<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 4, 1996
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DIGITAL VIDEO SYSTEMS, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 3665 77-0333728
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION) 2710 WALSH AVENUE
SANTA CLARA, CALIFORNIA 95051
(408) 748-2100
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL
PLACE OF BUSINESS)
-------------
ROBERT B. PFANNKUCH
PRESIDENT
DIGITAL VIDEO SYSTEMS, INC.
2710 WALSH AVENUE
SANTA CLARA, CALIFORNIA 95051
TEL. (408) 748-2100 . FAX. (408) 727-1888
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
-------------
COPIES TO:
<TABLE>
<S> <C>
SANFORD J. HILLSBERG, ESQ. SHELDON MISHER, ESQ.
TROY & GOULD PROFESSIONAL CORPORATION ALISON S. NEWMAN, ESQ.
1801 CENTURY PARK EAST, SUITE 1600 BACHNER, TALLY, POLEVOY & MISHER LLP
LOS ANGELES, CALIFORNIA 90067 380 MADISON AVENUE
TEL. (310) 553-4441 . FAX. (310) 201-4746 NEW YORK, NEW YORK 10017
TEL. (212) 687-7000 . FAX. (212) 682-5729
</TABLE>
-------------
APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC: As soon as practicable after
this Registration Statement becomes effective.
-------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, as amended, please
check the following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
please check the following box. [X]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
PROPOSED
PROPOSED MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED PER SECURITY(1) PRICE(1) FEE(10)
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<S> <C> <C> <C> <C>
Units (2).................................... 26,450 Units(3) $1,000 $26,450,000 $ 8,016
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units, each consisting of one share of Common
Stock, $.0001 par value, and one Class B 2,645,000
Warrant (4)................................. units(3) $ 6.50 $17,192,500 $ 5,210
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5,290,000
Common Stock, $.0001 par value (5)........... shares(3) $ 8.75 $46,287,500 $14,027
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Unit Purchase Option (6)..................... 1 option $ .001 $ .001 $ .00
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units(2) (7)................................. 2,300 units $1,300 $ 2,990,000 $ 906
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units, each consisting of one share of Common
Stock, $.0001 par value, and one Class B
Warrant (8)................................. 230,000 units $ 6.50 $ 1,495,000 $ 454
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Common Stock, $.0001 par value (9)........... 460,000 shares $ 8.75 $ 4,025,000 $ 1,220
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Total........................................ $29,833(10)
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</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c).
(2) Each Unit will consist of a minimum of 70 and a maximum of 100 IPO Units.
Each IPO Unit consists of one share of Common Stock, one Class A Warrant
and one Class B Warrant. Each Class A Warrant entitles the holder to
purchase one share of Common Stock and one Class B Warrant. Each Class B
Warrant entitles the holder to purchase one share of Common Stock.
Includes 3,450 Units subject to the Underwriter's over-allotment option.
(3) Assumes the Underwriter's over-allotment option is exercised in full.
(4) Issuable upon exercise of the Class A Warrants included in the Units to
be sold to the public.
(5) Issuable upon exercise of the Class B Warrants included in both the Units
to be sold to the public and the Class A Warrants underlying such Units.
(6) To be issued to the Underwriter.
(7) Issuable upon exercise of the Unit Purchase Option.
(8) Issuable upon exercise of the Class A Warrants underlying the Units
included in the Unit Purchase Option.
(9) Issuable upon exercise of the Class B Warrants included in both the Units
included in the Unit Purchase Option and the Class A Warrants underlying
such Units underlying the Unit Purchase Option.
(10) Pursuant to Rule 429, the following securities are being carried over
from the Company's registration statement on Form SB-2, Registration No.
333-2228-LA: (i) 4,830,000 shares of Common Stock and 4,830,000 Class B
Warrants issuable upon exercise of Class A Warrants; (ii) 9,660,000
shares of Common Stock issuable upon exercise of Class B Warrants;
(iii) 420,000 Units issuable to the Company's underwriter pursuant to a
unit purchase option; (iv) 1,680,000 shares of Common Stock issuable upon
exercise of the unit purchase option and the Warrants issuable
thereunder; (v) 3,500,000 Class A Warrants held by certain Selling
Securityholders; (vi) 3,500,000 shares of Common Stock and 3,500,000
Class B Warrants issuable upon exercise of the selling securityholders'
Class A Warrants; and (vii) 3,500,000 shares of Common Stock issuable
upon exercise of the Class B Warrants underlying the selling
securityholders' Class A Warrants. The carried over filing fees for the
foregoing securities are $10,826, $29,147, $0, $4,416, $0, $7,845 and
$10,560, respectively.
Pursuant to Rule 416, this Registration Statement also covers such
indeterminable additional shares as may become issuable as a result of any
anti-dilution adjustments in accordance with the terms of the Class A Warrants
and Class B Warrants and the Unit Purchase Option.
-------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
PURSUANT TO RULE 429(A) UNDER THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT ALSO RELATES TO THE COMPANY'S PRIOR REGISTRATION STATEMENT ON
FORM SB-2, REGISTRATION NO. 333-8213.
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<PAGE>
EXPLANATORY NOTE
Pursuant to Rule 429 of the Securities Act of 1933, as amended, this
Registration Statement relates to three different offerings, as follows:
Offering #1: This Registration Statement relates to the Company's offer (the
"Offering") of up to 26,450 units, each unit consisting of a minimum of 70 and
a maximum of 100 units of the Company's securities (the "IPO Units"). Each IPO
Unit consists of one share of Common Stock, one redeemable Class A Warrant
(the "Class A Warrants") and one redeemable Class B Warrant (the "Class B
Warrants"). The IPO Units are identical to the units sold in the Company's
initial public offering (the "IPO"), which was completed in May 1996. 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 9, 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 9, 2001. The Class A Warrants are currently
subject to redemption, and the Class B Warrants are subject to redemption
commencing May 9, 1997, 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 or $12.25 per share, respectively,
for any 30 consecutive trading days ending within 15 days of the date the
Warrants are called for redemption.
Offering #2: This Registration Statement also relates to (i) 4,830,000
shares of Common Stock and 4,830,000 Class B Warrants of the Company issuable
upon exercise of the Class A Warrants issued in the IPO; (ii) 4,830,000 shares
of Common Stock 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 issued in the IPO; and (iv) 420,000
shares of Common Stock, 420,000 Class A Warrants and 420,000 Class B Warrants
issuable upon exercise of the unit purchase options received by the
Underwriter and its designees in connection with the IPO (the "IPO Unit
Purchase Option"), 420,000 shares of Common Stock and 420,000 Class B Warrants
issuable upon exercise of said Class A Warrants and 840,000 shares of Common
Stock issuable upon exercise of all of said Class B Warrants.
The complete Prospectus relating to the Offering follows immediately after
this Explanatory Note. Following the Prospectus for the Offering are pages
(denoted as Alternate Offering #2 Pages) of the Prospectus relating solely to
the foregoing securities, including alternate front and back cover pages and
sections entitled "Concurrent Offerings," "Plan of Distribution" and "Use of
Proceeds" to be used in lieu of the sections entitled "Concurrent Offerings,"
"Underwriting" and "Use of Proceeds" in the Prospectus relating to the
Offering.
Offering #3: This Registration Statement also relates to (i) an additional
3,500,000 Class A Warrants (the "Selling Securityholder Warrants") held by the
holders thereof (the "Selling Securityholders"); (ii) 3,500,000 Class B
Warrants (the "Selling Securityholder Class B Warrants") underlying the
Selling Securityholder Warrants; and (iii) 7,000,000 shares of Common Stock
(the "Selling Securityholder Stock") underlying the Selling Securityholder
Warrants and the Selling Securityholder Class B Warrants, all for resale from
time to time by the Selling Securityholders. The Selling Securityholder
Warrants, the Selling Securityholder Class B Warrants and the Selling
Securityholder Stock are collectively referred to as the "Selling
Securityholder Securities."
The complete Prospectus relating to the Offering follows immediately after
this Explanatory Note. Following the Prospectus for the Offering are pages
(denoted as Alternate Offering #3 Pages) of the Prospectus relating solely to
the Selling Securityholder Securities, including alternative front and back
cover pages, a new section entitled "Selling Securityholders" and sections
entitled "Concurrent Offerings" and "Plan of Distribution" to be used in lieu
of the sections entitled "Concurrent Offerings" and "Underwriting" in the
Prospectus relating to the Offering. Certain sections of the Prospectus for
the Offering will not be used in the Prospectus relating to the Selling
Securityholder Securities, such as "Use of Proceeds."
<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 NOVEMBER 4, 1996
PROSPECTUS
23,000 UNITS
DIGITAL VIDEO SYSTEMS, INC.
EACH UNIT CONSISTING OF
A MINIMUM OF 70 AND A MAXIMUM OF 100 IPO UNITS, EACH CONSISTING OF ONE SHARE OF
COMMON STOCK,
ONE REDEEMABLE CLASS A WARRANT
AND ONE REDEEMABLE CLASS B WARRANT
Each unit ("Unit") offered hereby (the "Offering") by Digital Video Systems,
Inc. (the "Company") consists of a minimum of 70 and a maximum of 100 units of
the Company's securities (the "IPO Units"). Each IPO Unit consists of one share
of Common Stock, $.0001 par value per share (the "Common Stock"), one
redeemable Class A Warrant (the "Class A Warrants") and one redeemable Class B
Warrant (the "Class B Warrants"). The IPO Units are identical to the units sold
in the Company's initial public offering (the "IPO"), which was completed in
May 1996.
The components of the Units and IPO Units will be transferable separately
immediately upon issuance. It is currently anticipated that the public offering
price per Unit will be $1,000. The actual number of IPO Units to be included in
each Unit will be determined by negotiations between the Company and D.H. Blair
Investment Banking Corp. (the "Underwriter"), based primarily on the current
market price of the outstanding IPO Units, and a determination of the number of
IPO Units needed to successfully market the Units in light of market
conditions. Each Class A Warrant entitles the holder to purchase, at an
exercise price of $6.50, subject to adjustment, one share of Common Stock and
one Class B Warrant. Each Class B Warrant entitles the holder to purchase, at
an exercise price of $8.75, subject to adjustment, one share of Common Stock.
The Class A Warrants and the Class B Warrants included in the Units offered
hereby (collectively, the "SPO Warrants") are exercisable at any time after
issuance until May 9, 2001. The Class A Warrants are currently subject to
redemption, and the Class B Warrants are subject to redemption commencing May
9, 1997, by the Company at $.05 per Class A Warrant or Class B Warrant, upon 30
days' written notice, if the average closing bid price of the Common Stock has
equalled or exceeded $9.10 per share with respect to the Class A Warrants or
$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
the Warrants are called for redemption. See "Description of Securities."
The Company's Common Stock, Class A Warrants and Class B Warrants are traded
on the Nasdaq National Market under the symbols "DVID," "DVIDW," and "DVIDZ,"
respectively, and the IPO Units are traded on the Nasdaq SmallCap Market under
the symbol "DVIDU." The closing prices of these securities on November 1, 1996
as reported by Nasdaq were $8 3/8, $5, $2 1/2 and $15 1/2, respectively. See
"Price Range of Securities." The Units offered hereby will not be traded
separately on Nasdaq. The exercise prices and other terms of the Class A
Warrants and Class B Warrants were determined by negotiation between the
Company and the Underwriter at the time of the IPO and do not necessarily bear
any relationship to the Company's assets, book value, results of operations,
net worth or any other recognized criteria of value. THE UNDERWRITER IS SUBJECT
TO AN INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION (THE
"COMMISSION"). SEE "RISK FACTORS" AND "UNDERWRITING."
-----------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE
SECURITIES OFFERED HEREBY.
-----------
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.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING DISCOUNTS PROCEEDS TO
PUBLIC AND COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Unit........................ $1,000 $60 $940
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Total(3)........................ $23,000,000 $1,380,000 $21,620,000
</TABLE>
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(Footnotes appear on the following page)
The Units are offered by the Underwriter on a "firm commitment" basis when,
as and if delivered to and accepted by the Underwriter, and subject to
withdrawal or cancellation of the offer without notice and to their right to
reject orders in whole or in part and to certain other conditions. It is
expected that delivery of the certificates representing the Common Stock and
Warrants comprising the Units will be made at the offices of D.H. Blair
Investment Banking Corp., 44 Wall Street, New York, New York, on or about
November , 1996.
D.H. BLAIR INVESTMENT BANKING CORP.
The date of this Prospectus is November , 1996.
<PAGE>
(Footnotes for table on cover page)
(1) Does not reflect additional compensation to be received by the Underwriter
in the form of (i) a non-accountable expense allowance of $690,000 or $30
per Unit ($793,500 if the Underwriter's over-allotment option is exercised
in full); and (ii) an option to purchase up to 2,300 Units at an exercise
price of $1,300 per Unit, exercisable over a period of three years,
commencing two years from the date of this Prospectus (the "Unit Purchase
Option"). In addition, the Company has agreed to indemnify the Underwriter
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) Before deducting estimated expenses of the Offering of approximately
$1,417,000 ($1,520,000 if the Underwriter's over-allotment is exercised)
payable by the Company, including the Underwriter's non-accountable
expense allowance.
(3) The Company has granted to the Underwriter a 30-day option to purchase up
to 3,450 additional Units on the same terms and conditions as set forth
above, solely to cover over-allotments, if any. If the over-allotment
option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions, and Proceeds to Company will be increased to
$26,450,000, $1,587,000 and $24,863,000, respectively. See "Underwriting."
---------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE IPO UNITS,
THE COMMON STOCK AND THE WARRANTS AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
---------------
IN CONNECTION WITH THE OFFERING, THE UNDERWRITER AND SELLING GROUP MEMBERS
OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET MAKING
TRANSACTIONS IN THE COMPANY'S SECURITIES ON NASDAQ IN ACCORDANCE WITH RULE
10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (THE "EXCHANGE
ACT"). SEE "RISK FACTORS--POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN
THE COMPANY'S SECURITIES" AND "UNDERWRITING."
Pursuant to Rule 429 under the Securities Act, this Prospectus also relates
to and may be used in connection with securities previously registered under
the Securities Act pursuant to Registration Statement No. 333-2228-LA and
consisting of (i) 4,830,000 shares of Common Stock and 4,830,000 Class B
Warrants issuable upon exercise of the Class A Warrants issued in the IPO;
(ii) 9,660,000 shares of Common Stock issuable upon exercise of the Class A
Warrants and Class B Warrants issued in the IPO and the Class B Warrants
underlying the foregoing Class A Warrants (collectively, the "IPO Warrants");
(iii) 420,000 shares of Common Stock, Class A Warrants and Class B Warrants
issuable upon exercise of the unit purchase options received by the
Underwriter and its designees in connection with the IPO (the "IPO Unit
Purchase Options"), 420,000 shares of Common Stock and Class B Warrants
issuable upon exercise of said Class A Warrants and the 840,000 shares of
Common Stock issuable upon exercise of all of said Class B Warrants; and (iv)
3,500,000 Class A Warrants issued to certain bridge financing investors in
connection with the IPO (the "Bridge Warrants") and 3,500,000 shares of Common
Stock and Class B Warrants issuable upon exercise of the Bridge Warrants and
the 3,500,000 shares of Common Stock issuable upon exercise of the foregoing
Class B Warrants. The SPO Warrants and IPO Warrants are collectively referred
to herein as the "Warrants" and, unless the context otherwise requires, all
references herein to the Warrants shall include the Bridge Warrants.
---------------
The Company is currently a reporting company under the Exchange Act, and as
such furnishes its securityholders with annual reports containing audited
financial statements and such interim unaudited reports as it deems
appropriate.
2
<PAGE>
PROSPECTUS 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. Unless otherwise noted, all information in this Prospectus includes
the issuance of the Acquisition Shares (defined below) and assumes no exercise
of (i) the Underwriter's over-allotment option, (ii) the Warrants; (iii) the
Underwriter's Unit Purchase Option; (iv) the Underwriter's IPO Unit Purchase
Options; (v) options granted or available for grant under the Company's 1993
Stock Option Plan (the "1993 Option Plan") or 1996 Stock Option Plan (the "1996
Option Plan"); or (vi) other outstanding options and warrants. All share, per
share and other information contained in this Prospectus has been adjusted to
reflect an approximately 1.078-for-1 stock split effected in January 1996. See
"Capitalization," "Management--Stock Option Plans" and "Description of
Securities." Prospective investors are cautioned that this Prospectus contains
forward-looking statements within the meaning of the "safe-harbor" provisions
of the Private Securities Litigation Reform Act of 1995 that involve various
risks and uncertainties. Reference is made in particular to the description of
the Company's plans and objectives for future operations and the assumptions
underlying such plans and objectives. The Company's actual results may differ
materially from those described in these forward-looking statements due to a
number of factors, including those identified under "Risk Factors" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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 focus is
on the marketing of key electronic components for a digital video compact disc
("Video CD") player that incorporates the Company's proprietary technology. The
Company markets these Video CD components primarily to consumer electronics
manufacturers in China and other countries in the Far East.
Since the 1930s, video images have been transmitted and stored almost
exclusively using analog formats such as video tape. However, digital video,
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 (an analog format),
the Company believes that Video CDs and digital video discs ("DVD"), which are
an advanced video disc format, will effectively compete for these markets in
the future. A significant market for Video CD players recently has developed in
China, and the Company believes that the Video CD is likely to be the initial
format of choice in other developing countries, such as India and Malaysia, due
to a number of factors. These factors include recent reductions in the selling
prices for Video CD players, which have made them more affordable and
competitively priced with VHS video cassette players ("VCRs"), and the large
amount of entertainment software in Video CD format that is currently available
in languages indigenous to the developing countries. The quantity of
entertainment media available in the Video CD format, including movies, karaoke
and games, has increased from several hundred titles in 1994 to more than 5,000
titles worldwide in 1996, although only approximately 200 titles are available
in the United States.
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 China and
Taiwan. The Company markets its video encoding systems (including its recently
introduced video encoding board sets) to post-production houses, such as movie
and television studios, software developers and educational institutions, in
the United States and in foreign markets, that are converting large quantities
of analog video material to digital video for storage on Video CDs. In
addition, the Company recently has commenced marketing a network multimedia
system that has entertainment, education and business applications. If market
conditions are favorable, the Company may modify this multimedia system to
deliver video-on-demand to the hospitality industry, which includes hotels and
cruise ships.
3
<PAGE>
In October 1996, the Company acquired all of the outstanding capital stock of
ViComp Technology, Inc. ("ViComp") for 491,253 shares (the "Acquisition
Shares") of the Company's Common Stock (the "ViComp Acquisition"). ViComp was
founded in August 1995 and has been engaged in the design and development of
integrated circuits (or "chips") to decode MPEG-I (a standard for compression
of audio and video to CD-ROM) signals. The Company anticipates that ViComp's
decoding chip that is currently under development (the "ViComp MPEG-I Chip")
will be available for production in commercial quantities by the second half of
calendar year 1997. The Company plans to incorporate the ViComp MPEG-I Chip
into its Video CD products and may also market the chip to other manufacturers
of Video CD products. There can be no assurance, however, that the design and
development efforts by ViComp will be completed successfully or within the
foregoing time schedule. In addition, the Company intends to use ViComp's
integrated circuit design and development capabilities to create other chips,
such as an MPEG-II (an advanced standard for compression of audio and video to
broadcast systems) decoder chip, for use in products currently under
consideration by the Company. A portion of the net proceeds of the Offering
will be used to fund ViComp's current and anticipated design and development
activities, which will result in the Company incurring substantially increased
research and development expenses for the foreseeable future. Dr. Edmund Y.
Sun, the Chairman of the Board and Chief Executive Officer of the Company, was
a co-founder of ViComp and owned approximately 57% of ViComp's outstanding
capital stock at the time of the ViComp Acquisition. The terms of the ViComp
Acquisition provide that the Acquisition Shares received by Dr. Sun will be
subject to cancellation under certain conditions.
The Company's strategy is to continue to develop, market and sell key
electronic components for Video CD players in China and other such developing
countries as India and Malaysia. In addition, the Company intends to develop,
market and sell key electronic components for use in MPEG-II systems, such as
DVD, digital set top boxes and high definition television. See "Business--
Industry Background." A further objective of the Company will be to exploit
market niches that have not been broadly developed by the major consumer
electronic manufacturers. For example, the Company intends to pursue business
and educational applications for the Video CD player market. Similarly, the
Company will attempt to develop niche applications for its network multimedia
system, such as video-on-demand for the hospitality industry. To implement its
strategy, the Company has assembled a highly experienced engineering and
research and development team. In addition, the Company may seek to enter into
strategic partnerships or other collaborative arrangements to develop and
market these new products.
The Company was founded in 1992 by Dr. 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 many
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. Since 1995,
the Company has shifted its focus to production and sale of commercial 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. Having
significantly increased its working capital by completing the IPO in May 1996
and having thereafter expanded its marketing and production activities, the
Company believes that the continued increase in the demand for digital video
products may enable it to generate revenue growth in the balance of the
Company's fiscal year ending March 31, 1997. However, the Company anticipates
that it will incur a substantial operating loss for the balance of the current
fiscal year, and there can be no assurance that the Company thereafter will
attain or sustain profitable operations.
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 OFFERING
Securities Offered.......... 23,000 Units, each Unit consisting of a minimum
of 70 and a maximum of 100 IPO Units. Each IPO
Unit consists of one share of Common Stock, one
Class A Warrant and one Class B Warrant. See "De-
scription of Securities."
Terms of 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 until May
9, 2001 subject, in certain circumstances, to
earlier redemption by the Company. Each Class B
Warrant entitles the holder to purchase one share
of Common Stock at an exercise price of $8.75
from the date of issuance until May 9, 2001
subject, in certain circumstances, to earlier
redemption by the Company. The exercise prices
and the number of shares of Common Stock issuable
upon exercise of the Warrants are subject to
adjustment in certain circumstances. See
"Description of Securities--Warrants."
Shares of Common Stock
Outstanding:
Prior to the Offering..... 17,502,131 shares(1)
After the Offering........ 19,802,131(1)(2)(3)
Use of Proceeds............. The net proceeds of the Offering will be utilized
(i) to fund ViComp's research and development
activities in connection with the completion of
the development of the ViComp MPEG-I Chip and the
design and development of other integrated
circuits for use in products currently under
consideration by the Company; (ii) for the
acquisition of inventory to support any potential
increase in the sale of the Company's products;
(iii) to expand the Company's sales and marketing
activities; and (iv) for working capital
purposes. See "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."
Nasdaq Symbols(4)........... IPO Units--DVIDU
Common Stock--DVID
Class A Warrants--DVIDW
Class B Warrants--DVIDZ
- --------
(1) Includes 7,957,857 shares of Common Stock (the "Escrow Shares") that have
been deposited into escrow by the holders thereof and 491,253 Acquisition
Shares (of which a total of 302,493 shares (the "Escrow Acquisition
Shares") have been deposited into escrow by the holders thereof). Does not
include (i) 2,970,360 shares of Common Stock reserved for issuance under
the 1993 Option Plan and 1,000,000 shares of Common Stock reserved for
issuance under the 1996 Option Plan, under which options to purchase
2,547,690 and 189,557 shares of Common Stock, respectively, are
outstanding; and (ii) 205,990 shares of Common Stock issuable upon the
exercise of other outstanding options and warrants. Options to purchase
1,874,276 shares of Common Stock outstanding under either the 1993 Option
Plan or other options, and options to purchase 267,867 shares of Common
Stock available for grant under the 1993 Option Plan (collectively, the
"Escrow Options") have been deposited and agreed to be deposited into
escrow by the holders thereof and the Company, respectively, and represent
a portion of the excluded shares described in the preceding sentence.
5
<PAGE>
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, and the Escrow Acquisition Shares also are subject to
cancellation under certain conditions. Also excludes (i) 14,490,000 shares
of Common Stock issuable upon exercise of the IPO Warrants; (ii) 7,000,000
shares of Common Stock issuable upon exercise of the Bridge Warrants and
the exercise of the Class B Warrants issuable upon exercise of the Bridge
Warrants and (iii) 1,680,000 shares of Common Stock issuable upon exercise
of the IPO Unit Purchase Options and the Class A Warrants and Class B
Warrants underlying such options. See "Principal Shareholders--Escrow
Securities" and "Business--ViComp Acquisition."
(2) Excludes: (i) a minimum of 4,830,000 and a maximum of 6,900,000 shares of
Common Stock issuable upon exercise of the SPO Warrants; (ii) a minimum of
966,000 and a maximum of 1,380,000 shares of Common Stock issuable upon
exercise of the Underwriter's over-allotment option and the underlying SPO
Warrants included in the Units included in the over-allotment option;
(iii) a minimum of 161,000 and a maximum of 230,000 shares of Common Stock
issuable upon exercise of the Unit Purchase Option; and (iv) a minimum of
483,000 and a maximum of 690,000 shares of Common Stock issuable upon
exercise of the Class A Warrants and Class B Warrants underlying the Units
subject to the Unit Purchase Option. See "Description of Securities" and
"Underwriting."
(3) Assumes that each Unit consists of the maximum of 100 IPO Units. If each
Unit consists of the minimum of 70 IPO Units, 19,112,131 shares of Common
Stock would be outstanding after the Offering.
(4) The Units offered hereby will not be listed or traded separately on
Nasdaq.
SUMMARY AND PRO FORMA FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PRO FORMA
SIX-MONTH PERIOD SIX-MONTH
YEAR ENDED DECEMBER 31, ENDED JUNE 30, PERIOD ENDED
------------------------ ------------------------ JUNE 30,
1994 1995 1995(1) 1996(1) 1996(2)
----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................ $ 7,808,633 $ 3,520,831 $ 1,486,839 $ 3,032,847 $ 3,032,847
Cost of revenue........ 6,918,490 3,354,920 1,064,967 3,214,975 3,214,975
Gross profit (loss).... 890,143 165,911 421,871 (182,128) (182,128)
Loss from operations... (2,122,052) (3,154,131) (1,258,988) (2,252,449) (3,041,219)
Net loss(3)............ $(1,653,661) $(4,483,311) $(1,287,931) $(4,162,665) $(4,936,378)
Net loss per share..... $ (.39) $ (.84) $ (.24) $ (.65) $ (0.74)
Shares used in
computation of net
loss per share(4)..... 4,195,148 5,337,688 5,353,289 6,447,056 6,656,789
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------
PRO FORMA,
ACTUAL AS ADJUSTED(5)
------------ --------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ 18,907,066 $ 38,915,365
Total assets...................................... 20,911,387 41,453,146
Total liabilities................................. 1,427,512 1,799,156
Accumulated deficit............................... (10,187,398) (11,945,797)
Total stockholders' equity........................ 19,483,875 39,653,990
</TABLE>
- -------
(1) In June 1996, the Company changed its fiscal year end from December 31 to
March 31. As a result, the three-month period ended June 30, 1996
represents the first quarter of the Company's current fiscal year ending
March 31, 1997.
(2) The pro forma statement of operations data combines the Company's
statement of operations data for the six-month period ended June 30, 1996
with ViComp's statement of operations data for the period from its
inception (August 21, 1995) to August 31, 1996, as if the ViComp
Acquisition had occurred as of January 1, 1996. See "Pro Forma Financial
Information."
(3) The six-month period ended June 30, 1996 includes a non-cash charge of
approximately $1,264,000 relating to repayment of the Bridge Notes.
(4) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the computation of weighted average number of shares of
Common Stock used in computing net loss per share. Excludes the Escrow
Shares. The net loss per share for the pro forma six-month period ended
June 30, 1996 also reflects the shares issued in the ViComp Acquisition
(excluding the Escrow Acquisition Shares). See "Principal Shareholders--
Escrow Securities" and Note 11 of Notes to Financial Statements.
(5) Pro forma, as adjusted to give effect to the ViComp Acquisition and the
receipt of the estimated net proceeds to the Company from the sale of the
Units offered hereby. See "Use of Proceeds" and "Capitalization."
6
<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. This
Prospectus contains forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995
that involve risks and uncertainties. Reference is made in particular to the
description of the Company's plans and objectives for future operations and
the assumptions underlying such plans and objectives. The Company's actual
results could differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in the following section and
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
HISTORY OF LOSSES AND ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES. To
date, the Company has incurred significant losses. At June 30, 1996, the
Company had an accumulated deficit of approximately $10,187,000. 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, and an operating
loss of approximately $2,252,000 for the six-month period ended June 30, 1996.
Such losses resulted principally from limited revenues from operations and
significant costs associated with the development of the Company's
technologies. The Company's net loss for the six-month period ended June 30,
1996 of approximately $4,163,000 included certain non-operating charges,
including a non-cash charge of approximately $1,264,000 resulting from the
amortization of deferred financing costs and accretion of debt discount in
connection with the notes issued in the Company's bridge financing that was
completed in March 1996 (the "Bridge Financing"). The Company has incurred a
substantial operating loss for the three-month period ended September 30, 1996
and expects to incur a substantial operating loss for the balance of the
current fiscal year (which will also include a non-cash charge to operations
of approximately $1,758,000 in the three-month period ending December 31, 1996
in connection with the ViComp Acquisition). The Company also expects to
continue to incur losses in the future until such time, if ever, as there is a
substantial increase in product sales. There can be no assurance that sales of
the Company's products will ever generate significant revenue, or that the
Company will generate positive cash flow from its operations or 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 China and Taiwan, 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 ever
materialize. 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, and such Video CDs generally have not been
available to date in the United States or other large industrialized
countries. Failure of the Company's products in general (and the Video CD
player or player components 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 the current fiscal year, which could place a significant
strain on its limited personnel, financial and other resources. The Company's
ability to manage this expansion will 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 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
7
<PAGE>
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 materially
adverse effect on the Company's business and results of operations.
DEPENDENCE ON LIMITED NUMBERS OF SUPPLIERS. The Company's products
incorporate computer chips produced by C-Cube. The Company has no contractual
right to obtain any specified number of chips from C-Cube. 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 future needs. 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 or if the C-Cube
chip is only available to the Company at prices substantially higher than
those paid by the Company's competitors for these chips or other functionally
equivalent chips, the Company's ability to supply products to its customers on
a competitive basis or at all could be materially and adversely affected. The
Company has recently secured from an Asian manufacturer a source of MPEG-I
decoder chips that are substantially equivalent to the C-Cube chip that has
been used in the Company's Video CD products at significantly lower prices.
However, the Company and that manufacturer have not yet completed the
integration of this chip into the Company's Video CD board. No assurances can
be given that such integration will be successfully completed in time to
enable the Company to utilize such chips prior to the end of calendar year
1996 or that a sufficient quantity of such chips will be made available to the
Company to meet its requirements. The Company could also encounter quality
control or other reliability problems with this chip after the Company
incorporates it into its products. It is the Company's intention ultimately to
utilize the ViComp MPEG-I Chip in place of the C-Cube chip or the replacement
chip described above. However, there can be no assurance that development of
this chip by ViComp will be successfully completed on a timely basis. The
Company's inability to obtain a sufficient quantity of chips from one or more
sources at a competitive cost would have a materially adverse effect on the
Company's business, prospects, operations and financial condition. See "--
Risks of Limited Protection for Company's Intellectual Property and
Proprietary Rights and Infringement of Third Parties' Rights" and "Business--
Suppliers."
RISKS OF VICOMP ACQUISITION. Although ViComp has completed a substantial
portion of the design and development work for the ViComp MPEG-I Chip, there
can be no assurance that it will be able to successfully complete development
of this product (currently scheduled for completion by the second half of
calendar year 1997) or that such development will not require expenditures
substantially in excess of those presently estimated. ViComp may experience
significant delays due to, among other things, unexpected design problems,
loss of key ViComp personnel or other factors in completing development of
this chip. Further, if the costs to commercially produce the ViComp MPEG-I
Chip are higher than currently anticipated or if third parties develop MPEG-I
decoder chips that can be commercially produced at costs lower than the ViComp
MPEG-I Chip, the ViComp MPEG-I Chip could be of limited or no value to the
Company. Development work has not yet commenced on any other ViComp products,
and there can be no assurance that any additional products will be
successfully developed by ViComp or that such products will be commercially
viable. In addition, the Company will need to obtain sufficient foundry
capacity to produce any chips developed by ViComp, and there can be no
assurance that prior shortages of foundry capacity in the integrated circuit
industry will not recur in the future.
The success of ViComp's design and development work will be heavily
dependent upon the efforts of James Kirkpatrick, Jr., a co-founder and former
Chief Executive Officer of ViComp. The Company does not have an employment
contract with Mr. Kirkpatrick, and the loss of his services could have a
materially adverse effect on the Company. The Company will incur a substantial
non-cash charge to earnings at such time, if ever, that the conditions for the
release of any or all of Dr. Sun's Escrow Acquisition Shares from escrow are
satisfied, which 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 possible of being,
8
<PAGE>
released from escrow (except that, with respect to the release of any of Dr.
Sun's Escrow Acquisition Shares escrowed in connection with the ViComp
Acquisition, the Company may capitalize a portion of this amount and amortize
it over future periods). See "--Charge to Income in the Event of Release of
Escrowed Securities," "Business-- ViComp Acquisition" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Charge to Income in the Event of Release of Escrowed Securities."
