate of
the Underwriter. The Underwriter has not to date selected any such designee.
During the five-year period from May 9, 1996, in the event the Underwriter
originates a financing or a merger, acquisition or transaction to which the
Company is a party, the Underwriter will be entitled to receive a finder's fee
in consideration for origination of such transaction. The fee is based on a
percentage of the consideration paid in the transaction ranging from 6% of the
first $5,000,000 to 2% of any consideration in excess of $13,000,000.
The Underwriter acted as placement agent for a Bridge Financing in January
and March 1996 for which it received a placement agent fee of $700,000 and a
non-accountable expense allowance of $210,000. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
The Commission is conducting an investigation concerning various business
activities of the Underwriter and Blair & Co. The investigation appears to be
broad in scope, involving numerous aspects of the Underwriter's and Blair &
Co.'s compliance with the Federal securities laws and compliance with the
Federal securities laws by issuers whose securities were underwritten by the
Underwriter or Blair & Co., or in which the Underwriter or Blair & Co. made
over-the-counter markets, persons associated with the Underwriter or Blair &
Co., such issuers and other persons. The Company has been advised by the
Underwriter that the investigation has been ongoing since at least 1989 and
that it is cooperating with the investigation. The Underwriter cannot predict
whether this investigation will ever result in any type of formal enforcement
action against the Underwriter or Blair & Co. or, if so, whether any such
action might have an adverse effect on Blair or the securities offered hereby.
The Company has been advised that Blair & Co. will make a market in the
securities following this offering. An unfavorable resolution of the
Commission's investigation could have the effect of limiting such firm's
ability to make a market in the Company's securities, which could affect the
liquidity or price of such securities.
ALT 2-5
<PAGE>
RECENT EXERCISE OFFER AND CONCURRENT OFFERING
On July , 1996, the Company commenced an Exercise Offer pursuant to which
the Company offered to holders of Class A Warrants who exercised their Class A
Warrants pursuant to such Exercise Offer two alternative exercise options in
lieu of the existing terms of the Class A Warrants. The two alternatives from
which each Holder could choose provided for the Company either (i) to reduce
the exercise price of the Class A Warrants to $6.00 and to issue one share of
Common Stock and 1.3 Class B Warrants or (ii) to reduce the exercise price of
Class A Warrants to $3.00 and to issue 2/3 of a share of Common Stock and one
Class B Warrant for each Class A Warrant so exercised. The two alternative
exercise options were available to each Holder only if such Holder exercised
his or her Class A Warrants prior to the Expiration Date. The terms of the
Class B issued pursuant to the Exercise Offer Warrants are identical to the
terms of the previously outstanding Class B Warrants. Pursuant to the Exercise
Offer (i) Class A Warrants were exercised pursuant to the first
alternative described above, with shares of Common Stock and Class B
Warrants being issued, and the Company receiving gross proceeds of $
and (ii) Class A Warrants were exercised pursuant to the second
alternative described above, with shares of Common Stock and Class B
Warrants being issued and the Company receiving gross proceeds of $ . The
Company redeemed all of the remaining unexercised Class A Warrants for $.05
per Warrant on the first business day following the Expiration Date at a total
cost of $ . See "Plan of Distribution."
The Company has registered for resale by certain securityholders (the
"Selling Securityholders") 3,500,000 Class A Warrants (the "Selling
Securityholders' Warrants") and the Common Stock and Class B Warrants
underlying the Selling Securityholders' Warrants and the Common Stock issuable
upon exercise of such Class B Warrants. Sales of the Selling Securityholder
Warrants or the underlying securities, or the potential of such sales, may
have an adverse effect on the market price of the securities offered hereby.
ALT 2-6
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Prospectus/Exercise Offer Summary...................................... 3
Risk Factors........................................................... 9
The Exercise Offer..................................................... 18
Purpose of Exercise Offer and Use of Proceeds.......................... 25
Dividend Policy........................................................ 26
Capitalization......................................................... 27
Price Range of Securities.............................................. 29
Selected Financial Data................................................ 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 32
Business............................................................... 37
Management............................................................. 47
Certain Transactions................................................... 52
Principal Shareholders................................................. 53
Concurrent Offerings................................................... 56
Description of Securities.............................................. 56
Shares Eligible for Future Sale........................................ 59
Plan of Distribution................................................... 60
Legal Matters.......................................................... 62
Experts................................................................ 62
Additional Information................................................. 62
Index to Financial Statements.......................................... F-1
Use of Proceeds........................................................ ALT 2-3
Plan of Distribution................................................... ALT 2-4
Recent Exercise Offer and Concurrent Offering.......................... ALT 2-6
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIGITAL VIDEO SYSTEMS, INC.
4,830,000 SHARES OF COMMON STOCK
UNDERLYING REDEEMABLE CLASS A WARRANTS
9,660,000 SHARES OF COMMON STOCK
UNDERLYING REDEEMABLE CLASS B WARRANTS
2,499,000 SHARES OF COMMON STOCK
UNDERLYING ADDITIONAL REDEEMABLE CLASS B WARRANTS
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ALTERNATE OFFERING #3 PAGES
PROSPECTUS
DIGITAL VIDEO SYSTEMS, INC.
3,500,000 REDEEMABLE CLASS A WARRANTS
3,500,000 SHARES OF COMMON STOCK AND
3,500,000 REDEEMABLE CLASS B WARRANTS ISSUABLE UPON
EXERCISE OF THE REDEEMABLE CLASS A WARRANTS AND
3,500,000 SHARES OF COMMON STOCK ISSUABLE UPON
EXERCISE OF THE REDEEMABLE CLASS B WARRANTS
This Prospectus relates to 3,500,000 redeemable Class A Warrants (the
"Selling Securityholder Warrants" or the "Class A Warrants") of Digital Video
Systems, Inc., a Delaware corporation (the "Company"), held by approximately
182 holders (the "Selling Securityholders"), the 3,500,000 shares of Common
Stock, $0.0001 par value ("Common Stock"), and 3,500,000 redeemable Class B
Warrants of the Company ("Class B Warrants") issuable upon the exercise of the
Selling Securityholder Warrants, and 3,500,000 shares of the Company's Common
Stock issuable upon exercise of such Class B Warrants. The Selling
Securityholder Warrants and the Class B Warrants are referred to herein
collectively as the "Warrants" and the securities issuable upon exercise of
the Warrants, together with the Warrants, are sometimes collectively referred
to herein as the "Selling Securityholder Securities." The Selling
Securityholder Warrants were issued to the Selling Securityholders in exchange
for warrants they received in a private placement by the Company in January
and March 1996 (the "Bridge Financing"). See "Selling Securityholders" and
"Plan of Distribution." Each Selling Securityholder Warrant entitles the
holder to purchase one share of Common Stock and one Class B Warrant, at an
exercise price of $6.50, subject to adjustment, at any time until May 8, 2001.
Each Class B Warrant entitles the holder to purchase one share of Common
Stock, at an exercise price of $8.75, subject to adjustment, at any time until
May 8, 2001. The Selling Securityholders have agreed not to exercise the
Selling Securityholder Warrants until May 9, 1997 unless the Company has
delivered a notice of redemption with respect to such warrants. See "Plan of
Distribution." Commencing May 9, 1996 the Class A Warrants, and commencing May
9, 1997 the Class B Warrants, are subject to redemption by the Company for
$.05 per Warrant, upon 30 days' written notice, if the average closing bid
price of the Common Stock exceeds $9.10 per share with respect to the Class A
Warrants and $12.25 per share with respect to the Class B Warrants (subject to
adjustment in each case) for 30 consecutive trading days ending within 15 days
of the date of the notice of redemption. See "Description of Securities."
The securities offered by the Selling Securityholders by this Prospectus may
be sold from time to time by the Selling Securityholders or by their
transferees; provided, however, that until February 3, 1997, only certain
specified percentages of the Class A Warrants may be sold by the Selling
Securityholders. The distribution of the Class A Warrants, Common Stock and
Class B Warrants offered hereby by the Selling Securityholders may be effected
in one or more transactions that may take place on the over-the-counter
market, including ordinary brokers' transactions, privately negotiated
transactions or through sales to one or more dealers for resale of such
securities as principals, at market prices prevailing at the time of sale, at
prices related to such prevailing market prices or at negotiated prices. Usual
and customary or specifically negotiated brokerage fees or commissions may be
paid by the Selling Securityholders.
The Selling Securityholders, and intermediaries through whom the Selling
Securityholder Securities are sold, may be deemed underwriters within the
meaning of the Securities Act of 1933, as amended (the "Securities Act"), with
respect to the securities offered, and any profits realized or commissions
received may be deemed underwriting compensation. The Company has agreed to
indemnify the Selling Securityholders against certain liabilities, including
liabilities under the Securities Act.
The date of this Prospectus is , 1996.
ALT 3-1
<PAGE>
The Company will not receive any of the proceeds from the sale of securities
by the Selling Securityholders. In the event all of the Class A Warrants and
Class B Warrants are exercised, the Company will receive gross proceeds from
such exercises of $22,750,000 and $30,625,000, respectively. See "Selling
Securityholders" and "Plan of Distribution."
The Company's Class A Warrants and Class B Warrants described below were
issued in connection with the Company's initial public offering (the "IPO")
which was underwritten by D.H. Blair Investment Banking Corp. (the
"Underwriter"). On May 14, 1996, the Company completed the IPO which consisted
of 4,200,000 Units (the "Units"), each Unit consisting of one share of Common
Stock, one Class A Warrant and one Class B Warrant. On May 22, 1996, the
Company completed the sale of an additional 630,000 Units upon the Underwriter
exercising its over-allotment option to purchase these Units. The components
of the Units were transferrable separately upon issuance. The Common Stock,
Class A Warrants and Class B Warrants are listed on the Nasdaq National Market
under the symbols "DVID," "DVIDW" and "DVIDZ," respectively, and the Units are
listed on the Nasdaq Small Cap Market under the symbol "DVIDU."
On July , 1996, the Company commenced an Exercise Offer pursuant to which
the Company offered to the holders (the "Holders") of Class A Warrants who
exercised their Class A Warrants pursuant to such Exercise Offer two
alternative exercise options in lieu of the existing terms of the Class A
Warrants (which provide for the issuance of one share of Common Stock and one
redeemable Class B Warrant to each Class A Warrant exercised at an exercise
price of $6.50). The two alternatives from which each Holder could choose
provided for the Company either (i) to reduce the exercise price of Class A
Warrants to $6.00 and to issue one share of Common Stock and 1.3 Class B
Warrants or (ii) to reduce the exercise price of Class A Warrants to $3.00 and
to issue 2/3 of a share of Common Stock and one Class B Warrant for each Class
A Warrant so exercised. The two alternative exercise options were available to
each Holder only if such Holder exercised his or her Class A Warrants prior to
5:00 P.M., New York City time, on August 29, 1996, unless such date was
extended by the Company (such date, with any such extension, being referred to
as the "Expiration Date"). Those Class B Warrants issued pursuant to the
Exercise Offer that are in excess of the number of Class B Warrants that would
otherwise have been issued under the original terms of the Class A Warrants
are sometimes referred to herein as "Additional Class B Warrants." The terms
of the Additional Class B Warrants are identical to the terms of the Class B
Warrants that were previously outstanding as well as the other Class B
Warrants issued pursuant to the Exercise Offer and unless the context
otherwise requires, references here in to the Class B Warrants shall include
the Additional Class B Warrants.