RISKS OF INTERNATIONAL OPERATIONS. Sales outside the United States 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 44% and 50%,
respectively, of such revenues during the six-month period ended June 30,
1996), and the Company believes that foreign sales 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
planning 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, 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, the payment of significant customs
duties to deliver products into markets such as China where the smuggling of
competing products into such markets without the payment of duties may be
widespread, changes in governmental policies (including United States trade
policy toward certain countries such as China and Japan) and other factors
which could have a materially adverse effect on the Company's business. In
particular, the Company's markets may be adversely affected by the political
environment in China. 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, which are generally more
complex than domestic marketing and sales operations or manufacturing
relationships.
Should the Company substantially increase its product sales in China or
other countries, the Company anticipates that it will be required to
significantly increase the amount of credit it extends to purchasers in these
markets. The Company has had only limited experience in extending credit to
foreign customers and will encounter increased risks in extending credit to
new customers in these markets, including the creditworthiness of such
customers and the difficulty of collecting accounts receivable in these
countries. 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 could 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 China, Taiwan or Japan, trade sanctions, if imposed,
could have a materially 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 materially 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 substantial decrease in demand in that country for
the Company's Video CD products, including the Video CD player.
9
<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 that 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 that 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
materially 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. The DVD format 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 and the
principal manufacturers have recently reached cross-licensing agreements.
Although the final standards for DVD have not been released to the public, and
the commercial viability of DVD has not yet been established, particularly
since most of the major film studios have not yet agreed to the recording of
their films on DVD, introduction of this format may have an adverse effect on
the Company's business and products. While the Company's research and
development activities have included products incorporating MPEG-II standards,
substantially all of the Company's current products are in the MPEG-I format.
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 CD players
using the new format or any different format.
Moreover, if such new format is introduced, 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.
DEPENDENCE ON KEY PERSONNEL AND NEED FOR ADDITIONAL MANAGEMENT
PERSONNEL. The Company's success to date has depended in large part on the
skills and efforts of Dr. Edmund Y. Sun, the Company's Chairman, Chief
Executive Officer and founder and, to a lesser extent, Robert B. Pfannkuch,
the Company's President, James A. Munro, the Company's Director of
Engineering, and Ed Martini, the Company's Project Manager for Network Video.
The Company's success also depends to a significant extent on the performance
10
<PAGE>
and continued service of certain other key employees. The Company recently has
hired a senior sales and marketing director and is seeking other personnel to
complete its management team in connection with the Company's proposed
expansion of its operations. The Company also needs to strengthen its
accounting management capabilities and is seeking to hire additional senior
level executives in this area. 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 employment agreements 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 products marketed by other
manufacturers of Video CD players and their components as well as 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. Should a
significant market for DVD develop, many of the major electronics
manufacturers are expected to compete for this market. 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. To the extent the Company does not have the
resources or is otherwise unable to establish its own brand name
identification for its Video CD players in China and other markets, it will
face increased pressure to compete on the basis of the price and features of
its products. Manufacturers of Video CD player components have substantially
reduced the selling prices of these components in recent months, and further
reductions in those prices can be expected. As a result, the Company has been
reducing its production costs in order to remain competitive in the Video
CD player and component market. There can be no assurance, however, that the
Company will be able to remain competitive or that its operating margins will
not be materially adversely affected should competitors substantially reduce
their prices in the future. Several companies have announced their intention
to introduce MPEG-I decoder chips into the Video CD market, including Sony and
Toshiba. Any increases 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. 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 AND FOREIGN MANUFACTURERS. The Company primarily
relies on subcontractors and licensees (most of whom have been or are expected
to be located in China or Taiwan) 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 arrangements with
manufacturers in China or elsewhere may not prevent these manufacturers from
entering into similar arrangements with competitors of the Company or
competing directly with the Company. The Company's reliance on third parties
for manufacturing components of its products reduces the Company's control
over the manufacture of its
11
<PAGE>
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. On several occasions, the Company has had a small
number of its products manufactured in Taiwan returned to it by customers due
to quality control problems. There can be no assurance that the Company will
not incur quality control problems or product recalls in the future in its
foreign manufacturing operations that could have a materially adverse effect
on the Company's operations and financial condition. 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 and increased risks of
theft by personnel of source codes and other proprietary product information
in countries where intellectual property is not well protected by law. See "--
Risks of International Operations" and "--Risks of Limited Protection for
Company's Intellectual Property and Proprietary Rights and Infringement of
Third Parties' Rights." 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 market and sell 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 property rights which would limit
competition against it (including with respect to the ViComp MPEG-I Chip), but
has applied for patent protection in the United States and certain other
countries covering certain of the technologies that relate to its network
video systems. 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 for any of these technologies or that the scope
of any patent claims allowed will be sufficiently broad 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, including without limitation, the ViComp MPEG-I Chip or
any other future products developed by ViComp. 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
contemplates utilizing an MPEG-1 decoder chip in its Video CD products that is
being manufactured by an Asian company that is substantially equivalent to an
MPEG-1 chip currently marketed by C-Cube. Because of the similarities of this
chip to the C-Cube chip, it is possible that C-Cube could seek to bar the sale
of this chip to the Company or others. Should C-Cube
12
<PAGE>
successfully bar such sale at a time when the ViComp MPEG-1 chip or other low-
cost chip alternatives are not available to the Company, the Company's
operations could be materially and adversely affected.
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 67% of the total voting
power of the Company (59% following the completion of the Offering, assuming
the maximum of 100 IPO Units per Unit are sold and the Underwriter's over-
allotment option is exercised). 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
Offering. See "Principal Shareholders."
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROWED SECURITIES. In the
event any Escrow Securities owned by securityholders of the Company who are
officers, directors, consultants or employees of the Company or 140,760 of the
Escrow Acquisition Shares owned by Dr. Edmund Y. Sun that have been escrowed
in connection with the Offering 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 and the foregoing Escrow Acquisition Shares
owned by Dr. Sun, the release will be treated, for financial reporting
purposes, as expense of the Company. In the event that the 140,760 of the
Escrow Acquisition Shares owned by Dr. Sun that have been escrowed in
connection with the ViComp Acquisition are released from escrow, the Company
will record additional purchase price for the ViComp Acquisition at the time
of such release, which will either be (i) expensed at that time or (ii)
capitalized and amortized over future periods. Accordingly, the Company will,
in the event of the release of the Escrow Securities or Dr. Sun's Escrow
Acquisition Shares escrowed in connection with the Offering, recognize, during
the period that the conditions for such release are met, a substantial non-
cash charge to earnings that would increase the Company's loss or reduce or
eliminate earnings, if any, at such time. In the event of the release of Dr.
Sun's Escrow Acquisition Shares escrowed in connection with the ViComp
Acquisition, the Company will either recognize such charge during the period
that the conditions for such release are met or recognize such charge over
future periods. The amount of those charges will be equal to the aggregate
market price of such Escrow Securities or Escrow Acquisition Shares at the
time of release from escrow. Although the amount of 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. See Note 11 of Notes to Financial Statements.
BROAD DISCRETION AS TO USE OF PROCEEDS. Of the net proceeds of the Offering,
approximately $7,600,000 or approximately 37.7% has been allocated to working
capital (and not otherwise allocated for a specific purpose) and will be used
for such purposes as management may determine in its sole discretion without
the need for shareholder approval with respect to any such allocation.
FUTURE SALES OF COMMON STOCK. Upon sale of the Units offered hereby, the
Company will have outstanding 19,802,131 shares Common Stock, 10,630,000 Class
A Warrants (including 3,500,000 Bridge Warrants ), and 7,130,000 Class B
Warrants (assuming the maximum number of IPO Units included in the Units and
no exercise of the Underwriter's over-allotment option). All of the IPO Units
and the underlying shares of Common Stock, Class A Warrants and Class B
Warrants included in the Units sold in the Offering and the IPO Units,
consisting of 4,830,000 shares of Common Stock, 4,830,000 Class A Warrants and
4,830,000 Class B Warrants sold in the IPO, will be freely tradeable without
restriction under the Securities Act, unless acquired by "affiliates" of the
Company as that term is defined in the Securities Act. In connection with the
IPO, the Company also registered on behalf of certain selling stockholders
(the "Selling Securityholders") an aggregate of 3,500,000 outstanding Bridge
Warrants and the 7,000,000 shares of Common Stock underlying the Bridge
Warrants and the Class B Warrants issuable upon exercise thereof, subject to a
contractual restriction that such selling securityholders not sell any of the
Bridge Warrants for at least 90 days from the date of the closing of the
13
<PAGE>
IPO (which period has expired) and, during the period from 91 to 270 days
after the date of the closing of the IPO, may only sell specified percentages
of such Bridge Warrants. In addition, the Company will have outstanding (i)
the IPO Unit Purchase Options covering 420,000 IPO Units (or 1,680,000 shares
of Common Stock if the underlying Warrants are exercised), and (ii) the Unit
Purchase Option covering 2,300 Units (or 920,000 shares of Common Stock
assuming the maximum number of IPO Units included in the Units and exercise of
the underlying Warrants).
The holders of the IPO Unit Purchase Options and the Unit Purchase Option
have been granted registration rights with respect to the shares of Common
Stock and Warrants issuable upon exercise of the IPO Unit Purchase Options or
the Unit Purchase Option. In addition, the Company has granted certain
stockholders demand and piggyback registration rights with respect to a total
of 4,388,252 shares of Common Stock. None of such rights require the Company
to file a registration statement for any of the foregoing shares prior to May
1997. One holder of 1,198 shares of Common Stock and warrants to purchase
5,990 shares of Common Stock who has piggyback registration rights with
respect to those shares has waived these rights with respect to the Offering.
See "Management--Employment and Consulting Agreements." The remaining
12,672,131 shares of Common Stock currently outstanding are "restricted
securities" as that term is defined in Rule 144 promulgated under the
Securities Act, and under certain circumstances may be sold without
registration pursuant to such Rule or otherwise. Such shares are eligible for
sale under Rule 144 at varying periods, subject to the lock-up described
above. However, the Company's directors and executive officers and the holder
of 3,896,999 of the foregoing shares of Common Stock have agreed not to sell
or otherwise dispose of any securities of the Company for a period of 13
months following completion of the Offering without the written consent of the
Underwriter. See "Underwriting." The Company is unable to predict the effect
that sales made under Rule 144, or otherwise, may have on the then prevailing
market price of the Common Stock although any substantial sale of securities
pursuant to exercise of a registration right or Rule 144 may have an adverse
effect. The sale, or the availability for sale, of substantial amounts of the
Company's securities in the public market at any time subsequent to the
Offering could adversely affect the prevailing market price of such
securities. See "Description of Securities," "Shares Eligible for Future Sale"
and "Underwriting."
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. Upon completion of the Offering,
the Company will have outstanding 10,630,000 Class A Warrants (including the
Bridge Warrants held by the Selling Securityholders) and 7,130,000 Class B
Warrants (assuming the maximum number of IPO Units in the Units and no
exercise of the Underwriter's over-allotment option). In addition, the Company
will have outstanding the IPO Unit Purchase Options to purchase an aggregate
of 1,680,000 shares of Common Stock (assuming exercise of the underlying
Warrants), the Unit Purchase Option to purchase an aggregate of 920,000 shares
of Common Stock (assuming the maximum number of IPO Units in the Units and
exercise of the underlying Warrants), 2,970,360 shares of Common Stock
reserved for issuance under the 1993 Option Plan, under which options to
purchase 2,547,690 shares are outstanding at exercise prices ranging from $.14
to $3.50 per share, 1,000,000 shares of Common Stock reserved for issuance
under the 1996 Option Plan, under which options to purchase 189,557 shares are
outstanding at an exercise price of $8.38 per share, and additional options to
purchase 200,000 shares of Common Stock at an exercise price of $5.00 per
share and warrants to purchase 5,990 shares of Common Stock at an exercise
price of $8.38 per share. Holders of options to purchase 1,874,276 shares of
Common Stock outstanding under the 1993 Option Plan and other options have
placed such options in escrow and the Company has agreed to place options to
purchase 267,867 shares of Common Stock available for grant under the 1993
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
and warrants 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. Purchasers of the Units offered hereby
will incur immediate and substantial dilution in the net tangible book value
of the Common Stock included in the Units, estimated to be approximately
$12.19 per share or 85% if the minimum number of IPO Units are contained in
the Units and
14
<PAGE>
$7.98 or 80% if the maximum number of IPO Units are contained in the Units
(allocating no value to the Warrants). The net tangible book value per share
of Common Stock was $1.18 at June 30, 1996. Additional dilution to public
investors may result to the extent that the Warrants, the IPO Unit Purchase
Options, the Unit Purchase Option or outstanding options or warrants are
exercised at a time when the net tangible book value per share of Common Stock
exceeds the exercise price of any of such securities.
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK; POTENTIAL
ANTI-TAKEOVER PROVISIONS. The Company's Amended and Restated Certificate of
Incorporation authorizes the issuance 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."
CONTINUATION OF PUBLIC MARKET AND POSSIBLE VOLATILITY OF PRICE OF
SECURITIES. No assurance can be given that an active trading market in the
Company's securities will continue to exist following the completion of the
Offering. 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.
CURRENT PROSPECTUS AND STATE REGISTRATION REQUIRED TO EXERCISE
WARRANTS. Purchasers of the Units 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
currently subject to 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 or $12.25 per share with respect to the Class B Warrants. (In
July 1996, these conditions were met with respect to, and the Company gave
notice of redemption of, the Class A Warrants but subsequently withdrew such
notice due to market conditions.) 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."
NO DIVIDENDS. The Company has not paid any dividends on its Common Stock
since its inception. The Company has no current plans to pay dividends on its
Common Stock and intends to retain earnings, if any, for working capital
purposes. See "Dividend Policy."
15
<PAGE>
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 will distribute substantially all
of the Units offered hereby. 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 Underwriter has advised the Company that Blair & Co. intends to
continue to make a market in the Company's securities following the 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 adversely affect the liquidity or price of such
securities. See "Underwriting."
POSSIBLE RESTRICTIONS ON MARKET MAKING ACTIVITIES IN THE COMPANY'S
SECURITIES. The Underwriter has advised the Company that Blair & Co. intends
to continue to make a market in the Company's securities following the
Offering. 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, 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 Bridge
Warrants 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 Bridge Warrants, 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 "Underwriting."
16
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of 23,000 Units offered
hereby, at an assumed offering price of $1,000 per Unit, after deducting the
underwriting discounts and commissions and other estimated expenses of the
Offering, are expected to be approximately $20,200,000 ($23,343,000 if the
Underwriter's over-allotment option is exercised in full). The Company expects
the net proceeds to be utilized approximately as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
----------- ----------
<S> <C> <C>
ViComp research and development(1)....................... $ 5,600,000 27.7%
Acquisition of inventory(2).............................. 3,500,000 17.3
Sales and marketing(3)................................... 3,500,000 17.3
Working capital(4)....................................... 7,600,000 37.7
----------- -----
$20,200,000 100.0%
=========== =====
</TABLE>
- --------
(1) Represents the projected capital and operating expenses estimated in
connection with the completion of the development of the ViComp MPEG-I
Chip as well as the design and development of MPEG-II based integrated
circuits by ViComp for a variety of applications. See "Business--ViComp
Acquisitions."
(2) To finance the acquisition of inventory by the Company to support any
potential increase in the sales of the Company's products, including sales
of Video CD components.
(3) Represents the estimated costs to be incurred in opening sales and support
offices in China and the estimated costs to be incurred in connection with
increasing the Company's marketing efforts in Singapore, India and Europe.
(4) A portion of this amount may be used to finance any increase in accounts
receivable resulting from any potential increase in the sales of the
Company's products, and a portion of this amount will be used to pay
legal, accounting, investment banking and other closing costs of the
ViComp Acquisition, which are estimated to total $250,000.
The foregoing represents the Company's best estimate of its allocation of
the net proceeds of the Offering during the next 24 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 the remaining net proceeds of the
IPO, together with the net proceeds of the Offering, will be sufficient to
satisfy the Company's contemplated cash requirements for at least the next 24
months. 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 Offering will be invested in
short-term, high-grade interest-bearing investments or accounts.
17
<PAGE>
DIVIDEND POLICY
The Company has not paid any dividends on its Common Stock since its
inception. 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.
PRICE RANGE OF SECURITIES
The Company's Common Stock, Class A Warrants and Class B Warrants have
traded separately on the Nasdaq National Market under the symbols DVID, DVIDW
and DVIDZ, respectively, and the Company's IPO Units have traded on the Nasdaq
SmallCap Market under the symbol DVIDU since May 9, 1996. The following table
sets forth the high and low last sale or bid prices for these securities for
the periods set forth below, as reported by Nasdaq. These prices do not
reflect retail mark-ups, markdowns or commissions.
<TABLE>
<CAPTION>
HIGH LOW
------- ------
<S> <C> <C>
IPO UNITS
May 9, 1996 through June 30, 1996............................ $21.000 $8.000
July 1, 1996 through September 30, 1996...................... 19.250 8.000
October 1, 1996 through November 1, 1996..................... 16.500 15.500
COMMON STOCK
May 9, 1996 through June 30, 1996............................ $12.000 $8.000
July 1, 1996 through September 30, 1996...................... 9.500 5.750
October 1, 1996 through November 1, 1996..................... 9.000 8.375
CLASS A WARRANTS
May 9, 1996 through June 30, 1996............................ $ 7.750 $3.250
July 1, 1996 through September 30, 1996...................... 6.375 4.250
October 1, 1996 through November 1, 1996..................... 5.500 5.000
CLASS B WARRANTS
May 9, 1996 through June 30, 1996............................ $ 6.375 $1.500
July 1, 1996 through September 30, 1996...................... 3.547 1.750
October 1, 1996 through November 1, 1996..................... 3.000 2.500
</TABLE>
The closing sales prices on November 1, 1996 as reported by the Nasdaq
National Market were $8.375 per share of Common Stock, $5.000 per Class A
Warrant and $2.500 per Class B Warrant and the closing bid price on that date
as reported by Nasdaq was $15.500 per IPO Unit.
As of October 15, 1996, there were 43, 199 and 11 record holders of the
Common Stock, Class A Warrants and Class B Warrants, respectively.
18
<PAGE>
DILUTION
The following discussion and tables allocate no value to the Warrants
contained in the IPO Units.
At June 30, 1996, the pro forma net tangible book value of the Company's
Common Stock (after giving effect to the ViComp Acquisition) was approximately
$19,434,000 or $1.12 per share based on 17,287,911 pro forma shares
outstanding. After giving effect to the sale by the Company of 23,000 Units,
at an assumed price of $1,000 per Unit and assuming no exercise of any
outstanding options or warrants (including the Underwriter's over-allotment
option, the IPO Unit Purchase Options, and the Unit Purchase Option), the pro
forma net tangible book value at June 30, 1996 would have been approximately
$2.10 per share if each Unit contains the minimum number of IPO Units or $2.02
per share if each Unit contains the maximum number of Units (taking into
account the estimated underwriting discounts and offering expenses),
representing an immediate increase in net tangible book value of approximately
$20,220,000 or $.98 per share based on the minimum number of IPO Units per
Unit or an immediate increase in net tangible book value of $20,220,000 or
$.90 per share based on the maximum number of IPO Units per Unit, to existing
shareholders and an immediate dilution of $12.19 per share or approximately
85%, or $7.98 per share or approximately 80%, based on the minimum and maximum
number of IPO Units per Unit, respectively. "Dilution" per share represents
the difference between the public offering price per share and the pro forma
net tangible book value per share at June 30, 1996, as adjusted for the
Offering. The foregoing is illustrated in the following table:
<TABLE>
<CAPTION>
IF EACH UNIT IF EACH UNIT
CONTAINS THE CONTAINS THE
MINIMUM MAXIMUM
IPO UNITS IPO UNITS
------------ ------------
<S> <C> <C> <C> <C>
Assumed public offering price per share
of Common Stock......................... $14.29 $10.00
Pro Forma net tangible book value
before the Offering................... $1.12 $1.12
Increase in net tangible book value per
share of Common Stock attributable to
public investors...................... .98 .90
----- -----
Pro forma net tangible book value per
share of Common Stock after the
Offering(1)............................. 2.10 2.02
------ ------
Dilution per share of Common Stock to
public investors(1)..................... $12.19 $ 7.98
====== ======
</TABLE>
- --------
(1) Assumes no exercise of the Underwriter's over-allotment option. The
dilution of net tangible book value per share to new investors, assuming
the Underwriter's over-allotment option is exercised in full, would be
$12.05 per share, if each Unit contains the minimum number of IPO Units or
$7.85 per share if each Unit contains the maximum number of IPO Units.
The following tables set forth (i) the number of shares of Common Stock
purchased from the Company by those persons who were shareholders immediately
prior to the IPO; (ii) the number of shares of Common Stock sold in the IPO;
(iii) the total consideration paid, and the average price per share paid for
such shares by the existing shareholders; and (iv) the number of shares of
Common Stock to be sold by the Company to the purchasers of the 23,000 Units
offered hereby, the total consideration to be paid, and the average price per
share:
<TABLE>
<CAPTION>
IF EACH UNIT CONTAINS THE
MINIMUM IPO UNITS
------------------------------------------------------------
SHARES PURCHASED(1) CONSIDERATION PAID(1) AVERAGE PER
------------------------ ---------------------- SHARE OF
NUMBER PERCENTAGE AMOUNT PERCENTAGE COMMON STOCK
---------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Pre IPO Shareholders.... 11,958,572(2) 64.9% $ 8,279,930 14.9% $ .69
Investors in IPO........ 4,830,000 26.3 24,150,000 43.6 $ 5.00
Investors in the
Offering............... 1,610,000 8.8 23,000,000 41.5 $14.29
---------- ----- ----------- -----
Total................. 18,398,572 100.0% $55,429,930 100.0%
========== ===== =========== =====
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
IF EACH UNIT CONTAINS THE
MAXIMUM IPO UNITS
------------------------------------------------------------
SHARES PURCHASED(1) CONSIDERATION PAID(1) AVERAGE PER
------------------------ ---------------------- SHARE OF
NUMBER PERCENTAGE AMOUNT PERCENTAGE COMMON STOCK
---------- ---------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Pre IPO Shareholders.... 11,958,572(2) 62.6% $ 8,279,930 14.9% $ 1.92
Investors in IPO........ 4,830,000 25.4 24,150,000 43.6 $ 5.00
Investors in this
Offering............... 2,300,000 12.0 23,000,000 41.5 $10.00
---------- ----- ----------- -----
Total................. 19,088,572 100.0% $55,429,930 100.0%
========== ===== =========== =====
</TABLE>
- --------
(1) Prior to the deduction of costs of issuance. Does not include the issuance
and sale of the Acquisition Shares or 319,004 shares of Common Stock
issued subsequent to the IPO through September 30, 1996 pursuant to the
exercise of outstanding options under the 1993 Option Plan or otherwise.
(2) Includes the 7,957,857 Escrow Shares.
As of the date of this Prospectus there were certain options and warrants to
purchase shares of the Common Stock at prices below the price per share of the
Common Stock included in the Units, including, without limitation, options to
purchase a total of 2,547,690 shares of Common Stock outstanding under the
1993 Option Plan at prices ranging from $.14 to $3.50 per share and additional
options to purchase 200,000 shares at $5.00 per share. To the extent such
options or warrants are exercised in the future, there will be additional
dilution to the investors in the Offering. See "Management--Stock Option
Plans" and "Description of Securities."
20
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
June 30, 1996; (ii) pro forma as of June 30, 1996 to give effect to the ViComp
Acquisition; and (iii) pro forma, as adjusted, as of June 30, 1996 to give
effect to the ViComp Acquisition and the sale by the Company of the 23,000
Units offered hereby (assuming no exercise of the Underwriter's over-allotment
option) and the receipt of the net proceeds therefrom. See "Use of Proceeds."
This table should be read in conjunction with "Pro Forma Financial
Information" and the financial statements of the Company and the notes thereto
appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA,
AS ADJUSTED(3)(4)
--------------------------
ACTUAL PRO FORMA(3) MINIMUM MAXIMUM
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Stockholders' equity:
Preferred Stock, $.0001
par value, 5,000,000
shares authorized,
none issued and
outstanding........... $ -- $ -- $ -- $ --
Common Stock, $.0001
par value, 60,000,000
shares authorized,
16,796,658 shares
issued and
outstanding, actual;
17,287,911 shares
issued and
outstanding, pro
forma; and a minimum
of 18,897,911 and a
maximum of 19,587,911
shares issued and
outstanding, pro forma
as adjusted(1)(2)..... 1,680 1,729 1,890 1,959
Additional paid in
capital............... 29,771,192 31,527,657 51,747,496 51,747,427
Accumulated deficit.... (10,187,398) (11,945,797) (11,945,797) (11,945,797)
Foreign currency
translation
adjustments........... (52,876) (52,876) (52,876) (52,876)
Deferred compensation.. (48,723) (96,723) (96,723) (96,723)
------------ ------------ ------------ ------------
Total stockholders'
equity and
capitalization......... $ 19,483,875 $ 19,433,990 $ 39,653,990 $ 39,653,990
============ ============ ============ ============
</TABLE>
- --------
(1) Excludes (i) up to 3,183,339 shares of Common Stock issuable upon exercise
of stock options that may be issued pursuant to the 1993 Stock Option Plan
and 1996 Stock Option Plan, of which options to purchase 2,547,690 shares
of Common Stock have been granted under such plans as of September 30,
1996; (ii) other options and warrants to purchase 205,990 shares of Common
Stock at September 30, 1996; (iii) 14,490,000 shares of Common Stock
issuable on exercise of the IPO Warrants; (iv) a minimum of 966,000 and a
maximum of 1,380,000 shares of Common Stock issuable upon exercise of the
Underwriter's over-allotment option and underlying the SPO Warrants
included in the Units included in the over-allotment option; (v) 1,680,000
shares of Common Stock issuable upon exercise of the IPO Unit Purchase
Options and the Warrants underlying such option; (vi) a minimum of 161,000
and a maximum of 230,000 shares of Common Stock issuable upon exercise of
the Unit Purchase Option and the Warrants underlying the Unit Purchase
Option; (vii) a minimum of 4,830,000 and a maximum of 6,900,000 shares of
Common Stock issuable upon exercise of the SPO Warrants underlying the
Units; and (viii) 7,000,000 shares of Common Stock issuable upon exercise
of the Bridge Warrants and the Warrants underlying the Bridge Warrants.
See "Management--Stock Option Plans," "Management--Employment and
Consulting Agreements," "Description of Securities" and "Underwriting."
(2) As of June 30, 1996, includes 7,818,232 Escrow Shares of the 7,957,857
shares that have been deposited into escrow. See "Principal Shareholders--
Escrow Securities."
(3) Pro forma to give effect to the ViComp Acquisition. See "Pro Forma
Financial Information."
(4) Adjusted to give effect to the sale of 23,000 Units pursuant to the
Offering and the receipt of the net proceeds therefrom.
21
<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 "Pro Forma
Financial Information" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included elsewhere in this Prospectus.
The statement of operations data for the two years in the period ended
December 31, 1995 are derived from the audited financial statements of the
Company included elsewhere in this Prospectus. In June 1996, the Company
changed its fiscal year end from December 31 to March 31. The statement of
operations data for the six-month periods ended June 30, 1995 and 1996 and the
balance sheet data at June 30, 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>
PRO FORMA
YEARS ENDED DECEMBER SIX-MONTH PERIOD SIX-MONTH
31, ENDED JUNE 30, PERIOD ENDED
------------------------ ------------------------ JUNE 30,
1994 1995 1995 1996 1996(3)
----------- ----------- ----------- ----------- ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue....... $ 6,553,987 $ 1,927,015 $ 1,045,775 $ 1,245,382 $ 1,245,382
Development and
service revenue...... 1,254,646 1,021,816 441,064 156,839 156,839
Component revenue..... -- 572,000 -- 1,630,626 1,630,626
----------- ----------- ----------- ----------- -----------
Total revenue......... 7,808,633 3,520,831 1,486,839 3,032,847 3,032,847
Cost of product revenue. 5,963,959 2,274,638 894,187 1,353,177 1,353,177
Cost of development and
service revenue........ 954,531 585,282 170,780 263,298 263,298
Cost of component reve-
nue.................... -- 495,000 -- 1,598,500 1,598,500
----------- ----------- ----------- ----------- -----------
Gross profit (loss)..... 890,143 165,911 421,872 (182,128) (182,128)
Operating expenses:
Research and
development.......... 1,550,248 1,257,833 671,340 703,705 1,476,270
Sales and marketing... 602,818 548,573 299,573 470,675 470,675
General and
administrative....... 859,129 1,513,636 709,705 895,941 912,146
----------- ----------- ----------- ----------- -----------
Total operating
expenses............. 3,012,195 3,320,042 1,680,860 2,070,321 2,859,091
----------- ----------- ----------- ----------- -----------
Loss from operations.... (2,122,052) (3,154,131) (1,258,988) (2,252,449) (3,041,219)
Other income (expense),
net.................... 35,154 (80,312) (28,943) (646,420) (631,363)
Gain (loss) on
investments in
affiliates (1994 gain
was from a related
party)................. 350,000 (1,248,868) -- -- (1,263,796)
----------- ----------- ----------- ----------- -----------
Net loss before
extraordinary item..... (1,736,898) (4,483,311) (1,287,931) (2,898,869) (4,936,378)
Extraordinary item(1)... -- -- -- (1,263,796) --
----------- ----------- ----------- ----------- -----------
Loss before benefit for
income taxes........... (1,736,898) (4,483,311) (1,287,931) (4,162,665) (4,936,378)
Benefit for income tax-
es..................... (83,237) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net loss................ $(1,653,661) $(4,483,311) $(1,287,931) $(4,162,665) $(4,936,378)
=========== =========== =========== =========== ===========
Net loss per share...... $ (.39) $ (.84) $ (.24) $ (.65) $ (.74)
=========== =========== =========== =========== ===========
Shares used in
computation of net loss
per share (2).......... 4,195,148 5,337,668 5,353,289 6,447,056 6,656,789
=========== =========== =========== =========== ===========
</TABLE>
22
<PAGE>
BALANCE SHEET DATA:
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------
(UNAUDITED)
<S> <C>
Working capital.................................................. $ 18,907,066
Total assets..................................................... 20,911,387
Total liabilities................................................ 1,427,512
Accumulated deficit.............................................. (10,187,398)
Total stockholders' equity....................................... 19,483,875
</TABLE>
- --------
(1) The six-month period ended June 30, 1996 includes a non-cash charge of
approximately $1,264,000 relating to the repayment of the Bridge Notes.
(2) See Note 1 of Notes to Financial Statements for an explanation of the
determination of the computation of weighted average number of shares of
Common Stock used in computing net loss per share. Excludes the Escrow
Shares. The net loss per share for the pro forma six-month period ended
June 30, 1996 also reflects the shares issued in the ViComp Acquisition
(excluding the Escrow Acquisition Shares). See "Principal Shareholders--
Escrow Securities" and Note 11 of Notes to Financial Statements.
(3) The pro forma statement of operations data combines the Company's
statement of operations data for the six-month period ended June 30, 1996,
with ViComp's statement of operations data for the period from its
inception (August 21, 1995) to August 31, 1996 as if the ViComp
Acquisition had occurred as of January 1, 1996. See "Pro Forma Financial
Information."
23
<PAGE>
PRO FORMA FINANCIAL INFORMATION
In October 1996, the Company completed the ViComp Acquisition for a purchase
price consisting of 491,253 shares of the Company's Common Stock. The Company
also granted options to purchase 189,557 additional shares of the Company's
common stock to certain of the shareholders of ViComp who were previously
employed by ViComp and who continued to be employed by ViComp after the ViComp
Acquisition. The Chairman and Chief Executive Officer of the Company was a co-
founder of ViComp and owned approximately 57% of ViComp's outstanding capital
stock at the time of the ViComp Acquisition. The shares issued to this related
party will be subject to cancellation under certain conditions pursuant to the
terms of the ViComp Acquisition or in connection with the Offering. See
"Business--ViComp Acquisition." The value of these shares subject to
cancellation have not been included in the purchase price at the date of the
ViComp Acquisition due to the uncertainty of their ultimate release from
escrow. The Company will, in the event of the release of the Escrow Securities
or Dr. Sun's Escrow Acquisition Shares escrowed in connection with the
Offering, recognize, during the period that the conditions for such release
are met, a substantial non-cash charge to earnings that would increase the
Company's loss or reduce or eliminate earnings, if any, at such time. In the
event of release of Dr. Sun's Escrow Acquisition Shares escrowed in connection
with the ViComp Acquisition, the Company will recognize such a charge to
earnings either during the period that the conditions for such release are met
or will recognize such charge to earnings over future periods. The purchase
method of accounting has been used to account for the ViComp Acquisition. The
unaudited pro forma combined condensed balance sheet and statement of
operations reflects the following: (i) the combination of the financial
statements of the Company and ViComp; and (ii) the issuance of the Acquisition
Shares (other than Dr. Sun's shares). The unaudited pro forma combined
condensed balance sheet was prepared as if the ViComp Acquisition had occurred
at June 30, 1996, and the unaudited pro forma combined condensed statements of
operations combine the Company's statements of operations for the year ended
December 31, 1995 and the six-month period ended June 30, 1996 with ViComp's
statement of operations for the period from inception (August 21, 1995)
through August 31, 1996 and reflects the ViComp Acquisition as if it had
occurred as of the beginning of the periods presented.
The historical balance sheet and statements of operations of ViComp are
presented to coincide with the six-month period ended June 30, 1996 and the
twelve month period ended December 31, 1995 of the Company and the fiscal year
of ViComp, respectively.