Pursuant to the Exercise Offer, (i) Class A Warrants were exercised
pursuant to the first alternative described above, with shares of Common
Stock and Class B Warrants being issued and with the Company receiving
gross proceeds of $ and (ii) Class A Warrants were exercised pursuant to
the second alternative described above, with shares of Common Stock and
Class B Warrants being issued and with the Company receiving gross proceeds of
$ . Pursuant to a notice of redemption issued on July , 1996, the Company
redeemed the remaining unexercised Class A Warrants for $0.05 per
warrant on the first business day following the Expiration Date at a total
cost of $ . See "Recent Exercise Offer and Concurrent Offering." Blair did
not receive any fee in respect of the exercise of Class A Warrants made in
connection with the Exercise Offer.
As part of the registration statement of which this Prospectus forms a part,
the Company has registered (i) 4,830,000 shares of Common Stock of the Company
issuable upon exercise of the Company's Class A Warrants, (ii) 4,830,000
shares of Common Stock issuable upon exercise of the Company's Class B
Warrants that are issuable upon exercise of the Company's Class A Warrants,
(iii) 4,830,000 shares of Common Stock issuable upon exercise of the Company's
outstanding Class B Warrants, and (iv) a maximum of 2,499,000 shares of Common
Stock issuable upon exercise of the Additional Class B Warrants. See "Recent
Exercise Offer and Concurrent Offering."
ALT 3-2
<PAGE>
SELLING SECURITYHOLDERS
An aggregate of up to 3,500,000 Class A Warrants, 3,500,000 shares of Common
Stock and 3,500,000 Class B Warrants issuable upon exercise of such Class A
Warrants and 3,500,000 shares of Common Stock issuable upon exercise of such
Class B Warrants may be offered for resale by investors who received their
Class A Warrants in exchange for warrants received in the Bridge Financing.
The following table sets forth certain information with respect to each
Selling Securityholder for whom the Company is registering the Selling
Securityholder Securities for resale to the public. (Footnotes 2 through 20 to
this table list the beneficial owners of the securities.) The Company will not
receive any of the proceeds from the sale of such securities. There are no
material relationships between any of the Selling Securityholders and the
Company, nor have any such material relationships existed within the past
three years.
<TABLE>
<CAPTION>
NUMBER OF CLASS A
WARRANTS BENEFICIALLY
OWNED AND MAXIMUM
SELLING SECURITYHOLDER NUMBER TO BE SOLD(1)
---------------------- ---------------------
<S> <C>
Leonard J. Adams..................................... 25,000
Robert P. Adler...................................... 12,500
Alta Resource Group International(2)................. 12,500
Rosemarie J. Assini.................................. 12,500
Mark Berger.......................................... 12,500
The Frank & Brynde Berkowitz Family Foundation....... 37,500
Solomon Blisko & Carole Blisko, JTROS................ 6,250
Michael Bollag....................................... 25,000
Jacob Borenstein & Channabh Borenstein, JTROS........ 12,500
Sid Borenstein....................................... 6,250
Mark H. Brafman...................................... 12,500
David James Brown.................................... 50,000
Yakov Burstein....................................... 6,250
Brian Chadroff....................................... 6,250
Norman Chalif & Rosalie Chalif, JTROS................ 12,500
Chesed Congregations of America(3)................... 50,000
Joel Confino & Lisa Alter, JTROS..................... 6,250
John M. Dalena....................................... 6,250
Donald B. Davies..................................... 12,500
Benjamin S. De Young................................. 6,250
Raymond David Drapkin................................ 25,000
Jules H. Dreyfuss.................................... 50,000
Nathan Eisen & Rose Eisen, JTROS..................... 25,000
Leonard R. Farber.................................... 12,500
Robert A. Foisie..................................... 50,000
Benjamin Frankel & Linda Frankel, JTROS.............. 6,250
William Frankel...................................... 6,250
Sal Fried & Shirley Fried, JTROS..................... 6,250
Stephen G. Friedler.................................. 25,000
James R. Gavin....................................... 6,250
Paul T. Gentile & Yvette Aguiar Gentile, JTROS....... 25,000
Roger Gimbel......................................... 12,500
Harvey Glicker Profit Sharing Trust.................. 18,750
Mitchell Gordon...................................... 12,500
Barbara Grae......................................... 25,000
David Gross.......................................... 12,500
Stuart Gruber........................................ 25,500
</TABLE>
ALT 3-3
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF CLASS A
WARRANTS BENEFICIALLY
OWNED AND MAXIMUM
SELLING SECURITYHOLDER NUMBER TO BE SOLD(1)
---------------------- ---------------------
<S> <C>
William E. Harris................................... 6,250
Lawrence Helfant.................................... 12,500
Tatiana Hirsu....................................... 6,250
Andrew Holder....................................... 6,250
The Samuel J. Holtzman Trust........................ 100,000
Sheela L. Idnani.................................... 6,250
Ivan H. Jacobs, M.D................................. 6,250
Joyce Johnson & James P. Johnson, JTROS............. 12,500
Jack Judge.......................................... 12,500
Neil Karnofsky & Patti Karnofsky, JTROS............. 6,250
Bruce Kashkin & Marjorie Kashkin, JTROS............. 6,250
Melvin L. Katten.................................... 18,750
Patrick J. Keogh.................................... 6,250
Jay Kestenbaum...................................... 25,000
R.E. Kirby.......................................... 50,000
Norman Kobert & Natalie Kobert, JTROS............... 6,250
Ray Kralovic........................................ 12,500
Thomas Krigas Rev. Trust 8/12/91.................... 12,500
Joseph S. Kulpa..................................... 6,250
Solomon Kurz........................................ 6,250
Charles M. Laritz................................... 6,250
Regina Lehrer....................................... 12,500
Harriet Leibowitz................................... 12,500
Lawrence I. Lerner.................................. 18,750
George Lionikis Sr.................................. 12,500
Joseph S. Littenberg................................ 18,750
Robert Lombardi & Margaret Lombardi, JTROS.......... 12,500
Ludlow Management(4)................................ 12,500
Allan B. Margolis................................... 6,250
James L. Miller..................................... 12,500
Albert Milstein..................................... 12,500
Harvey Mininberg & Susan Mininberg, JTROS........... 25,000
Momentum Enterprises Inc.(5)........................ 12,500
Edmond Nagel........................................ 25,000
Richard A. Nelson & Elaine M. Nelson, JTROS......... 62,500
Richard A. Nelson, Elaine M. Nelson, & Ross R.
Nelson, JTROS...................................... 62,500
William R. O'Neill.................................. 12,500
Shefali Patel....................................... 12,500
Ruth Peyser......................................... 12,500
Frank R. Puentes.................................... 25,000
Marc Roberts........................................ 43,750
J. Philip Rosen..................................... 6,250
The Rubin Family Foundation, Inc.(6)................ 25,000
Wayne Saker......................................... 25,000
The Chana Sasha Foundation(7)....................... 25,000
Anand Sathe......................................... 12,500
Roy Schaeffer & Marlena Schaeffer, JTROS............ 25,000
Schon Family Foundation(8).......................... 12,500
Abraham Schreiber................................... 6,250
</TABLE>
ALT 3-4
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF CLASS A
WARRANTS BENEFICIALLY
OWNED AND MAXIMUM
SELLING SECURITYHOLDER NUMBER TO BE SOLD(1)
---------------------- ---------------------
<S> <C>
Michael M. Seago.................................... 12,500
Perry Seamonds...................................... 12,500
Perry Seamonds & Gail G. Seamonds, JTROS............ 12,500
E. Donald Shapiro................................... 25,000
Robert J. Shilliday, Jr............................. 12,500
Gail Silberman...................................... 6,250
Paul Sirotkin....................................... 25,000
SJG Management, Inc. Profit Sharing Fund(9)......... 12,500
Steven Sklow........................................ 6,250
Tali Skoczylas & Skoczylas, Dvora JTROS............. 6,250
Charles A. Snyder................................... 6,250
Abraham Sterman, The Sterman Trust.................. 6,250
Howard Sternheim & Sharon Sternheim, JTROS.......... 6,250
Bernard Strassner & Bernice Strassner, JTROS........ 12,500
Gary J. Strauss..................................... 12,500
H. Wallace Swanstrom................................ 12,500
TCM Partners, L.P.(10).............................. 25,000
Jenner & Block Profit Sharing Plan Trust No.
053(11)............................................ 12,500
Leonard Toboroff.................................... 12,500
Donald J. Vernine................................... 12,500
Carl F.R. Weiman & Beverly J. Weiman, JTROS......... 12,500
Weingarten Family Foundation(12).................... 12,500
Benjamin S. Williams................................ 12,500
Donald Winton....................................... 12,500
Aaron Wolfson....................................... 25,000
Wolfson Equities(13)................................ 225,000
Herman L. Zeller.................................... 12,500
Agent 17 Inc.(14)................................... 25,000
Byron M. Allen...................................... 6,250
Delbert Allen and Pat Allen......................... 25,000
Amore Perpetuo, Inc.(15)............................ 62,500
Alan Bresler and Hanna Bresler...................... 6,250
Michael Cantor...................................... 25,000
Kenneth Cohen and Sherry Cohen...................... 12,500
Robert H. Cohen and Nannette C. Koryn............... 6,250
William F. Cushman, M.D............................. 6,250
Errett Deck and Evelyn Deck......................... 12,500
Robert Delserro..................................... 12,500
Isaac R. Dweck...................................... 25,000
Denis Fortin........................................ 12,500
Carlos Freyre and Holly Freyre...................... 6,250
Marc L. Friedman and Lisa L. Friedman............... 12,500
Morris Friedman..................................... 18,750
Paul Friedman....................................... 6,250
Jeffrey Goffman..................................... 12,500
Bernard J. Golan Revocable Living Trust............. 12,500
Dr. Martin Goldman.................................. 18,750
Jerome L. Grushkin, P.C. Defined Benefit Plan....... 12,500
Moise E. Hendeles................................... 25,000
</TABLE>
ALT 3-5
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF CLASS A
WARRANTS BENEFICIALLY
OWNED AND MAXIMUM
SELLING SECURITYHOLDER NUMBER TO BE SOLD(1)
---------------------- ---------------------
<S> <C>
Stanley Hoffman....................................... 12,500
Herman Howard......................................... 50,000
Steven R. Hurlburt.................................... 43,750
Naava Katlowitz....................................... 6,250
Jacob Katz and Christel Katz.......................... 18,750
Louis Katz and Irene Katz............................. 12,500
Leonard Keller and Eileen Keller...................... 100,000
Robert Klein, M.D. and Miriam Gluck, M.D.............. 6,250
Daniel Klugman and Miriam Klugman..................... 12,500
Naeem M. Kohli and Tahira N. Kohli.................... 12,500
Frank Lagano.......................................... 25,000
Salvatore Lauria...................................... 18,750
LCL Ltd.(16).......................................... 25,000
Reuben Mark........................................... 25,000
Jamie Massimi......................................... 18,750
MDBC Capital Corp.(17)................................ 25,000
George Y. Motonaga and Irene M. Motonaga.............. 12,500
Pervez Mussarat....................................... 12,500
Stephen W. Nagy and Louise B. Nagy.................... 6,250
Dr. William Neuman.................................... 12,500
Marvin P. Nodvin...................................... 12,500
Quest Enterprises, Inc.(18)........................... 12,500
Pattabhiraman Rajendran and Pindi L. Rajendran........ 25,000
Majer Rosenfeld and Judith Rosenfeld.................. 6,250
Alan J. Rubin......................................... 12,500
Matthew C. Schilowitz................................. 37,500
Gabriel Schnurmann and Silvia Schnurmann.............. 12,500
Sterl F. Shinaberry................................... 12,500
The Silberberg Family Trust(19)....................... 6,250
Eugene Silverman...................................... 6,250
Martin Sirotkin....................................... 25,000
Jeffrey D. Smith and Susanne M. Smith................. 12,500
David W. Solana....................................... 6,250
Leonard Solomon....................................... 12,500
Dr. George Spiegel IRA................................ 43,750
Michael G. Springer and James A. Springer and
Christine M. Springer................................ 6,250
Suan Investments(20).................................. 50,000
Michael Tornichia..................................... 25,000
Richard D. Tufo and Luella A. Tufo.................... 12,500
Lee A. Turet.......................................... 6,250
W. Ed Tyler and Vicki S. Tyler........................ 100,000
Dean Vaughan.......................................... 12,500
Eric J. Wiborg Trust.................................. 25,000
Robert I. Wier and Ann Wier........................... 6,250
Joel Wolff............................................ 25,000
Abraham Wolfson....................................... 25,000
Nancy Zachary......................................... 12,500
---------
Total............................................... 3,500,000
=========
</TABLE>
ALT 3-6
<PAGE>
- --------
(1) Does not include shares of Common Stock and Class B Warrants issuable
upon exercise of the Class A Warrants and the shares of Common Stock
issuable upon exercise of the Class B Warrants.
(2) Allen Robert Glick may be deemed the beneficial owner of such securities.
(3) Jacob Safier may be deemed the beneficial owner of such securities.
(4) Ned Hurley may be deemed the beneficial owner of such securities.
(5) Louis A. Falcigno may be deemed the beneficial owner of such securities.
(6) Liebel Rubin, Dorothy Rubin, Eugene Rubin and Dina Rubin may be deemed
the beneficial owners of such securities.
(7) Morris Wolfson may be deemed the beneficial owner of such securities.
(8) Henry A. Schon and Anna E. Schon may be deemed the beneficial owners of
such securities.
(9) Sydney J. Goldstein may be deemed the beneficial owner of such
securities.
(10) Scott J. Turkel may be deemed the beneficial owner of such securities.
(11) Theodore R. Tetzlaff may be deemed the beneficial owner of such
securities.
(12) Otto Weingarten, Rosemarie Weingarten, Heshie Weingarten and Simone
Weingarten may be deemed the beneficial owners of such securities.
(13) Aaron Wolfson may be deemed the beneficial owner of such securities.
(14) Matt Lewis and Saul Elias may be deemed the beneficial owners of such
securities.
(15) Joseph M. Anzalone may be deemed the beneficial owner of such securities.
(16) Albert L. Lord may be deemed the beneficial owner of such securities.
(17) Marc Belzberg may be deemed the beneficial owner of such securities.
(18) Tovia Barak may be deemed the beneficial owner of such securities.
(19) Mendel Silberberg may be deemed the beneficial owner of such securities.
(20) Ernest Gottdiener may be deemed the beneficial owner of such securities.
ALT 3-7
<PAGE>
PLAN OF DISTRIBUTION
The sale of the securities by the Selling Securityholders may be effected
from time to time in transactions (which may include block transactions by or
for the account of the Selling Securityholders) in the over-the-counter market
or in negotiated transactions, through the writing of options on the
securities, a combination of such methods of sale or otherwise. Sales may be
made at fixed prices which may be changed, at market prices prevailing at the
time of sale, or at negotiated prices.
The Selling Securityholders may effect such transactions by selling their
securities directly to purchasers, through broker-dealers acting as agents for
the Selling Securityholders or to broker-dealers who may purchase shares as
principals and thereafter sell the securities from time to time in the over-
the-counter market in negotiated transactions or otherwise. Such broker-
dealers, if any, may receive compensation in the form of discounts,
concessions or commissions from the Selling Securityholders or the purchasers
for whom such broker-dealers may act as agents or to whom they may sell as
principals or otherwise (which compensation as to a particular broker-dealer
may exceed customary commissions).
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Selling Securityholder Warrants may not
simultaneously engage in market making activities with respect to any
securities of the Company for a period of at least two (and possibly nine)
business days prior to the commencement of such distribution. Accordingly, in
the event the Underwriter or D.H. Blair & Co. Inc. ("Blair & Co.") is engaged
in a distribution of the Selling Securityholder Warrants, neither of such
firms will be able to make a market in the Company's securities during the
applicable restrictive period. However, neither the Underwriter nor Blair &
Co. have agreed to nor are either of them obliged to act as broker/dealer in
the sale of the Selling Securityholder Warrants and the Selling
Securityholders may be required, and in the event Blair & Co. is a market
maker, will likely be required, to sell such securities through another
broker/dealer. In addition, each Selling Securityholder desiring to sell
Warrants will be subject to the applicable provisions of the Exchange Act and
the rules and regulations thereunder, including without limitation, Rules
10b-6 and 10b-7, which provisions may limit the timing of the purchases and
sales of shares of the Company's securities by such Selling Securityholders.
The Selling Securityholders and broker-dealers, if any, acting in connection
with such sale might be deemed to be underwriters within the meaning of
Section 2(11) of the Securities Act and any commission received by them, and
any profit on the resale of the securities, might be deemed to be underwriting
discounts and commissions under the Securities Act.
ALT 3-8
<PAGE>
RECENT EXERCISE OFFER AND CONCURRENT OFFERING
On July , 1996, the Company commenced an Exercise Offer pursuant to which
the Company offered to the holders (the "Holders") of Class A Warrants who
exercised their Class A Warrants pursuant to such Exercise Offer two
alternative exercise options in lieu of the existing terms of the Class A
Warrants. The two alternatives from which each Holder could choose provided
for the Company either (i) to reduce the exercise price of Class A Warrants to
$6.00 and to issue one share of Common Stock and 1.3 Class B Warrants or (ii)
to reduce the exercise price of Class A Warrants to $3.00 and to issue 2/3 of
a share of Common Stock and one Class B Warrant for each Class A Warrant so
exercised. The two alternative exercise options were available to each Holder
only if such Holder exercised his or her Class A Warrants prior to the
Expiration Date. The terms of the Class B Warrants offered pursuant to the
Exercise Offer are identical to the terms of the Class B Warrants and those
Class B Warrants issued pursuant to the Exercise Offer that are in excess of
the number of Class B Warrants that would otherwise have been issued under the
original terms of the Class A Warrants are sometimes referred to herein as
"Additional Class B Warrants". Pursuant to the Exercise Offer, (i) Class A
Warrants were exercised pursuant to the first alternative described above,
with shares of Common Stock and Class B Warrants being issued and with
the Company receiving gross proceeds of $ and (ii) Class A Warrants were
exercised pursuant to the second alternative described above, with shares
of Common Stock and Class B Warrants being issued and with the Company
receiving gross proceeds of $ . The Company redeemed the remaining
unexercised Class A Warrants for $0.05 per warrant on the first business day
following the Expiration Date at a total cost of $ .
Pursuant to the registration statement of which this Prospectus forms a
part, the Company has registered (i) 4,830,000 shares of Common Stock of the
Company, which are issuable upon exercise of the Company's Class A Warrants,
(ii) 4,830,000 shares of Common Stock which are issuable upon exercise of the
Company's Class B Warrants, which are issuable upon exercise of the Company's
outstanding Class A Warrants, (iii) 4,830,000 shares of Common Stock issuable
upon exercise of the Company's outstanding Class B Warrants, and (iv) a
maximum of 2,499,000 shares of Common Stock issuable upon exercise of the
Additional Class B Warrants.
ALT 3-9
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY OFFER TO BUY
ANY OF THE SECURITIES OFFERED HEREBY TO ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING
SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-------
<S> <C>
Prospectus/Exercise Offer Summary...................................... 3
Risk Factors........................................................... 9
The Exercise Offer..................................................... 18
Purpose of Exercise Offer and Use of Proceeds.......................... 25
Dividend Policy........................................................ 25
Capitalization......................................................... 27
Price Range of Securities.............................................. 29
Selected Financial Data................................................ 30
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 32
Business............................................................... 37
Management............................................................. 47
Certain Transactions................................................... 52
Principal Shareholders................................................. 53
Concurrent Offerings................................................... 56
Description of Securities.............................................. 56
Shares Eligible for Future Sale........................................ 59
Plan of Distribution................................................... 60
Legal Matters.......................................................... 62
Experts................................................................ 62
Additional Information................................................. 62
Index to Financial Statements.......................................... F-1
Selling Securityholders................................................ ALT 3-3
Plan of Distribution................................................... ALT 3-8
Recent Exercise Offer and Concurrent Offering.......................... ALT 3-9
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIGITAL VIDEO SYSTEMS, INC.
3,500,000 REDEEMABLE CLASS A WARRANTS
3,500,000 SHARES OF COMMON STOCK AND
3,500,000 REDEEMABLE CLASS B WARRANTS
ISSUABLE UPON EXERCISE OF THE
REDEEMABLE CLASS A WARRANTS
3,500,000 SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF THE
REDEEMABLE CLASS B WARRANTS
, 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXHIBIT 99(b)
<PAGE>
EXHIBIT 1.2
LETTER OF TRANSMITTAL
TO EXERCISE CLASS A WARRANTS
OF
DIGITAL VIDEO SYSTEMS, INC.
PURSUANT TO THE PROSPECTUS/EXERCISE OFFER DATED JULY , 1996
----------------
DIGITAL VIDEO SYSTEMS, INC.
OFFER TO HOLDERS OF THE COMPANY'S CLASS A WARRANTS EITHER TO:
(A) REDUCE THE EXERCISE PRICE OF CLASS A WARRANTS
TO $6.00 AND ISSUE ONE SHARE OF COMMON STOCK
AND 1.3 NEW CLASS B WARRANTS OR
(B) REDUCE THE EXERCISE PRICE OF CLASS A WARRANTS
TO $3.00 AND ISSUE 2/3 OF A SHARE OF COMMON STOCK
AND ONE NEW CLASS B WARRANT
FOR EXERCISES ON OR BEFORE
AUGUST 29, 1996
THE EXERCISE OFFER WILL EXPIRE ON THURSDAY, AUGUST 29, 1996, AT 5:00 P.M.,
NEW YORK CITY TIME, UNLESS EXTENDED. WITHDRAWAL RIGHTS WILL ALSO EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON THURSDAY, AUGUST 29, 1996.