In the opinion of the Company's management, all adjustments necessary to
present fairly such pro forma combined condensed financial statements have
been made in the terms and structure of the ViComp Acquisition.
The unaudited pro forma combined condensed balance sheet and statements of
operations are not necessarily indicative of the actual results had the ViComp
Acquisition occurred as of June 30, 1996, January 1, 1996 or January 1, 1995,
as the case may be, nor do they purport to indicate the results of future
operations of the Company.
These unaudited pro forma combined condensed financial statements should be
read in connection with the accompanying notes and the historical financial
statements and notes thereto of the Company and ViComp included in this
Prospectus. See "Index to Financial Statements."
24
<PAGE>
DIGITAL VIDEO SYSTEMS, INC. AND
VICOMP TECHNOLOGY, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------- ----------------------------
DIGITAL VIDEO VICOMP
SYSTEMS, INC. TECHNOLOGY, INC.
JUNE 30, AUGUST 31, PRO FORMA
1996 1996 ADJUSTMENTS COMBINED
------------- ---------------- ----------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash
equivalents.......... $ 16,700,116 $ 159,943 $ -- $ 16,860,059
Accounts receivable,
net.................. 908,501 -- -- 908,501
Inventories........... 2,448,067 2,448,067
Prepaid expenses and
other current assets. 277,894 -- -- 277,894
------------ ---------- ----------- ------------
Total current
assets............. 20,334,578 159,943 -- 20,494,521
Property and
equipment, net....... 509,305 217,988 (56,172)(a) 671,121
Purchase research and
technology........... -- -- 1,758,399 (a)
-- -- (1,758,399)(b) --
Other assets.......... 67,504 -- -- 67,504
------------ ---------- ----------- ------------
Total assets........ $ 20,911,387 $ 377,931 $ (56,172) $ 21,233,146
============ ========== =========== ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable...... $ 1,251,127 $ 93,958 $ -- $ 1,345,085
Accrued liabilities... 176,385 27,686 250,000 (a) 454,071
------------ ---------- ----------- ------------
Total current
liabilities........ 1,427,512 121,644 250,000 1,799,156
Stockholders' equity
Convertible preferred
stock................ -- 3,000 (3,000)(c) --
Common stock.......... 1,680 3,000 (3,000)(c)
49 (a) 1,729
Additional paid-in
capital.............. 29,771,192 1,072,000 (1,072,000)(c)
1,756,465 (a) 31,527,657
Accumulated deficit... (10,187,398) (773,713) 773,713 (c)
(1,758,399)(b) (11,945,797)
Foreign currency
translation
adjustments.......... (52,876) -- -- (52,876)
Deferred compensation. (48,723) (48,000) -- (96,723)
------------ ---------- ----------- ------------
Total stockholders'
equity............. 19,483,875 256,287 (306,172) 19,433,990
------------ ---------- ----------- ------------
Total liabilities
and stockholders
equity............. $ 20,911,387 $ 377,931 $ (56,172) $ 21,233,146
============ ========== =========== ============
</TABLE>
25
<PAGE>
DIGITAL VIDEO SYSTEMS, INC. AND
VICOMP TECHNOLOGY, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
----------------------------------- -------------------------
VICOMP
DIGITAL VIDEO TECHNOLOGY, INC.
SYSTEMS, INC. AUGUST 21, 1995
SIX MONTHS ENDED (INCEPTION) PRO FORMA
JUNE 30, 1996 TO AUGUST 31, 1996 ADJUSTMENTS COMBINED
---------------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Total revenue........... $ 3,032,847 $ -- $ -- $ 3,032,847
Cost of revenue......... 3,214,975 -- -- 3,214,975
----------- --------- -------- -----------
Gross profit.......... (182,128) -- -- (182,128)
Operating expenses:
Research and
development.......... 703,705 772,565 -- 1,476,270
Sales and marketing... 470,675 -- -- 470,675
General and
administrative....... 895,941 16,205 -- 912,146
----------- --------- -------- -----------
Total operating
expenses........... 2,070,321 788,770 -- 2,859,091
----------- --------- -------- -----------
Loss from operations.... (2,252,449) (788,770) -- (3,041,219)
Other income (expenses),
net.................... (646,420) 15,057 -- (631,363)
----------- --------- -------- -----------
Net loss before
extraordinary items.... (2,898,869) (773,713) -- (3,672,582)
Extraordinary item--loss
on early extinguishment
of bridge notes........ (1,263,796) -- -- (1,263,796)
----------- --------- -------- -----------
Net loss................ $(4,162,665) $(773,713) $ -- $(4,936,378)
=========== ========= ======== ===========
Net loss per share...... $ (.65) $ (.74)
=========== ===========
Shares used in the
computation of net loss
per share.............. 6,447,056 209,733(d) 6,656,789
=========== ======== ===========
</TABLE>
26
<PAGE>
DIGITAL VIDEO SYSTEMS, INC. AND
VICOMP TECHNOLOGY, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA
------------------------------------ -------------------------
VICOMP
DIGITAL VIDEO TECHNOLOGY, INC.
SYSTEMS, INC. AUGUST 21, 1995
YEAR ENDED (INCEPTION) PRO FORMA
DECEMBER 31, 1995 TO AUGUST 31, 1996 ADJUSTMENTS COMBINED
----------------- ------------------ ----------- -----------
<S> <C> <C> <C> <C>
Total revenue........... $ 3,520,831 $ -- $ -- $ 3,520,831
Cost of revenue......... 3,354,920 -- -- 3,354,920
----------- --------- -------- -----------
Gross profit.......... 165,911 -- -- 165,911
Operating expenses:
Research and
development.......... 1,257,833 772,565 -- 2,030,398
Sales and marketing... 548,573 -- -- 548,573
General and
administration....... 1,513,636 16,205 -- 1,529,841
----------- --------- -------- -----------
Total operating
expenses........... 3,320,042 788,770 -- 4,108,812
----------- --------- -------- -----------
Loss from operations.... (3,154,131) (788,770) -- (3,942,901)
Other income (expense),
net.................... (80,312) 15,057 -- (65,255)
Loss on investment in
affiliate.............. (1,248,868) -- -- (1,248,868)
----------- --------- -------- -----------
Net loss................ $(4,483,311) $(773,713) $ -- $(5,257,024)
=========== ========= ======== ===========
Net loss per share...... $ (.84) $ (.95)
=========== ===========
Shares used in the
computation of net loss
per share.............. 5,337,668 209,733(d) 5,547,401
=========== ======== ===========
</TABLE>
27
<PAGE>
DIGITAL VIDEO SYSTEMS, INC. AND
VICOMP TECHNOLOGY, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED BALANCED SHEET AND STATEMENT
OF OPERATIONS
The following pro forma adjustments are required to allocate the purchase
price and acquisition cost to the assets acquired from ViComp Technology, Inc.
based on their fair value, as determined by an independent appraisal and to
reflect the write-off of purchased research and development identified in the
purchase price allocation.
(a) Reflects the allocation of the purchase price, based on fair market
values, to the historical balance sheet.
(b) Reflects the write-off of purchased research and development identified in
the purchase price allocation. The pro forma statements of operations
exclude the write-off of purchased research and development due to its
non-recurring nature.
(c) Reflects the elimination of ViComp equity accounts.
(d) Reflects an increase in common stock for the shares issued in connection
with the purchase price of ViComp for the net assets acquired. Does not
include 281,520 shares issued to a related party that are subject to
cancellation. See "Business--ViComp Acquisition." Inclusion of these
shares in the pro forma weighted average common shares outstanding
calculation would be anti-dilutive.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion contains forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995 that involve risks and uncertainties. Reference is made in
particular to the description of the Company's plans and objectives for future
operations and the assumptions underlying such plans and objectives. The
Company's actual results could differ materially from those discussed herein.
Factors that could cause or contribute to such differences include, but are
not limited to, those discussed below and in "Business" and "Risk Factors," as
well as those discussed elsewhere in this Prospectus and any document
incorporated herein by reference. The following discussion should be read in
conjunction with the financial statements and notes thereto appearing
elsewhere in this Prospectus.
GENERAL
The Company was founded in October 1992 by Dr. Edmund Y. 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 shift in the Company's focus since 1995 to 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.
The Company has shifted its focus since 1995 to production and sale of
commercial 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.
Having significantly increased its working capital by completing the IPO in
May 1996 and having thereafter expanded its marketing and production
activities, the Company believes that the continued increase in the demand for
digital video products may enable it to generate revenue growth in the balance
of the Company's fiscal year ending March 31, 1997. The Company expects its
revenues in the current fiscal year to be derived largely from sales of its
Video CD players and components, sales of MPEG encoding board sets, the
marketing of which commenced in the first quarter of the current fiscal year,
and sales of network video systems released during the first quarter of the
current fiscal year.
The Company incurred a substantial operating loss for the three-month period
ended September 30, 1996 and expects to incur a substantial operating loss for
the balance of the current fiscal year, which will also include a non-cash
charge to operations of approximately $1,758,000 in the three-month period
ending December 31, 1996 in connection with the ViComp Acquisition. Results of
operations may vary significantly from quarter to quarter depending on, among
other things, the progress, if any, of the Company's research and development
efforts, including the development of the ViComp MPEG-I Chip and other
integrated circuits by ViComp, and the results of the Company's marketing
efforts for its current and future products. See "Business--ViComp
Acquisition." The Company anticipates that it will incur substantially higher
research and development expenses during the balance of the current fiscal
year and the fiscal year ending March 31, 1998, primarily in connection with
ViComp's activities. There can be no assurance that sales of the Company's
products will ever generate significant revenue or that the Company will
generate positive cash flow from its operations or attain or thereafter
sustain profitability in any future period.
In June 1996, the Company elected to change its year end from December 31 to
March 31. Accordingly, the Company's current fiscal year will end March 31,
1997.
29
<PAGE>
In October 1996, the Company determined that its previously reported
operating results and balance sheet data for the three-month periods ended
March 31, 1995 and June 30, 1995 and for the three-month period ended June 30,
1996 required restatement. The revisions to the March 31, 1995 and June 30,
1995 quarters were made to more accurately reflect certain previously recorded
year-end adjustments in the appropriate 1995 quarterly periods. The revisions
to the June 30, 1996 quarter related primarily to (a) the Company's
determination that certain development revenues previously recognized in this
quarter (approximately $225,000) should not have been recognized, and (b) data
errors caused by improper installation of a new manufacturing accounting
system for the Company's Taiwan operation. Pending proper installation of a
new accounting system for the Taiwan operation, the Company continues to use
the system it has used in prior accounting periods, which the Company believes
is an accurate system. The foregoing revisions did not require any restatement
of the Company's previously reported audited financial statements for the year
ended December 31, 1995, and the Company believes that the restated quarterly
financial results (which are reflected in this Management's Discussion and
Analysis of Financial Condition and Results of Operations and elsewhere in the
Prospectus) do not represent a material change in the aggregate from the
results as previously reported.
RESULTS OF OPERATIONS
SIX-MONTH PERIOD ENDED JUNE 30, 1996 COMPARED TO SIX-MONTH PERIOD ENDED JUNE
30, 1995
The Company incurred an operating loss and a net loss of approximately
$2,252,000 and $4,163,000, respectively, for the six months ended June 30,
1996, as compared to an operating loss and a net loss of approximately
$1,259,000 and $1,288,000, respectively, for the six months ended June 30,
1995.
NET REVENUES AND COSTS OF REVENUES. Total revenues increased approximately
$1,546,000 or 104% from approximately $1,487,000 in the six months ended June
30, 1995 to approximately $3,033,000 in the six months ended June 30, 1996.
This increase was due to increases in unit sales of Video CD players and
components. The gross margin percentage for the six months ended June 30, 1996
was negative, as compared to the positive gross margin for the six months
ended June 30, 1995 of 28%. This decline was due in part to increased product
price competition and increased product recalls in the three months ended June
30, 1996. In addition, the gross margin percentage for development and service
revenue was positively impacted in the three months ended June 30, 1995 due to
timing differences with respect to the recognition of revenue and associated
costs. The gross margins in both periods were adversely affected by the
Company's inability to produce products in quantities that could result in
greater economies of scale. There can be no assurance, however, that unit
costs will decrease if Video CD players and components, and to a lesser
extent, MPEG encoding board sets, are produced in greater quantities.
OPERATING EXPENSES. Total operating expenses increased by approximately
$389,000 or 23% from approximately $1,681,000 in the six months ended June 30,
1995 to approximately $2,070,000 in the six months ended June 30, 1996. This
increase resulted from the Company's increased research and development, sales
and marketing, and general and administrative expense in the six months ended
June 30, 1996 described below.
Research and development expenses consist primarily of personnel and
equipment costs required to conduct the Company's development efforts. The
Company believes that investments in research and development are required to
remain competitive. These expenses increased approximately $33,000 or 5% from
approximately $671,000 in the six months ended June 30, 1995 to approximately
$704,000 in the six months ended June 30, 1996. This increase was related
primarily to increased personnel and consulting costs, offset in part by
reduced development expenditures for Video CD players in the three months
ended March 31, 1996. As a percentage of net sales, however, research and
development expenses decreased from 45% during the six months ended June 30,
1995 to 23% during the six months ended June 30, 1996 due to the increase in
sales in the six months ended June 30, 1996 compared to the six months ended
June 30, 1995.
Sales and marketing expenses consist primarily of personnel and consulting
costs involved in the sales process, including sales commissions. Sales and
marketing expenses increased 57% in the six months ended June 30, 1996 to
approximately $471,000 as compared to approximately $300,000 in the six months
ended
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June 30, 1995. This increase was primarily due to the increase in sales and
marketing personnel as well as trade shows activities for the 1996 period
being compared. The Company intends to increase its investment in sales and
marketing and expects these expenses to increase in absolute dollars as a
percentage of revenues during the remainder of the fiscal year ending March
31, 1997.
General and administrative expenses, which consist of administrative
salaries and benefits, insurance and other business support costs, increased
approximately $186,000 or 26% to approximately $896,000 in the six months
ended June 30, 1996 as compared to approximately $710,000 in the six months
ended June 30, 1995. This increase was due to increases in salaries and
related expenses, which resulted from hiring additional administrative
personnel, and increases in liability insurance costs and accounting and
strategic business consulting fees and an increase in facility costs. As a
percentage of net sales, general and administrative expenses decreased from
48% in the six months ended June 30, 1995 to 30% in the six months ended June
30, 1996 due to an increase in sales in the six months ended June 30, 1996.
The Company expects further increases in these expenses during the remainder
of the fiscal year ending March 31, 1997.
OTHER INCOME (EXPENSES), NET. Other expenses increased to approximately
$646,000 in the six months ended June 30, 1996 as compared to approximately
$29,000 in the six months ended June 30, 1995. This increase was primarily due
to charges to interest expense and financing charges related to the Company's
Bridge Financing.
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.
Development and service revenues, primarily from the development of
customized Video CD encoding and decoding 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."
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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 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.
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.
General and administrative expenses increased in 1995 over the same period
in 1994 primarily due to an increase in personnel at the Company's facilities
in Taiwan.
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.
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, 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.
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LIQUIDITY AND CAPITAL RESOURCES
From its inception until May 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.
In March 1996, the Company completed the Bridge Financing and received
aggregate proceeds of $6,055,000, 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. In May
1996, the Company completed the IPO (including exercise of the Underwriter's
over-allotment option), which consisted of 4,830,000 IPO Units. The Company
received net offering proceeds from the sale of IPO Units of approximately
$20,500,000 after deducting underwriting discounts and commissions and other
expenses of the offering. In May 1996, the Company repaid in full the Bridge
Notes and related expenses with a portion of the proceeds received from the
IPO.
As of June 30, 1996 the Company had working capital of approximately
$18,907,000 as compared to working capital of approximately $1,442,000 as of
December 31, 1995. The increase in working capital resulted from the proceeds
of the IPO, net of the repayment of the Bridge Notes. Net cash used in
operations was approximately $4,236,000 for the six-month period ended June
30, 1996 as compared to approximately $557,000 net cash used in operations in
the comparable period in 1995. Net cash provided by financing activities was
approximately $13,715,000 for the six-month period ended June 30, 1996 as
compared to approximately $915,000 for the comparable period in 1995.
Except for existing facility and office equipment operating lease
obligations that will require total payments of approximately $489,830 in
calendar years 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,
together with the net proceeds of the Offering, will be sufficient to satisfy
the Company's contemplated cash requirements for at least the next 24 months.
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 and adversely affected.
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROWED 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 and 140,760 of Dr. Sun's Escrow Acquisition Shares deposited into
an escrow pursuant to the Offering, the release of such securities to Company
officers, directors, employees or consultants will be treated, for financial
reporting purposes, as compensation expense of the Company. In the
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event that the other 140,760 of the Escrow Acquisition Shares owned by Dr. Sun
that have been escrowed in connection with the ViComp Acquisition are released
from escrow, the Company will record additional purchase price for the ViComp
Acquisition at the time of such release, which will either be (i) expensed at
that time or (ii) amortized over future periods. Accordingly, the Company
will, in the event of the release of the Escrow Securities or Dr. Sun's Escrow
Acquisition Shares escrowed in connection with the Offering, recognize, during
the period that the conditions for such release 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. In
the event of the release of Dr. Sun's Escrow Acquisition Shares escrowed in
connection with the ViComp Acquisition, the Company will recognize such charge
to earnings either during the period that the conditions for such release are
met or will recognize such charge to earnings over future periods. Although
the amount of 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. See Note 11 of Notes to Financial
Statements.
SEASONALITY
The Company's business in China and Taiwan is somewhat seasonal, with demand
for consumer products generally being higher in the fourth calendar quarter
and lower in January and February due to the Chinese New Year.
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BUSINESS
The discussion in this "Business" section contains forward-looking
statements within the meaning of the "safe harbor" provisions of the Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Reference is made in particular to the description of the Company's plans and
objectives for future operations and the assumptions underlying such plans and
objectives. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this "Business" section
and in "Risk Factors" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
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 focus is on the marketing of key electronic components for a
Video CD player that incorporates the Company's proprietary technology. The
Company markets these Video CD components primarily to consumer electronics
manufacturers in China and other countries in the Far East. A significant
market for Video CD players recently has developed in China and the Company
believes is likely to develop in other developing countries as the recent
reductions in selling prices for the players have made them more affordable
and a large amount of entertainment software in Video CD format has become
available in languages indigenous to the developing countries.
INDUSTRY BACKGROUND
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.
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 $0.50 per
Video CD (two Video CD's are required for most movie title), 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 new video disc format 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 Digital Video Disc
or Digital Versatile Disc ("DVD"), will be the same size as a current Video
CD, but will be based on the new MPEG-II compression technology and 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
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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. However, the final standards for DVD have not yet been released to
the public, and the commercial viability of DVD has not yet been established
particularly since most of the major studios have not yet agreed to the
recording of their films on DVD.
The quantity of entertainment media available in the Video CD format,
including movies, karaoke and games, has increased from several hundred titles
in 1994 to more than 5,000 titles worldwide in 1996, although only
approximately 200 titles are available in the United States.
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, 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, currently
marketed Video CD players cannot record material.
The Video CD player market has grown rapidly in China in the last two years,
and the Company believes significant markets for Video CD players are likely
to emerge in other such developing countries as India and Malaysia. The price
of the Video CD player has declined as manufacturing capacity has begun to
exceed demand and the price of key components recently has fallen
significantly with the increased competition among suppliers of these
components. The cost of the MPEG-I decoder chip, which is the most expensive
single chip in the Video CD player, has begun to decline, and several
companies, including Sony and Toshiba, have announced that they intend to
introduce proprietary MPEG-I decoder chips to the market in late 1996, which
may contribute to further price erosion. The Company has recently secured from
an Asian manufacturer a source of MPEG-I decoder chips that are substantially
equivalent to the C-Cube chip that has been used in the Company's Video CD
products at significantly lower prices. However, the Company and that
manufacturer have not yet completed the integration of this chip into the
Company's Video CD board. No assurances can be given that such integration
will be successfully completed in time to enable the Company to utilize such
chips prior to the end of calendar year 1996 or that a sufficient quantity of
such chips will be made available to the Company. In addition, if ViComp
successfully develops the ViComp MPEG-I Chip, the Company would have a lower
cost alternative than either the C-Cube chip or the replacement chip described
above. See "--ViComp Acquisition."
The consumer market for Video CD players in the United States is currently
not significant. The Company believes that this is due to the fact that few
motion picture titles are available on Video CD format and, consequently, few
U.S. consumers have an incentive to acquire a Video CD player. Moreover, the
VCR is firmly entrenched, with most households with sufficient income already
owning one. Because the image quality of the Video CD and the VHS tape is
similar, the Video CD player offers no qualitative advantage over the VCR
(which also can record material) to the U.S. consumer, even though both
players are comparably priced.
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
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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 are based upon MPEG-I compression. The
Company, however, is in the process of developing additional products based on
MPEG-II compression, as well as its MPEG-II 1/2-D1 encoding board set.
VIDEO CD PLAYERS
CONSUMER. The Company currently markets Video CD players and 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 sells these components primarily 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
under the Company's "DVS" label or other private manufacturer labels.
Additionally, the Company intends to begin manufacturing Video CD players in
China for domestic sales as well as export. The Company's current model Video
CD player (the CDV350) has features that 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).
COMMERCIAL. The Company's 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 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.
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 is compatible with certain PCs and allows the user to encode video
material without purchasing an entire encoding system. This encoding board set
is targeted for sale to original equipment manufacturers and distributors who
will integrate it with other parts of an encoding system. The Company
commenced marketing the encoding board set in the second quarter of calendar
1996, but has generated only limited sales of this product to date.
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
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video material to Video CD. These include movie studios, karaoke producers,
educational institutions, and corporate and other video production studios.
The Company, however, has sold only a limited number of these systems since
1995.
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 its current
version of the Encoding Kiosk at the Multimedia Show in Beijing in April 1996
but has only sold a limited number of these kiosks to date.
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 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 the 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 preliminary marketing activities for its current 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, but
has yet to sell any of these systems.
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 (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, although there can be no assurances
that it will be able to do so. In the future the Company intends to develop
additional networking capability to enable its product to work over digital
cable TV systems and 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
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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 titles, a DVD authoring system, and an MPEG-II
Transport Multiplexor which reformats MPEG elementary streams for broadcast
channels. However, none of these development projects can be completed until
the Company receives the final specifications for the DVD format from Toshiba.
See "--Agreements with Hyundai."
ViComp's integrated circuit design and development capabilities may
potentially give the Company the ability to develop an MPEG-II decoder that
could present opportunities for the Company in the DVD and digital set-top box
markets, since products in these two markets will utilize an MPEG-II decoder
to translate compressed video signals into an image that can be viewed on a
television screen. An MPEG-II decoder is in the very early stage of
development and there can be no assurance that ViComp will successfully
develop an MPEG-II decoder or any other product utilizing the MPEG-II format.
See "--ViComp Acquisition."
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 and ease of accessibility among other things.
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.
VICOMP ACQUISITION
In October 1996, the Company acquired all of the outstanding capital stock
of ViComp in exchange for 491,253 shares of the Company's Common Stock. ViComp
is engaged in the design and development of integrated circuits to decode
MPEG-I signals. The Company anticipates that the ViComp MPEG-I Chip under
development by ViComp, which the Company plans to incorporate into its Video
CD products and which the Company may market to other manufacturers of Video
CD products, will be available for production in commercial quantities by the
second half of calendar year 1997. However, there can be no assurance that the
design and development of the MPEG-I Chip by ViComp will be successfully
completed within the foregoing time schedule (which could be delayed due to
unexpected design problems, loss of key ViComp personnel or other factors), or
at all. Further, if the costs to commercially produce the ViComp MPEG-I Chip
in commercial quantities is higher than currently anticipated, such product
may be noncompetitive based on the selling prices of other functionally
equivalent chips that may then be available. In addition, the Company intends
to use the ViComp integrated circuit design and development to create other
chips, such as an MPEG-II decoder chip for use in products currently under
consideration by the Company.
ViComp was founded in August 1995 by Dr. Edmund Y. Sun, the Chairman of the
Board and Chief Executive Officer of the Company, and James Kirkpatrick Jr.,
who had previously been employed by C-Cube as its Vice President of
Engineering and by Hyundai as a Vice President and the General Manager of its
Digital Media Division. Mr. Kirkpatrick served as ViComp's Chief Executive
Officer prior to the ViComp Acquisition and will continue to serve in a full-
time capacity as ViComp's Chief Technical Officer. ViComp's current staff
includes two additional engineers who had been employed by ViComp prior to the
ViComp Acquisition, and the Company anticipates employing additional
engineering and support staff at ViComp to expand its design and development
activities. See "Management--Key Employees."
Dr. Sun received 281,520 shares of the Company's Common Stock in exchange
for his shares of ViComp capital stock, all of which shares have been
deposited in escrow (the "Sun Escrow Acquisition Shares"). A total of 140,760
of the Sun Escrow Acquisition Shares deposited into an escrow pursuant to the
terms of the ViComp Acquisition will be cancelled in the event that (a) the
ViComp MPEG-I Chip is not ready for commercial
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production by July 1, 1997; (b) ViComp's cost to manufacture the ViComp MPEG-I
Chip is not at least $3 per chip less than the cost for the Company to
purchase the lowest-priced chips that are functionally substantially
equivalent to the ViComp MPEG-I Chip from other manufacturers at the time the
ViComp MPEG-I Chip is ready for commercial production; or (c) the Company's
cost to obtain the ViComp MPEG-I Chip in commercial quantities exceeds $10 per
chip. The other 140,760 of the Sun Escrow Acquisition Shares have been
deposited in escrow in connection with the Offering and will be subject to
cancellation upon the same terms and conditions as the arrangement with
respect to the Escrow Shares as described under "Principal Shareholders--
Escrow Shares." In the event of the release of the Sun Escrow Acquisition
Shares that have been escrowed in connection with the Offering, the Company
will incur a substantial non-cash charge to earnings equal to the aggregate
market value of such shares at the time of release from escrow. In the event
of the release of the Sun Escrow Acquisition Shares that have been escrowed in
connection with the ViComp Acquisition, the Company will either (i) incur such
a charge at the time of release from escrow or (ii) capitalize and amortize
such amount over future periods. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Charge to Income in the Event
of Release of Escrowed Securities" and Note 11 of Notes to Financial
Statements. A total of 20,973 of the Acquisition Shares issued to the other
ViComp shareholders in the ViComp Acquisition were deposited into an escrow
and are subject to cancellation in the event of a breach of certain
representations and warranties made by these shareholders to the Company in
connection with the ViComp Acquisition.
In connection with the ViComp Acquisition, Mr. Kirkpatrick and the two other
ViComp shareholders who continue to be employed by ViComp after the
Acquisition were granted options to purchase a total of 189,557 shares of the
Company's Common Stock for a ten-year period at a price of $8.38 per share
under the Company's 1996 Option Plan, which Plan is subject to shareholder
approval. These options will vest over a five-year period commencing one year
from the date of grant. Pursuant to the terms of the ViComp Acquisition, the
holders of the Acquisition Shares have been granted demand and unlimited
piggyback registration rights following the Offering. None of such rights
require the Company to file a registration statement for such shares prior to
May 1997.
STRATEGY
The Company's strategy is to continue to develop, market and sell key
electronic components for Video CD players in China and other developing
countries such as India and Malaysia. In addition, the Company intends to
develop, market and sell key electronic components for use in MPEG-II systems
such as DVD, digital set top boxes and high definition television. See "--
Industry Background." A further objective of the Company is to exploit market
niches that have not been broadly developed by the major consumer electronic
manufacturers. For example, the Company intends to pursue business and
educational applications for the Video CD player market. Similarly, the
Company may develop niche applications for its network multimedia system, such
as video-on-demand for the hospitality industry. To implement its strategy,
the Company has assembled a highly experienced engineering and research and
development team. In addition, the Company may seek to enter into strategic
partnerships or other collaborative arrangements to develop and market these
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, and the Company will attempt
to increase its sales in this market. 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 and components. The acquisition of ViComp's
integrated circuit design and development capability is a key element in this
strategy.
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.
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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'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. For example, 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 subcontractors in Taiwan to manufacture most of the decoder boards. The
Company then adds an MPEG-I decoder chip to such board in order to complete
its manufacture. See "--Suppliers." 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 intends to shift assembly of Video CD
players to a contract manufacturer in China, where costs are lower than
Taiwan.
The Company primarily sells key decoder board components to Video CD player
manufacturers. As a result, the Company does not anticipate a need to
significantly expand its manufacturing capability even if orders for its Video
CD player products increase substantially. 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 and
components for the foreseeable future will occur in China, the Company is
currently considering the use of one or more subcontractors in Shenzhen,
China. In the event ViComp successfully completes the development of the
ViComp MPEG-1 Chip or any other chip, the Company anticipates that it will
subcontract out the manufacture of these chips. The Company has made no
arrangements to date for such manufacturing but does not anticipate
encountering any significant difficulty in securing a suitable arrangement in
the future.
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.
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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 who are based in Santa Clara, California, Taipei, Taiwan,
Tokyo, Japan, Shanghai, China and Hong Kong to sell its products and
anticipates that it will hire additional sales personnel as required to
support the Company's business plan. 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 or for the six-
month period ended June 30, 1996. 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 Offering to
expand its marketing activities, including adding additional sales and support
offices in China.
SUPPLIERS
Programmable decoder or encoder chips are an integral part of the Company's
products. The Company currently obtains all of such chips from C-Cube. The
Company has no contractual right to obtain or obligation to purchase any
specified number of chips from C-Cube. Although C-Cube substantially increased
its capacity to supply chips in April 1996, there can be no assurance that the
Company's allocation from C-Cube will increase sufficiently to meet the
Company's future needs. The Company has recently secured from an Asian
manufacturer a source of MPEG-I decoder chips that are substantially
equivalent to the C-Cube chip that has been used in the Company's Video CD
products, but are available at significantly lower prices. The Company is
currently working with the manufacturer to integrate the chip into the
Company's Video CD board. No assurances can be given that such integration
will be completed in time to enable the Company to utilize the chips prior to
the end of calendar year 1996 or that the Company will be able to obtain a
sufficient quantity of these chips from the manufacturer.
In recent months, several companies have announced their intention to
introduce MPEG-I decoder chips to the Video CD market, including Sony, NEC,
and Toshiba. Any increases 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 and may allow the Company's
competitors to produce products at lower costs than those incurred by the
Company. See "--Competition."
AGREEMENTS WITH HYUNDAI
In March 1993, the Company and 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 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
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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 provided 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 were delivered by certain
specified dates. Such agreement provided for penalties which would reduce the
amounts due to the Company if certain schedules were not met. As a result of
delays in meeting the schedule for delivery of the network video distribution
system, the total purchase price for this product, which the Company recently
delivered, was reduced from $750,000 to $645,000 (of which payments
aggregating $525,000 had been received as of October 31, 1996). The Company
and Hyundai mutually agreed to renegotiate the agreement as it relates to the
delivery of the MPEG-II compression products, based upon the delay of the
release of DVD specifications.
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 recently filed patent applications in the United States and other
countries covering certain 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
technologies. 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 and the six months ended June 30, 1996, the
Company incurred research and development expenses of $1,550,000, $1,258,000
and $907,000, respectively.
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The Company currently anticipates that during the next twelve months its
research and development efforts will focus on reducing the costs of its
products, particularly the components of the Video CD players, completing the
development of the ViComp MPEG-I Chip, developing specific uses for its
network video systems and through ViComp, developing novel MPEG-II integrated
circuits. The Company also anticipates that some of its research and product
development personnel will be 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 products marketed by other manufacturers
of Video CD players and their components as well as 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 of the United States and other industrial nations are currently served
primarily by VHS video cassettes (an analog format) and laser discs, the
Company believes that Video CDs and digital video discs ("DVD") will
effectively compete for these markets in the future. The Company believes that
the Video CD is likely to be the initial format of choice in developing
countries, such as China, India and Malaysia, because (i) the penetration by
VHS video cassette players ("VCRs") is much smaller on a relative basis in
these countries than in the major consumer electronics markets represented by
the United States, Western Europe and Japan; (ii) the Video CD player is
priced comparably to a VCR; (iii) the cost to produce a movie title on a
compact disc is approximately one-half the cost to produce the same title on a
video cassette; and (iv) significantly more entertainment software is
currently available in languages indigenous to the developing countries. Most
of the Company's competitors and potential competitors, such as Sony, C-Cube
and Toshiba, 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. 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 (which funded a portion of the
development of the Company's products and made a substantial equity investment
in the Company), 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
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offered by manufacturers who are customers of the Company or offer products
with more desirable features, thereby reducing demand for the Company's
products. Moreover, in recent months manufacturers of Video CD player
components have substantially reduced the selling prices of these components
and further reductions in those prices can be expected, which will require the
Company to reduce its production costs in order to remain competitive in the
Video CD player and component market. Although the Company has been reducing
its costs of production for these products, there can be no assurance that it
will be able to remain competitive or that its operating margins will not be
materially adversely affected should competitors substantially reduce their
prices in the future.
Although CD-ROM equipped computers are capable of playing Video CDs, they
require the addition of an 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.
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.
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 approximately $155,000 and will increase to approximately $164,000
in December 1996. In addition, the Company pays a ratable share (currently
approximately $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. ViComp leases approximately 1,700 square feet of
general office space in San Jose, California from an unaffiliated lessor. The
annual rent for the lease is approximately $37,000, and the lease expires in
December 1997 but may be extended by ViComp for an additional six months at
the then current prevailing market rates.