The Warrant Agent for the Offer is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
1-(800) 937-5449 (toll free outside of the five boroughs of New York City)
(212) 936-5100 (all other calls)
By Facsimile: By Mail or Hand Delivery:
(718) 236-2976 Reorganization Department
40 Wall Street
Confirm Facsimile by Telephone: 46th Floor
1-(800) 937-5449 (toll free New York, NY 10005
outside of the five
boroughs of New York City)
(212) 936-5100 (all other calls)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSIONS OF INSTRUCTIONS VIA A FACSIMILE TRANSMISSION TO A
NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
This Letter of Transmittal is to be completed by holders (the "Holders") of
Class A Warrants (defined below) either if certificates for Class A Warrants
are to be forwarded herewith or, unless an Agent's Message (as defined in the
Prospectus/Exercise Offer) is utilized, if exercises are to be made by book-
entry transfer to an account maintained by American Stock Transfer & Trust
Company (the "Warrant Agent") at the Depository Trust Company ("DTC"), Pacific
Securities Trust Company ("PSDTC") or Philadelphia Depository Trust Company
("PDTC") (each a "Book-Entry Transfer Facility" and collectively referred to
as the "Book-Entry Transfer Facilities"), pursuant to the procedures set forth
under the caption "The Exercise Offer--Procedure for Exercising Class A
Warrants--Book-Entry Transfer" in the Prospectus/Exercise Offer, dated July
, 1996 (the "Prospectus/Exercise Offer"). Holders who exercise Class A
Warrants by book-entry transfer are referred to herein as "Book-Entry
Holders."
Holders of Class A Warrants whose certificates for such Class A Warrants
(the "Warrant Certificates") are not immediately available or who cannot
deliver their Warrant Certificates, together with a certified or bank check
payable to "Digital Video Systems, Inc." in the amount of either $6.00 or
$3.00 per Class A Warrant exercised in the Exercise Offer (depending upon
which alternative exercise option is selected by the Holder) and all other
required documents to the Warrant Agent on or prior to the Expiration Date or
who cannot complete the procedures for book-entry transfer on a timely basis,
must exercise their Class A Warrants according to the guaranteed delivery
procedures set forth under the caption "The Exercise Offer--Procedures for
Exercising Class A Warrants--Guaranteed Delivery" in the Prospectus/Exercise
Offer. See Instruction 2 below. Delivery of documents to a Book-Entry Transfer
Facility does not constitute delivery to the Warrant Agent.
NOTE: SIGNATURES MUST BE PROVIDED ON PAGE 6. PLEASE READ THE ACCOMPANYING
INSTRUCTIONS CAREFULLY.
[_]CHECK HERE IF CLASS A WARRANTS ARE BEING EXERCISED BY BOOK-ENTRY TRANSFER
MADE TO AN ACCOUNT MAINTAINED BY THE WARRANT AGENT WITH A BOOK-ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Exercising Institution: _______________________________________________
Check Box of Book-Entry Transfer Facility:
[_] The Depository Trust Company
[_] Pacific Securities Trust Company
[_] Philadelphia Depository Trust Company
Account Number: __________________ Transaction Code Number: __________________
[_]CHECK HERE IF CLASS A WARRANTS ARE BEING EXERCISED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE WARRANT AGENT AND COMPLETE THE
FOLLOWING. PLEASE ENCLOSE A PHOTOCOPY OF SUCH NOTICE OF GUARANTEED
DELIVERY.
Name(s) of Registered Holder(s): ______________________________________________
Window Ticket Number (if any): ________________________________________________
Date of Execution of Notice of Guaranteed Delivery: ___________________________
Name of Institution which Guaranteed Delivery: ________________________________
2
<PAGE>
- --------------------------------------------------------------------------------
DESCRIPTION OF CLASS A WARRANTS EXERCISED PURSUANT TO ALTERNATIVE EXERCISE
OPTION THAT PROVIDES FOR THE COMPANY TO REDUCE THE EXERCISE PRICE OF CLASS A
WARRANTS TO $6.00 AND ISSUE ONE SHARE OF COMMON STOCK AND
1.3 NEW CLASS B WARRANTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME(S) AND
ADDRESS(ES) OF
REGISTERED
HOLDER(S)
(PLEASE FILL
IN, IF BLANK,
EXACTLY AS
NAME(S)
APPEAR(S) WARRANT CERTIFICATE(S) AND
ON WARRANT WARRANT(S) EXERCISED
CERTIFICATE(S)) (ATTACH ADDITIONAL LIST, IF NECESSARY)
- ----------------------------------------------------------------
TOTAL NUMBER
OF WARRANT
REPRESENTED NUMBER OF
CERTIFICATE BY WARRANT CLASS A WARRANTS
NUMBER(S) CERTIFICATE(S) EXERCISED*
- ----------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
Total Warrants
- ----------------------------------------------------------------
</TABLE>
* Unless otherwise indicated, it will be assumed that all Warrants described
above are being exercised. See Instruction 4.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
DESCRIPTION OF CLASS A WARRANTS EXERCISED PURSUANT TO ALTERNATIVE EXERCISE
OPTION THAT PROVIDES FOR THE COMPANY TO REDUCE THE EXERCISE PRICE OF CLASS A
WARRANTS TO $3.00 AND ISSUE 2/3 OF A SHARE OF COMMON STOCK
AND ONE NEW CLASS B WARRANT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
NAME(S) AND
ADDRESS(ES) OF
REGISTERED
HOLDER(S)
(PLEASE FILL
IN, IF BLANK,
EXACTLY AS
NAME(S)
APPEAR(S) WARRANT CERTIFICATE(S) AND
ON WARRANT WARRANT(S) EXERCISED
CERTIFICATE(S)) (ATTACH ADDITIONAL LIST, IF NECESSARY)
- ----------------------------------------------------------------
TOTAL NUMBER
OF WARRANT
REPRESENTED NUMBER OF
CERTIFICATE BY WARRANT CLASS A WARRANTS
NUMBER(S) CERTIFICATE(S) EXERCISED*
- ----------------------------------------------------------------
<S> <C> <C> <C>
-----------------------------------------------
-----------------------------------------------
-----------------------------------------------
Total Warrants
- ----------------------------------------------------------------
</TABLE>
* Unless otherwise indicated, it will be assumed that all Warrants described
above are being exercised. See Instruction 4.
- -------------------------------------------------------------------------------
3
<PAGE>
Ladies and Gentlemen:
The undersigned hereby exercises the redeemable Class A Warrants (the "Class
A Warrants") of Digital Video Systems, Inc. a Delaware corporation (the
"Company"), as described on page 3 of this Letter of Transmittal, at an
exercise price of either $6.00 or $3.00 per Class A Warrant (depending upon
which alternative exercise option is selected by the Holder), upon the terms
and subject to the conditions set forth in the Prospectus/Exercise Offer,
dated July , 1996 (the "Prospectus/Exercise Offer"), receipt of which is
hereby acknowledged, and in this Letter of Transmittal (which, together with
the Prospectus/Exercise Offer, constitutes the "Exercise Offer"). The
undersigned understands that upon exercise of each such Class A Warrant either
(i) the Company will issue to the undersigned one (1) share of Common Stock,
par value $.0001 per share (the "Common Stock"), and 1.3 redeemable New Class
B Warrants (the "New Class B Warrants") at an exercise price of $6.00 per
Class A Warrant or (ii) 2/3 of a share of Common Stock and one (1) Class B
Warrant at an exercise price of $3.00.
Subject to, and effective upon, acceptance for exercise of the Class A
Warrants included herewith in accordance with the terms and subject to the
conditions of the Exercise Offer, the undersigned hereby (i) exercises and
transfers to, or upon the order of, the Company all right, title and interest
in and to all the Class A Warrants that are being exercised hereby, and (ii)
constitutes and irrevocably appoints the Warrant Agent the true and lawful
agent, attorney-in-fact and proxy of the undersigned to the full extent of the
undersigned's rights with respect to such Class A Warrants with full power of
substitution and re-substitution (such power of attorney and proxy being
deemed to be an irrevocable power coupled with an interest), to (a) deliver
Warrant Certificates and transfer ownership of such Class A Warrants on the
account books maintained by the Book-Entry Transfer Facilities, together with
all accompanying evidences of transfer and authenticity, to or upon the order
of the Company, upon issuance by the Warrant Agent, as the undersigned's
agent, of the applicable Common Stock and New Class B Warrants, (b) present
such Class A Warrants for transfer, and effect such transfer, on the books of
the Company, and (c) receive all benefits and otherwise exercise all rights of
beneficial ownership of such Class A Warrants, all in accordance with the
terms of the Exercise Offer.
The undersigned hereby represents and warrants that the undersigned has full
power and authority to exercise, assign and transfer the Class A Warrants
exercised hereby and that, when the same are accepted for exercise by the
Company, the Company will acquire good, marketable and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances
and the same will not be subject to any adverse claim. The undersigned, upon
request, will execute and deliver any additional documents deemed by the
Warrant Agent or the Company to be necessary or desirable to complete the
exercise, assignment and transfer of the Class A Warrants exercised hereby. In
addition, if there shall occur any anti-dilution adjustment pursuant to the
terms of the Class A Warrants, or other adjustment affecting the exercise
price or the number of shares of Common Stock obtainable upon exercise of the
Class A Warrants, the Company, in its sole discretion, may make such
adjustments in the exercise price of the Class A Warrants or the securities
issuable upon exercise thereof as it deems appropriate.
All authority herein conferred or herein agreed to be conferred shall not be
affected by, and shall survive, the death or incapacity of the undersigned and
any obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, legal representatives, successors and assigns of
the undersigned. Except as stated in the Prospectus/Exercise Offer, this
exercise is irrevocable.
The undersigned understands that exercises of Class A Warrants pursuant to
any one of the procedures described under the caption "The Exercise Offer--
Procedures for Exercising Class A Warrants" in the Prospectus/Exercise Offer
and in the Instructions hereto will constitute a binding agreement between the
undersigned and the Company upon the terms and subject to the conditions of
the Exercise Offer. The undersigned further understands that the Company will
redeem for $.05 per warrant any remaining unexercised Class A Warrants on the
first business day following expiration of Exercise Offer, or as soon
thereafter as possible.
4
<PAGE>
Unless otherwise indicated herein under "Special Issuance Instructions,"
please issue the applicable Common Stock and New Class B Warrants and/or
return any Warrant Certificates not exercised or accepted for exercise in the
name(s) of the undersigned. Similarly, unless otherwise indicated under
"Special Delivery Instructions," please mail the applicable Common Stock and
New Class B Warrants and/or return any Warrant Certificates not exercised or
accepted for exercise (and accompanying documents, as appropriate) to the
undersigned at the address shown below the undersigned's signature. In the
event that both the "Special Issuance Instructions" and the "Special Delivery
Instructions" are completed, please issue the applicable Common Stock and New
Class B Warrants and/or return any Warrant Certificates not exercised or
accepted for exercise in the name(s) of, and deliver said applicable Common
Stock and New Class B Warrants and/or return certificates to, the person or
persons so indicated. Holders exercising Class A Warrants by book-entry
transfer may request that any Class A Warrants not accepted for exercise be
returned by crediting such account maintained at such Book-Entry Transfer
Facility as such Holder may designate by making an appropriate entry under
"Special Issuance Instructions." The undersigned recognizes that the Company
has no obligation pursuant to the "Special Issuance Instructions" to issue any
applicable Common Stock and New Class B Warrants in the name of a different
registered Holder if the Company does not accept for exercise any of such
Class A Warrants.