The Company has a branch office in Taipei, Taiwan, where it leases
approximately 12,000 square feet of office and manufacturing space from an
unaffiliated lessor. The lease expired in September 1996 and the Company is
currently negotiating a new lease. The annual rent is currently approximately
$128,000. In addition, the Company pays a ratable share (currently
approximately $30,000 annually) of property taxes, maintenance and other
common area expenses of the premises. All such amounts are payable monthly.
The Company has a sales representative office in Hong Kong, where it leases
approximately 862 square feet of general office space from an unaffiliated
lessor. The lease expires in May 1998 and currently provides for
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annual rent of $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. On
October 1, 1996, the Company leased an additional 1,360 square feet of office
and warehouse space in Hong Kong from an unaffiliated lessor. The annual rent
is $22,000 per year and the associated management fee is approximately $10,000
per year.
In August 1996, the Company leased approximately 4,200 square feet of office
and storage space in Shanghai, China under a two-year lease at $12,200 per
month and a $464 per month management fee.
The Company has excess space available to it in its United States and Taiwan
current facilities, which the Company believes will allow for substantial
expansion of its business and be sufficient for at least the next 24 months.
The Company believes it has sufficient space leased in Hong Kong and in
Shanghai, China for its currently contemplated operations and that additional
space can be readily obtained by the Company in those areas should such space
be needed.
EMPLOYEES
As of September 30, 1996, the Company had 68 full-time employees (31 in
Santa Clara, 32 in Taiwan, four in Hong Kong and one in China), of whom seven
were management personnel, 41 were research and development personnel, six
were marketing representatives, seven were operations personnel and seven were
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 material litigation.
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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 48 Chairman of the Board and Chief Executive Officer
Robert B. Pfannkuch 61 President and Director
Chief Financial Officer, Vice President and
Arvin S. Erickson 53 Secretary
Janis P. Gemignani 48 Director
Sung Hee Lee 42 Director
Sanford Sigoloff 66 Director
Philip B. Smith 60 Director
Joseph F. Troy 58 Director
</TABLE>
EDMUND Y. SUN has served as the Company's Chairman of the Board and Chief
Executive Officer since its inception in October 1992 and is the founder of
the Company. Dr. Sun served as President of the Company from October 1992 to
May 1996. 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 May 1996. 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.
ARVIN S. ERICKSON has served as the Chief Financial Officer, Vice President
and Secretary of the Company since October 1996. Mr. Erickson served as the
Vice President and Chief Financial and Administrative Officer of InterActive
Partners, a group of start-up companies in California since May 1994. From
August 1992 to May 1994, Mr. Erickson worked in various capacities, including
financial management, at Paramount Communications, Inc. From February 1984 to
August 1992, Mr. Erickson provided management consulting services to various
corporate clients. Mr. Erickson received a B.A. from California State
University and an M.B.A. from the University of Southern California.
JANIS P. GEMIGNANI has been a director of the Company since August 1995 and
served as the Chief Financial Officer, Vice President and Secretary of the
Company from August 1995 until October 1996. Ms. Gemignani 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. Mrs. Gemignani earned her B.A. degree with honors from the
University of West Florida. Ms. Gemignani 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 since March 1993. From May 1991 until March 1993,
47
<PAGE>
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.
SANFORD C. SIGOLOFF has served as a director of the Company since 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, ChatCom, Inc. 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 has served as a director of the Company since 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., DenAmerica Corp., ChatCom, Inc. and KLS
Enviro Resources, 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 May 1996. 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., a publicly-held company. Mr. Troy 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.
In October 1996, the Company removed Janis Gemignani as the Company's
Vice President, Secretary and Chief Financial Officer. The Company currently
is attempting to negotiate the terms under which Ms. Gemignani will continue
to provide services to the Company or will receive severance payments from the
Company. There can be no assurance, however, that the Company will be able to
negotiate such an arrangement with Ms. Gemignani, who has advised the Company
that she has claims against the Company in connection with her employment by
the Company and that she intends to formally assert those claims. Although the
Company has not been served with any litigation by Ms. Gemignani, based on a
preliminary review of the relevant facts, the Company does not believe that
any of the claims she may have against the Company have merit. In the event a
lawsuit is filed against the Company, however, the costs to defend the
lawsuit, and any damages the Company might be required to pay should Ms.
Gemignani prevail, could have a material adverse effect on the Company.
KEY EMPLOYEES:
The following individuals are 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
48
<PAGE>
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.
JAMES KIRKPATRICK, JR. has served as ViComp's Chief Technical Officer since
the ViComp Acquisition. He was the co-founder and from August 1995 to October
1996 served as a director and the Chief Executive Officer of ViComp. From June
1993 to May 1995, Mr. Kirkpatrick was a Vice President of Hyundai and the
General Manager of its Digital Media Division. Mr. Kirkpatrick was an
independent consultant on chip development from February 1992 to June 1993. He
held various positions at C-Cube from September 1988 to February 1992,
including Vice President of Engineering. Mr. Kirkpatrick has a B.B.E. and a
Master of Science degree from Ohio State University and an M.B.A. from the
University of Santa Clara.
BOARD COMMITTEES AND DESIGNATED DIRECTORS
The Board of Directors has the following committees: Compensation, 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 Dr. Sun, Mr. Smith
and Mr. Troy. The Audit Committee reviews the results and scope of the audit
and other accounting related matters. The members of the Audit Committee are
Mr. Sigoloff, 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.
To date, the Underwriter has not designated a director.
Sung Hee Lee serves as the representative of Hyundai on the Company's Board
of Directors.
DIRECTOR COMPENSATION
Directors (other than directors who are employees of the Company and who
receive no compensation for serving on the Board of Directors) receive $15,000
per year as compensation for serving on the Board of Directors and are also
entitled to participate in the Company's stock option plans and from time to
time to receive grants of options thereunder to purchase shares of the
Company's Common Stock.
EXECUTIVE COMPENSATION
The following table sets forth the cash compensation paid by the Company for
its fiscal year ended December 31, 1995 to Dr. Edmund Y. 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>
Dr. Edmund Y. 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.
49
<PAGE>
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 in May 1996 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 in May 1996. 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 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 an annual
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, for 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 and 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."
In September 1996, the Company entered into an agreement with Sitrick and
Company ("Sitrick") pursuant to which Sitrick will provide investor and public
relations services to the Company for an initial period of six months, which
may be extended upon mutual agreement of the parties. The agreement provides
that the Company will pay Sitrick a retainer (against time billed) of $10,000
plus 599 shares of Common Stock per month. Excess fees above $15,000 per month
are to be paid 65% in cash and 35% in Common Stock, valued at $8.375 per
share. In addition, each month during the term of the agreement, the Company
will issue Sitrick a five-year warrant to purchase 2,995 shares of Common
Stock with an exercise price of $8.38 per share plus a warrant to purchase
five shares of Common Stock for each share of Common Stock issued as excess
fees. Sitrick has been granted piggyback registration rights with respect to
shares of Common Stock received under the agreement.
STOCK OPTION PLANS
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 "1993 Option Plan"), which effected certain
amendments to the 1993 Stock Option Plan. The 1993 Option
50
<PAGE>
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 1993 Option Plan is administered by the
Board of Directors or a committee of the Board and is currently administered
by the Board of Directors, which has complete discretion to select the
optionees and to establish the terms and conditions of each option, subject to
the provisions of the 1993 Option Plan. Options granted under the 1993 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 1993 Option Plan or any other option plan adopted by the
Company. Nonqualified options may be granted under the 1993 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 1993 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 1993 Option Plan, shares subject to cancelled or terminated
options are reserved for 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 1993 Option Plan is effective for ten years, unless
sooner terminated or suspended.
As of the date of this Prospectus, options to purchase 2,547,690 shares were
outstanding at exercise prices ranging from $.14 to $3.50 per share, options
to purchase 792,170 shares had been exercised at $.14 per share and options to
purchase 422,670 shares were available for grant under the 1993 Option Plan.
In September 1996, the Company's Board of Directors approved the Company's
1996 Stock Option Plan (the "1996 Option Plan"), which is subject to
subsequent shareholder approval. The 1996 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 1,000,000 shares of Common Stock.
The 1996 Option Plan, which is administered by the Board of Directors or a
committee of "non-employee directors" (as defined in the Exchange Act) and is
currently administered by the Board of Directors, has terms and conditions
substantially identical to those of the 1993 Option Plan. The Company has
granted options to purchase a total of 189,559 shares of Common Stock under
the 1996 Option Plan to James Kirkpatrick, Jr. and the two other ViComp
engineers who have continued to be employed by ViComp following completion of
the ViComp Acquisition at an exercise price of $8.375 per share, subject to
shareholder approval of the 1996 Option Plan.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Amended and Restated 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
51
<PAGE>
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.
52
<PAGE>
CERTAIN TRANSACTIONS
In October 1996, the Company completed the ViComp Acquisition. Dr. Edmund Y.
Sun, the Company's Chairman of the Board and Chief Executive Officer, was a
co-founder of ViComp and owned 57.3% of the outstanding capital stock of
ViComp (for which he had paid a total of $1,000,000 in September 1995 and
January 1996) at the time of the ViComp Acquisition. The Company issued to Dr.
Sun 281,520 shares of the Company's Common Stock for his ViComp capital stock
in the ViComp Acquisition (57.3% of the total 491,253 shares of Common Stock
issued in the ViComp Acquisition).
All of the Acquisition Shares issued to Dr. Sun and 10% of the Acquisition
Shares issued to the other former ViComp stockholders have been deposited in
escrow and are subject to forfeiture and cancellation under certain
circumstances. Dr. Sun and the other holders of the Acquisition Shares were
granted certain demand and piggyback registration rights under a registration
rights agreement pursuant to the terms of the ViComp Acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Charge to Income in the Event of Release of Escrowed Securities"
and "Business--ViComp Acquisition."
The ViComp Acquisition was unanimously approved by the disinterested members
of the Company's Board of Directors, and the Company's Board of Directors was
advised by the Sutter Securities Incorporated that the ViComp Acquisition is
fair from a financial point of view to the Company's shareholders other than
Dr. Sun.
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 $1,900,000, $809,000 and $2,682,000
of inventory from C-Cube during 1994, 1995 and the six-month period ended June
30, 1996, respectively. The Company acquired fixed assets from C-Cube for
total payments of approximately $8,000 in 1994. Dr. Edmund Y. Sun, is the
founder and a significant shareholder of C-Cube.
In July 1993, the Company advanced $108,000 to Dr. Edmund Y. 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.
Edmund Y. 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. Edmund Y. 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 in May 1996.
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
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<PAGE>
first refusal terminated in connection with the IPO and Hyundai waived its
registration rights for 13 months following the closing of the IPO in May
1996. 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.
Edmund Y. Sun and a consulting and employment agreement with Robert Pfannkuch.
See "Management--Employment and Consulting Agreements."
In July 1995, the Company granted Janis Gemignani, formerly 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 and 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.
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.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of the date of this Prospectus, and
as adjusted to reflect the sale of the Units offered hereby, 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
and executive officers; and (iii) all officers and directors of the Company as
a group.
<TABLE>
<CAPTION>
PERCENT PERCENT
AMOUNT AND OF OF
NATURE OF OWNERSHIP OWNERSHIP
BENEFICIAL BEFORE AFTER
NAME AND ADDRESS(1) OWNERSHIP(2) OFFERING OFFERING
------------------- ------------ --------- ---------
<S> <C> <C> <C>
Edmund Y. Sun.............................. 7,822,418(3) 44.4% 39.3%
Robert B. Pfannkuch........................ 2,250(4) * *
Sung Hee Lee............................... 0(5) 0 0
Philip B. Smith............................ 36,998(6) * 0
Arvin S. Erickson.......................... 0 0
Janis Gemignani............................ 86,770(7) *
Sanford Sigoloff........................... 0 0 0
Joseph F. Troy............................. 0(8) 0 0
Hyundai Electronics Industries Company,
Ltd. ..................................... 3,896,999(9) 22.1 19.6
10th Floor, Boram Building
705-19, Yeeksam-dong
Kongnam-Ku, Seoul, Korea
All executive officers and directors as
a group (8 persons)....................... 7,948,436 45.1 39.9
</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 281,520 shares of Common Stock acquired by Dr. Sun in the ViComp
Acquisition, all of which have been deposited in escrow and are subject to
cancellation in certain circumstances. See "Business--ViComp Acquisition."
Also includes 280,334 shares owned by Dr. Sun's sons and 21,564 shares
owned by Dr. Sun's sister.
(4) Excludes options to purchase 750,000 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) Includes options to purchase 36,998 shares of Common Stock, but excludes
options to purchase 99,610 shares of Common Stock which are not
exercisable within 60 days.
(7) Includes options to purchase 84,250 shares of Common Stock, but excludes
options to purchase 154,126 shares of Common Stock which are not
exercisable within 60 days.
(8) Excludes options to purchase 136,608 shares of Common Stock which are not
exercisable within 60 days.
(9) 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 have placed 7,957,857 shares and options to
purchase 1,874,276 shares and the Company has placed
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options issuable under the 1993 Option Plan to purchase 267,867 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.
All or a portion of the Escrow Securities may be released from escrow based
on the Company's Minimum Pretax Income amounts (as defined and set forth
below) or the trading price of the Company's Common Stock. The Minimum Pretax
Income amounts (i) shall be calculated exclusively of any extraordinary
earnings, including, but not limited to, any charge to income resulting from
the release of the Escrow Securities; and (ii) shall be increased from the
amounts established at the time of the IPO 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 the IPO (including, without limitation, the Acquisition Shares and the
shares of Common Stock included in the Units and underlying the SPO Warrants).
The Minimum Pretax Income amounts as originally established at the time of the
IPO are described below.
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 thereafter, 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 November 9, 1997 and ending 36 months thereafter, 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 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.
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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 thereafter, 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 November 9, 1997 and ending 36 months thereafter, the
bid price of the Company's Common Stock 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
(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.
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.
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.
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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 prior to the
IPO 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.
CONCURRENT OFFERINGS
The Registration Statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering of (i) 4,830,000 shares of
Common Stock and 4,830,000 Class B Warrants of the Company that are issuable
upon exercise of the Company's Class A Warrants issued in the IPO;
(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 outstanding
Class A Warrants; (iii) 4,830,000 shares of Common Stock issuable upon
exercise of the Company's outstanding Class B Warrants issued in the IPO; and
(iv) 420,000 shares of Common Stock, Class A Warrants and Class B Warrants
issuable upon exercise of the unit purchase options received by the
Underwriter and its designees in connection with the IPO, 420,000 shares of
Common Stock and Class B Warrants issuable upon exercise of said Class A
Warrants and 840,000 shares of Common Stock issuable upon exercise of all of
said Class B Warrants.
The Registration Statement of which this Prospectus forms a part also
includes a prospectus with respect to an offering of (i) an additional
3,500,000 Class A Warrants (the "Bridge Warrants") held by the holders thereof
(the "Selling Securityholders"); (ii) 3,500,000 Class B Warrants (the "Selling
Securityholder Class B Warrants") underlying the Bridge Warrants; and
(iii) 7,000,000 shares of Common Stock underlying the Bridge Warrants and the
Selling Securityholder Class B Warrants, all for resale from time to time by
the Selling Securityholders. See "Shares Eligible for Future Sale."
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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 incorporated by reference as exhibits to the Company's Registration
Statement, of which this Prospectus 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, there were
17,502,131 shares of Common Stock outstanding.
UNITS
Each Unit consists of a minimum of 70 and a maximum of 100 IPO Units.
IPO UNITS
Each IPO Unit consists 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 IPO Units are 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 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,
the Underwriter 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 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 9, 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.
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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 and the IPO Units. The Class A Warrants are subject to redemption,
as described below.
CLASS B WARRANTS
The holder of each 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 9, 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 are subject to redemption, as described
below.
REDEMPTION
The Class A Warrants currently 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 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 the date set for redemption. All of the outstanding
Warrants of a class, except for those underlying the Unit Purchase Option and
the IPO 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.
GENERAL
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 1993 Option Plan or other
employee benefit plans or (ii) the sale or exercise of certain outstanding
options or warrants or the Warrants offered hereby.
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.
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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.
UNIT PURCHASE OPTION
Upon the closing of the Offering, the Company has agreed to grant to the
Underwriter the Unit Purchase Option to purchase up to 2,300 Units. The Units
issuable upon exercise of the Unit Purchase Option will, when so issued, be
identical to the Units offered hereby. 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 two years from the date of this Prospectus at an exercise price of
$1,300 per Unit (130% of the Unit offering price) subject to adjustment in
certain events. The holders of the Unit Purchase Option will have certain
demand and piggyback registration rights. See "Underwriting."
IPO UNIT PURCHASE OPTIONS
In connection with the IPO, the Company granted to the Underwriter and its
designees the IPO Unit Purchase Options to purchase up to 420,000 IPO Units.
The IPO Units issuable upon exercise of the IPO Unit Purchase Option will,
when so issued, be identical to the IPO Units. The IPO 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 IPO Unit Purchase Options are exercisable during the three-year
period commencing on May 9, 1998, at an exercise price of $6.50 per IPO Unit
subject to adjustment in certain events. The holders of the IPO Unit Purchase
Options have certain demand and piggyback registration rights. See "--
Registration Rights."
REGISTRATION RIGHTS
The Company has granted certain demand and piggyback 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 in May 1996. Such rights have been waived by Hyundai for a period
of 13 months following completion of the IPO. The holders of the IPO Unit
Purchase Options have, and the holders of the Unit Purchase Options will have,
demand and piggyback registration rights relating to their options and the
underlying securities. In addition, the holders of the Acquisition Shares have
demand and piggyback registration rights (which do not apply to the Offering
and which will not require the Company to file a registration statement for
such shares prior to May 1997) and the holder of 1,198 shares of Common Stock
and warrants to purchase 5,990 shares of Common Stock has piggyback
registration rights, which have been waived in connection with the Offering.
See "Business--ViComp Acquisition" and "Management--Employment and Consulting
Agreements."
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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
Upon completion of the Offering, the Company will have outstanding
(excluding outstanding options and warrants) 19,802,131 shares of Common Stock
(assuming each Unit consists of the maximum number of IPO Units) and
19,110,933 shares of Common Stock (assuming each Unit consists of the minimum
number of IPO Units). Of these shares, all of the shares issued in the
Offering and 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 outstanding
12,672,131 shares of Common Stock are "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 became eligible for resale commencing August 8, 1996.
However, all of the executive officers and directors of the Company and a
shareholder holding 3,896,999 shares of Common Stock have agreed that they
will not sell any of the Company's securities owned by them prior to 13 months
from the date of the Offering 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 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 became entitled to sell such
shares after August 8, 1996 in reliance on Rule 144, without having
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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 are currently eligible to be sold
pursuant to such rule.
In addition, in connection with the IPO, the Company registered for resale
on behalf of certain holders the Bridge Warrants and the securities issuable
upon exercise of the Bridge Warrants, subject to the contractual restriction
that such holders agreed (i) not to exercise the Bridge Warrants until May 9,
1997 unless such securities are subject to a notice of redemption delivered by
the Company, and (ii) not to sell any of the Bridge Warrants until after
August 12, 1996, and during the period from August 13, 1996 to February 8,
1997 to only sell certain specified percentages of such Bridge Warrants.
The Underwriter and its designee also has demand and piggyback registration
rights with respect to the securities underlying the IPO Unit Purchase Option
and the Unit Purchase Option. The Company has granted demand and piggyback
registration rights to the holder of 3,896,999 shares of Common Stock (which
cannot be exercised prior to June 1997), demand and piggyback registration
rights to the holders of the Acquisition Shares (which do not apply to the
Offering and which will not require the Company to file a registration
statement for such shares prior to May 1997) and piggyback registration rights
to the Company's public relations firm for up to 7,188 shares of Common Stock
currently owned or covered by warrants issued to date to that firm for
services (which rights have been waived in connection with the Offering). See
"Business--ViComp Acquisition," "Management--Employment and Consulting
Agreements" and "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.
UNDERWRITING
D.H. Blair Investment Banking Corp., the Underwriter, has agreed, subject to
the terms and conditions of the Underwriting Agreement, to purchase the 23,000
Units offered hereby from the Company on a "firm commitment" basis, if any are
purchased. It is expected that Blair & Co. will distribute as a selling group
member substantially all of the Units offered hereby. Blair & Co. is owned by
a corporation that is substantially owned by family members of J. Morton
Davis. Mr. Davis is the sole shareholder of the Underwriter.
The Underwriter has advised the Company that it proposes to offer the Units
to the public at the public offering price set forth on the cover page of this
Prospectus. The Underwriter may allow to selected dealers who are members of
the National Association of Securities Dealers, Inc. (the "NASD") concessions
not in excess of $ per Unit, of which not in excess of $ per Unit may be
reallowed to other dealers who are members of the NASD. After commencement of
the Offering, the public offering price, concession and the reallowance may be
changed by the Underwriter.
The Company has agreed to indemnify the Underwriter against certain
liabilities, including liabilities under the Securities Act. The Company has
also agreed to pay to the Underwriter a nonaccountable expense allowance of 3%
of the gross proceeds derived from the sale of the Units offered hereby,
including any Units purchased pursuant to the Underwriter's over-allotment
option, $40,000 of which has been paid as of the date of this Prospectus.
The Company has granted to the Underwriter an option, exercisable during the
30-day period commencing on the date of this Prospectus, to purchase from the
Company at the public offering price, less underwriting discounts and
commissions, up to 3,450 additional Units for the purpose of covering over-
allotments, if any.
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The Company has agreed to sell to the Underwriter and its designees, for
nominal consideration, the Unit Purchase Option to purchase up to 2,300 Units
substantially identical to the Units being offered hereby, except that the
Warrants included therein are subject to redemption by the Company for $.05 at
any time after the Unit Purchase Option has been exercised and the underlying
warrants are outstanding. The Unit Purchase Option will be exercisable during
the three-year period commencing two years from the date of this Prospectus at
an exercise price of $1,300 per Unit, subject to adjustment in certain events
and the Unit Purchase Option and the underlying securities are not
transferable for a period of two years from the date of this Prospectus except
to officers of the Underwriter or to members of the Underwriter's selling
group. The Company has agreed to register the securities issuable upon
exercise thereof under the Securities Act on two separate occasions (the first
at the Company's expense and the second at the expense of the holders of the
Unit Purchase Option) during the four-year period commencing one year from the
date of this Prospectus. The Unit Purchase Option includes a provision
permitting the holder to elect a cashless exercise of the Option. The Company
has also granted certain piggyback rights to holders of the Unit Purchase
Option.
All of the Company's executive officers and directors and all shareholders
of the Company known by the Company to beneficially own 5% or more of the
outstanding Common Stock have agreed not to sell, assign or transfer any of
the Company's securities for a 13-month period from the closing of the
Offering without the prior written consent of the Underwriter.
During the five-year period from the closing of the Offering, 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 Underwriter
also acted as underwriter of the Company's IPO and received a 6% commission of
$1,449,000 and a non-accountable expense allowance of $724,500 in connection
with such offering. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Description of Securities."
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.
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 Class A or Class
B Warrants after one year from the date of this Prospectus, the Company will
pay the Underwriter a fee of 5% with respect to the Class A Warrants and 8%
with respect to the Class B Warrants, of the aggregate exercise price (the
"Warrant Fee") for Warrant exercises solicited by the Underwriter or its
representatives or agents, if (i) the market price of the Company's Common
Stock on the date the Warrant is exercised is greater than the then exercise
price of the Warrants; (ii) the exercise of the Warrant was solicited in
writing by a member of the NASD; (iii) the Warrant is 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, provided however, that (a) no
Warrant Fee will be payable prior to May 9, 1997 and (b) in the event Warrants
are exercised after May 9, 1997 but prior to the first anniversary of the date
of this Prospectus, the Underwriter only shall be entitled to receive the
Warrant Fee with respect to the IPO Warrants and the Bridge Warrants. For
purposes of determining which Warrants have been exercised, it will be assumed
that the first 8,330,000 Class A Warrants and 13,160,000 Class B Warrants
(which include the 8,330,000 Class B Warrants that may be issued on exercise
of the Class A Warrants) exercised were those issued in connection with the
IPO.
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 two to
nine business days (or such other applicable period as
64
<PAGE>
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.
The Underwriter and certain selling group members that currently act as
market makers for the Company's securities may engage in "passive market
making" in the Company's securities on Nasdaq in accordance with Rule 10b-6A
under the Exchange Act. Rule 10b-6A permits, upon the satisfaction of certain
conditions, underwriters and selling group members participating in a
distribution that are also Nasdaq market makers in the security being
distributed to engage in limited market making transactions during the period
when Rule 10b-6 under the Exchange Act would otherwise prohibit such activity.
In general, under Rule 10b-6A, any underwriter or selling group member engaged
in passive market making in the Company's securities (i) may not effect
transactions in, or display bids for, such securities at a price that exceeds
the highest bid for such securities displayed on Nasdaq by a market maker that
is not participating in the distribution of such securities; (ii) may not have
net daily purchases of such Company's securities that exceed 30% of its
average daily trading volume in such securities for the two full consecutive
calendar months immediately preceding the filing date of the Registration
Statement of which this Prospectus forms a part; and (iii) must identify its
bids made by a passive market maker.
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 the Underwriter or the securities
offered hereby. The Company has been advised that Blair & Co. will make a
market in the securities following the 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 adversely
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.
Certain legal matters will be passed upon for the Underwriter by Bachner,
Tally, Polevoy & Misher LLP, New York, New York. Joseph F. Troy, a member of
Troy & Gould Professional Corporation, became a director of the Company in May
1996 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, and the
financial statements of ViComp Technology, Inc. at August 31, 1996 and for the
period from inception (August 21, 1995) through August 31, 1996, appearing in
this Prospectus 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.
65
<PAGE>
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, 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 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 Registration 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 Commission maintains a World Wide Web site
that contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission. The address of
the Commission's World Wide Web site is http://www.sec.gov. The Common Stock,
Class A Warrants and Class B Warrants are quoted on the Nasdaq National Market
and the IPO 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.
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Digital Video Systems, Inc.
Report of Ernst & Young LLP, Independent Auditors....................... F-2
Balance Sheet........................................................... 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
ViComp Technology, Inc.
Report of Ernst & Young LLP, Independent Auditors....................... F-19
Balance Sheet........................................................... F-20
Statement of Operations................................................. F-21
Statement of Shareholders' Equity....................................... F-22
Statement of Cash Flows................................................. F-23
Notes to Financial Statements........................................... F-24
</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. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of 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.
Walnut Creek, California Ernst & Young LLP
October 31, 1996
F-2
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 1,218,920 $ 16,700,116
Accounts receivable, net of allowance for doubtful
accounts of $0 and $101,571, respectively........ 169,185 908,501
Accounts receivable from affiliate, net of
allowance of $239,516............................ -- --
Inventories....................................... 673,775 2,448,067
Prepaid expenses and other current assets......... 300,407 277,894
----------- ------------
Total current assets............................ 2,362,287 20,334,578
Property and equipment, net......................... 558,087 509,305
Other assets........................................ 49,295 67,504
----------- ------------
Total assets.................................... $ 2,969,669 $ 20,911,387
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................. $ 414,344 $ 1,251,127
Accrued liabilities............................... 506,118 176,385
----------- ------------
Total current liabilities....................... 920,462 1,427,512
Commitments and Contingencies
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;
aggregate liquidation preference of $8,058,739;
5,000,000 shares authorized and none issued or
outstanding at June 30, 1996--unaudited.......... $ 524 $ --
Common stock, $0.0001 par value:
60,000,000 shares authorized, 6,627,688 and
16,796,658 shares issued and outstanding at
December 31, 1995 and June 30, 1996 unaudited,
respectively..................................... 662 1,680
Additional paid-in capital......................... 8,265,120 29,771,192
Accumulated deficit................................ (6,024,733) (10,187,398)
Foreign currency translation adjustments........... (30,616) (52,876)
Deferred compensation.............................. (161,750) (48,723)
----------- ------------
Total stockholders' equity...................... 2,049,207 19,483,875
----------- ------------
Total liabilities and stockholders' equity...... $ 2,969,669 $ 20,911,387
=========== ============
</TABLE>
See accompanying notes.
F-3
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX-MONTH PERIOD
DECEMBER 31, ENDED JUNE 30,
------------------------ ------------------------
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
six-month periods ended
June 30, 1995 and 1996,
respectively)............ $ 6,553,987 $ 1,927,015 $ 1,045,775 $ 1,245,382
Development and services
revenue, (including
$636,000, $1,000,000,
$429,000 and $150,000
from affiliates and
related parties for the
years ended December 31,
1994 and 1995, and the
six-month periods ended
June 30, 1995 and 1996,
respectively)............ 1,254,646 1,021,816 441,064 156,839
Component revenue......... -- 572,000 -- 1,630,626
----------- ----------- ----------- -----------
Total revenue........... 7,808,633 3,520,831 1,486,839 3,032,847
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 six-month periods
ended June 30, 1995 and
1996, respectively)....... 5,963,959 2,274,638 894,187 1,353,177
Cost of development and
services revenue.......... 954,531 585,282 170,780 263,298
Cost of component revenue
purchased from related
party..................... -- 495,000 -- 1,598,500
----------- ----------- ----------- -----------
Gross profit (loss)........ 890,143 165,911 421,872 (182,128)
Operating expenses:
Research and development.. 1,550,248 1,257,833 671,341 703,705
Sales and marketing....... 602,818 548,573 299,813 470,675
General and
administrative........... 859,129 1,513,636 709,706 895,941
----------- ----------- ----------- -----------
Total operating
expenses............... 3,012,195 3,320,042 1,680,860 2,070,321
----------- ----------- ----------- -----------
Loss from operations....... (2,122,052) (3,154,131) (1,258,988) (2,252,449)
Interest expense........... (17,055) (99,248) -- (759,102)
Interest income and other.. 52,209 18,936 (28,943) 112,682
Gain (loss) on investments
in affiliates (1994 gain
was from a related party). 350,000 (1,248,868) -- --
----------- ----------- ----------- -----------
Net loss before
extraordinary item........ (1,736,898) (4,483,311) (1,287,931) (2,898,869)
Extraordinary item--loss on
early extinguishment of
bridge notes.............. -- -- -- (1,263,796)
----------- ----------- ----------- -----------
Loss before benefit for
income taxes.............. (1,736,898) (4,483,311) (1,287,931) (4,162,665)
Benefit for income taxes... (83,237) -- -- --
----------- ----------- ----------- -----------
Net loss................... $(1,653,661) $(4,483,311) $(1,287,931) $(4,162,665)
=========== =========== =========== ===========
Net loss per share before
extraordinary item........ $ (.39) $ (.84) $ (.24) $ (.45)
=========== =========== =========== ===========
Net loss per share......... $ (.39) $ (.84) $ (.24) $ (.65)
=========== =========== =========== ===========
Shares used in computing
net loss per share........ 4,195,148 5,337,668 5,353,289 6,447,056
=========== =========== =========== ===========
</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
------------------ ------------------ PAID-IN (ACCUMULATED TRANSLATION FROM DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT) ADJUSTMENTS STOCKHOLDER COMPENSATION
---------- ------ ---------- ------ ----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31,
1993............ -- $-- 6,199,720 $ 620 $ 380 $ 112,239 $ (5,048) $ -- $ --
Sale of Series A
preferred
stock, net of
issuance costs. 3,247,473 325 -- -- 4,976,520 -- -- -- --
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) --
Translation
adjustment..... -- -- -- -- -- -- 7,261 -- --
Net loss........ -- -- -- -- -- (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) --
Sale of Series B
preferred
stock, net of
issuance costs. 1,985,475 199 -- -- 3,056,608 -- -- -- --
Exercise of
common stock
options........ -- -- 355,086 35 49,365 -- -- -- --
Repayment on
note receivable
from
stockholder.... -- -- -- -- -- -- -- 6,482 --
Cancellation of
common stock
and note
receivable..... -- -- (61,234) (6) (8,512) -- -- 8,518 --
Translation
adjustment..... -- -- -- -- -- -- (32,829) -- --
Deferred
compensation
resulting from
grants of
options........ -- -- -- -- 174,344 -- -- -- (174,344)
Amortization of
deferred
compensation... -- -- -- -- -- -- -- -- 12,594
Net loss........ -- -- -- -- -- (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)
Exercise of
common stock
options
(unaudited).... -- -- 106,022 11 14,738 -- -- -- --
Warrants issued
in connection
with bridge
notes
(unaudited).... -- -- -- -- 875,000 -- -- -- --
Reduction in
deferred
compensation
for options
placed in
escrow
(unaudited).... -- -- -- -- (97,026) -- -- -- 97,026
Sale of IPO
Units, net of
issuance costs
(unaudited).... -- -- 4,830,000 483 20,713,360 -- -- -- --
Conversion of
preferred stock
in connection
with IPO
(unaudited).... (5,232,948) (524) 5,232,948 524 -- -- -- -- --
Translation
adjustment
(unaudited) -- -- -- -- -- -- (22,260) -- --
Amortization of
deferred
compensation
(unaudited).... -- -- -- -- -- -- -- -- 16,001
Net loss
(unaudited).... -- -- -- -- -- (4,162,665) -- -- --
---------- ---- ---------- ------ ----------- ------------ -------- -------- --------
Balance at June
30, 1996
(unaudited)..... 0 $ 0 16,796,658 $1,680 $29,771,192 $(10,187,398) $(52,876) $ 0 $(48,723)
========== ==== ========== ====== =========== ============ ======== ======== ========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
-------------
<S> <C>
Balance at
December 31,
1993............ $ 108,191
Sale of Series A
preferred
stock, net of
issuance costs. 4,976,845
Issuance of
common stock
for acquisition
of Sunny Rich
assets......... --
Shares of common
stock
reacquired and
canceled in
conjunction
with
acquisition of
Sunny Rich
assets......... --
Sale of common
stock for cash
and note
receivable..... 1,428
Translation
adjustment..... 7,261
Net loss........ (1,653,661)
-------------
Balance at
December 31,
1994............ 3,440,064
Sale of Series B
preferred
stock, net of
issuance costs. 3,056,807
Exercise of
common stock
options........ 49,400
Repayment on
note receivable
from
stockholder.... 6,482
Cancellation of
common stock
and note
receivable..... --
Translation
adjustment..... (32,829)
Deferred
compensation
resulting from
grants of
options........ --
Amortization of
deferred
compensation... 12,594
Net loss........ (4,483,311)
-------------
Balance at
December 31,
1995............ 2,049,207
Exercise of
common stock
options
(unaudited).... 14,749
Warrants issued
in connection
with bridge
notes
(unaudited).... 875,000
Reduction in
deferred
compensation
for options
placed in
escrow
(unaudited).... --
Sale of IPO
Units, net of
issuance costs
(unaudited).... 20,713,843
Conversion of
preferred stock
in connection
with IPO
(unaudited).... --
Translation
adjustment
(unaudited) (22,260)
Amortization of
deferred
compensation
(unaudited).... 16,001
Net loss
(unaudited).... (4,162,665)
-------------
Balance at June
30, 1996
(unaudited)..... $19,483,875
=============
</TABLE>
See accompanying notes.