SPECIAL ISSUANCE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7) (SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if Warrant To be completed ONLY if Warrant
Certificates not exercised or Certificates not exercised or
not accepted for exercise and/or not accepted for exercise and/or
the applicable Common Stock and the applicable Common Stock and
New Class B Warrants are to be New Class B Warrants to be sent
issued in the name of someone to someone other than the
other than the undersigned, or undersigned, or to the
if Class A Warrants exercised by undersigned at an address other
book-entry transfer which are than shown on the front cover.
not accepted for exercise are to
be returned by credit to an
account maintained at a Book-
Entry Transfer Facility other
than the designated on the front
cover.
Issue Common Stock and New Class Mail Common Stock and New Class
B Warrants and/or certificates B Warrants and/or certificates
to: to:
Name: ___________________________ Name: ___________________________
(Please Print) (Please Print)
Address: ________________________ Address: _________________________
_________________________________ _________________________________
_________________________________ _________________________________
(Include Zip Code) (Include Zip Code)
_________________________________ __________________________________
(Taxpayer Identification or (Taxpayer Identification or
Social Security No.) Social Security No.)
NOTE: SIGNATURE MUST BE PROVIDED ON FOLLOWING PAGE
5
<PAGE>
SIGN HERE
_____________________________________________________________
_____________________________________________________________
Signature(s) of Owner(s)
(Must be signed by the registered holder(s) exactly as
name(s) appear(s) on the Warrant Certificate(s) or on a
security position listing or by person(s) authorized to
become registered holder(s) by certificates and documents
transmitted herewith. If signature is by trustees,
executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or
representative capacity, please provide the necessary
information. See Instruction 5.)
Name(s): ____________________________________________________
_____________________________________________________________
(Please Print)
Capacity (Full Title): ______________________________________
Address: ____________________________________________________
_____________________________________________________________
_____________________________________________________________
(Include Zip Code)
Area Code and Telephone Number: _____________________________
Tax Identification or Social Security No.: __________________
Dated: ______________________________________________________
GUARANTEE OF SIGNATURE(S)
(If Required--See Instructions 1 and 5)
Authorized Signature: _______________________________________
Name: _______________________________________________________
Name of Firm: _______________________________________________
Address: ____________________________________________________
_____________________________________________________________
_____________________________________________________________
(Include Zip Code)
Area Code and Telephone Number: _____________________________
Dated: ______________________________________________________
6
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES. No signature guarantee on this Letter of
Transmittal is required (i) if this Letter of Transmittal is signed by the
registered holder (which term, for purposes of this document, shall include
any participant in a Book-Entry Transfer Facility whose name appears on a
security position listing as the owner of Class A Warrants) of the Class A
Warrants exercised hereby, unless such holder has completed the box entitled
"Special Issuance Instructions" on page 5 hereof, or (ii) if such Class A
Warrants are exercised for the account of a firm that is a bank, broker,
dealer, credit union, savings association or other entity which is a member in
good standing of the Securities Transfer Agent's Medallion Program (an
"Eligible Institution"). In all other cases, all signatures on this Letter of
Transmittal must be guaranteed by an Eligible Institution. See Instruction 5.
2. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES. This Letter of
Transmittal is to be used either if Warrant Certificates are to be forwarded
herewith or, unless an Agent's Message (as defined in the Prospectus/Exercise
Offer) is utilized, if exercises of Class A Warrants are to be made pursuant
to the procedures for exercise by book-entry set forth under the caption "The
Exercise Offer--Procedures for Exercising Class A Warrants--Book-Entry
Exercise" in the Prospectus/Exercise Offer. Warrant Certificates or timely
confirmation (a "Book-Entry Confirmation") of a book-entry exercise of such
Class A Warrants in the Warrant Agent's account at a Book-Entry Transfer
Facility, as well as a Letter of Transmittal (or a facsimile hereof), properly
completed and duly executed, with any required signature guarantees, or an
Agent's Message in the case of a book-entry delivery, together with a
certified or bank check payable to "Digital Video Systems, Inc." in the amount
of either $6.00 or $3.00 per Class A Warrant exercised in the Exercise Offer
(depending upon which alternative exercise option is selected by the Holder)
and any other documents required by the Letter of Transmittal, must be
received by the Warrant Agent at its address set forth herein prior to the
Expiration Date. Holders whose Warrant Certificates are not immediately
available or who cannot deliver their Warrant Certificates, together with a
certified or bank check payable to "Digital Video Systems, Inc." in the amount
of either $6.00 or $3.00 per Class A Warrant exercised in the Exercise Offer
(depending upon which alternative exercise option is selected by the Holder)
and all other required documents to the Warrant Agent prior to the Expiration
Date or who cannot complete the procedures for delivery by book-entry exercise
on a timely basis may exercise their Class A Warrants by properly completing
and duly executing a Notice of Guaranteed Delivery pursuant to the guaranteed
delivery procedures set forth under the caption "The Exercise Offer--
Procedures for Exercising Class A Warrants--Guaranteed Delivery" in the
Prospectus/Exercise Offer. Pursuant to such procedure: (i) such exercise must
be made by or through an Eligible Institution; (ii) a properly completed and
duly executed Notice of Guaranteed Delivery, substantially in the form made
available by the Company, must be received by the Warrant Agent on or prior to
the Expiration Date; and (iii) the Warrant Certificates (or a Book-Entry
Confirmation) representing all exercised Class A Warrants with a Letter of
Transmittal (or a facsimile thereof), properly completed and duly executed,
with any required signature guarantees (or, in the case of a book-entry
delivery, an Agent's Message), together with a certified or bank check payable
to "Digital Video Systems, Inc." in the amount of either $6.00 or $3.00 per
Class A Warrant exercised in the Exercise Offer (depending upon which
alternative exercise option is selected by the Holder) and any other documents
required by the Letter of Transmittal, must be received by the Warrant Agent
within five Nasdaq National Market. ("Nasdaq") trading days after the date of
execution of such Notice of Guaranteed Delivery, as provided under the caption
"The Exercise Offer--Procedures for Exercising Class A Warrants--Guaranteed
Delivery" in the Prospectus/Exercise Offer. If Warrant Certificates are
forwarded separately to the Warrant Agent, a properly completed and duly
executed Letter of Transmittal (or facsimile thereof) must accompany each such
delivery.
The method of delivery of Warrant Certificates, the Letter of Transmittal
and all other required documents is at the option and sole risk of the
exercising Holder and the delivery will be deemed made only when actually
received by the Warrant Agent. If delivery is by mail, registered mail with
return receipt requested, properly insured, is recommended. In all cases,
sufficient time should be allowed to ensure timely delivery.
No other alternative, conditional or contingent exercise will be accepted.
All exercising Holders, by execution of this Letter of Transmittal or
facsimile hereof, waive any right to receive any notice of the acceptance of
their Class A Warrants for exercise.
7
<PAGE>
3. INADEQUATE SPACE. If the space provided herein is inadequate, the Warrant
Certificate numbers and/or the number of Class A Warrants and any other
required information should be listed on a separate schedule attached hereto
and separately signed on each page thereof in the same manner as this Letter
of Transmittal is signed.
4. PARTIAL EXERCISES. (Not applicable to Holders who exercise by book-entry
transfer.) If fewer than all Class A Warrants evidenced by any certificate
submitted are to be exercised, fill in the number of Class A Warrants which
are to be exercised in the appropriate box for the alternative exercise option
selected entitled "Number of Class A Warrants Exercised." In such case, new
certificate(s) for the remainder of the Class A Warrants that were evidenced
by your old certificate(s) will be sent to you, unless otherwise provided in
the appropriate box marked "Special Issuance Instructions" and/or "Special
Delivery Instructions" on this Letter of Transmittal, as soon as practicable,
but such unexercised Class A Warrants will be subject to the redemption that
will occur on the first business day following the Expiration Date, or as soon
thereafter as possible. All Class A Warrants represented by Warrant
Certificates delivered to the Warrant Agent will be deemed to have been
exercised unless otherwise indicated.
5. SIGNATURES ON LETTER OF TRANSMITTAL. If this Letter of Transmittal is
signed by the registered holder(s) of the Class A Warrants exercised hereby,
the signatures must correspond exactly with the name(s) as written on the face
of the Warrant Certificate(s), without alteration, enlargement or any change
whatsoever.
If any of the Class A Warrants exercised hereby are owned of record by two
or more joint owners, all such owners must sign this Letter of Transmittal.
If any of the Class A Warrants exercised hereby are registered in different
names on several certificates, it will be necessary to complete, sign and
submit as many separate Letters of Transmittal as there are different
registrations of Warrant Certificates.
If this Letter of Transmittal is signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or
others acting in a fiduciary or representative capacity, such persons should
so indicate when signing, and proper evidence satisfactory to the Company of
their authority so to act must be submitted.
When this Letter of Transmittal is signed by the registered owner(s) of the
Class A Warrants listed and transmitted hereby, no endorsements of Warrant
Certificates are required unless payment is to be made to, or certificates for
Class A Warrants not exercised or accepted for exercise are to be issued in
the name of, a person other than the registered owner(s). Signatures on such
Warrant Certificates must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Class A Warrants listed, the Warrant Certificates
must be endorsed or accompanied by appropriate transfer powers, in either case
signed exactly as the name or names of the registered owner(s) appear(s) on
the Warrant Certificates. Signatures on such Warrant Certificates must be
guaranteed by an Eligible Institution.
6. TRANSFER TAXES. Except as set forth in this Instruction 6, the Company
will pay or cause to be paid any transfer taxes with respect to the transfer
and exercise of exercised Class A Warrants pursuant to the Exercise Offer. If,
however, issuance of the applicable Common Stock and New Class B Warrants is
to be made to, or if certificates for Class A Warrants not accepted for
exercise are to be registered in the name of, any person other than the
registered holder, or if exercised Warrant Certificates are registered in the
name of any person other than the person(s) signing this Letter of
Transmittal, the amount of any transfer taxes (whether imposed on the
registered holder or such person) payable on account of the transfer to such
person will be the obligation of the Holder, unless satisfactory evidence of
the payment of such taxes or exemption therefrom is submitted.
EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR
TRANSFER TAX STAMPS TO BE AFFIXED TO THE WARRANT CERTIFICATES LISTED IN THIS
LETTER OF TRANSMITTAL.
8
<PAGE>
7. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If the applicable Common
Stock and New Class B Warrants are to be issued in the name of and/or
certificates for unexercised Class A Warrants are to be returned to a person
other than the signer of this Letter of Transmittal or if the applicable
Common Stock and New Class B Warrants are to be sent and/or such certificates
are to be returned to someone other than the signer of this Letter of
Transmittal or to an address other than that shown on the front cover hereof,
the appropriate boxes on this Letter of Transmittal should be completed.