F-5
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX-MONTH PERIOD
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net loss................... $(1,653,661) $(4,483,311) $(1,287,931) $(4,162,665)
Adjustments to reconcile
net loss to net cash used
in operating activities:
Depreciation and
amortization............ 190,038 249,364 133,434 115,511
Amortization of deferred
compensation............ -- 12,594 -- 16,001
Deferred financing
charges and accretion
related to bridge notes. -- -- -- 1,820,000
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) 49,199 (22,260)
Loss on write-off of
investments in
affiliate............... -- 1,248,868 -- --
Changes in operating
assets and liabilities:
Accounts receivable..... (174,130) (39,195) 35,742 (739,316)
Accounts receivable from
affiliate.............. 413,133 -- -- --
Inventories............. (18,768) 384,408 31,388 (1,774,293)
Prepaid expenses and
other current assets... (62,358) (96,788) 79,504 22,514
Deferred income taxes... 57,054 -- -- --
Other assets............ (17,849) 11,312 (38,681) (18,209)
Accounts payable........ (152,298) (57,619) (135,759) 836,784
Accrued liabilities..... 69,682 255,914 5,872 (329,734)
Advances from related
party.................. (1,212,976) -- -- --
Deferred revenue from
related party.......... (451,143) -- 571,079 --
Income taxes payable.... (173,821) -- -- --
----------- ----------- ----------- -----------
Net cash provided by (used
in) operating activities.. (3,157,859) (2,482,057) (556,603) (4,235,667)
INVESTING ACTIVITIES
Acquisition of property and
equipment................. (576,050) (114,487) (64,016) (66,729)
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) (66,729)
FINANCING ACTIVITIES
Proceeds from initial
public offering of Units.. -- -- -- 20,713,843
Proceeds from line of
credit.................... 600,000 -- -- --
Repayment on line of
credit.................... -- (600,000) (600,000) --
Increase (decrease) in
restricted cash........... (930,414) 1,018,990 1,000,000 --
Proceeds from issuance of
common stock.............. 1,428 49,400 8,518 14,749
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 6,482 --
Proceeds from bridge notes. -- -- -- 6,055,000
Repayment of bridge notes.. -- (7,000,000)
----------- ----------- ----------- -----------
Net cash provided by
financing activities...... 4,147,859 3,474,872 915,000 19,783,592
----------- ----------- ----------- -----------
Net (decrease) increase in
cash and cash equivalents. (177,184) 878,328 294,381 15,481,196
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 $ 634,973 $16,700,116
=========== =========== =========== ===========
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.............. -- -- -- $ 875,000
Warrants issued pursuant to
bridge notes.............. -- -- -- $ 945,000
</TABLE>
See accompanying notes.
F-6
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 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 products, 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 Financial Information
The financial statements for the six-month periods ended June 30, 1995 and
1996 are 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. Operating results for
the six-month periods ended June 30, 1995 and 1996 are not necessarily
indicative of the results that may be expected for any future periods.
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 investments in a money market fund and certificates
of deposits 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 JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
ended December 31, 1994 and 1995, respectively and $429,000 and $150,000 for
the six-month periods ended June 30, 1995 and 1996, respectively. Costs
related to development revenues totaled approximately $266,000 and $585,000
for the years ended December 31, 1994 and 1995, respectively, and $170,000 and
$61,000 for six-month periods ended June 30, 1995 and 1996, 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.
Income Taxes
The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109, the
liability method is used to account for income taxes. Under this method,
deferred tax assets and liabilities are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
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.
F-8
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
NOTE 1 -- THE COMPANY AND ITS SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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.
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 initial public 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.
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 JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 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 and June 30, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
Inventories:
Raw materials.................................. $657,153 $1,141,207
Work in progress............................... -- 303,421
Finished goods................................. 16,622 1,003,439
-------- ----------
$673,775 $2,448,067
======== ==========
Property and equipment:
Machinery and computer equipment............... $697,819 $ 742,161
Furniture and fixtures......................... 221,194 203,237
-------- ----------
919,013 945,398
Accumulated depreciation....................... (360,926) (436,093)
-------- ----------
$558,087 $ 509,305
======== ==========
Accrued liabilities:
Accrued warranty and related expenses.......... $101,376 $ --
Payroll and related expenses................... 89,227 84,610
Accrued expenses............................... 315,515 91,775
-------- ----------
$506,118 $ 176,385
======== ==========
</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,
$73,047 and $147,045 for the years ended December 31, 1994 and 1995 and the
six-month periods ended June 30, 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 JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 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 JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 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, 1994 and 1995 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 as of December 31, 1995 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 were
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 had 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 JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
NOTE 6 -- STOCKHOLDERS' EQUITY--(CONTINUED)
All outstanding preferred stock automatically converted into common stock,
as a result of the initial public offering of the Company's Units. See
Note 11.
Stock Option Plan
The Company's 1993 Stock Option Plan (the "1993 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 3,183,339 shares of common stock for issuance
under the 1993 Plan. The options granted under the 1993 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 approximately $16,000 for the six-
month period ended June 30, 1996, respectively).
Information with respect to the 1993 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 -- $--
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
Increase in shares authorized......... 150,000 -- $--
Options granted....................... (1,154,108) 1,154,108 $0.14-3.50
Options exercised..................... -- (106,022) $0.14
Options canceled...................... 172,160 (172,160) $0.14
---------- --------- ----------
Balance at June 30, 1996................ 393,243 2,790,096 $0.14-3.50
========== ========= ==========
</TABLE>
As of June 30, 1996, 661,235 options were vested.
F-13
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 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
F-14
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
NOTE 8 -- INVESTMENTS IN AFFILIATES--(CONTINUED)
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.
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Company purchased approximately $1,900,000, $809,000, $68,611 and
$2,375,000 of inventory from a company that is a related party in the year
ended December 31, 1994 and 1995 and the six-month periods ended June 30, 1995
and 1996, respectively. The Company also acquired fixed assets from this
company for total payments of approximately $8,000 in 1994. The chairman and
Chief Executive Officer 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) with a maximum 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 additional 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>
F-15
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
NOTE 10 -- SEGMENT INFORMATION--(CONTINUED)
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.
NOTE 11 -- SUBSEQUENT EVENTS
Private Placement
In March 1996, the Company completed a $7,000,000 private placement of 140
bridge units at $50,000 per unit. Each bridge unit consisted of a $50,000 face
value promissory note bearing 10% interest and due in January and March 1997,
and 25,000 warrants ("Bridge Warrants") which initially enabled the holder to
purchase shares of common stock at $4.00 per share. The Company received net
proceeds of approximately $6,055,000 after deducting selling commissions and
expenses of $945,000. The $7,000,000 was allocated $875,000 to the 3,500,000
Bridge Warrants issued 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.
The Bridge Warrants included in the private placement converted on a one-to-
one basis into Class A Warrants upon the closing of the Company's initial
public offering ("IPO") of Units. See "Initial Public Offering of Units and
Related Matters" for a description of the terms of A Warrants.
Initial Public Offering of Units and Related Matters
In February 1996, the Board of Directors authorized management of the
Company to file a registration statement for its IPO of Units with the
Securities and Exchange Commission and authorized the amendment and
restatement of the Company's Certificate of Incorporation. During May 1996,
the Company closed the IPO which consisted of 4,830,000 IPO Units, each
consisting of one share of Common Stock, one Class A Warrant and one Class B
Warrant, priced at $5.00 per Unit. Additionally, the Company agreed to grant
an option to purchase 420,000 Units to an underwriter which is exercisable at
a price of $6.50 per Unit during a three year period commencing in May 1998.
The Company received approximately $20,713,000 of net offering proceeds after
deducting underwriting discounts and commissions and other expenses of the
IPO.
Each Class A Warrant entitles the holder to purchase at an exercise price of
$6.50, subject to adjustment, one share of Common Stock and one Class B
Warrant. Each Class B Warrant entitles the holder to purchase, at an exercise
price of $8.75, subject to adjustment, one share of Common Stock. The Class A
Warrants and the Class B Warrants included in the Units are exercisable at any
time after issuance until May 9, 2001. The Class A Warrants are subject to
immediate redemption and the Class B Warrants, are subject to redemption
commencing in May 1997, by the Company at $.05 per Warrant, upon 30 days'
written notice, if the average closing bid price of the Company's Common Stock
has equalled or exceeded $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 the Warrants are called for redemption.
Assuming full conversion of all outstanding A and B Warrants, and the option
to purchase 420,000 Units issued to an Underwriter (and the underlying common
stock and Class A and Class B Warrants) an additional 23,170,000 shares of
common stock would be outstanding.
F-16
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
NOTE 11 -- SUBSEQUENT EVENTS--(CONTINUED)
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 were 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. The pretax income levels are subject to
proportionate adjustment upon the issuance of certain securities subsequent to
the Company's IPO.
Based on the terms of the Escrow agreement, 7,818,232 shares of the
Company's common stock and 2,033,130 outstanding options to purchase common
stock outstanding as of June 30, 1996 were in escrow. Additionally, at June
30, 1996, 248,638 options available for future grant were 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.
Secondary Offering of Units with Underwriter
In October 1996, the Board of Directors authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
for the registration of up to 26,450 Units at $1,000 per unit. Each Unit will
consist of a minimum of 70 and a maximum of 100 units which are identical to
the Units issued in the Company's initial public offering of Units as
described in Note 11. Additionally the Board of Directors authorized the
issuance of an additional option which will allow the Company's underwriter to
purchase up to 2,300 Units (each consisting of a minimum of 70 and a maximum
of 100 units identical to the ones issued in the IPO) at an exercise price of
$1,300 per Unit, exercisable over a period of three years commencing two years
from the date of such Offering.
Business Combination with Related Party
In October 1996 the Company acquired ViComp Technology, Inc. ("ViComp"), a
development stage company that designs integrated circuits for use in video CD
players. Pursuant to such acquisition, the Company issued 491,253 shares of
its Common Stock for all the outstanding ViComp capital stock and granted
options to certain ViComp shareholders exercisable for 189,557 shares of
Digital Video common stock. The Company's Chairman and Chief Executive Officer
owned approximately 57% of the outstanding capital stock of ViComp at the time
of its acquisition by the Company. Of the 281,520 shares of the Company to be
received by this related
F-17
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(INFORMATION AT JUNE 30, 1996 AND FOR THE SIX-MONTH PERIODS
ENDED JUNE 30, 1995 AND 1996 IS UNAUDITED)
party, 140,760 shares are subject to an escrow having substantially identical
terms to the escrow agreement described in Note 11. These shares have not been
included in the purchase price as they are subject to forfeiture in the event
specified levels of pretax income or market price are not achieved. An
additional 140,760 shares are held in a separate performance escrow and may be
released to this related party in the event that certain performance
milestones relating to the development of ViComp's MPEG-I chip are reached by
July 1997. Since the shares are subject to forfeiture, they also have not been
included in the purchase price. The transaction will be accounted for as a
purchase and, accordingly, the initial purchase price and acquisition costs
will be allocated to the identifiable assets and liabilities, including in-
process research and development which will be immediately expensed.
Additional consideration paid upon the achievement of the performance
milestones (equal to the fair market value of the 140,760 shares released from
the performance escrow), if any, will be recorded as additional purchase price
at such time.
The following unaudited pro forma information assumes the acquisition of
ViComp was consummated on January 1, 1996 after giving effect to the
amortization and depreciation of acquired assets. The unaudited pro forma
information combines the Company's operations data for the six-month period
ending June 30, 1996 with ViComp's August 21, 1995 (inception) to August 31,
1996 operations data. The pro forma information does not reflect addition
consideration, if any, which may be paid upon the achievement of certain
performance milestones. The following unaudited pro forma information presents
the consolidated results of operation for the year ended December 31, 1995.
This pro forma information has been prepared for comparative purposes only and
does not purport to be indicative of what would have occurred had the
acquisition been made on January 1, 1995, or of results that may occur in the
future.
<TABLE>
<CAPTION>
SIX MONTH PERIOD
ENDED
JUNE 30, 1996
----------------
<S> <C>
Total Revenues........................................... $ 3,032,847
Net loss ................................................ $(4,936,378)
Net loss per Common Share................................ $ (.81)
</TABLE>
1996 Stock Option Plan
In September 1996, the Company's Board of Directors approved the Company's
1996 Stock Option Plan (the "1996 Option Plan"), which is subject to
subsequent shareholder approval. The 1996 Option Plan provides for the grant
of options to purchase up to an aggregate of 1,000,000 shares of the Company's
Common Stock. The 1996 Option Plan has terms and conditions substantially
identical to those of the 1993 Option Plan.
Employee Matter
In October 1996, the Company removed Janis Gemignani as the Company's
Vice President, Secretary and Chief Financial Officer. The Company currently
is attempting to negotiate the terms under which Ms. Gemignani will continue
to provide services to the Company or will receive severance payments from the
Company. There can be no assurance, however, that the Company will be able to
negotiate such an arrangement with Ms. Gemignani, who has advised the Company
that she has claims against the Company in connection with her employment by
the Company and that she intends to formally assert those claims. Although the
Company has not been served with any litigation by Ms. Gemignani, based on its
preliminary review of the relevant facts, the Company does not believe that
any of the claims she may have against the Company have merit. In the event a
lawsuit is filed against the Company, however, the costs to defend the
lawsuit, and any damages the Company might be required to pay should Ms.
Gemignani prevail, could have a material adverse effect on the Company.
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
ViComp Technology, Inc.
We have audited the accompanying balance sheet of ViComp Technology, Inc. (a
development stage company) as of August 31, 1996, and the related statements
of operations, shareholders' equity, and cash flows for the period from
inception (August 21, 1995) to August 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides 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 ViComp Technology, Inc. (a
development stage company) at August 31, 1996, and the results of its
operations and its cash flows for the period from inception (August 21, 1995)
to August 31, 1996, in conformity with generally accepted accounting
principles.
Walnut Creek, California
October 18, 1996
F-19
<PAGE>
VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
<TABLE>
<CAPTION>
AUGUST 31,
1996
----------
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................................... $ 159,943
Property and equipment, net........................................ 217,988
----------
$ 377,931
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 93,958
Accrued payroll and related........................................ 27,686
----------
Total current liabilities........................................ 121,644
Shareholders' equity:
Convertible preferred stock, issuable in series: $0.001 par value,
4,000,000 shares authorized, 3,000,000 shares issued and
outstanding; aggregate liquidation preference of $1,000,000....... 3,000
Common stock, $0.001 par value, 16,000,000 shares authorized,
3,000,000 shares issued and outstanding........................... 3,000
Additional paid-in capital......................................... 1,072,000
Deficit accumulated during the development stage................... (773,713)
Deferred compensation.............................................. (48,000)
----------
Total shareholders' equity....................................... 256,287
----------
$ 377,931
==========
</TABLE>
See accompanying notes.
F-20
<PAGE>
VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
PERIOD FROM INCEPTION (AUGUST 21, 1995) TO AUGUST 31, 1996
<TABLE>
<S> <C>
Operating costs and expenses:
Research and development........................................... $ 772,565
General and administration......................................... 16,205
---------
Total operating costs and expenses............................... 788,770
---------
Loss from operations................................................. (788,770)
Interest income...................................................... 15,057
---------
Net loss......................................................... $(773,713)
=========
</TABLE>
See accompanying notes.
F-21
<PAGE>
VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF SHAREHOLDERS' EQUITY
PERIOD FROM INCEPTION (AUGUST 21, 1995) TO AUGUST 31, 1996
<TABLE>
<CAPTION>
SERIES A DEFICIT
CONVERTIBLE NOTES ACCUMULATED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE DURING THE TOTAL
---------------- ---------------- PAID-IN FROM DEVELOPMENT DEFERRED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL SHAREHOLDERS STAGE COMPENSATION EQUITY
--------- ------ --------- ------ ---------- ------------ ----------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Issuance of common
stock at $0.01 per
share in August 1995
for cash............. -- $ -- 3,000,000 $3,000 $ 27,000 $ -- $ -- $ -- $ 30,000
Issuance of Series A
convertible preferred
stock at $0.33 1/3
per share in
September 1995 for
cash and shareholder
notes receivable..... 3,000,000 3,000 -- -- 997,000 (500,000) -- -- 500,000
Repayment of notes
receivable from
shareholders......... -- -- -- -- -- 500,000 -- -- 500,000
Unearned compensation
related to stock
options.............. -- -- -- -- 48,000 -- -- (48,000) --
Net loss from
inception (August 21,
1995) to August 31,
1996................. -- -- -- -- -- -- (773,713) -- (773,713)
--------- ------ --------- ------ ---------- --------- --------- -------- ---------
Balances at August 31,
1996................. 3,000,000 $3,000 3,000,000 $3,000 $1,072,000 $ -- $(773,713) $(48,000) $ 256,287
========= ====== ========= ====== ========== ========= ========= ======== =========
</TABLE>
See accompanying notes.
F-22
<PAGE>
VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
PERIOD FROM INCEPTION (AUGUST 21, 1995) TO AUGUST 31, 1996
<TABLE>
<S> <C>
CASH FLOWS USED IN OPERATING ACTIVITIES
Net loss.......................................................... $ (773,713)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................... 63,194
Increase in accounts payable.................................... 93,958
Increase in accrued liabilities................................. 27,686
----------
Net cash used in operating activities............................. (588,875)
----------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of property and equipment................................ (281,182)
CASH FLOWS PROVIDED BY FINANCING ACTIVITIES
Proceeds from issuance of preferred stock......................... 500,000
Proceeds from issuances of common stock........................... 30,000
Repayments of notes receivable from shareholders.................. 500,000
----------
Net cash provided by financing activities......................... 1,030,000
----------
Net increase in cash and cash equivalents......................... 159,943
Cash and cash equivalents at beginning of period.................. --
----------
Cash and cash equivalents at end of period........................ $ 159,943
==========
</TABLE>
See accompanying notes.
F-23
<PAGE>
VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
AUGUST 31, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Business
ViComp Technology, Inc. ("ViComp") was incorporated on August 21, 1995 and
develops integrated circuits for use in video CD players. The operations of
the Company from inception to August 31, 1995 were not significant and are not
separately disclosed.
On October 17, 1996, ViComp signed an Agreement and Plan of Reorganization
to effectively merge ViComp with Digital Video Systems, Inc. ("DVS"), a
related party. The holder of all of ViComp's outstanding Series A preferred
stock is a significant shareholder, Chairman and Chief Executive Officer of
DVS. All outstanding equity interests in ViComp will be exchanged for
approximately 491,253 common shares of DVS.
Cash and Cash Equivalents
ViComp maintains its cash and cash equivalents in depository and money
market accounts with one financial institution.
Income Taxes
ViComp follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("Statement 109"). Under Statement 109, the
liability method is used to account for income taxes. Under this method,
deferred tax assets and liabilities are measured using the enacted tax rates
and laws that will be in effect when the differences are expected to reverse.
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.
Stock Based Compensation
ViComp accounts for its stock option plan in accordance with the provisions
of the Accounting Principles Board's Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB 25"). In 1995, the Financial Accounting Standards
Board released the Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 provides an
alternative method of accounting for stock-based compensation to APB 25 and is
effective for fiscal years beginning after December 15, 1995. ViComp expects
to continue to account for its stock-based compensation in accordance with the
provisions of APB 25. Accordingly, SFAS 123 is not expected to have any
material impact on ViComp's financial position or results of operations.
F-24
<PAGE>
VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the lesser of the estimated useful lives of the
respective assets, generally three years. Property and equipment consists of
the following at August 31, 1996:
<TABLE>
<S> <C>
Equipment........................................................ $ 25,738
Software......................................................... 255,444
--------
281,182
Less accumulated depreciation and amortization................... (63,194)
--------
$217,988
========
</TABLE>
In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 121 "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of" ("FAS 121"). FAS 121
requires recognition of impairment of long-lived assets in the event the net
book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. FAS 121 is effective for fiscal years beginning
after December 15, 1995. Adoption of FAS 121 is not expected to have a
material impact on ViComp's financial position or results of operations.
NOTE 3 -- COMMITMENTS
Throughout fiscal 1996, ViComp occupied a facility under an operating lease.
Prior to August 31, 1996, ViComp terminated this lease. Rent expense totaled
$10,532 for the period from inception through August 31, 1996.
NOTE 4 -- SHAREHOLDERS' EQUITY
Convertible Preferred Stock and Shareholder Note Receivable
In September 1995, ViComp issued 3,000,000 shares of Series A preferred
stock at $0.33 1/3 per share in exchange for cash of $500,000 and a $500,000
note receivable from shareholder. The shareholder note receivable accrued
interest at 7% per year and was repaid in January 1996.
Authorized and outstanding convertible preferred stock and its principal
terms are as follows at August 31, 1996.
<TABLE>
<CAPTION>
LIQUIDATION
DIVIDEND PREFERENCE
DESIGNATED OUTSTANDING PER SHARE PER SHARE
---------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Series A...................... 3,000,000 3,000,000 $0.023 $0.33 1/3
Undesignated.................. 1,000,000 -- -- --
---------
4,000,000
=========
</TABLE>
Dividends on the convertible preferred stock are payable when and if
declared by the board of directors. The dividend requirements of the preferred
stock must be satisfied prior to payment of any dividends or distributions
with respect to ViComp's common stock. No dividends have been declared.
ViComp's board of directors has three members: holders of Series A preferred
stock and holders of common stock, each voting separately as a class, are each
entitled to elect one director. The third director shall
F-25
<PAGE>
VICOMP TECHNOLOGY, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
NOTE 4 -- SHAREHOLDERS' EQUITY--(CONTINUED)
be elected by the affirmative vote of the holders of both common and Series A
preferred shareholders. Preferred shareholders are entitled to voting rights
equivalent to the number of common shares into which their shares are
convertible. Subject to certain antidilution provisions, each share of Series
A preferred stock is convertible at any time into one common share. All
preferred shares convert automatically to common stock (3,000,000 shares if
converted at August 31, 1996) in the event of a public offering of the
Company's common stock with aggregate proceeds to ViComp of at least
$10,000,000 and a price per share of not less than $2.00 (as adjusted for any
stock dividends, stock splits or recapitalization).
Stock Option Plan
Under ViComp's 1995 stock option plan (the "Plan"), incentive and non-
qualified stock options may be granted to qualified employees, directors and
consultants to purchase a maximum of 2,400,000 common shares. The exercise
price of the option is determined by the administrator of the Plan on the date
of grant and must be at least equal to 85% in the case of a non-qualified
stock option or 100% in the case of an incentive stock option of the fair
market value of the shares on the grant date. Vesting periods are determined
by the board of directors. Options expire 10 years from the date of grant or 3
months from the date of the optionee's termination from ViComp. As of August
31, 1996, options for the purchase of 2,400,000 shares were granted and
outstanding under this plan and 550,000 of the options were exercisable.
NOTE 5 -- INCOME TAXES
At August 31, 1996, ViComp had net operating loss carryforwards for federal
and state tax purposes of approximately $780,000. The federal net operating
loss carryforwards expire in 2010 and 2011 and the state net operating loss
carryforward expires in 2023. Due to the "change of ownership" provisions and
other restrictions of the Internal Revenue Code, utilization of the net
operating loss carryforward may be limited.
As of August 31, 1996, ViComp had deferred tax assets of approximately
$330,000 relating primarily to the future tax benefits of net operating loss
carryforwards. Due to ViComp's lack of earnings history, the deferred tax
assets have been fully offset by a valuation allowance.
F-26
<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, 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
SECURITIES IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. 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 Summary........................................................ 3
Risk Factors.............................................................. 7
Use of Proceeds........................................................... 17
Dividend Policy........................................................... 18
Price Range of Securities................................................. 18
Dilution.................................................................. 19
Capitalization............................................................ 21
Selected Financial Data................................................... 22
Pro Forma Financial Information........................................... 24
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 29
Business.................................................................. 35
Management................................................................ 47
Certain Transactions...................................................... 53
Principal Shareholders.................................................... 55
Concurrent Offerings...................................................... 58
Description of Securities................................................. 59
Shares Eligible for Future Sale........................................... 62
Underwriting.............................................................. 63
Legal Matters............................................................. 65
Experts................................................................... 65
Additional Information.................................................... 66
Index to Financial Statements............................................. F-1
</TABLE>
---------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIGITAL VIDEO SYSTEMS, INC.
23,000
UNITS
EACH UNIT CONSISTING OF A MINIMUM OF
70 AND A MAXIMUM OF 100
IPO UNITS, EACH CONSISTING OF
ONE SHARE OF COMMON STOCK,
ONE REDEEMABLE CLASS A WARRANT AND
ONE REDEEMABLE CLASS B WARRANT
---------------
PROSPECTUS
---------------
D. H. BLAIR
INVESTMENT BANKING CORP.
November , 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
ALTERNATE OFFERING #2 PAGES
PROSPECTUS
- ----------
DIGITAL VIDEO SYSTEMS, INC.
4,830,000 SHARES OF COMMON STOCK
AND 4,830,000 CLASS B WARRANTS
UNDERLYING REDEEMABLE CLASS A WARRANTS
9,660,000 SHARES OF COMMON STOCK
UNDERLYING REDEEMABLE CLASS B WARRANTS
This Prospectus relates to (i) 4,830,000 shares of common stock, $0.0001 par
value (the "Common Stock") and 4,830,000 redeemable Class B Warrants ("Class B
Warrants"), 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, the "Warrants"),
which are issuable upon exercise of the Company's outstanding Class A
Warrants; and (iii) 4,830,000 shares of Common Stock issuable upon exercise of
the Company's outstanding Class B Warrants. The Class A Warrants, together
with the Company's Class B Warrants and Common Stock, were issued as
components of units (the "IPO Units") issued in connection with the Company's
initial public offering in May 1996 ("IPO"). Each IPO Unit consists of one
share of Common Stock, one Class A Warrant and one Class B Warrant.
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 9, 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 9, 2001. The Class A Warrants are
currently subject to redemption, and the Class B Warrants are subject to
redemption commencing May 9, 1997, 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 or $12.25 per share with respect to the Class B Warrants, for
any 30 consecutive trading days ending within 15 days of the notice of
redemption. See "Description of Securities."
The components of the IPO Units were transferrable separately immediately
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 IPO Units are listed on the Nasdaq SmallCap
Market under the symbol "DVIDU." The closing prices of these securities on
November 1, 1996 as reported by Nasdaq were $8 3/8, $5, $2 1/2 and $15 1/2,
respectively. See "Price Range of Securities." The exercise price and other
terms of the Class A Warrants and Class B Warrants were determined by
negotiation between the Company and D.H. Blair Investment Banking Corp. (the
"Underwriter") at the time of the IPO and do not necessarily bear a
relationship to the Company's assets, book value, results of operations, net
worth of any other recognized criteria of value.
On November 4, 1996, the Company filed a registration statement under the
Securities Act of 1933 with the Securities and Exchange Commission relating to
a public offering (the "Second Offering") by the Company through the
Underwriter of 23,000 Units (including up to an additional 3,450 Units which
the Underwriter has an option to purchase for the purpose of covering over-
allotments), each Unit consisting of a minimum of 70 and a maximum of 100 IPO
Units.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY.
-------------------
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 is November , 1996.
ALT 2-1
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
upon exercise of the Warrants will be realized only if and to the extent any
of the Warrants are exercised. The holders of the Warrants are not obligated
to exercise the Warrants, and there can be no assurance that the holders will
choose to exercise the Warrants in whole or in part. The Warrants are
redeemable under certain circumstances at the option of the Company. See
"Description of Securities." The estimated net proceeds to the Company in the
event that the 4,830,000 Class A Warrants are exercised in full would be
$29,825,250, after deducting the solicitation fee payable to D.H. Blair
Investment Banking Corp., the underwriter of the Company's IPO. In the event
that all of the 4,830,000 outstanding Class B Warrants and 4,830,000 Class B
Warrants issuable upon exercise of the outstanding Class A Warrants are
exercised, the Company would receive additional net proceeds of $77,763,000
after deducting the solicitation fee payable to D.H. Blair Investment Banking
Corp.
The Company intends to apply any net proceeds it receives from the exercise
of the Warrants to augment its working capital and for general corporate
purposes. Prior to their use, the net proceeds from the exercise of the
Warrants will be invested in short-term, high-grade interest-bearing
investments of accounts.
ALT 2-2
<PAGE>
PLAN OF DISTRIBUTION
The securities offered hereby by the Company are being offered directly by
the Company pursuant to the terms of the Warrants. 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. Upon any exercise
of the Warrants after May 9, 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 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.
The Company is aware that Blair & Co. ("Blair & Co."), which is
substantially owned by family members of J. Morton Davis, the sole stockholder
of the Underwriter, 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.
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 the closing of the Second Offering, 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 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 Underwriter
also acted as underwriter of the Company's IPO and received a 6% commission of
$1,444,000 and a non-accountable expense allowance of $724,500 in connection
with such offering. The Underwriter is acting as underwriter in connection
with the sale by the Company of 23,000 Units (including an additional 3,450
Units which the Underwriter has an option to purchase for the purpose of
covering over-allotments), each Unit consisting of a minimum of 70 and a
maximum of 100 units of the Company's securities (the "IPO Units"). Each IPO
Unit consists of one share of Common Stock, one Class A Warrant and one Class
B Warrant. The IPO Units are identical to the units sold in the IPO, which was
completed in May 1996. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
In connection with the IPO, the Company sold to D.H. Blair Investment
Banking Corp. and its designees, for nominal consideration, the IPO Unit
Purchase Options 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 IPO
Unit Purchase Options have been exercised and the underlying warrants are
outstanding. The IPO Unit Purchase Options are 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 IPO Unit Purchase Options and
the underlying securities are not transferable until May 9, 1998, except to
officers
ALT 2-3
<PAGE>
of the Underwriter or to members of the selling group. The IPO Unit Purchase
Options include 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 IPO Unit Purchase Options.
In connection with the Second Offering, the Company has agreed to sell to
the Underwriter and its designees, for nominal consideration, a Unit Purchase
Option to purchase up to 2,300 Units substantially identical to the Units
being offered pursuant to the Second Offering, except that the Warrants
included therein are subject to redemption by the Company for $.05 at any time
after the Unit Purchase Option has been exercised and the underlying warrants
are outstanding. The Unit Purchase Option will be exercisable during the
three-year period commencing two years from the date of this Prospectus at an
exercise price of $1,300 per Unit, subject to adjustment in certain events and
the Unit Purchase Option and the underlying securities are not transferable
for a period of two years from the date of this Prospectus except to officers
of the Underwriter or to members of the Underwriter's selling group. The
Company has agreed to register the securities issuable upon exercise thereof
under the Securities Act on two separate occasions (the first at the Company's
expense and the second at the expense of the holders of the Unit Purchase
Option) during the four-year period commencing one year from the date of this
Prospectus. The Unit Purchase Option includes a provision permitting the
holder to elect a cashless exercise of the Option. The Company has also
granted certain piggyback rights to holders of the Unit Purchase Option.
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 2-4
<PAGE>
CONCURRENT OFFERINGS
The Underwriter is acting as underwriter in connection with the sale by the
Company of 23,000 Units (including up to an additional 3,450 Units which the
Underwriter has an option to purchase for the purpose of covering over-
allotments), each Unit consisting of a minimum of 70 and a maximum of 100 IPO
Units. Each IPO Unit consists of one share of Common Stock, one Class A
Warrant and one Class B Warrant.
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, the Units 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 2-5
<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 Summary..................................................... 3
Risk Factors........................................................... 7
Use of Proceeds........................................................ 17
Dividend Policy........................................................ 18
Price Range of Securities.............................................. 18
Dilution............................................................... 19
Capitalization......................................................... 21
Selected Financial Data................................................ 22
Pro Forma Financial Information........................................ 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 30
Business............................................................... 37
Management............................................................. 49
Certain Transactions................................................... 55
Principal Shareholders................................................. 57
Concurrent Offerings................................................... 60
Description of Securities.............................................. 61
Shares Eligible for Future Sale........................................ 64
Underwriting........................................................... 65
Legal Matters.......................................................... 67
Experts................................................................ 67
Additional Information................................................. 68
Index to Financial Statements.......................................... F-1
Use of Proceeds........................................................ ALT 2-2
Plan of Distribution................................................... ALT 2-3
Concurrent Offerings................................................... ALT 2-5
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
DIGITAL VIDEO SYSTEMS, INC.
4,830,000 SHARES OF COMMON STOCK
AND 4,830,000 REDEEMABLE CLASS B WARRANTS
UNDERLYING REDEEMABLE CLASS A WARRANTS
9,660,000 SHARES OF COMMON STOCK
UNDERLYING REDEEMABLE CLASS B WARRANTS
NOVEMBER , 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 9, 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 9, 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." The Class A Warrants are currently subject to redemption, and
the Class B Warrants are subject to redemption commencing May 9, 1997 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; provided, however,
that until February 8, 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.
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 SmallCap Market under the symbol "DVIDU."
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 and 4,830,000
Class B Warrants 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; and (iii) 4,830,000 shares of Common Stock
issuable upon exercise of the Company's outstanding Class B Warrants.
On November 4, 1996, the Company filed a registration statement under the
Securities Act of 1933 with the Securities and Exchange Commission relating to
a public offering (the "Second Offering") by the Company through the
Underwriter of 23,000 Units (including up to an additional 3,450 Units which
the Underwriter has an option to purchase for the purpose of covering over-
allotments), each Unit consisting of a minimum of 70 and a maximum of 100 IPO
Units.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD
BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED HEREBY.
---------------------
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 is November , 1996.
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 & Channah 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........................................ 25,000
</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 Peppetuo, 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>
CONCURRENT OFFERINGS
Pursuant to the registration statement of which this Prospectus forms a
part, the Company has registered (i) 4,830,000 shares of Common Stock and
4,830,000 Class B Warrants 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; and
(iii) 4,830,000 shares of Common Stock issuable upon exercise of the Company's
outstanding Class B Warrants.
On November 1, 1996, the Company filed a registration statement under the
Securities Act of 1933 with the Securities and Exchange Commission relating to
a public offering (the "Second Offering") by the Company through the
Underwriter of 23,000 Units (including up to an additional 3,450 Units which
the Underwriter has an option to purchase for the purpose of covering over-
allotments), each Unit consisting of a minimum of 70 and a maximum of 100 IPO
Units.
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 Summary..................................................... 3
Risk Factors........................................................... 7
Use of Proceeds........................................................ 17
Dividend Policy........................................................ 18
Price Range of Securities.............................................. 18
Dilution............................................................... 19
Capitalization......................................................... 21
Selected Financial Data................................................ 22
Pro Forma Financial Information........................................ 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations......................................................... 30
Business............................................................... 37
Management............................................................. 49
Certain Transactions................................................... 55
Principal Shareholders................................................. 57
Concurrent Offerings................................................... 60
Description of Securities.............................................. 61
Shares Eligible for Future Sale........................................ 64
Underwriting........................................................... 65
Legal Matters.......................................................... 67
Experts................................................................ 67
Additional Information................................................. 68
Index to Financial Statements.......................................... F-1
Selling Securityholders................................................ ALT 3-3
Plan of Distribution................................................... ALT 3-8
Concurrent Offerings................................................... 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
NOVEMBER , 1996
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws also
provide that the Registrant will indemnify its directors and officers and may
indemnify its employees and other agents to the fullest extent not prohibited
by Delaware law.
The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty
of care to the Registrant and its shareholders. These provisions do not
eliminate the directors' duty of care and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Registrant, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the director derived an improper personal benefit, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
The Registrant intends to enter into agreements with its directors and
executive officers that require the Registrant to indemnify such persons
against expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person
may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriter of the registrant
and its officers and directors for certain liabilities arising under the
Securities Act or otherwise.
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION
The following table sets forth an itemized statement of all expenses to be
incurred in connection with the issuance and distribution of the securities
that are the subject of this Registration Statement. All amounts set forth
below assume that each Unit consists of 100 IPO Units and that the
Underwriter's over-allotment option is exercised in full. All amounts set
forth below, other than the Securities and Exchange Commission registration
fee and the NASD and Nasdaq filing fees, are estimates only.
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 29,833
NASD fee...................................................... 10,345
NASDAQ fee.................................................... 25,000
Printing and engraving expenses............................... 80,000
Accounting fees and expenses.................................. 150,000
Legal fees and expenses....................................... 150,000
Blue Sky filing fees and expenses............................. 15,000
Transfer agent's fees and expenses............................ 10,000
Representative's nonaccountable expense allowance (3%)........ 793,500
Directors and officers liability insurance.................... 125,000
Miscellaneous expenses........................................ 131,322
----------
Total......................................................... $1,520,000
==========
</TABLE>
II-1
<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth all of the unregistered sales of securities by
the Company during the past three years.
<TABLE>
<CAPTION>
DATE PURCHASER SECURITIES PURCHASED CONSIDERATION
---- ------------------------ ------------------------ -------------
<C> <C> <S> <C>
January 1994 Hyundai Electronics 3,247,473 shares of $4,999,762
Industries Company, Ltd. Series A Preferred Stock
September 1994 Wei Yuan Lin 118,085 shares of Common $ 16,415(1)
Stock(2)
December 1994 Edmund Sun(3) 6,215,756 shares of (4)
Common Stock
April 1995 Hyundai Electronics 649,526 shares of Series $1,000,000
Industries Company, Ltd. B Preferred Stock
August 1995 Sian Che Chang 351,807 shares of Common $ 48,944
Stock(2)
December 1995 Van Nguyen 1,797 shares of Common $ 250
Stock(2)
December 1995 Wendy Sar 1,482 shares of Common $ 206
Stock(2)
December 1995 Edmund Sun 1,335,949 shares of (5)
Series B Preferred Stock
January and March Bridge Financing $7,000,000 principal $7,000,000
1996 amount of 10% Notes and
warrants to purchase
3,500,000 shares of
Common Stock(6)
Febuary 1996 Dale Hitt 97,931 shares of Common $ 13,624
Stock(2)
September 1996 Yu Ming Hsu 4,379 shares of Common $ 613
Stock(2)
September 1996 Szu Ming Chen 13,813 shares of Common $ 1,934
Stock(2)
September 1996 Ya Ling Chen 3,818 shares of Common $ 534
Stock(2)
September 1996 Tusng Min Lin 75,475 shares of Common $ 10,567
Stock(2)
September 1996 Pei Chih Lei 12,130 shares of Common $ 1,698
Stock(2)
September 1996 Chen Ho Tsai 13,813 shares of Common $ 1,934
Stock(2)
September 1996 Chun Hsiung Hung 11,231 shares of Common $ 15,732
Stock(2)
September 1996 Hsiu Ling Ko 2,358 shares of Common $ 331
Stock(2)
September 1996 Jim Monroe 35,041 shares of Common $ 4,906
Stock(2)
September 1996 Oliver Hellwig 1,571 shares of Common $ 220
Stock(2)
September 1996 Ed Martini 51,258 shares of Common $ 7,176
Stock(2)
September 1996 Phil Ma 17,522 shares of Common $ 2,453
Stock(2)
October 1996 Dr. Edmund Sun 281,520 shares of Common (7)
Stock
October 1996 James W. Kirkpatrick Jr. 93,840 shares of Common (8)
Stock
October 1996 Lish Chen 46,920 shares of Common (8)
Stock
October 1996 Michael Mruzik 24,398 shares of Common (8)
Stock
October 1996 Mihailo Stojancic 20,645 shares of Common (8)
Stock
October 1996 Tai Sato 11,965 shares of Common (8)
Stock
October 1996 Francis Hung 11,965 shares of Common (8)
Stock
October 1996 Sitrick & Company 1,198 shares of Common (9)
Stock
</TABLE>
- --------
(1) Including a note receivable of $15,000. During 1995, the unpaid principal
balance of such note and 61,234 shares were cancelled.
(2) Exercise of stock options issued under the 1993 Option Plan.
II-2
<PAGE>
(3) The shares of Common Stock were sold to Sunny Rich Enterprises, Ltd. which
subsequently dissolved and distributed its assets to Edmund Sun, its sole
shareholder.
(4) Assets of Sunny Rich Enterprises, Ltd., including 6,199,720 shares of the
Company's Common Stock.
(5) Conversion of $2,056,807 of outstanding principal and interest under a
convertible note.
(6) Issued solely to accredited investors in connection with a private
placement in which D.H. Blair Investment Banking Corp. acted as placement
agent and received $910,000 in fees and expenses.
(7) Shares of the Company's Common stock were issued in exchange for shares of
ViComp's Series A Convertible Preferred Stock.
(8) Shares of the Company's Common Stock were issued in exchange for shares of
ViComp's Common Stock.
(9) Issued to the Company's public relations firm for services.
The Company believes that the issuances of securities pursuant to the
foregoing transactions were exempt from registration under the Securities Act
of 1933, as amended, by virtue of Section 4(2) thereof as transactions not
involving public offerings. Except as indicated above, all securities
referenced in the preceding table were sold for cash.
ITEM 27. EXHIBITS
(a) The following exhibits, which are furnished with this Registration
Statement or incorporated herein by reference, are filed as part of this
Registration Statement:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of the
Company.(1)
3.2 Bylaws of the Company.(1)
4.1 Specimen Common Stock Certificate.(3)
4.2 Form of Warrant Agreement (the "Warrant Agreement") by and
among the Company, American Stock Transfer & Trust Company
and the Underwriter (including forms of Class A and Class B
Warrant certificates).(3)
4.3 Form of Underwriter's Unit Purchase Option (issued in
connection with the Company's initial public offering).(1)
4.4 Warrant Agreement.(1)
4.5 Escrow Agreement dated as of April 23, 1996 among American
Stock Transfer & Trust Company, the Company and
Optionholders listed on Exhibit B thereto.(3)
4.6 Form of Subscription Agreement from the Bridge
Financing.(2)
4.7 Escrow Agreement dated as of October 17, 1996 made by and
between the Company and Dr. Edmund Y. Sun.
4.8 Escrow Agreement dated as of October 17, 1996 made by and
among the Company, Dr. Edmund Sun and American Stock
Transfer & Trust Company.
4.9 Escrow Agreement dated as of October 17, 1996 made by and
among the Company, the shareholders named on the signature
pages thereto and American Stock Transfer & Trust Company.
4.10 Form of Amendment to the Warrant Agreement.
4.11 Form of Underwriter's Unit Purchase Option (to be issued in
connection with the Offering).
5.1 Opinion of Troy & Gould Professional Corporation.
10.1 1993 Amended and Restated Stock Option Plan.(2)
10.2 Employment Agreement as of March 1, 1996 between the
Company and Dr. Edmund Sun.(2)
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
------- -------------------
<C> <S>
10.3 Product Agreement made March 16, 1993 between Hyundai and the
Company.(1)
10.4 Technical Assistance and License Agreement made March 16, 1993
between Hyundai and the Company.(1)
10.5 1995 Hyundai Technical Assistance and License Agreement.(1)
10.6 Consulting Agreement made as of February 1, 1996 between the Company
and Intermarkt.(1)
10.7 Sublease Agreement, dated as of November 15, 1995, between the
Company and McAfee Associates, Inc. (along with consent to sublease
and master lease agreement).(1)
10.8 House Leasing Agreements dated August 31, 1994 and September 6, 1994
for facility in Taiwan (translated).(1)
10.9 Form of Indemnity Agreement with the Company's officers and
directors.(1)
10.10 Series A Preferred Stock Purchase Agreement made as of January 21,
1994 between the Company and Hyundai.(1)
10.11 Series B Preferred Stock Purchase Agreement made as of April 1995
between the Company and Hyundai.(1)
10.12 Consulting and Employment Agreement between the Company and
Robert B. Pfannkuch entered into as of March 15, 1996.(2)
10.13 Agreement and Plan of Merger dated as of October 17, 1996 by and
between the Company, ViComp Technology, Inc. and the shareholders of
ViComp Technology, Inc.
10.14 Registration Rights Agreement dated as of October 17, 1996 by and
between the Company and the shareholders of ViComp Technology, Inc.
named therein.
10.15 1996 Stock Option Plan.
10.16 Consulting Agreement made as of September 27, 1996 between the
Company and Sitrick And Company Inc.
10.17 Office Lease Agreement commencing on October 15, 1996 between the
Company and Paulsen Office Park.
10.18 Lease, dated July 17, 1996, between the Company and Ken Yang Real
Estate (Shanghai) Co. Ltd.
11.1 Statement regarding computation of net loss per share.
23.1 Consents of Ernst & Young LLP.
23.2 Consent of Troy & Gould Professional Corporation (contained in
Exhibit 5.1).
23.3 Consent of Sutter Securities Incorporated.
24.1 Form of Power of Attorney.
</TABLE>
- --------
(1) Incorporated by reference from the Company's Registration Statement on
Form SB-2 (Registration No. 333-2228), as filed with the Commission on
March 8, 1996.
(2) Incorporated by reference from Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-2228), as filed
with the Commission on April 23, 1996.
(3) Incorporated by reference from Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-2228), as filed
with the Commission on May 8, 1996.
II-4
<PAGE>
ITEM 28. UNDERTAKINGS
(1) The registrant hereby undertakes to file, during any period in which it
offers or sells the securities covered by this Registration Statement, a post-
effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the Securities
Act;
(ii) Reflect in the prospectus any facts or events which, individually or
together, represent a fundamental change in the information in the
registration statement; and
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, the undersigned will
treat each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be the
initial bona fide offering.
(3) The registrant undertakes to file a post-effective amendment to remove
from registration any of the securities that remain unsold at the end of the
offering.
(4) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(5) The registrant hereby undertakes:
(i) For determining any liability under the Securities Act, to treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant under Rule 424(b)(1), or (4) or
497(h) under the Securities Act as part of this registration statement as
of the time the Commission declared it effective.
(ii) For determining any liability under the Securities Act, to treat
each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
II-5
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED THIS
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED,
THEREUNTO DULY AUTHORIZED, IN THE CITY OF SANTA CLARA, STATE OF CALIFORNIA, ON
OCTOBER 31, 1996.
DIGITAL VIDEO SYSTEMS, INC.
By /s/ Edmund Sun
_____________________________________
Edmund Sun
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
By /s/ Edmund Sun Chairman of the Board and October 31, 1996
____________________________________ Chief Executive Officer
Edmund Sun
By /s/ Robert B. Pfannkuch President and Director October 31, 1996
____________________________________
Robert B. Pfannkuch
By /s/ Arvin S. Erickson Chief Financial Officer and October 31, 1996
____________________________________ Principal Accounting Officer
Arvin S. Erickson
Director
____________________________________
Janis P. Gemignani
By /s/ Sung Hee Lee Director October 31, 1996
____________________________________
Sung Hee Lee
By /s/ Sanford Sigoloff Director October 31, 1996
____________________________________
Sanford Sigoloff
By /s/ Philip B. Smith Director October 31, 1996
____________________________________
Philip B. Smith
By /s/ Joseph F. Troy Director October 31, 1996
____________________________________
Joseph F. Troy
</TABLE>
II-6
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION PAGE NO.
------- ------------------- --------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of
the Company.(1)
3.2 Bylaws of the Company.(1)
4.1 Specimen Common Stock Certificate.(3)
4.2 Form of Warrant Agreement (the "Warrant Agreement") by
and among the Company, American Stock Transfer & Trust
Company and the Underwriter (including forms of Class A
and Class B Warrant certificates).(3)
4.3 Form of Underwriter's Unit Purchase Option (issued in
connection with the Company's initial public
offering).(1)
4.4 Warrant Agreement.(1)
4.5 Escrow Agreement dated as of April 23, 1996 among
American Stock Transfer & Trust Company, the Company
and Optionholders listed on Exhibit B thereto.(3)
4.6 Form of Subscription Agreement from the Bridge
Financing.(2)
4.7 Escrow Agreement dated as of October 17, 1996 made by
and between the Company and Dr. Edmund Y. Sun.
4.8 Escrow Agreement dated as of October 17, 1996 made by
and among the Company, Dr. Edmund Sun and American
Stock Transfer & Trust Company.
4.9 Escrow Agreement dated as of October 17, 1996 made by
and among the Company, the shareholders named on the
signature pages thereto and American Stock Transfer &
Trust Company.
4.10 Form of Amendment to the Warrant Agreement.
4.11 Form of Underwriter's Unit Purchase Option (to be
issued in connection with the Offering).
5.1 Opinion of Troy & Gould Professional Corporation.
10.1 1993 Amended and Restated Stock Option Plan.(2)
10.2 Employment Agreement as of March 1, 1996 between the
Company and Dr. Edmund Sun.(2)
10.3 Product Agreement made March 16, 1993 between Hyundai
and the Company.(1)
10.4 Technical Assistance and License Agreement made March
16, 1993 between Hyundai and the Company.(1)
10.5 1995 Hyundai Technical Assistance and License
Agreement.(1)
10.6 Consulting Agreement made as of February 1, 1996
between the Company and Intermarkt.(1)
10.7 Sublease Agreement, dated as of November 15, 1995,
between the Company and McAfee Associates, Inc. (along
with consent to sublease and master lease
agreement).(1)
10.8 House Leasing Agreements dated August 31, 1994 and
September 6, 1994 for facility in Taiwan
(translated).(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT EXHIBIT DESCRIPTION PAGE NO.
NUMBER ------------------- --------
-------
<C> <S> <C>
10.9 Form of Indemnity Agreement.(1)
10.10 Series A Preferred Stock Purchase Agreement made as of
January 21, 1994 between the Company and Hyundai.(1)
10.11 Series B Preferred Stock Purchase Agreement made as of
April 1995 between the Company and Hyundai.(1)
10.12 Consulting and Employment Agreement between the Company and
Robert B. Pfannkuch entered into as of March 15, 1996.(2)
10.13 Agreement and Plan of Merger dated as of October 17, 1996
by and among the Company, Digital Video Acquisition Co.,
ViComp Technology, Inc. and the shareholders of ViComp
Technology, Inc.
10.14 Registration Rights Agreement dated as of October 17, 1996
by and between the Company and the shareholders of ViComp
Technology, Inc. named therein.
10.15 1996 Stock Option Plan.
10.16 Consulting Agreement made as of September 27, 1996 between
the Company and Sitrick And Company Inc.
10.17 Office Lease Agreement commencing on October 15, 1996
between the Company and Paulsen Office Park.
10.18 Lease, dated July 17, 1996, between the Company and Ken
Yang Real Estate (Shanghai) Co. Ltd.
11.1 Statement regarding computation of net loss per share.
23.1 Consents of Ernst & Young LLP.
23.2 Consent of Troy & Gould Professional Corporation (contained
in Exhibit 5.1).
23.3 Consent of Sutter Securities Incorporated
24.1 Form of Power of Attorney.
</TABLE>
- --------
(1) Incorporated by reference from the Company's Registration Statement on
Form SB-2 (Registration No. 333-2228), as filed with the Commission on
March 8, 1996.
(2) Incorporated by reference from Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-2228), as filed
with the Commission on April 23, 1996.
(3) Incorporated by reference from Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-2228), as filed
with the Commission on May 8, 1996.
<PAGE>
EXHIBIT 1.1
23,000 Units
(each Unit consisting of ____ Units (the "IPO Units"),
which consist of one share of Common Stock, par
value $.0001 per share; one redeemable Class A warrant
and one redeemable Class B warrant)
DIGITAL VIDEO SYSTEMS, INC.
UNDERWRITING AGREEMENT
----------------------
, 1996
D.H. Blair Investment Banking Corp.
44 Wall Street
New York, New York 10005
Digital Video Systems, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to D.H. Blair Investment Banking Corp. (the
"Underwriter"), an aggregate of 23,000 Units, each unit being hereinafter
referred to as a "Unit" and consisting of ____ Units (the "IPO Units"), each
consisting of one share of Common Stock, par value $.0001 per share, ("Shares"),
one redeemable Class A warrant ("Class A Warrant") and one redeemable Class B
warrant ("Class B Warrant"). Each Class A Warrant is exercisable to purchase
one share of Common Stock and one Class B Warrant at a price of $6.50 from the
date of issuance to May 9, 2001. Each Class B Warrant is exercisable to
purchase one share of Common Stock at a price of $8.75 from the date of issuance
to May 9, 2001. The Class A Warrants and Class B Warrants are collectively
referred to as the "Warrants". The Class A Warrants are subject to redemption,
in certain instances immediately following issuance, and the Class B Warrants
are subject to redemption, in certain instances commencing one year from the
date of this Agreement. In addition, the Company proposes to grant to the
Underwriter the option referred to in Section 2(b) to purchase all or any part
of an aggregate of 3,450 additional Units. Unless the context otherwise
indicates, the term "Units" shall include the 3,450 additional Units referred to
above.
The aggregate of 23,000 Units to be sold by the Company, together with
all or any part of the 3,450 Units that the Underwriter has the option to
purchase, and the IPO Units and the Shares and the Warrants comprising such IPO
Units, are herein called the "Units." The Common Stock of the Company to be
outstanding after giving effect to the sale of the Shares is herein called the
"Common Stock." The Shares and Warrants included in the Units (including the
Units which the Underwriter has the option to purchase) are herein collectively
called the "Securities."
You have advised the Company that you desire to purchase the Units.
The Company confirms the agreements made by it with respect to the purchase of
the Units by you as follows:
<PAGE>
1. Representations and Warranties of the Company. The Company
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represents and warrants to, and agrees with, the Underwriter that:
(a) A registration statement (File No. 33-______) on Form SB-2
relating to the public offering of the Units, including a form of prospectus
subject to completion, copies of which have heretofore been delivered to you,
has been prepared by the Company in conformity with the requirements of the
Securities Act of 1933, as amended (the "Act"), and the rules and regulations
(the "Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder, and has been filed with the Commission under the Act
and one or more amendments to such registration statement may have been so
filed. After the execution of this Agreement, the Company will file with the
Commission either (i) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the Act,
either (A) if the Company relies on Rule 434 under the Act, a Term Sheet (as
hereinafter defined) relating to the Units that shall identify the Preliminary
Prospectus (as hereinafter defined) that it supplements containing such
information as is required or permitted by Rules 434, 430A and 424(b) under the
Act or (B) if the Company does not rely on Rule 434 under the Act a prospectus
in the form most recently included in an amendment to such registration
statement (or, if no such amendment shall have been filed, in such registration
statement), with such changes or insertions as are required by Rule 430A under
the Act or permitted by Rule 424(b) under the Act and in the case of either
clause (i)(A) or (i)(B) of this sentence, as have been provided to and approved
by you prior to the execution of this Agreement, or (ii) if such registration
statement, as it may have been amended, has not been declared by the Commission
to be effective under the Act, an amendment to such registration statement,
including a form of prospectus, a copy of which amendment has been furnished to
and approved by you prior to the execution of this Agreement.
As used in this Agreement, the term "Registration Statement" means
such registration statement, as amended at the time when it was or is declared
effective, including all financial schedules and exhibits thereto and including
any information omitted therefrom pursuant to Rule 430A under the Act and
included in the Prospectus (as hereinafter defined); the term "Preliminary
Prospectus" means each prospectus subject to completion filed with such
registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective); the term
"Prospectus" means (A) if the Company relies on Rule 434 under the Act, the Term
Sheet relating to the Units that is first filed pursuant to Rule 424(b)(7) under
the Act, together with the Preliminary Prospectus identified therein that such
Term Sheet supplements; (B) if the Company does not rely on Rule 434 under the
Act, the prospectus first filed with the Commission pursuant to Rule 424(b)
under the Act or (C) if the Company does not rely on Rule 434 under the Act and
if no prospectus is required to be filed pursuant to said Rule 424(b), such term
means the prospectus included in the Registration Statement; except that if such
registration statement or prospectus is amended or such prospectus is
supplemented, after the effective date of such registration statement and prior
to the Option Closing Date (as hereinafter defined), the terms "Registration
Statement" and "Prospectus" shall include such
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<PAGE>
registration statement and prospectus as so amended, and the term "Prospectus"
shall include the prospectus, as amended, and as so supplemented, or both, as
the case may be; and the term "Term Sheet" means any term sheet that satisfies
the requirements of Rule 434 under the Act. Any reference to the "date" of a
Prospectus that includes a Term Sheet shall mean the date of such Term Sheet.
(b) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus. At the time the Registration Statement
becomes effective and at all times subsequent thereto up to and on the Closing
Date (as hereinafter defined) or the Option Closing Date, as the case may be,
(i) the Registration Statement and Prospectus will in all respects conform to
the requirements of the Act and the Rules and Regulations; and (ii) neither the
Registration Statement nor the Prospectus will include any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make statements therein not misleading; provided, however, that
the Company makes no representations, warranties or agreements as to information
contained in or omitted from the Registration Statement or Prospectus in
reliance upon, and in conformity with, written information furnished to the
Company by or on behalf of the Underwriter specifically for use in the
preparation thereof. It is understood that the statements set forth in the
Prospectus on page 2 with respect to stabilization, under the heading
"Underwriting", "Risk Factors -- 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.," and "Risk Factors --
Possible Restrictions on market making activities in the Company's securities."
and the identity of counsel to the Underwriter under the heading "Legal Matters"
constitute the only information furnished in writing by or on behalf of the
Underwriter for inclusion in the Registration Statement and Prospectus, as the
case may be.
(c) Each of the Company and Vicomp Technology, Inc. (the "Subsidiary")
has been duly incorporated and is validly existing as a corporation in good
standing under the laws of the jurisdiction of its incorporation, with full
power and authority (corporate and other) to own its properties and conduct its
business as described in the Prospectus and is duly qualified to do business as
a foreign corporation and is in good standing in all other jurisdictions in
which the nature of its business or the character or location of its properties
requires such qualification, except where failure to so qualify will not
materially affect the Company's or the Subsidiary's business, properties or
financial condition.
(d) The authorized, issued and outstanding capital stock of the
Company as of June 30, 1996 is as set forth in the Prospectus under
"Capitalization"; the shares of issued and outstanding capital stock of the
Company set forth thereunder have been duly authorized, validly issued and are
fully paid and non-assessable; except as set forth in the Prospectus, no
options, warrants, or other rights to purchase, agreements or other obligations
to issue, or agreements or other rights to convert any obligation into, any
shares of capital stock of the Company have been granted or entered into by the
Company; and the capital stock conforms to all statements relating thereto
contained in the Registration Statement and Prospectus.
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<PAGE>
(e) The Units, the IPO Units and the Shares are duly authorized, and
when issued and delivered pursuant to this Agreement, will be duly authorized,
validly issued, fully paid and nonassessable and free of preemptive rights of
any security holder of the Company. Neither the filing of the Registration
Statement nor the offering or sale of the Units as contemplated in this
Agreement gives rise to any rights, other than those which have been waived or
satisfied, for or relating to the registration of any shares of Common Stock,
except as described in the Registration Statement.
The Warrants have been duly authorized and, when issued and delivered
pursuant to this Agreement, will have been duly executed, issued and delivered
and will constitute valid and legally binding obligations of the Company
enforceable in accordance with their terms and entitled to the benefits provided
by the warrant agreement pursuant to which such Warrants are to be issued (the
"Warrant Agreement"), which will be substantially in the form filed as an
exhibit to the Registration Statement. The shares of Common Stock issuable upon
exercise of the Warrants have been reserved for issuance upon the exercise of
the Warrants and when issued, paid for and delivered in accordance with the
terms of the Warrants and Warrant Agreement, will be duly and validly
authorized, validly issued, fully paid and non-assessable and free of preemptive
rights and no personal liability will attach to the ownership thereof. The
Warrant Agreement has been duly authorized and, when executed and delivered
pursuant to this Agreement, will have been duly executed and delivered and will
constitute the valid and legally binding obligation of the Company enforceable
in accordance with its terms. The Warrants and the Warrant Agreement conform to
the respective descriptions thereof in the Registration Statement and
Prospectus.
The Shares and the Warrants contained in the Unit Purchase Option have
been duly authorized and, when duly issued and delivered, such Warrants will
constitute valid and legally binding obligations of the Company enforceable in
accordance with their terms and entitled to the benefits provided by the Unit
Purchase Option. The Shares included in the Unit Purchase Option (and the
shares of Common Stock issuable upon exercise of such Warrants) when issued and
sold, paid for and delivered in accordance with the terms of the Warrants will
be duly authorized, validly issued, fully paid and non-assessable and free of
preemptive rights and no personal liability will attach to the ownership
thereof.
(f) This Agreement, the Unit Purchase Option, the Amendment to the M/A
Agreement dated May 13, 1996 ("Amendment to M/A Agreement") and the Amendment to
the Warrant Agreement dated May 9, 1996 ("Amendment to Warrant Agreement") have
been duly and validly authorized, executed and delivered by the Company. The
Company has full power and lawful authority to authorize, issue and sell the
Units to be sold by it hereunder on the terms and conditions set forth herein,
and no consent, approval, authorization or other order of any governmental
authority is required in connection with such authorization, execution and
delivery or with the authorization, issue and sale of the Units or the Unit
Purchase Option, except such as may be required under the Act or state
securities laws.
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<PAGE>
(g) Except as described in the Prospectus, neither the Company nor the
Subsidiary is in violation, breach or default of or under, and consummation of
the transactions herein contemplated and the fulfillment of the terms of this
Agreement will not conflict with, or result in a breach or violation of, any of
the terms or provisions of, or constitute a default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any of the
property or assets of the Company or the Subsidiary pursuant to the terms of any
indenture, mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or the Subsidiary is a party or by which the
Company or the Subsidiary may be bound or to which any of the property or assets
of the Company or the Subsidiary is subject, nor will such action result in any
violation of the provisions of the articles of incorporation or the by-laws of
the Company or the Subsidiary, as amended, or any statute or any order, rule or
regulation applicable to the Company or the Subsidiary of any court or of any
regulatory authority or other governmental body having jurisdiction over the
Company or the Subsidiary.
(h) Subject to the qualifications stated in the Prospectus, each of
the Company and the Subsidiary has good and marketable title to all properties
and assets described in the Prospectus as owned by it, free and clear of all
liens, charges, encumbrances or restrictions, except such as are not materially
significant or important in relation to its business; all of the material leases
and subleases under which each of the Company and the Subsidiary is the lessor
or sublessor of properties or assets or under which each of the Company and the
Subsidiary holds properties or assets as lessee or sublessee as described in the
Prospectus are in full force and effect, and, except as described in the
Prospectus, neither the Company nor the Subsidiary is in default in any material
respect with respect to any of the terms or provisions of any of such leases or
subleases, and no claim has been asserted by anyone adverse to rights of the
Company or the Subsidiary as lessor, sublessor, lessee or sublessee under any of
the leases or subleases mentioned above, or affecting or questioning the right
of the Company or the Subsidiary to continued possession of the leased or
subleased premises or assets under any such lease or sublease except as
described or referred to in the Prospectus; and each of the Company and the
Subsidiary owns or leases all such properties described in the Prospectus as are
necessary to its operations as now conducted and, except as otherwise stated in
the Prospectus, as proposed to be conducted as set forth in the Prospectus.
(i) Ernst & Young LLP, who have given their reports on certain
financial statements filed and to be filed with the Commission as a part of the
Registration Statement, which are incorporated in the Prospectus, are with
respect to the Company, independent public accountants as required by the Act
and the Rules and Regulations.
(j) The financial statements, together with related notes, set forth
in the Prospectus (or if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or the Registration Statement present fairly the
financial position and results of operations and changes in cash flow position
of the Company and the Subsidiary on the basis stated in the Registration
Statement, at the respective dates and for the respective periods to which they
apply. Said statements and Schedules and related notes have been prepared in
accordance with generally
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<PAGE>
accepted accounting principles applied on a basis which is consistent during the
periods involved. The information set forth under the captions "Dilution",
"Capitalization", and "Selected Financial Data" in the Prospectus fairly
present, on the basis stated in the Prospectus, the information included
therein. The pro forma financial information filed as part of the Registration
Statement or included in the Prospectus (or such preliminary prospectus) has
been prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements, and includes all adjustments
necessary to present fairly the pro forma financial condition and results of
operations at the respective dates and for the respective periods indicated and
all assumptions used in preparing such pro forma financial statements are
reasonable.
(k) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus), neither the Company nor
the Subsidiary has incurred any liabilities or obligations, direct or
contingent, not in the ordinary course of business, or entered into any
transaction not in the ordinary course of business, which is material to the
business of the Company or the Subsidiary, and there has not been any change in
the capital stock of, or any incurrence of short-term or long-term debt by, the
Company or the Subsidiary or any issuance of options, warrants or other rights
to purchase the capital stock of the Company or the Subsidiary or any adverse
change or any development involving, so far as the Company can now reasonably
foresee a prospective adverse change in the condition (financial or other), net
worth, results of operations, business, key personnel or properties of it which
would be material to the business or financial condition of the Company or the
Subsidiary and neither the Company nor the Subsidiary has become a party to, and
neither the business nor the property of the Company or the Subsidiary has
become the subject of, any material litigation whether or not in the ordinary
course of business.