Holders exercising Class A Warrants by book-entry transfer may request that
Class A Warrants not accepted for exercise be credited to such account
maintained at such Book-Entry Transfer Facility as such Holder may designate
hereon. If no such instructions are given, such Class A Warrants not accepted
for exercise will be returned by crediting the account at the Book-Entry
Transfer Facility designated above. See Instruction 1.
8. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Requests for assistance may
be directed to the Warrant Agent at its address set forth below. Requests for
additional copies of the Exercise Offer and this Letter of Transmittal may be
directed to the Warrant Agent or to brokers, dealers, commercial banks or
trust companies.
9. LOST, DESTROYED OR STOLEN CERTIFICATES. If any certificate(s)
representing Class A Warrants has been lost, destroyed or stolen, the Holder
should promptly notify the Warrant Agent. The Holder will then be instructed
as to the steps that must be taken in order to replace the certificate(s).
This Letter of Transmittal and related documents cannot be processed until the
procedures for replacing lost or destroyed certificates have been followed.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE COPY HEREOF) OR AN
AGENT'S MESSAGE TOGETHER WITH (I) WARRANT CERTIFICATES OR CONFIRMATION OF
BOOK-ENTRY TRANSFER, (II) A CERTIFIED OR BANK CHECK PAYABLE TO "DIGITAL VIDEO
SYSTEMS, INC." IN THE AMOUNT OF EITHER $6.00 OR $3.00 PER CLASS A WARRANT
EXERCISED IN THE EXERCISE OFFER (DEPENDING UPON WHICH ALTERNATIVE EXERCISE
OPTION IS SELECTED BY THE HOLDER), AND (III) ALL OTHER REQUIRED DOCUMENTS MUST
BE RECEIVED BY THE WARRANT AGENT ON OR PRIOR TO THE EXPIRATION DATE.
Facsimile copies of the Letter of Transmittal, properly completed and duly
exercised, will be accepted. The Letter of Transmittal, Warrant Certificates,
a certified or bank check payable to "Digital Video Systems, Inc." in the
amount of either $6.00 or $3.00 per Class A Warrant exercised in the Exercise
Offer (depending upon which alternative exercise option is selected by the
Holder) and any other required documents should be sent or delivered by each
Holder or his broker, dealer, commercial bank, trust company or other nominee
to the Warrant Agent as follows:
The Warrant Agent for the Offer is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
1-(800) 937-5449 (toll free outside of the five boroughs of New York City)
(212) 936-5100 (all other calls)
By Facsimile: By Mail or Hand Delivery:
(718) 236-2976 Reorganization Department
40 Wall Street
Confirm Facsimile 46th Floor
by Telephone: New York, NY 10005
1-(800) 937-5449 (toll free outside of
the five boroughs of New York City)
(212) 936-5100 (all other calls)
Questions and requests for assistance may be directed to the Warrant Agent
at its address and telephone number listed above. Additional copies of the
Prospectus/Exercise Offer, this Letter of Transmittal and other Exercise Offer
materials may be obtained from the Warrant Agent as set forth above, and will
be furnished promptly at the Company's expense. You may also contact your
broker, dealer, commercial bank, trust company or other nominee for assistance
concerning the Exercise Offer.
9
<PAGE>
[Digital Video Systems, Inc. Letterhead]
DIGITAL VIDEO SYSTEMS, INC.
NOTICE OF REDEMPTION AND WARRANT EXERCISE OFFER
IMPORTANT--IMMEDIATE ACTION REQUIRED
July 24, 1996
Dear Class A Warrant Holder:
Digital Video Systems, Inc. (the "Company") hereby exercises its right,
pursuant to the Warrant Agreement dated May 9, 1996 among the Company,
American Stock Transfer & Trust Company, as Warrant Agent (the "Warrant
Agent"), and D.H. Blair Investment Banking Corp., to redeem, on August 30,
1996 (the "Redemption Date"), all of its outstanding redeemable Class A
Warrants ("Class A Warrants") at the redemption price of $.05 per Class A
Warrant (the "Redemption Price"). The Company has the right to redeem the
Class A Warrants as it has satisfied the condition for redemption--namely,
that the average closing bid price of the Company's Common Stock ("Common
Stock") exceeded $9.10 for a period of 30 consecutive trading days within 15
days of the date of the Notice of Redemption.
The Redemption Date will be the first business day following the Expiration
Date (as defined below), or as soon thereafter as possible. A copy of the
Prospectus/Exercise Offer (the "Prospectus/Exercise Offer") accompanies this
letter and notice of the foregoing redemption (the "Redemption Notice").
In lieu of surrendering their Class A Warrants, holders of Class A Warrants
may, at their option, exercise their Class A Warrants to purchase Common Stock
and New Class B Warrants (as defined below). The right of Class A Warrant
holders to exercise their Class A Warrants will terminate at 5:00 P.M., New
York City time, on Thursday, August 29, 1996. After such time, the Class A
Warrants will no longer be exercisable and the holders will have no rights
except to receive, upon surrender of the Class A Warrants, the Redemption
Price. THE REDEMPTION PRICE IS SUBSTANTIALLY LESS THAN EITHER (i) THE MARKET
PRICE OF THE COMMON STOCK AND CLASS B WARRANTS RECEIVABLE UPON EXERCISE OF THE
CLASS A WARRANTS OR (ii) THE PRICE THAT COULD BE OBTAINED UPON THE SALE OF THE
CLASS A WARRANTS IN THE OPEN MARKET.
Concurrently with the issuance of the Redemption Notice, the Company has
made a special, limited-time offer (the "Exercise Offer") to all holders of
Class A Warrants who exercise their Class A Warrants on or prior to August 29,
1996 pursuant to the Exercise Offer, in lieu of the existing terms of the
Class A Warrants (which provide for the issuance of one share of Common Stock
and one Class B Warrant for an exercise price of $6.50). Pursuant to the
Exercise Offer, the two alternatives from which you may choose provide for the
Company either: (i) to reduce the exercise price of the Class A Warrants to
$6.00 and issue one share of Common Stock ("Common Stock") and 1.3 New Class B
Warrants ("New Class B Warrants"), or (ii) to reduce the exercise price of the
Class A Warrants to $3.00 and issue 2/3 of a share of Common Stock and one New
Class B Warrant, for each Class A Warrant so exercised.
The terms of the New Class B Warrants offered pursuant to the two
alternative exercise options described above are identical to the terms of the
Company's currently outstanding redeemable Class B Warrants. The terms of the
Exercise Offer will be available to you only if you exercise your Class A
Warrants prior to 5:00 P.M., New York City time on Thursday, August 29, 1996,
unless such date is extended by the Company (such date, or such date as so
extended, being referred to herein as the "Expiration Date"). Since the Class
A Warrants have been called for redemption, the holders of Class A Warrants
received in exchange for the Company's then outstanding bridge warrants
("Bridge Warrants") upon the completion of the Company's initial public
offering (the "Selling Securityholders") will be permitted to exercise all
such Class A Warrants pursuant to the Exercise Offer. The Exercise Offer will
expire on August 29, 1996, unless extended by the Company.
<PAGE>
You are urged to consider the three alternatives to redemption which are
available to you and which may be more beneficial to you than redemption.
These alternatives are:
1. EXERCISE OF CLASS A WARRANTS FOR ONE SHARE OF COMMON STOCK AND 1.3 NEW
CLASS B WARRANTS.
Each Class A Warrant may be exercised during the Exercise Offer by
payment of the reduced exercise price of $6.00 per Class A Warrant, in
consideration for which you will receive one share of Common Stock and 1.3
New Class B Warrants for each Class A Warrant so exercised. On July 22,
1996, the closing sale price of the Common Stock, as reported by the Nasdaq
National Market, was $9.06, and the closing sale price of the Class B
Warrants, as reported by the Nasdaq National Market, was $3.38.
2. EXERCISE OF CLASS A WARRANTS FOR 2/3 OF A SHARE OF COMMON STOCK AND ONE
NEW CLASS B WARRANT.
Each Class A Warrant may be exercised during the Exercise Offer by
payment of the reduced exercise price of $3.00 per Class A Warrant, in
consideration for which you will receive 2/3 of a share of Common Stock and
one New Class B Warrant for each Class A Warrant so exercised.
3. SALE OF THE CLASS A WARRANTS IN THE OPEN MARKET.
Class A Warrants may be sold in the open market. You should consult your
broker as to this procedure and for current market quotations. The Selling
Securityholders shall not be permitted to sell any Class A Warrants
received in exchange for Bridge Warrants prior to August 9, 1996, and shall
be permitted to sell only 25% of such Class A Warrants between August 9,
1996 and November 7, 1996. On July 22, 1996, the closing sale price of the
Class A Warrants, as reported by the Nasdaq National Market, was $6.00.
Holders of the Class A Warrants who wish to exercise their right to
participate in the Exercise Offer may do so by following the procedures set
forth under the caption "The Exercise Offer--Procedures for Exercising Class A
Warrants" on page 20 of the Prospectus/Exercise Offer on or before 5:00 P.M.,
New York City time on August 29, 1996. The Election to Purchase Form on the
reverse side of each such Class A Warrant certificate must be completed and
signed by the holder of the Class A Warrant and the signature guaranteed by an
eligible institution.
The Company will, through the Warrant Agent, assist each holder of Class A
Warrants in connection with the exercise thereof.
Payment of the amount to be received on redemption of the Class A Warrants
will be made by the Company upon the presentation and surrender of the Class A
Warrants for payment at any time on or after the Redemption Date. To surrender
Class A Warrants for redemption, Class A Warrant holders should deliver
certificates representing the Class A Warrants to the Warrant Agent at the
following address:
American Stock Transfer & Trust Company 40 Wall Street New York, NY 10005
The Class A Warrants may be exercised by delivery of the Class A Warrants to
the Warrant Agent, at the address set forth above, on or before 5:00 P.M. New
York City time, on August 29, 1996. The Class A Warrants so delivered must be
accompanied by a bank or certified check made payable to Digital Video
Systems, Inc. for the full amount of the exercise price (either $6.00 or $3.00
for each Class A Warrant so exercised, depending upon which exercise option is
selected by the holder). The subscription form on the reverse side of each
Class A Warrant must be completed in full and signed.
<PAGE>
The method of delivery of the Class A Warrants to the Warrant Agent is at
the option and risk of the holder, but if mail is used, registered mail,
properly insured, is suggested. THE CLASS A WARRANTS AND EXERCISE PRICE MUST
BE RECEIVED BY THE WARRANT AGENT PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON
AUGUST 29, 1996, AND CLASS A WARRANTS WHICH HAVE NOT BEEN RECEIVED BY SUCH
DATE SHALL NOT BE ELIGIBLE FOR THE EXERCISE OFFER AND SHALL BE REDEEMED BY THE
COMPANY ON THE REDEMPTION DATE AS DESCRIBED ABOVE.
DIGITAL VIDEO SYSTEMS, INC.
By:
_____________________________________
Name:
Title:
<PAGE>
NOTICE OF GUARANTEED DELIVERY
FOR
EXERCISE OF CLASS A WARRANTS
OF
DIGITAL VIDEO SYSTEMS, INC.