(l) Except as set forth in the Prospectus, there is not now pending
or, to the knowledge of the Company, threatened, any action, suit or proceeding
to which the Company or the Subsidiary is a party before or by any court or
governmental agency or body, which might result in any material adverse change
in the condition (financial or other), business prospects, net worth, or
properties of the Company or the Subsidiary, nor are there any actions, suits or
proceedings related to environmental matters or related to discrimination on the
basis of age, sex, religion or race; and no labor disputes involving the
employees of the Company or the Subsidiary exist or to the knowledge of the
Company are imminent, which might be expected to materially adversely affect the
conduct of the business, property or operations or the financial condition or
results of operations of the Company or the Subsidiary.
(m) Except as disclosed in the Prospectus, the Company has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes shown as due thereon; and there is no tax deficiency which has
been or to the knowledge of the Company might be asserted against the Company.
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<PAGE>
(n) Each of the Company and the Subsidiary has sufficient licenses,
permits and other governmental authorizations as are currently required for the
conduct of its business or the ownership of its properties as described in the
Prospectus and is in all material respects complying therewith and owns or
possesses adequate rights to use all material patents, patent applications,
trademarks, service marks, trade-names, trademark registrations, service mark
registrations, copyrights and licenses necessary for the conduct of such
business and had not received any notice of conflict with the asserted rights of
others in respect thereof. To the best knowledge of the Company, none of the
activities or business of the Company or the Subsidiary are in violation of, or
cause the Company or the Subsidiary to violate, any law, rule, regulation or
order of the United States, any state, county or locality, or of any agency or
body of the United States or of any state, county or locality, the violation of
which would have a material adverse impact upon the condition (financial or
otherwise), business, property, prospective results of operations, or net worth
of the Company or the Subsidiary.
(o) The Company has not, directly or indirectly, at any time (i) made
any contributions to any candidate for political office, or failed to disclose
fully any such contribution in violation of law or (ii) made any payment to any
state, federal or foreign governmental officer or official, or other person
charged with similar public or quasi-public duties, other than payments or
contributions required or allowed by applicable law. The Company's internal
accounting controls and procedures are sufficient to cause the Company to comply
in all material respects with the Foreign Corrupt Practices Act of 1977, as
amended.
(p) On the Closing Dates (hereinafter defined) all transfer or other
taxes, (including franchise, capital stock or other tax, other than income
taxes, imposed by any jurisdiction) if any, which are required to be paid in
connection with the sale and transfer of the Units to the Underwriter hereunder
will have been fully paid or provided for by the Company and all laws imposing
such taxes will have been fully complied with.
(q) All contracts and other documents of the Company which are, under
the Rules and Regulations, required to be filed as exhibits to the Registration
Statement have been so filed.
(r) The Company has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the shares of Common Stock to facilitate the sale
or resale of the Units hereby.
(s) The Company has no subsidiaries, except for ViComp Technology,
Inc .
(t) The Company has not entered into any agreement pursuant to which
any person is entitled either directly or indirectly to compensation from the
Company for services as a finder in connection with the proposed public
offering.
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<PAGE>
(u) Except as previously disclosed in writing by the Company to you,
no officer, director or stockholder of the Company has any affiliation or
association with any member of the National Association of Securities Dealers
Inc. ("NASD").
(v) The Company is not, and upon receipt of the proceeds from the sale
of the Units will not be, an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, and the rules and regulations
thereunder.
(w) The Company has not distributed and will not distribute prior to
the First Closing Date any offering material in connection with the offering and
sale of the Units other than the Preliminary Prospectus, Prospectus, the
Registration Statement or the other materials permitted by the Act, if any.
(x) The conditions for use of Form SB-2, as set forth in the General
Instructions thereto, have been satisfied.
(y) There are no business relationships or related-party transactions
of the nature described in Item 404 of Regulation S-K involving the Company or
the Subsidiary, and any person described in such Item that are required to be
disclosed in the Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) that have not been so disclosed.
2. Purchase, Delivery and Sale of the Units.
----------------------------------------
(a) Subject to the terms and conditions of this Agreement, and upon
the basis of the representations, warranties, and agreements herein contained,
the Company agrees to issue and sell to the Underwriter, and the Underwriter
agrees, to buy from the Company at $1,000 per Unit, at the place and time
hereinafter specified, 23,000 Units ("First Units").
Delivery of the First Units against payment therefor shall take place
at the offices of D.H. Blair Investment Banking Corp., 44 Wall Street, New York,
N.Y. (or at such other place as may be designated by agreement between you and
the Company) at 10:00 a.m., New York time, on _______, 1996, or at such later
time and date as you may designate, such time and date of payment and delivery
for the First Units being herein called the "First Closing Date."
(b) In addition, subject to the terms and conditions of this
Agreement, and upon the basis of the representations, warranties and agreements
herein contained, the Company hereby grants an option to the Underwriter to
purchase all or any part of an aggregate of an additional 3,450 Units at the
same price per Unit as the Underwriter shall pay for the First Units being sold
pursuant to the provisions of subsection (a) of this Section 2 (such additional
Units being referred to herein as the "Option Units"). This option may be
exercised within 30 days after the effective date of the Registration Statement
upon notice by you to the Company
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<PAGE>
advising as to the amount of Option Units as to which the option is being
exercised, the names and denominations in which the certificates for such Option
Units are to be registered and the time and date when such certificates are to
be delivered. Such time and date shall be determined by you but shall not be
earlier than four nor later than ten full business days after the exercise of
said option, nor in any event prior to the First Closing Date, and such time and
date is referred to herein as the "Option Closing Date." Delivery of the Option
Units against payment therefor shall take place at the offices of D.H. Blair
Investment Banking Corp., 44 Wall Street, New York, N.Y. The Option granted
hereunder may be exercised only to cover overallotments in the sale by the
Underwriter of First Units referred to in subsection (a) above. In the event the
Company declares or pays a dividend or distribution on its Common Stock, whether
in the form of cash, shares of Common Stock or any other consideration, prior to
the Option Closing Date, such dividend or distribution shall also be paid on the
Option Units on the Option Closing Date.
(c) The Company will make the certificates for the securities
comprising the Units to be purchased by the Underwriter hereunder available to
you for checking at least two full business days prior to the First Closing Date
or the Option Closing Date (which are collectively referred to herein as the
"Closing Dates"). The certificates shall be in such names and denominations as
you may request, at least two full business days prior to the Closing Dates.
Time shall be of the essence and delivery at the time and place specified in
this Agreement is a further condition to the obligations of the Underwriter.
Definitive certificates in negotiable form for the securities
comprising the Units to be purchased by the Underwriter hereunder will be
delivered by the Company to you against payment of the purchase price by
certified or bank cashier's checks in New York Clearing House funds, payable to
the order of the Company.
In addition, in the event the Underwriter exercises the option to
purchase from the Company all or any portion of the Option Units pursuant to the
provisions of subsection (b) above, payment for such Units shall be made to or
upon the order of the Company by certified or bank cashier's checks payable in
New York Clearing House funds at the offices of D.H. Blair Investment Banking
Corp., at the time and date of delivery of such Units as required by the
provisions of subsection (b) above, against receipt of the certificates for such
Units by the Underwriter for the account of the Underwriter registered in such
names and in such denominations as the Underwriter may request.
It is understood that the Underwriter propose to offer the Units to be
purchased hereunder to the public upon the terms and conditions set forth in the
Registration Statement, after the Registration Statement becomes effective.
3. Covenants of the Company. The Company covenants and agrees with
------------------------
the Underwriter that:
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<PAGE>
(a) The Company will use its best efforts to cause the Registration
Statement to become effective as promptly as possible. If required, the Company
will file the Prospectus or any Term Sheet that constitutes a part thereof and
any amendment or supplement thereto with the Commission in the manner and within
the time period required by Rules 434 and 424(b) under the Act. Upon
notification from the Commission that the Registration Statement has become
effective, the Company will so advise you and will not at any time, whether
before or after the effective date, file the Prospectus, Term Sheet or any
amendment to the Registration Statement or supplement to the Prospectus of which
you shall not previously have been advised and furnished with a copy or to which
you or your counsel shall have objected in writing or which is not in compliance
with the Act and the Rules and Regulations. At any time prior to the later of
(A) the completion by the Underwriter of the distribution of the Units
contemplated hereby (but in no event more than nine months after the date on
which the Registration Statement shall have become or been declared effective)
and (B) 25 days after the date on which the Registration Statement shall have
become or been declared effective, the Company will prepare and file with the
Commission, promptly upon your request, any amendments or supplements to the
Registration Statement or Prospectus which, in your opinion, may be necessary or
advisable in connection with the distribution of the Units.
As soon as the Company is advised thereof, the Company will advise
you, and confirm the advice in writing, of the receipt of any comments of the
Commission, of the effectiveness of any post-effective amendment to the
Registration Statement, of the filing of any supplement to the Prospectus or any
amended Prospectus, of any request made by the Commission for amendment of the
Registration Statement or for supplementing of the Prospectus or for additional
information with respect thereto, of the issuance by the Commission or any state
or regulatory body of any stop order or other order or threat thereof suspending
the effectiveness of the Registration Statement or any order preventing or
suspending the use of any preliminary prospectus, or of the suspension of the
qualification of the Units for offering in any jurisdiction, or of the
institution of any proceedings for any of such purposes, and will use its best
efforts to prevent the issuance of any such order, and, if issued, to obtain as
soon as possible the lifting thereof.
The Company has caused to be delivered to you copies of each
Preliminary Prospectus, and the Company has consented and hereby consents to the
use of such copies for the purposes permitted by the Act. The Company
authorizes the Underwriter and dealers to use the Prospectus in connection with
the sale of the Units for such period as in the opinion of counsel to the
Underwriter the use thereof is required to comply with the applicable provisions
of the Act and the Rules and Regulations. In case of the happening, at any time
within such period as a Prospectus is required under the Act to be delivered in
connection with sales by an underwriter or dealer of any event of which the
Company has knowledge and which materially affects the Company or the securities
of the Company, or which in the opinion of counsel for the Company or counsel
for the Underwriter should be set forth in an amendment of the Registration
Statement or a supplement to the Prospectus in order to make the statements
therein not then misleading, in light of the circumstances existing at the time
the Prospectus is
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<PAGE>
required to be delivered to a purchaser of the Units or in case it shall be
necessary to amend or supplement the Prospectus to comply with law or with the
Rules and Regulations, the Company will notify you promptly and forthwith
prepare and furnish to you copies of such amended Prospectus or of such
supplement to be attached to the Prospectus, in such quantities as you may
reasonably request, in order that the Prospectus, as so amended or supplemented,
will not contain any untrue statement of a material fact or omit to state any
material facts necessary in order to make the statements in the Prospectus, in
the light of the circumstances under which they are made, not misleading. The
preparation and furnishing of any such amendment or supplement to the
Registration Statement or amended Prospectus or supplement to be attached to the
Prospectus shall be without expense to the Underwriter, except that in case any
Underwriter is required, in connection with the sale of the Units to deliver a
Prospectus nine months or more after the effective date of the Registration
Statement, the Company will upon request of and at the expense of the
Underwriter, amend or supplement the Registration Statement and Prospectus and
furnish the Underwriter with reasonable quantities of prospectuses complying
with Section 10(a)(3) of the Act.
The Company will comply with the Act, the Rules and Regulations and
the Securities Exchange Act of 1934 and the rules and regulations thereunder in
connection with the offering and issuance of the Units.
(b) The Company will use its best efforts to qualify to register the
Units for sale under the securities or "blue sky" laws of such jurisdictions as
the Underwriter may designate and will make such applications and furnish such
information as may be required for that purpose and to comply with such laws,
provided the Company shall not be required to qualify as a foreign corporation
or a dealer in securities or to execute a general consent of service of process
in any jurisdiction in any action other than one arising out of the offering or
sale of the Units. The Company will, from time to time, prepare and file such
statements and reports as are or may be required to continue such qualification
in effect for so long a period as the Underwriter may reasonably request.
(c) If the sale of the Units provided for herein is not consummated
for any reason caused by the Company, the Company shall pay all costs and
expenses incident to the performance of the Company's obligations hereunder,
including but not limited to, all of the expenses itemized in Section 8,
including the out-of-pocket accountable expenses of the Underwriter as provided
for in Section 8.
(d) The Company will use its best efforts to (i) cause a registration
statement under the Securities Exchange Act of 1934 to be declared effective
concurrently with the completion of this offering and will notify the
Underwriter in writing immediately upon the effectiveness of such registration
statement, and (ii) if requested by the Underwriter, to obtain a listing on the
Pacific Stock Exchange and to obtain and keep current a listing in the Standard
& Poors or Moody's Industrial OTC Manual.
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(e) For so long as the Company is a reporting company under either
Section 12(g) or 15(d) of the Securities Exchange Act of 1934, the Company, at
its expense, will furnish to its stockholders an annual report (including
financial statements audited by independent public accountants), in reasonable
detail and at its expense, will furnish to you during the period ending five (5)
years from the date hereof, (i) as soon as practicable after the end of each
fiscal year, a balance sheet of the Company and any of its subsidiaries as at
the end of such fiscal year, together with statements of income, stockholders'
equity and cash flow of the Company and any subsidiaries for such fiscal year,
all in reasonable detail and accompanied by a copy of the certificate or report
thereon of independent accountants; (ii) as soon as practicable after the end of
each of the first three fiscal quarters of each fiscal year, consolidated
summary financial information of the Company for such quarter in reasonable
detail; (iii) as soon as they are available, a copy of all reports (financial or
other) mailed to security holders; (iv) as soon as they are available, a copy of
all non-confidential reports and financial statements furnished to or filed with
the Commission or any securities exchange or automated quotation system on which
any class of securities of the Company is listed; and (v) such other information
as you may from time to time reasonably request.
(f) In the event the Company has an active subsidiary or subsidiaries,
such financial statements referred to in subsection (e) above will be on a
consolidated basis to the extent the accounts of the Company and its subsidiary
or subsidiaries are consolidated in reports furnished to its stockholders
generally.
(g) The Company will deliver to you at or before the First Closing
Date two signed copies of the Registration Statement including all financial
statements and exhibits filed therewith, and of all amendments thereto, and will
deliver to the Underwriter such number of conformed copies of the Registration
Statement, including such financial statements but without exhibits, and of all
amendments thereto, as the Underwriter may reasonably request. The Company will
deliver to or upon the order of the Underwriter, from time to time until the
effective date of the Registration Statement, as many copies of any Preliminary
Prospectus filed with the Commission prior to the effective date of the
Registration Statement as the Underwriter may reasonably request. The Company
will deliver to the Underwriter on the effective date of the Registration
Statement and thereafter for so long as a Prospectus is required to be delivered
under the Act, from time to time, as many copies of the Prospectus, in final
form, or as thereafter amended or supplemented, as the Underwriter may from time
to time reasonably request. The Company, not later than (i) 5:00 p.m., New York
City time, on the date of determination of the public offering price, if such
determination occurred at or prior to 12:00 noon, New York City time, on such
date or (ii) 6:00 p.m., New York City time, on the business day following the
date of determination of the public offering price, if such determination
occurred after 12:00 noon, New York City time, on the date of determination of
the public offering price, will deliver to the Underwriter, without charge, as
many copies of the Prospectus and any amendment or supplement thereto as the
Underwriter may reasonably request for purposes of confirming orders that are
expected to settle on the First Closing Date.
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(h) The Company will make generally available to its security holders
and to the registered holders of its Warrants and deliver to you as soon as it
is practicable to do so but in no event later than 90 days after the end of
twelve months after its current fiscal quarter, an earnings statement (which
need not be audited) covering a period of at least twelve consecutive months
beginning after the effective date of the Registration Statement, which shall
satisfy the requirements of Section 11(a) of the Act.
(i) The Company will apply the net proceeds from the sale of the Units
for the purposes set forth under "Use of Proceeds" in the Prospectus, and will
file such reports with the Commission with respect to the sale of the Units and
the application of the proceeds therefrom as may be required pursuant to Rule
463 under the Act.
(j) The Company will, promptly upon your request, prepare and file
with the Commission any amendments or supplements to the Registration Statement,
Preliminary Prospectus or Prospectus and take any other action, which in the
reasonable opinion of Bachner, Tally, Polevoy & Misher LLP, counsel to the
Underwriter, may be reasonably necessary or advisable in connection with the
distribution of the Units, and will use its best efforts to cause the same to
become effective as promptly as possible.
(k) The Company will reserve and keep available that maximum number of
its authorized but unissued securities that are issuable upon exercise of the
Unit Purchase Option outstanding from time to time.
(l) For a period of 13 months from the First Closing Date, no
executive officer or director of the Company or stockholder owning in excess of
5% of the Company's outstanding securities (the "Principal Stockholders") will
directly or indirectly, offer, sell (including any short sale), grant any option
for the sale of, acquire any option to dispose of, or otherwise dispose of any
shares of Common Stock without the prior written consent of the Underwriter. In
order to enforce this covenant, the Company shall impose stop-transfer
instructions with respect to the shares owned by the Principal Stockholders
until the end of such period.
(m) Prior to completion of this offering, the Company will make all
filings required, including registration under the Securities Exchange Act of
1934, to obtain the listing of the Common Stock and Warrants on the Nasdaq
National Market and the IPO Units on the Nasdaq SmallCap Market (or a listing on
such other market or exchange as the Underwriter consents to), and will use its
best efforts to effect and maintain such listing for at least five years from
the date of this Agreement.
(n) The Company and each of the Principal Stockholders represent that
it or he has not taken and agree that it or he will not take, directly or
indirectly, any action designed to or which has constituted or which might
reasonably be expected to cause or result in
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the stabilization or manipulation of the price of the IPO Units, Shares or the
Warrants or to facilitate the sale or resale of the Securities.
(o) On the Closing Date and simultaneously with the delivery of the
Units, the Company shall execute and deliver to you, the Unit Purchase Option.
The Unit Purchase Option will be substantially in the form of the Underwriter's
Unit Purchase Option filed as an Exhibit to the Registration Statement.
(p) During the 18 month period commencing on the date of this
Agreement, the Company will not, without the prior written consent of the
Underwriter, grant options to purchase shares of Common Stock at an exercise
price less than the greater of (i) the public offering price of the Units
(without allocating any value to the Warrants) or (ii) the fair market value of
the Common Stock on the date of grant. During the three year period from the
First Closing Date, the Company will not, without the prior written consent of
the Underwriter, offer or sell any of its securities pursuant to Regulation S
under the Act.
(q) Edmund Sun shall be Chairman, Robert Pfannkuch shall be President,
James A. Munro shall be the Director of Engineering and Ed Martini shall be the
Project Manager of the Company on the Closing Dates. Prior to the Effective
Date, the Company shall have entered into an employment agreement with Dr. Sun
having a term of not less than five years (provided that the employment
agreement may permit termination after three years if, prior thereto, the shares
of Common Stock of the Company held in escrow pursuant to the escrow agreement
entered into in connection with the Company's initial public offering have been
released from such escrow). The Company has obtained key person life insurance
on the life of Dr. Sun in an amount of not less than $3 million, $2 million on
the life of Mr. Pfannkuch, $1 million on the life of Mr. Munro and $500,000 on
the life of Mr. Martini, and will use its best efforts to maintain such
insurance during the three year period commencing on the First Closing Date or
the term of their respective employment, whichever period is longer. In the
event that any of such individual's employment is terminated prior to the three
year period commencing on the First Closing Date, the Company will obtain a
comparable policy on the life of his successor for the balance of the three year
period. For a period of thirteen months from the First Closing Date, the
compensation of the executive officers of the Company shall not be increased
from the compensation levels disclosed in the Prospectus, except for increases
in the normal course of business consistent with prior practice, which increases
shall not exceed 15% per annum.
(r) On the Closing Date and simultaneously with the delivery of the
Units, the Company shall execute and deliver to you, the Amendment to the M/A
Agreement.
(s) On the Closing Date and simultaneous with the delivery of the
Units, the Company shall execute and deliver to you, the Amendment to the
Warrant Agreement.
(t) So long as any Warrants are outstanding, the Company shall use its
best efforts to cause post-effective amendments to the Registration Statement to
become effective
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in compliance with the Act and without any lapse of time between the
effectiveness of any such post-effective amendments and cause a copy of each
Prospectus, as then amended, to be delivered to each holder of record of a
Warrant and to furnish to each Underwriter and dealer as many copies of each
such Prospectus as such Underwriter or dealer may reasonably request. The
Company shall not call for redemption any of the Warrants unless a registration
statement covering the securities underlying the Warrants has been declared
effective by the Commission and remains current at least until the date fixed
for redemption. In addition, for so long as any Warrant is outstanding, the
Company will promptly notify the Underwriter of any material change in the
business, financial condition or prospects of the Company.
(u) Upon the exercise of any Warrant or Warrants after October __,
1997, the Company will pay D.H. Blair Investment Banking Corp., a fee of 5% with
respect to the Class A Warrants, and 8% with respect to the Class B Warrants, of
the aggregate exercise price of the Warrants, of which 1% may be reallowed to
the dealer who solicited the exercise (which may also be D.H. Blair Investment
Banking Corp.) if (i) the market price of the Company's Common Stock is greater
than the exercise price of the Warrants on the date of exercise; (ii) the
exercise of the Warrant was solicited in writing by a member of the National
Association of Securities Dealers, Inc.; (iii) the Warrant is not held in a
discretionary account; (iv) the disclosure of compensation arrangements has been
made in documents provided to customers, both as part of the original offering
and at the time of exercise; and (v) the solicitation of the Warrant was not in
violation of Rule 10b-6 promulgated under the Securities Exchange Act of 1934,
as amended. The Company agrees not to solicit the exercise of any Warrants
other than through D.H. Blair Investment Banking Corp. and will not authorize
any other dealer to engage in such solicitation without the prior written
consent of D.H. Blair Investment Banking Corp.
(v) For a period of five (5) years from the Effective Date, the
Company (i) at its expense, shall cause its regularly engaged independent
certified public accountants to review (but not audit) the Company's financial
statements for each of the first three (3) fiscal quarters prior to the
announcement of quarterly financial information, the filing of the Company's 10-
Q quarterly report and the mailing of quarterly financial information to
stockholders and (ii) shall not change its accounting firm without the prior
written consent of the Chairman or the President of the Underwriter, which
consent shall not be unreasonably withheld in connection with a change from one
"big 6" firm to any other "big 6" firm.
(w) As promptly as practicable after the Closing Date, the Company
will prepare, at its own expense, hard cover "bound volumes" relating to the
offering, and will distribute at least four of such volumes to the individuals
designated by the Underwriter or counsel to the Underwriter.
(x) For a period of five years from the First Closing Date (i) the
Underwriter shall have the right, but not the obligation, to designate one
director of the Board of
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Directors of the Company who shall be reasonably acceptable to the Company and
(ii) the Company shall engage a public relations firm acceptable to the
Underwriter.
(y) The Company shall, for a period of six years after date of this
Agreement, submit such reports to the Secretary of the Treasury and to
stockholders, as the Secretary may require, pursuant to Section 1202 of the
Internal Revenue Code, as amended, or regulations promulgated thereunder, in
order for the Company to qualify as a "small business" so that stockholders may
realize special tax treatment with respect to their investment in the Company.
(z) With respect to the Selling Stockholders, the Company will send
all post-effective amendments or prospectus supplements disclosing actual price
and selling terms to the NASD concurrently with the filing thereof with the
Commission. The Company will notify the Underwriter and the NASD if the Company
becomes aware that any 5% or greater stockholder of the Company becomes an
affiliated or associated person of an NASD member participating in the
distribution of this offering.
4. Conditions of Underwriter's Obligation. The obligations of the
--------------------------------------
Underwriter to purchase and pay for the Units which they have respectively
agreed to purchase hereunder, are subject to the accuracy (as of the date
hereof, and as of the Closing Dates) of and compliance with the representations
and warranties of the Company herein, to the performance by the Company of its
obligations hereunder, and to the following conditions:
(a) The Registration Statement shall have become effective and
you shall have received notice thereof not later than 10:00 A.M., New York
time, on the date on which the amendment to the registration statement
originally filed with respect to the Units or to the Registration
Statement, as the case may be, containing information regarding the initial
public offering price of the Units has been filed with the Commission, or
such later time and date as shall have been agreed to by the
Representative; if required, the Prospectus or any Term Sheet that
constitutes a part thereof and any amendment or supplement thereto shall
have been filed with the Commission in the manner and within the time
period required by Rule 434 and 424(b) under the Act; on or prior to the
Closing Dates no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
or a similar purpose shall have been instituted or shall be pending or, to
your knowledge or to the knowledge of the Company, shall be contemplated by
the Commission; any request on the part of the Commission for additional
information shall have been complied with to the reasonable satisfaction of
Bachner, Tally, Polevoy & Misher LLP, counsel to the Underwriter;
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<PAGE>
(b) At the First Closing Date, you shall have received the
opinion, dated as of the First Closing Date, of Troy & Gould Professional
Corporation, counsel for the Company, in form and substance satisfactory to
counsel for the Underwriter, to the effect that:
(i) each of the Company and the Subsidiary has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the State of Delaware, with full corporate power and
authority to own its properties and conduct its business as described
in the Registration Statement and Prospectus and is duly qualified or
licensed to do business as a foreign corporation and is in good
standing in each jurisdiction in which the Company or the Subsidiary
owns or leases real property or maintains an office, except where the
failure to so qualify would not have a materially adverse effect on
the business and condition (financial and otherwise) of the Company or
the Subsidiary;
(ii) to the best knowledge of such counsel, (a) each of the
Company and the Subsidiary has obtained, or is in the process of
obtaining, all licenses, permits and other governmental authorizations
necessary to the conduct of its business as described in the
Prospectus, (b) such licenses, permits and other governmental
authorizations obtained are in full force and effect, and (c) each of
the Company and the Subsidiary is in all material respects complying
therewith;
(iii) the authorized, issued and outstanding capital stock of
the Company as of June 30, 1996 is as set forth under "Capitalization"
in the Prospectus; all shares of the Company's outstanding stock
requiring authorization for issuance by the Company's board of
directors have been duly authorized, validly issued, are fully paid
and non-assessable and conform to the description thereof contained in
the Prospectus; the outstanding shares of Common Stock of the Company
have not been issued in violation of the preemptive rights of any
shareholder and the stockholders of the Company do not have any
preemptive rights or other rights to subscribe for or to purchase,
nor, except as described in the Prospectus, are there any restrictions
upon the voting or transfer of any of the Company's securities, and
the Common Stock, the Warrants, the Unit Purchase Option and the
Warrant Agreement, as amended, conform to the respective descriptions
thereof contained in the Prospectus; the Shares have been, and the
shares of Common Stock to be issued upon exercise of the Warrants and
the Unit Purchase Option, upon issuance in accordance with the terms
of such Warrants, the Warrant Agreement, as amended, and Unit Purchase
Option have been duly authorized and, when issued and delivered in
accordance with the terms of such documents, will be duly
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<PAGE>
and validly issued, fully paid, non-assessable, free of preemptive
rights and no personal liability will attach to the ownership thereof;
all prior sales by the Company of the Company's securities have been
made in compliance with or under an exemption from registration under
the Act and applicable state securities laws and no stockholders of
the Company have any rescission rights with respect to Company
securities; a sufficient number of shares of Common Stock has been
reserved for issuance upon exercise of the Warrants and Unit Purchase
Option and to the best of such counsel's knowledge, neither the filing
of the Registration Statement nor the offering or sale of the Units as
contemplated by this Agreement gives rise to any registration rights
or other rights, other than those which have been waived or satisfied
for or relating to the registration of any shares of Common Stock;
(iv) this Agreement, the Unit Purchase Option, the Amendment
to the Warrant Agreement and the Amendment to the M/A Agreement have
been duly and validly authorized, executed and delivered by the
Company and, assuming due execution by each other party hereto or
thereto, each constitutes a legal, valid and binding obligation of the
Company enforceable against the Company in accordance with its
respective terms (except as such enforceability may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application relating to or affecting enforcement of
creditors' rights and the application of equitable principles in any
action, legal or equitable, and except as rights to indemnity or
contribution may be limited by applicable law;
(v) the certificates evidencing the shares of Common Stock
are in valid and proper legal form; the Warrants will be exercisable
for shares of Common Stock of the Company in accordance with the terms
of the Warrants and at the prices therein provided for; the shares of
Common Stock of the Company issuable upon exercise of the Warrants
have been duly authorized and reserved for issuance at all times
during the term of the Warrants upon such exercise and such shares,
when issued upon such exercise in accordance with the terms of the
Warrants and at the price provided for, will be duly and validly
issued, fully paid and non-assessable;
(vi) such counsel knows of no pending or threatened legal or
governmental proceedings to which the Company or the Subsidiary is a
party which could materially adversely affect the business, property,
financial condition or operations of the Company or the Subsidiary; or
which question the validity of the Securities, this Agreement, the
Warrant
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Agreement, as amended, the Unit Purchase Option or the M/A Agreement,
as amended, or of any action taken or to be taken by the Company
pursuant to this Agreement, the Warrant Agreement, as amended, the
Unit Purchase Option or the M/A Agreement, as amended; and no such
proceedings are known to such counsel to be contemplated against the
Company or the Subsidiary; there are no governmental proceedings or
regulations required to be described or referred to in the
Registration Statement which are not so described or referred to;
(vii) neither the execution and delivery of this Agreement,
the Unit Purchase Option, the Amendment to the Warrant Agreement, or
the Amendment to the M/A Agreement, nor the incurrence of the
obligations herein and therein set forth and the consummation of the
transactions herein or therein contemplated, will conflict with, or
result in a breach or violation of, or constitute a default under, and
to the best of such counsel's knowledge, neither the Company nor the
Subsidiary is in violation of or default under the certificate or
articles of incorporation or by-laws of the Company or the Subsidiary
or to the best of such counsel's knowledge, in the performance or
observance of any material obligations, agreement, covenant or
condition contained in any bond, debenture, note or other evidence of
indebtedness or in any contract, indenture, mortgage, loan agreement,
lease, joint venture or other agreement or instrument to which the
Company or the Subsidiary is a party or by which it or any of its
properties may be bound or, to the best of such counsel's knowledge,
in a violation of any material order, rule, regulation, writ,
injunction, or decree of any government, governmental instrumentality
or court, domestic or foreign;
(viii) the Registration Statement has become effective under
the Act, and to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement is in
effect and no proceedings for that purpose have been instituted or are
pending before, or threatened by, the Commission; the Registration
Statement and the Prospectus (except for the financial statements,
notes thereto and other financial information and schedules and
statistical data contained therein, or omitted therefrom, as to which
such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
Rules and Regulations;
(ix) such counsel has participated in the preparation of the
Registration Statement and the Prospectus and nothing has come to the
attention of such counsel to cause such counsel to have reason to
believe that the Registration Statement or any amendment thereto at
the time it
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became effective or as of the Closing Dates contained any untrue
statement of a material fact required to be stated therein or omitted
to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus
or any supplement thereto contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make
statements therein, in light of the circumstances under which they
were made, not misleading (except, in the case of both the
Registration Statement and any amendment thereto and the Prospectus
and any supplement thereto, for the financial statements, notes
thereto and other financial information and schedules and statistical
data contained therein, as to which such counsel need express no
opinion);
(x) all descriptions in the Registration Statement and the
Prospectus, and any amendment or supplement thereto, of contracts and
other documents are accurate in all material respects and fairly
present the information required to be shown, and such counsel is
familiar with all contracts and other documents referred to in the
Registration Statement and the Prospectus and any such amendment or
supplement or filed as exhibits to the Registration Statement, and
such counsel does not know of any contracts or documents of a
character required to be summarized or described therein or to be
filed as exhibits thereto which are not so summarized, described or
filed;
(xi) no authorization, approval, consent, or license of any
governmental or regulatory authority or agency is necessary in
connection with the authorization, issuance, transfer, sale or
delivery of the Units by the Company, in connection with the
execution, delivery and performance of this Agreement by the Company
or in connection with the taking of any action contemplated herein, or
the issuance of the Unit Purchase Option or the Securities underlying
the Unit Purchase Option, other than registrations or qualifications
of the Units under applicable state or foreign securities or Blue Sky
laws and registration under the Act;
(xii) the statements in the Registration Statement under the
captions "Business," "Use of Proceeds," "Management," and "Description
of Securities" have been reviewed by such counsel and insofar as they
refer to descriptions of agreements, statements of law, descriptions
of statutes, licenses, rules or regulations or legal conclusions, are
correct in all material respects except that such counsel need express
no opinion with respect to patents and trademarks and patent and
trademark law;
(xiii) the Common Stock and the Warrants have been duly
authorized for quotation on the Nasdaq National Market and the IPO
Units
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<PAGE>
have been duly authorized for quotation on the Nasdaq SmallCap Market;
and
(xiv) to such counsel's knowledge, there are no business
relationships or related-party transactions of the nature described in
Item 404 of Regulation S-K involving the Company, any subsidiary of
the Company and any person described in such Item that are required to
be disclosed in the Prospectus and which have not been so disclosed.
(c) At the First Closing Date, you shall have received the opinion,
addressed to the Underwriter, dated as of the First Closing Date, of Benman,
Collins & Sawyer, patent counsel to the Company, in form and substance
satisfactory to counsel for the Underwriter, to the effect that:
(i) there has not been any public use or sale by the
Company prior to the filing of any of the patent applications related
to the technical documentation which are proposed to be filed by the
Company which would affect their validity and, we have no reason to
believe that patents will not issue with respect thereto or that the
claims contained in the applications proposed to be filed by the
Company conflict with the rights of others;
(ii) we are not aware of any adverse or conflicting rights
or licenses to use any United States patents necessary to the
Company's business as currently conducted; and there have been no
claims asserted against the Company;
(iii) there have been no claims asserted against the Company
relating to the potential infringement of or conflict with any
patents, trademarks, copyrights or trade secrets of others; such
counsel has conducted a search regarding the technology disclosed in
Exhibit A. In such counsel's opinion, such technology can be patented
in view of that search.