This Notice of Guaranteed Delivery or one substantially equivalent hereto
must be used to accept the Exercise Offer (as defined below) if certificates
representing Class A Warrants are not immediately available or time will not
permit all required documents to reach American Stock Transfer & Trust Company
(the "Warrant Agent") on or prior to the Expiration Date (as defined in the
Prospectus/Exercise Offer (as defined below)), or the procedures for delivery
by book-entry exercise cannot be completed on a timely basis. This Notice of
Guaranteed Delivery may be delivered by hand or sent by facsimile transmission
or mail to the Warrant Agent. See the caption "The Exercise Offer--Procedures
for Exercising Class A Warrants--Guaranteed Delivery" in the
Prospectus/Exercise Offer.
The Warrant Agent for the Exercise Offer is:
AMERICAN STOCK TRANSFER & TRUST COMPANY
1-(800) 937-5449 (toll free outside of the five boroughs of New York City)
(212) 936-5100 (all other calls)
By Facsimile: By Mail or Hand Delivery:
(718) 236-2976 Reorganization Department
40 Wall Street
Confirm Facsimile 46th Floor
by Telephone: New York, NY 10005
1-(800) 937-5449 (toll free outside of
the five boroughs of New York City)
(212) 936-5100 (all other calls)
Delivery of this Notice of Guaranteed Delivery to an address other than as
set forth above or transmission of instructions via a facsimile transmission
to a number other than as set forth above will not constitute a valid
delivery.
This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an "Eligible Institution" under the instructions thereto, such
signature guarantee must appear in the applicable space provided in the
signature box on the Letter of Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby exercises, upon the terms and subject to the
conditions set forth in the Prospectus/Exercise Offer, dated July , 1996
(the "Prospectus/Exercise Offer"), and in the Letter of Transmittal,
receipt of each of which is hereby acknowledged (which together constitute
the "Exercise Offer"), the number of Class A Warrants indicated below
pursuant to the guaranteed delivery procedures set forth under the caption
"The Exercise Offer--Procedures for Exercising Class A Warrants--
Guaranteed Delivery" in the Prospectus/Exercise Offer.
Number of Class A Warrants Name(s) of Record Holder(s): _______
exercised pursuant to the ____________________________________
alternative exercise option that Address(es): _______________________
provides for the Company to reduce ____________________________________
the price of Class A Warrants to ____________________________________
$6.00 and issue one share of Common Area Code and Telephone Number(s): _
Stock and 1.3 New Class B Warrants: ____________________________________
____________________________________
Signature(s): ____________
Certificate No(s). (if available): _ ____________________________________
____________________________________ ____________________________________
If Class A Warrants will be
exercised by book-entry exercise,
check one box.
[_] The Depository Trust Company
[_] Pacific Securities Trust
Company
[_] Philadelphia Depository Trust
Company
Account Number: ____________________
Date: ______________________________
____________________________________
Number of Class A Warrants Name(s) of Record Holder(s): _______
exercised pursuant to the ____________________________________
alternative exercise option that Address(es): _______________________
provides for the Company to reduce ____________________________________
the exercise price of Class A ____________________________________
Warrants to $3.00 and issue 2/3 of Area Code and Telephone Number(s): _
a share of Common Stock and One New ____________________________________
Class B Warrant: ___________________
Signature(s): __________
Certificate No(s). (if available): _ ____________________________________
____________________________________ ____________________________________
If Class A Warrants will be
exercised by book-entry exercise,
check one box.
[_] The Depository Trust Company
[_] Pacific Securities Trust
Company
[_] Philadelphia Depository Trust
Company
Account Number: ____________________
Date: ______________________________
____________________________________
<PAGE>
THE GUARANTEE BELOW MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm that is a bank, broker, dealer, credit union,
savings association or other entity which is a member in good standing of
the Securities Transfer Agent's Medallion Program, hereby (a) represents
that the exercise of Class A Warrants effected hereby complies with Rule
14e-4 under the Securities Exchange Act of 1934, as amended, and (b)
guarantees to deliver to the Warrant Agent, at its address set forth
above, the certificate(s) representing all exercised Class A Warrants, in
proper form for transfer, or a Book-Entry Confirmation (as defined in the
Prospectus/Exercise Offer), together with a properly completed and duly
executed Letter of Transmittal (or facsimile thereof), with any required
signature guarantees, or an Agent's Message (as defined in the
Prospectus/Exercise Offer) in the case of a book-entry delivery, a
certified or bank check payable to "Digital Video Systems, Inc." in the
amount of either $6.00 or $3.00 per share exercised in the Exercise Offer
(depending upon which alternative exercise option is selected by the
Holder), and any other documents required by the Letter of Transmittal
within five Nasdaq National Market ("Nasdaq") trading days after the date
of execution of this Notice of Guaranteed Delivery.
Name of Firm: ______________________ ____________________________________
Address: ___________________________ (Authorized Signature)
____________________________________ Title: _____________________________
(Zip Code) Name: ______________________________
(Please type or print)
Area Code and Telephone Number: ____
Date: ______________________________
NOTE: DO NOT SEND CERTIFICATES FOR CLASS A WARRANTS WITH THIS NOTICE OF
GUARANTEED DELIVERY. CERTIFICATES FOR CLASS A WARRANTS SHOULD BE SENT
WITH YOUR LETTER OF TRANSMITTAL.
<PAGE>
Digital Video Systems, Inc.
2710 Walsh Avenue
Santa Clara, California 95051
DIGITAL VIDEO SYSTEMS, INC.
EXERCISE OFFER TO HOLDERS OF THE COMPANY'S CLASS A WARRANTS EITHER TO:
(A) REDUCE THE EXERCISE PRICE OF CLASS A WARRANTS TO
$6.00 AND ISSUE ONE SHARE OF COMMON STOCK AND
1.3 NEW CLASS B WARRANTS OR
(B) REDUCE THE EXERCISE PRICE OF CLASS A WARRANTS TO $3.00 AND ISSUE 2/3 OF A
SHARE OF COMMON STOCK AND ONE NEW CLASS B WARRANT
FOR EXERCISES ON OR BEFORE
AUGUST 29, 1996
THE EXERCISE OFFER WILL EXPIRE ON THURSDAY, AUGUST 29, 1996, AT 5:00 P.M.,
NEW YORK CITY TIME, UNLESS EXTENDED. WITHDRAWAL RIGHTS WILL ALSO EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON THURSDAY, AUGUST 29, 1996.
July , 1996
To Brokers, Dealers, Commercial Banks,
Trust Companies and Other Nominees:
Digital Video Systems, Inc., a Delaware corporation (the "Company"), is
offering, to the holders (the "Holders") of the Company's redeemable Class A
Warrants (the "Class A Warrants") who exercise their Class A Warrants pursuant
to the Exercise Offer, two alternative exercise options in lieu of the
existing terms of the Class A Warrants (which provide for the issuance of one
share of Common Stock and one Class B Warrant at an excise price of $6.50).
The two alternatives from which each Holder may choose provide for the Company
either (i) to reduce the exercise price of Class A Warrants to $6.00 per Class
A Warrant and issue one share of Common Stock ("Common Stock") and 1.3 New
Class B Warrants (the "New Class B Warrants") or (ii) to reduce the exercise
price of Class A Warrants to $3.00 and issue 2/3 of a share of Common Stock
and one New Class B Warrant, for each Class A Warrant so exercised, in each
case if and only if a Holder exercises his or her Class A Warrants prior to
5:00 P.M., New York City Time, on August 29, 1996, unless such date is
extended by the Company (such date, or such date as so extended, being
referred to as the "Expiration Date"), upon the terms and subject to the
conditions set forth in the Prospectus/Exercise Offer to Purchase, dated
July , 1996 (the "Prospectus/Exercise Offer") and the related blue Letter of
Transmittal. Holders whose certificates for such Class A Warrants (the
"Warrant Certificates") are not immediately available or who cannot deliver
their Warrant Certificates and all other required documents to the Warrant
Agent on or prior to the Expiration Date, or who cannot complete the
procedures for book-entry exercise on a timely basis, must exercise their
Class A Warrants according to the guaranteed delivery procedures set forth
under the caption "The Exercise Offer--Procedures for Exercising Warrants--
Guaranteed Delivery" in the Prospectus/Exercise Offer.
Please furnish copies of the enclosed materials to those of your clients for
whose accounts you hold Class A Warrants registered in your name or in the
name of your nominee.
<PAGE>
Enclosed herewith for your information and forwarding to your clients are
copies of the following documents:
1. The Prospectus/Exercise Offer, dated July , 1996.
2. The blue Letter of Transmittal to exercise Class A Warrants for your
use and for the information of your clients. Facsimile copies of the blue
Letter of Transmittal may be used to exercise Class A Warrants.
3. The yellow Notice of Guaranteed Delivery to be used to accept the
Exercise Offer if certificates for Class A Warrants are not immediately
available or if such certificates, a certified or bank check payable to
"Digital Video Systems, Inc." in the amount of either $6.00 or $3.00 per
Class A Warrant exercised in the Exercise Offer (depending upon which
alternative exercise option is selected by the Holder) and all other
required documents cannot be delivered to American Stock Transfer & Trust
Company (the "Warrant Agent") by the Expiration Date or if the procedure
for book-entry exercise cannot be completed by the Expiration Date.
4. A printed form of the letter which may be sent to your clients for
whose accounts you hold Class A Warrants registered in your name or in the
name of your nominee, with space provided for obtaining such clients'
instructions with regard to the Exercise Offer.
5. A letter and notice of redemption from Digital Video Systems, Inc. to
Class A Warrant Holders.
6. A return envelope addressed to the Warrant Agent.
YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS
PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS WILL
EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON THURSDAY, AUGUST 29, 1996, UNLESS
THE EXERCISE OFFER IS EXTENDED.
In order to accept the Exercise Offer, a duly executed and properly
completed Letter of Transmittal and any required signature guarantees, or an
Agent's Message (as defined in the Prospectus/Exercise Offer) in connection
with a book-entry exercise of Class A Warrants, a certified or bank check
payable to "Digital Video Systems, Inc." in the amount of either $6.00 or
$3.00 per Class A Warrant exercised in the Exercise Offer (depending upon
which alternative exercise option is selected by the Holder) and any other
required documents should be sent to the Warrant Agent, and Warrant
Certificates representing the exercised Class A Warrants should be delivered
to the Warrant Agent, or such Class A Warrants should be exercised by book-
entry in the Warrant Agent's account maintained at one of the Book-Entry
Transfer Facilities (as described in the Prospectus/Exercise Offer), all in
accordance with the instructions set forth in the Letter of Transmittal and
the Prospectus/Exercise Offer.
If Holders wish to exercise, but it is impracticable for them to forward
their Warrant Certificates or other required documents on or prior to the
Expiration Date or to comply with the book-entry exercise procedures on a
timely basis, an exercise may be effected by following the guaranteed delivery
procedures specified under the caption "The Exercise Offer--Procedures for
Exercising Warrants--Guaranteed Delivery" in the Prospectus/Exercise Offer.
The Company will, upon request, reimburse you for customary clerical mailing
expenses incurred by you in forwarding any of the enclosed materials to your
clients. The Company will pay or cause to be paid any transfer taxes payable
on the exercise of Class A Warrants, except as otherwise provided in
Instruction 6 of the Letter of Transmittal.
<PAGE>
Any inquiries you may have with respect to the Exercise Offer should be
addressed to, and additional copies of the enclosed material may be obtained
from, the Warrant Agent, at its address and telephone number set forth on the
back cover of the Prospectus/Exercise Offer.
Very truly yours,
DIGITAL VIDEO SYSTEMS, INC.
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU
OR ANY OTHER PERSON THE AGENT OF THE COMPANY OR THE WARRANT AGENT, OR ANY
AFFILIATE OF ANY OF THEM, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY
STATEMENT OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE
OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN.
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
EXERCISE OFFER TO HOLDERS OF THE COMPANY'S CLASS A WARRANTS EITHER TO:
(A) TO REDUCE THE EXERCISE PRICE OF CLASS A WARRANTS TO $6.00 AND ISSUE ONE
SHARE OF COMMON STOCK AND 1.3 NEW CLASS B WARRANTS
OR
(B) REDUCE THE EXERCISE PRICE OF CLASS A WARRANTS TO $3.00 AND ISSUE 2/3 A
SHARE OF COMMON STOCK AND ONE NEW CLASS B WARRANT
FOR EXERCISES ON OR BEFORE
AUGUST 29, 1996
THE EXERCISE OFFER WILL EXPIRE ON THURSDAY, AUGUST 29, 1996, AT 5:00 P.M.,
NEW YORK CITY TIME, UNLESS EXTENDED. WITHDRAWAL RIGHTS WILL ALSO EXPIRE AT
5.00 P.M., NEW YORK CITY TIME, ON THURSDAY, AUGUST 29, 1996.
July , 1996
To Our Clients:
Enclosed for your consideration are the Prospectus/Exercise Offer and the
blue Letter of Transmittal (which together constitute the "Exercise Offer")
relating to the offer by Digital Video Systems, Inc., a Delaware corporation
(the "Company"), to the holders (the "Holders") of the Company's redeemable
Class A Warrants (the "Class A Warrants") who exercise their Class A Warrants
pursuant to the Exercise Offer, two alternative exercise options in lieu of
the existing terms of the Class A Warrants (which provide for the issuance and
sale of Common Stock and Class B Warrants at an exercise price of $6.50), (i)
the two alternatives from which each Holder may choose provide for the Company
either to reduce the exercise price of Class A Warrants to $6.00 and issue one
share of Common Stock and 1.3 New Class B Warrants ("New Class B Warrants") or
(ii) to reduce the price of Class A Warrants to $3.00 and issue 2/3 of a share
of Common Stock and one Class B Warrant, for each Class A Warrant so
exercised, in each case if and only if a Holder exercises his or her Class A
Warrants prior to 5:00 P.M., New York City Time, on August 29, 1996, unless
such date is extended by the Company as described in the Prospectus/Exercise
Offer (such date, or such date as so extended, being referred to as the
"Expiration Date"), upon the terms and subject to the conditions set forth in
the Prospectus/Exercise Offer, dated July , 1996 (the "Prospectus/Exercise
Offer") and the related blue Letter of Transmittal. Holders whose certificates
for such Class A Warrants (the "Warrant Certificates") are not immediately
available or who cannot deliver their Warrant Certificates and all other
required documents to the Warrant Agent on or prior to the Expiration Date, or
who cannot complete the procedures for book-entry exercise on a timely basis,
must exercise their Class A Warrants according to the guaranteed delivery
procedures set forth under the caption "The Exercise Offer--Procedures for
Exercising Class A Warrants--Guaranteed Delivery" in the Prospectus/Exercise
Offer.
WE ARE THE HOLDER OF RECORD OF CLASS A WARRANTS HELD BY US FOR YOUR ACCOUNT.
AN EXERCISE OF SUCH CLASS A WARRANTS CAN BE MADE ONLY BY US AS THE HOLDER OF
RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS
FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO
EXERCISE CLASS A WARRANTS HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish to have us
exercise on your behalf any or all Class A Warrants held by us for your
account pursuant to the terms and conditions set forth in the Exercise Offer.
<PAGE>
Please note the following:
1. The exercise price is either $6.00 or $3.00 per Class A Warrant
(depending upon which alternative exercise option is selected by the
Holder) and the Company will either (i) issue one share of Common Stock and
1.3 New Class B Warrants at an exercise price of $6.00 or (ii) issue 2/3 of
a share of Common Stock and one New Class B Warrant at an exercise price of
$3.00, for each Class A Warrant so exercised, upon the terms and subject to
the conditions set forth in the Exercise Offer.
2. The Exercise Offer is being made for the exercise of any and all
outstanding Class A Warrants.
3. Holders who exercise their Class A Warrants pursuant to the Exercise
Offer will not be obligated to pay brokerage fees or commissions or, except
as otherwise provided in Instruction 6 of the Letter of Transmittal,
transfer taxes on the exercise of Class A Warrants pursuant to the Exercise
Offer.
4. The Exercise Offer and withdrawal rights will expire at 5:00 P.M., New
York City Time, on Thursday, August 29, 1996, unless the Exercise Offer is
extended at the sole discretion of the Company.
5. Exercise of Class A Warrants pursuant to the Exercise Offer will in
all cases be accepted only after timely receipt by American Stock Transfer
& Trust Company (the "Warrant Agent") of (a) Warrant Certificates or timely
confirmation of the book-entry exercise of such Class A Warrants into the
account maintained by the Warrant Agent at The Depository Trust Company,
Pacific Securities Trust Company or Philadelphia Depository Trust Company
(collectively, the "Book-Entry Transfer Facilities"), pursuant to the
procedures set forth under the caption "The Exercise Offer--Procedures for
Exercising Class A Warrants--Book-Entry Exercise" in the
Prospectus/Exercise Offer, (b) a Letter of Transmittal (or a facsimile
thereof), properly completed and duly executed, with any required signature
guarantees, or an Agent's Message (as defined in the Prospectus/Exercise
Offer) in connection with a book-entry delivery, (c) a certified or bank
check payable to "Digital Video Systems, Inc." in the amount of either
$6.00 or $3.00 per Class A Warrant exercised in the Exercise Offer
(depending upon which alternative exercise option is selected by the
Holder), and (d) any other documents required by the Letter of Transmittal.
Accordingly, issuances of the securities issuable upon exercise of the
Class A Warrants may not be made to all exercising Holders at the same time
depending upon when Warrant Certificates or confirmations of book-entry
transfer of such Class A Warrants into the Warrant Agent's account at the
Book-Entry Transfer Facility are actually received by the Warrant Agent.
If you wish to have us exercise any or all of the Class A Warrants held by
us for your account, please so instruct us by completing, executing, detaching
and returning to us the instruction form set forth on the back page of this
letter. If you authorize the exercise of your Class A Warrants, all such Class
A Warrants will be exercised unless otherwise specified on the next page of
this letter. An envelope to return your instructions to us is enclosed. Your
instructions should be forwarded to us in ample time to permit us to submit an
exercise on your behalf prior to the expiration of the Exercise Offer. THE
COMPANY HAS SATISFIED THE CONDITIONS CONTAINED IN THE CLASS A WARRANTS TO
REDEEM ALL OF THE CLASS A WARRANTS FOR $.05 PER WARRANT AND HAS CALLED CLASS A
WARRANTS FOR REDEMPTION. ANY CLASS A WARRANTS NOT EXERCISED PURSUANT TO THE
EXERCISE OFFER WILL BE REDEEMED BY THE COMPANY FOR $.05 PER WARRANT ON THE
FIRST BUSINESS DAY FOLLOWING THE EXPIRATION DATE, OR AS SOON THEREAFTER AS
POSSIBLE.
THE EXERCISE OFFER IS NOT BEING MADE TO (NOR WILL EXERCISES BE ACCEPTED FROM
OR ON BEHALF OF) HOLDERS OF CLASS A WARRANTS RESIDING IN ANY JURISDICTION IN
WHICH THE MAKING OF THE EXERCISE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE
IN COMPLIANCE WITH THE SECURITIES, BLUE SKY OR OTHER LAWS OF SUCH
JURISDICTION. HOWEVER, THE COMPANY MAY, IN ITS DISCRETION, TAKE SUCH ACTION AS
IT MAY DEEM NECESSARY TO MAKE THE EXERCISE OFFER IN ANY JURISDICTION AND
EXTEND THE EXERCISE OFFER TO HOLDERS OF CLASS A WARRANTS IN SUCH JURISDICTION.
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<PAGE>
INSTRUCTIONS WITH RESPECT TO THE EXERCISE OFFER
BY DIGITAL VIDEO SYSTEMS, INC. TO EITHER:
(A) REDUCE THE EXERCISE PRICE OF CLASS A WARRANTS TO $6.00 AND ISSUE ONE SHARE
OF COMMON STOCK AND 1.3 NEW CLASS B WARRANTS OR
(B) REDUCE THE EXERCISE PRICE OF CLASS A WARRANTS TO $3.00 AND ISSUE 2/3 OF A
SHARE OF COMMON STOCK AND ISSUE ONE NEW CLASS B WARRANT
The undersigned acknowledges) receipt of the Prospectus/Exercise Offer,
dated July , 1996 (the "Prospectus/Exercise Offer") and the blue Letter of
Transmittal (which document, together with the Prospectus/Exercise Offer,
constitutes the "Exercise Offer") in connection with the offer by Digital
Video Systems, Inc., a Delaware corporation (the "Company"), to the holders
(the "Holders") of the Company's redeemable Class A Warrants (the "Class A
Warrants") who exercise their Class A Warrants pursuant to the Exercise Offer,
two alternative exercise options in lieu of the existing terms of the Class A
Warrants (which provide for the issuance of one share of Common Stock and one
Class B Warrant at an exercise price of $6.50). The two alternative exercise
options from which each Holder may choose provide for the Company either (i)
to reduce the exercise price of Class A Warrants to $6.00 and issue one share
of Common Stock and 1.3 New Class B Warrants or (ii) to reduce the exercise
price of Class A Warrants to $3.00 and issue 2/3 of a share of Common Stock
and one New Class B Warrant, for each Class A Warrant so exercised, in each
case if and only if a Holder exercises his or her Class A Warrants prior to
5:00 P.M., New York City Time, on August 29, 1996, unless such date is
extended by the Company.
This will instruct you to exercise any or all Class A Warrants which are
held by you for the account of the undersigned, upon the terms and subject to
the conditions set forth in the Exercise Offer.
Number of Class A Warrants to be exercised pursuant to the
alternative exercise option that provides for the Company to
reduce the exercise price of Class A Warrants to $6.00 and
issue one share of Common Stock and 1.3 New Class B Warrants:
________________ Class A Warrants
Date: _________________________________________________________
Number of Class A Warrants to be exercised pursuant to the
alternative exercise option that provides for the Company to
reduce the exercise price of Class A Warrants to $3.00 and
issue 2/3 of a share of Common Stock and one New Class B Warrant:
________________ Class A Warrants
Date: _________________________________________________________
SIGN HERE
Signature: __________________________________________________
(Print Name(s)): ____________________________________________
(Print Address(es)): ________________________________________
(Area Code and Telephone Number(s)): ________________________
(Taxpayer Identification or
Social Security Number(s)): _________________________________
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