Such opinion[s] shall also cover such matters incident to the
transactions contemplated hereby as the Underwriter shall reasonably request. In
rendering such opinion, such counsel may rely upon certificates of any officer
of the Company or public officials as to matters of fact; and may rely as to all
matters of law other than the law of the United States or of the State of
California upon opinions of counsel satisfactory to you, in which case the
opinion shall state that they have no reason to believe that you and they are
not entitled to so rely.
(d) All corporate proceedings and other legal matters relating to
this Agreement, the Registration Statement, the Prospectus and other related
matters shall be
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satisfactory to or approved by Bachner, Tally, Polevoy & Misher LLP,
counsel to the Underwriter, and you shall have received from such counsel a
signed opinion, dated as of the First Closing Date, with respect to the validity
of the issuance of the Units, the form of the Registration Statement and
Prospectus (other than the financial statements and other financial data
contained therein), the execution of this Agreement and other related matters as
you may reasonably require. The Company shall have furnished to counsel for the
Underwriter such documents as they may reasonably request for the purpose of
enabling them to render such opinion.
(e) You shall have received a letter prior to the effective date of
the Registration Statement and again on and as of the First Closing Date from
Ernst & Young LLP, independent public accountants for the Company, substantially
in the form approved by you, and including estimates of the Company's revenues
and results of operations for the period ending at the end of the month
immediately preceding the effective date and results of the comparable period
during the prior fiscal year.
(f) At the Closing Dates, (i) the representations and warranties of
the Company contained in this Agreement shall be true and correct with the same
effect as if made on and as of the Closing Dates and the Company shall have
performed all of its obligations hereunder and satisfied all the conditions on
its part to be satisfied at or prior to such Closing Date; (ii) the Registration
Statement and the Prospectus and any amendments or supplements thereto shall
contain all statements which are required to be stated therein in accordance
with the Act and the Rules and Regulations, and shall in all material respects
conform to the requirements thereof, and neither the Registration Statement nor
the Prospectus nor any amendment or supplement thereto shall contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein in light of the
circumstances under which they were made not misleading; (iii) there shall have
been, since the respective dates as of which information is given, no material
adverse change, or any development involving a prospective material adverse
change, in the business, properties, condition (financial or otherwise), results
of operations, capital stock, long-term or short-term debt or general affairs of
the Company from that set forth in the Registration Statement and the
Prospectus, except changes which the Registration Statement and Prospectus
indicate might occur after the effective date of the Registration Statement, and
the Company shall not have incurred any material liabilities or entered into any
agreement not in the ordinary course of business other than as referred to in
the Registration Statement and Prospectus; and (iv) except as set forth in the
Prospectus, no action, suit or proceeding at law or in equity shall be pending
or threatened against the Company which would be required to be set forth in the
Registration Statement, and no proceedings shall be pending or threatened
against the Company before or by any commission, board or administrative agency
in the United States or elsewhere, wherein an unfavorable decision, ruling or
finding would materially and adversely affect the business, property, condition
(financial or otherwise), results of operations or general affairs of the
Company, and (v) you shall have received, at the First Closing Date, a
certificate signed by each of the Chairman of the Board or the President and the
principal financial or accounting officer of
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the Company, dated as of the First Closing Date, evidencing compliance with the
provisions of this subsection (f).
(g) Upon exercise of the option provided for in Section 2(b) hereof,
the obligations of the Underwriter to purchase and pay for the Option Units
referred to therein will be subject (as of the date hereof and as of the Option
Closing Date) to the following additional conditions:
(i) The Registration Statement shall remain effective at the
Option Closing Date, and no stop order suspending the effectiveness
thereof shall have been issued and no proceedings for that purpose
shall have been instituted or shall be pending, or, to your knowledge
or the knowledge of the Company, shall be contemplated by the
Commission, and any reasonable request on the part of the Commission
for additional information shall have been complied with to the
satisfaction of Bachner, Tally, Polevoy & Misher LLP, counsel to the
Underwriter.
(ii) At the Option Closing Date there shall have been delivered
to you the signed opinions of Troy & Gould Professional Corporation
and Benman, Collins & Sawyer, counsels for the Company, dated as of
the Option Closing Date, in form and substance satisfactory to
Bachner, Tally, Polevoy & Misher LLP, counsel to the Underwriter,
which opinions shall be substantially the same in scope and substance
as the opinions furnished to you at the First Closing Date pursuant to
Section 4(b) and (c) hereof, except that such opinion, where
appropriate, shall cover the Option Units.
(iii) At the Option Closing Date there shall have been delivered
to you a certificate of the Chairman of the Board or the President and
the principal financial or accounting officer of the Company, dated
the Option Closing Date, in form and substance satisfactory to
Bachner, Tally, Polevoy & Misher LLP, counsel to the Underwriter,
substantially the same in scope and substance as the certificate
furnished to you at the First Closing Date pursuant to Section 4(f)
hereof.
(iv) At the Option Closing Date there shall have been delivered
to you a letter in form and substance satisfactory to you from Ernst &
Young, LLP, dated the Option Closing Date and addressed to the
Underwriter confirming the information in their letter referred to in
Section 4(e) hereof and stating that nothing has come to their
attention during the period from the ending date of their review
referred to in said letter to a date not more than five business days
prior to the Option Closing Date, which would require any change in
said letter if it were required to be dated the Option Closing Date.
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(v) All proceedings taken at or prior to the Option Closing
Date in connection with the sale and issuance of the Option Units
shall be satisfactory in form and substance to you, and you and
Bachner, Tally, Polevoy & Misher LLP, counsel to the Underwriter,
shall have been furnished with all such documents, certificates, and
opinions as you may reasonably request in connection with this
transaction in order to evidence the accuracy and completeness of any
of the representations, warranties or statements of the Company or its
compliance with any of the covenants or conditions contained herein.
(h) No action shall have been taken by the Commission or the NASD the
effect of which would make it improper, at any time prior to the Closing Date,
for members of the NASD to execute transactions (as principal or agent) in the
Units, Common Stock or the Warrants and no proceedings for the taking of such
action shall have been instituted or shall be pending, or, to the knowledge of
the Underwriter or the knowledge of the Company, shall be contemplated by the
Commission or the NASD. The Company represents that at the date hereof it has
no knowledge that any such action is in fact contemplated by the Commission or
the NASD. The Company shall have advised the Underwriter of any NASD
affiliation of any of its officers, directors, stockholders or their affiliates.
(i) If any of the conditions herein provided for in this Section shall
not have been fulfilled as of the date indicated, this Agreement and all
obligations of the Underwriter under this Agreement may be cancelled at, or at
any time prior to, each Closing Date by the Underwriter. Any such cancellation
shall be without liability of the Underwriter to the Company.
5. Conditions of the Obligations of the Company. The obligation of
--------------------------------------------
the Company to sell and deliver the Units is subject to the condition that at
the Closing Dates, no stop orders suspending the effectiveness of the
Registration Statement shall have been issued under the Act or any proceedings
therefor initiated or threatened by the Commission.
If the condition to the obligations of the Company provided for in
this Section have been fulfilled on the First Closing Date but are not fulfilled
after the First Closing Date and prior to the Option Closing Date, then only the
obligation of the Company to sell and deliver the Units on exercise of the
option provided for in Section 2(b) hereof shall be affected.
6. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person, if any, who controls the Underwriter within the meaning of the
Act against any losses, claims, damages or liabilities, joint or several (which
shall, for all purposes of this Agreement, include, but not be limited to, all
reasonable costs of defense and investigation and all attorneys' fees), to which
the Underwriter or such controlling person may become subject,
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under the Act or otherwise, and will reimburse, as incurred, such Underwriter
and such controlling persons for any legal or other expenses reasonably incurred
in connection with investigating, defending against or appearing as a third
party witness in connection with any losses, claims, damages or liabilities,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in (A) the Registration Statement, any
Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto,
(B) any blue sky application or other document executed by the Company
specifically for that purpose or based upon written information furnished by the
Company filed in any state or other jurisdiction in order to qualify any or all
of the Units under the securities laws thereof (any such application, document
or information being hereinafter called a "Blue Sky Application"), or arise out
of or are based upon the omission or alleged omission to state in the
Registration Statement, any Preliminary Prospectus, Prospectus, or any amendment
or supplement thereto, or in any Blue Sky Application, a material fact required
to be stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company will not be liable in any such case to the
extent, but only to the extent, that any such loss, claim, damage or liability
arises out of or is based upon an untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company by or on behalf of the Underwriter
specifically for use in the preparation of the Registration Statement or any
such amendment or supplement thereof or any such Blue Sky Application or any
such preliminary Prospectus or the Prospectus or any such amendment or
supplement thereto. This indemnity will be in addition to any liability which
the Company may otherwise have.
(b) The Underwriter will indemnify and hold harmless the Company, each
of its directors, each nominee (if any) for director named in the Prospectus,
each of its officers who have signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of the Act, against
any losses, claims, damages or liabilities (which shall, for all purposes of
this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees) to which the Company or any such
director, nominee, officer or controlling person may become subject under the
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto, or arise out of or are based upon the omission or the
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any Preliminary Prospectus, the Prospectus, or any amendment or
supplement thereto (i) in reliance upon and in conformity with written
information furnished to the Company by you specifically for use in the
preparation thereof and (ii) relates to the transactions effected by the
Underwriter in connection with the offer and sale of the Units contemplated
hereby. This indemnity agreement will be in addition to any liability which the
Underwriter may otherwise have.
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<PAGE>
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify in writing the indemnifying party of the commencement thereof;
but the omission so to notify the indemnifying party will not relieve it from
any liability which it may have to any indemnified party otherwise than under
this Section. In case any such action is brought against any indemnified party,
and it notifies the indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified, to
assume the defense thereof, subject to the provisions herein stated, with
counsel reasonably satisfactory to such indemnified party, and after notice from
the indemnifying party to such indemnified party of its election so to assume
the defense thereof, the indemnifying party will not be liable to such
indemnified party under this Section for any legal or other expenses
subsequently incurred by such indemnified party in connection with the defense
thereof other than reasonable costs of investigation. The indemnified party
shall have the right to employ separate counsel in any such action and to
participate in the defense thereof, but the fees and expenses of such counsel
shall not be at the expense of the indemnifying party if the indemnifying party
has assumed the defense of the action with counsel reasonably satisfactory to
the indemnified party; provided that if the indemnified party is an Underwriter
or a person who controls such Underwriter within the meaning of the Act, the
fees and expenses of such counsel shall be at the expense of the indemnifying
party if (i) the employment of such counsel has been specifically authorized in
writing by the indemnifying party or (ii) the named parties to any such action
(including any impleaded parties) include both such Underwriter or such
controlling person and the indemnifying party and in the judgment of the
Underwriter, it is advisable for the Underwriter or controlling persons to be
represented by separate counsel (in which case the indemnifying party shall not
have the right to assume the defense of such action on behalf of such
Underwriter or such controlling person, it being understood, however, that the
indemnifying party shall not, in connection with any one such action or separate
but substantially similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances, be liable for the
reasonable fees and expenses of more than one separate firm of attorneys for the
Underwriter and controlling persons, which firm shall be designated in writing
by you). No settlement of any action against an indemnified party shall be made
without the consent of the indemnifying party, which shall not be unreasonably
withheld in light of all factors of importance to such indemnifying party.
7. Contribution.
------------
In order to provide for just and equitable contribution under the Act
in any case in which (i) the Underwriter makes claim for indemnification
pursuant to Section 6 hereof but it is judicially determined (by the entry of a
final judgment or decree by a court of competent jurisdiction and the expiration
of time to appeal or the denial of the last right of appeal) that such
indemnification may not be enforced in such case, notwithstanding the fact that
the express provisions of Section 6 provide for indemnification in such case, or
(ii) contribution under the Act may be required on the part of the Underwriter,
then the Company and each person who
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<PAGE>
controls the Company, in the aggregate, and the Underwriter shall contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (which shall, for all purposes of this Agreement, include, but not be
limited to, all reasonable costs of defense and investigation and all reasonable
attorneys' fees) in either such case (after contribution from others) in such
proportions that the Underwriter is responsible in the aggregate for that
portion of such losses, claims, damages or liabilities represented by the
percentage that the underwriting discount per Unit appearing on the cover page
of the Prospectus bears to the public offering price appearing thereon, and the
Company shall be responsible for the remaining portion, provided, however, that
if such allocation is not permitted by applicable law then the relative fault of
the Company and the Underwriter and controlling persons, in the aggregate, in
connection with the statements or omissions which resulted in such damages and
other relevant equitable considerations shall also be considered. The relative
fault shall be determined by reference to, among other things, whether in the
case of an untrue statement of a material fact or the omission to state a
material fact, such statement or omission relates to information supplied by the
Company, or the Underwriter and the parties' relative intent, knowledge, access
to information and opportunity to correct or prevent such untrue statement or
omission. The Company and the Underwriter agree that it would not be just and
equitable if the respective obligations of the Company and the Underwriter to
contribute pursuant to this Section 7 were to be determined by pro rata or per
capita allocation of the aggregate damages (even if the Underwriter in the
aggregate were treated as one entity for such purpose) or by any other method of
allocation that does not take account of the equitable considerations referred
to in the first sentence of this Section 7. No person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who is not guilty of such fraudulent
misrepresentation. As used in this paragraph, the word "Company" includes any
officer, director, or person who controls the Company within the meaning of
Section 15 of the Act. If the full amount of the contribution specified in this
paragraph is not permitted by law, then the Underwriter and each person who
controls the Underwriter shall be entitled to contribution from the Company, its
officers, directors and controlling persons to the full extent permitted by law.
The foregoing contribution agreement shall in no way affect the contribution
liabilities of any persons having liability under Section 11 of the Act other
than the Company and the Underwriter. No contribution shall be requested with
regard to the settlement of any matter from any party who did not consent to the
settlement; provided, however, that such consent shall not be unreasonably
withheld in light of all factors of importance to such party.
8. Costs and Expenses.
------------------
(a) Whether or not this Agreement becomes effective or the sale of the
Units to the Underwriter is consummated, the Company will pay all costs and
expenses incident to the performance of this Agreement by the Company including,
but not limited to, the fees and expenses of counsel to the Company and of the
Company's accountants; the costs and expenses incident to the preparation,
printing, filing and distribution under the Act of the Registration Statement
(including the financial statements therein and all amendments and exhibits
thereto), Preliminary Prospectus and the Prospectus, as amended or supplemented,
or the Term Sheet, the
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<PAGE>
fee of the NASD in connection with the filing required by the NASD relating to
the offering of the Units contemplated hereby; all expenses, including
reasonable fees and disbursements of counsel to the Underwriter, in connection
with the qualification of the Units under the state securities or blue sky laws
which the Underwriter shall designate; the cost of printing and furnishing to
the Underwriter copies of the Registration Statement, each Preliminary
Prospectus, the Prospectus, this Agreement, Selling Agreement and the Blue Sky
Memorandum, any fees relating to the listing of the Units, Common Stock and
Warrants on the Nasdaq National Market and Nasdaq SmallCap Market or any other
securities exchange, the cost of printing the certificates representing the
securities comprising the Units, the fees of the transfer agent and warrant
agent the cost of publication of at least three "tombstones" of the offering (at
least one of which shall be in national business newspaper and one of which
shall be in a major New York newspaper) and the cost of preparing at least four
hard cover "bound volumes" relating to the offering, in accordance with the
Underwriter's request. The Company shall pay any and all taxes (including any
transfer, franchise, capital stock or other tax imposed by any jurisdiction) on
sales to the Underwriter hereunder. The Company will also pay all costs and
expenses incident to the furnishing of any amended Prospectus or of any
supplement to be attached to the Prospectus as called for in Section 3(a) of
this Agreement except as otherwise set forth in said Section.
(b) In addition to the foregoing expenses the Company shall at the
First Closing Date pay to D.H. Blair Investment Banking Corp., a non-accountable
expense allowance of $690,000 of which $_______ has been paid. In the event the
overallotment option is exercised, the Company shall pay to D.H. Blair
Investment Banking Corp. at the Option Closing Date an additional amount equal
to 3% of the gross proceeds received upon exercise of the overallotment option.
In the event the transactions contemplated hereby are not consummated by reason
of any action by the Underwriter (except if such prevention is based upon a
breach by the Company of any covenant, representation or warranty contained
herein or because any other condition to the Underwriter's obligations hereunder
required to be fulfilled by the Company is not fulfilled) or if the transaction
is not completed because of market conditions, the Company shall be liable for
the accountable out-of-pocket expenses of the Underwriter, including legal fees,
up to a maximum of $40,000. In the event the transactions contemplated hereby
are not consummated by reason of any action of the Company or because of a
breach by the Company of any covenant, representation or warranty herein, the
Company shall be liable for the accountable out-of-pocket expenses of the
Underwriter, including legal fees, up to a maximum of $510,000. In the event
the offering is not consummated for any reason, any portion of the non-
accountable expense allowance previously paid to the Underwriter which is not
accounted for shall be returned to the Company.
(c) No person is entitled either directly or indirectly to
compensation from the Company, from the Underwriter or from any other person for
services as a finder in connection with the proposed offering, and the Company
agrees to indemnify and hold harmless the Underwriter, against any losses,
claims, damages or liabilities, joint or several (which shall, for all purposes
of this Agreement, include, but not be limited to, all costs of defense and
investigation and all attorneys' fees), to which the Underwriter or person may
become subject
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<PAGE>
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon the claim of any person (other than an
employee of the party claiming indemnity) or entity that he or it is entitled to
a finder's fee in connection with the proposed offering by reason of such
person's or entity's influence or prior contact with the indemnifying party.
9. Effective Date.
--------------
The Agreement shall become effective upon its execution except that
you may, at your option, delay its effectiveness until 11:00 A.M., New York time
on the first full business day following the effective date of the Registration
Statement, or at such earlier time after the effective date of the Registration
Statement as you in your discretion shall first commence the initial public
offering by the Underwriter of any of the Units. The time of the initial public
offering shall mean the time of release by you of the first newspaper
advertisement with respect to the Units, or the time when the Units are first
generally offered by you to dealers by letter or telegram, whichever shall first
occur. This Agreement may be terminated by you at any time before it becomes
effective as provided above, except that Sections 3(c), 6, 7, 8, 12, 13, 14 and
15 shall remain in effect notwithstanding such termination.
10. Termination.
-----------
(a) This Agreement, except for Sections 3(c), 6, 7, 8, 12, 13, 14 and
15 hereof, may be terminated at any time prior to the First Closing Date, and
the option referred to in Section 2(b) hereof, if exercised, may be cancelled at
any time prior to the Option Closing Date, by you if in your judgment it is
impracticable to offer for sale or to enforce contracts made by the Underwriter
for the resale of the Units agreed to be purchased hereunder by reason of (i)
the Company having sustained a material loss, whether or not insured, by reason
of fire, earthquake, flood, accident or other calamity, or from any labor
dispute or court or government action, order or decree; (ii) trading in
securities on the New York Stock Exchange, the American Stock Exchange, the
Nasdaq SmallCap Market or the Nasdaq National Market having been suspended or
limited; (iii) material governmental restrictions having been imposed on trading
in securities generally (not in force and effect on the date hereof); (iv) a
banking moratorium having been declared by federal or New York state
authorities; (v) an outbreak of international hostilities or other national or
international calamity or crisis or change in economic or political conditions
having occurred; (vi) a pending or threatened legal or governmental proceeding
or action relating generally to the Company's business, or a notification having
been received by the Company of the threat of any such proceeding or action,
which could materially adversely affect the Company; (vii) except as
contemplated by the Prospectus, the Company is merged or consolidated into or
acquired by another company or group or there exists a binding legal commitment
for the foregoing or any other material change of ownership or control occurs;
(viii) the passage by the Congress of the United States or by any state
legislative body or federal or state agency or other authority of any act, rule
or regulation, measure, or the adoption of any orders, rules or regulations by
any governmental body or any authoritative accounting institute or board, or any
governmental executive, which is reasonably believed likely by the Underwriter
to
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have a material adverse impact on the business, financial condition or financial
statements of the Company or the market for the securities offered pursuant to
the Prospectus; (ix) any adverse change in the financial or securities markets
beyond normal market fluctuations having occurred since the date of this
Agreement, or (x) any material adverse change having occurred, since the
respective dates of which information is given in the Registration Statement and
Prospectus, in the earnings, business prospects or general condition of the
Company, financial or otherwise, whether or not arising in the ordinary course
of business.
(b) If you elect to prevent this Agreement from becoming effective or
to terminate this Agreement as provided in this Section 10 or in Section 9, the
Company shall be promptly notified by you, by telephone or telegram, confirmed
by letter.
11. Unit Purchase Option.
--------------------
At or before the First Closing Date, the Company will sell to D.H.
Blair Investment Banking Corp. (for its own account), or its designees for a
consideration of $23, and upon the terms and conditions set forth in the form of
Unit Purchase Option annexed as an exhibit to the Registration Statement, a Unit
Purchase Option to purchase an aggregate of 2,300 Units. In the event of
conflict in the terms of this Agreement and the Unit Purchase Option, the
language of the Unit Purchase Option shall control.
12. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
The respective indemnities, agreements, representations, warranties
and other statements of the Company or its Principal Stockholders, where
appropriate, and the undertakings set forth in or made pursuant to this
Agreement will remain in full force and effect, regardless of any investigation
made by or on behalf of the Underwriter, the Company or any of its officers or
directors or any controlling person and will survive delivery of and payment of
the Units and the termination of this Agreement.
13. Notice.
------
Any communications specifically required hereunder to be in writing,
if sent to the Underwriter, will be mailed, delivered and confirmed to them at
D.H. Blair Investment Banking Corp., 44 Wall Street, New York, New York 10005,
with a copy sent to Bachner, Tally, Polevoy & Misher LLP, 380 Madison Avenue,
New York, New York 10017, or if sent to the Company, will be mailed, delivered
and confirmed to it at Digital Video Systems, Inc., 2710 Walsh Avenue, Santa
Clara, California 95051, with a copy sent to Troy & Gould Professional
Corporation, 1801 Century Park East, Suite 1600, Los Angeles, California 90067.
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<PAGE>
14. Parties in Interest.
-------------------
The Agreement herein set forth is made solely for the benefit of the
Underwriter, the Company and, to the extent expressed, the Principal
Stockholders, any person controlling the Company or the Underwriter, and
directors of the Company, nominees for directors (if any) named in the
Prospectus, its officers who have signed the Registration Statement, and their
respective executors, administrators, successors, assigns and no other person
shall acquire or have any right under or by virtue of this Agreement. The term
"successors and assigns" shall not include any purchaser, as such purchaser,
from the Underwriter of the Units.
15. Applicable Law.
--------------
This Agreement will be governed by, and construed in accordance with,
the laws of the State of New York applicable to agreements made and to be
entirely performed within New York.
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<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return this agreement, whereupon it will become a
binding agreement between the Company and the Underwriter in accordance with its
terms.
Very truly yours,
DIGITAL VIDEO SYSTEMS, INC.
By: ____________________________________
Robert Pfannkuch, President
The foregoing Underwriting Agreement is hereby confirmed and accepted
as of the date first above written.
D.H. BLAIR INVESTMENT BANKING CORP.
By: ____________________________________
Martin A. Bell, Vice Chairman and
General Counsel
We each hereby severally agree to be bound by the provisions of
Sections 3(1) and (n) and 12 hereof (but make no representations, warranties or
covenants with respect to the other stockholder or any other stockholder of the
Company).
_________________________________
Edmund Sun
HYUNDAI ELECTRONICS INDUSTRIES
COMPANY, LTD.
By: ___________________________
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EXHIBIT 4.7
ESCROW AGREEMENT
AGREEMENT, dated as of October 17, 1996, by and between Digital Video
Systems, Inc., a Delaware corporation (the "Company") and Dr. Edmund Sun ("Dr.
Sun"). Capitalized terms used herein and not otherwise defined shall have the
meanings given to such terms in the Agreement and Plan of Merger, dated as of
October 17, 1996 by and among the Company, Digital Video Acquisition Co.
("Digital Sub"), ViComp Technology, Inc. ("ViComp"), and the shareholders of
ViComp listed in Exhibit A thereto (the "Merger Agreement").
W I T N E S S E T H
-------------------
WHEREAS, the Company wishes to acquire all of the outstanding capital stock
of ViComp by merging Digital Sub with and into ViComp, with ViComp as the
surviving corporation, in a transaction intended to qualify as a reorganization
within the meaning of Section 368(a)(1)(A) of the Internal Revenue Code of 1986,
as amended (the "Merger");
WHEREAS, Dr. Sun owns beneficially and of record 3,000,000 shares of ViComp
Series A preferred stock ("ViComp Preferred Stock");
WHEREAS, ViComp is currently developing an MPEG-I standard integrated
circuit for use in video CD players of the type made by the Company (the "ViComp
Chip");
WHEREAS, the acquisition of ViComp by the Company is based in substantial
part on the representation by ViComp that the ViComp Chip will be ready for
commercial manufacture no later than July 1, 1997; and
WHEREAS, the value of the ViComp Chip to the Company will be dependent in
substantial part upon the Company's ability to purchase this chip in commercial
quantities at a price significantly below the cost for the Company to purchase
other chips that are functionally substantially equivalent to the ViComp Chip
from other manufacturers.
NOW, THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, the Company and Dr. Sun agree as
follows:
1. Appointment of Escrow Agent; Delivery of Escrow Securities. The
----------------------------------------------------------
Company and Dr. Sun hereby agree that the Company will serve as the escrow agent
for purposes of this Agreement (the Company in this capacity and any successor
escrow agent being hereinafter referred to as the "Escrow Agent"). Dr. Sun
agrees that he will deliver to the Escrow Agent at the Closing to hold in
accordance with the provisions hereof, certificates representing 140,760 of the
shares of the Company's common stock issued to Dr. Sun pursuant to the Merger
(the "Escrow Securities"), together with a stock power executed in blank.
<PAGE>
2. Effectiveness of Agreement. This Agreement shall become effective
--------------------------
upon the Closing Date and shall continue in effect until the distribution by the
Escrow Agent of all of the Escrow Securities in accordance with the terms hereof
(the "Termination Date"). The period of time from the Closing Date until the
Termination Date is referred to herein as the "Escrow Period."
3. Escrow Property. During the Escrow Period, the Escrow Agent shall
---------------
receive all of the money, securities, rights or property distributed in respect
of the Escrow Securities then held in escrow, including any such property
distributed pursuant to any stock split, merger, recapitalization, dissolution,
or total or partial liquidation of the Company, such property to be held and
distributed as herein provided and hereinafter referred to collectively as the
"Escrow Property." Dividends distributed with respect to the Escrow Property
shall be promptly paid to Dr. Sun.
4. Escrow Conditions.
-----------------
The Escrow Securities shall be forfeited and cancelled in the event that
the ViComp Chip does not meet each and every one of the following performance
conditions (the "Performance Standards"):
(a) The ViComp Chip is capable of being manufactured in commercial
quantities by no later than July 1, 1997;
(b) The Company's cost to purchase fully manufactured ViComp Chips in
commercial quantities from qualified third party manufacturers will not exceed
$10.00 per chip; and
(c) The Chip Cost will be at least $3.00 per chip less than the cost
for the Company to purchase the lowest-priced chips that are functionally
substantially equivalent to the ViComp Chip available from other manufacturers
at the time the ViComp Chip is ready for commercial manufacture.
All Escrow Securities, together with stock powers executed in blank, and
the related Escrow Property shall be delivered to Dr. Sun by the Escrow Agent
immediately following the conclusive determination of the satisfaction of the
Performance Standards.
5. Notice to Escrow Agent. Upon the occurrence of satisfaction of any of
----------------------
the events or conditions specified in paragraph 4, the Company shall promptly
give appropriate notice to the Escrow Agent, and present such documentation as
is reasonably required by the Escrow Agent to evidence the satisfaction of such
conditions. Escrow Securities and Escrow Property to be cancelled and forfeited
pursuant to this Agreement shall be delivered to the Company, together with
stock powers executed in blank, to be placed in the Company's treasury for
cancellation thereof as a contribution to capital. After such date, Dr. Sun
shall have no further rights as a stockholder of the Company with respect to any
of the cancelled Escrow Securities.
2.
<PAGE>
6. Duties of Escrow Agent. It is understood and agreed by the parties to
----------------------
this Agreement as follows:
(a) The Escrow Agent is not and shall not be deemed to be a trustee
for any party for any purpose and is merely acting as a depository and in a
ministerial capacity hereunder with the limited duties herein prescribed.
(b) The Escrow Agent does not have and shall not be deemed to have any
responsibility in respect of any instruction, certificate or notice delivered to
it or of the Escrow Securities or any related Escrow Property other than
faithfully to carry out the obligations undertaken in this Agreement and to
follow the directions in such instruction or notice provided in accordance with
the terms hereof.
(c) The Escrow Agent is not and shall not be deemed to be liable for
any action taken or omitted by it in good faith and may rely upon, and act in
accordance with the advice of its counsel without liability on its part for any
action taken or omitted in accordance with such advice. In any event, its
liability hereunder shall be limited to liability for gross negligence, willful
misconduct or bad faith on its part.
(d) The Escrow Agent may conclusively rely upon and act in accordance
with any certificate, instruction, notice, letter, telegram, cablegram on other
written instrument believed by it to be genuine and to have been signed by the
proper party or parties.
(e) The Company agrees (i) to pay the Escrow Agent's reasonable fees
and to reimburse it for its reasonable expenses, including attorney's fees,
incurred in connection with duties hereunder and (ii) to save harmless,
indemnify and defend the Escrow Agent for, from against any loss, damage,
liability, judgment, cost and expense whatsoever, including counsel fees,
suffered or incurred by it by reason of, or on account of, any misrepresentation
made to it or its status or activities as Escrow Agent under this Agreement
except for any loss, damage, liability, judgment, cost or expense resulting from
gross negligence, willful misconduct or bad faith on the part of the Escrow
Agent. The obligation of the Escrow Agent to deliver the Escrow Securities to
either Dr. Sun or the Company shall be subject to the prior satisfaction upon
demand from the Escrow Agent, of the Company's obligations to so save harmless,
indemnify and defend the Escrow Agent or otherwise pay its fees and expenses
hereunder.
(f) The Escrow Agent shall not be required to defend any legal
proceeding which may be instituted against it in respect of the subject matter
on this Agreement unless requested to do so by Dr. Sun or the Company and
indemnified to the Escrow Agent's satisfaction against the cost and expense of
such defense by the party requesting such defense. If any such legal proceeding
is instituted against it, the Escrow Agent agrees promptly to give notice of
such proceeding to Dr. Sun and the Company. The Escrow Agent shall not be
required to institute legal proceedings of any kind.
3.
<PAGE>
(g) The Escrow Agent shall not, by act, delay, omission or otherwise,
be deemed to have waived any right or remedy it may have either under this
Agreement or generally, unless such waiver be in writing, and no waiver shall be
valid unless it is in writing, signed by the Escrow Agent, and only to the
extent expressly therein set forth. A waiver by the Escrow Agent under the term
of this Agreement shall not be construed as a bar to, or waiver of, the same or
any other such right or remedy which it would otherwise have on any other
occasion.
(h) The Escrow Agent may resign as such hereunder by giving 30 days
written notice thereof to Dr. Sun and the Company. Within 20 days after receipt
of such notice, the Company shall furnish to the Escrow Agent written
instructions for the release of the Escrow Securities and any related Escrow
Property (if such shares, options and property, if any, have not yet been
released pursuant to paragraph 4 hereof) to a substitute Escrow Agent which
(whether designated by written instructions from the Company or in the absence
thereof by instructions from a court of competent jurisdiction to the Escrow
Agent) shall be a bank or trust company organized and doing business under the
laws of the United States or any state thereof. Such substitute Escrow Agent
shall thereafter hold any Escrow Securities and any related Escrow Property
received by it pursuant to the terms of this Agreement and otherwise act
hereunder as if it were the Escrow Agent originally named herein. The Escrow
Agent's duties and responsibilities hereunder shall terminate upon the release
of all shares then held in escrow according to such written instruction or upon
such delivery as herein provided. The Agreement shall not otherwise be
assignable by the Escrow Agent without the prior written consent of the Company.
7. No Pledge of Escrow Securities; Further Assurances.
--------------------------------------------------
(a) Dr. Sun agrees that during the term of this Agreement, he will not
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 the notice as provided in paragraph 5 as to such Escrow
Securities; or (B) such disposition is (i) proposed in connection with an
agreement by which the Company is to be acquired or merged into another entity,
and (ii) approved by a vote of the holders of at least 80% of the votes cast, in
person or by proxy, by holders of the Company's common stock eligible to vote on
such matter. The restriction shall not be applicable to transfer upon death or
by operation of law; to family members of Dr. Sun or to any trust for the
benefit of Dr. Sun, provided that such transferee agrees to be bound by the
provisions of this Agreement, or to the Company, provided that the
consideration, if any, paid by the Company for Escrow Securities transferred to
the Company does not exceed the consideration, if any, paid by Dr. Sun for such
securities.
(b) Dr. Sun will take any action necessary or appropriate, including
the execution of any further documents or agreements, in order to effectuate the
transfer of the Escrow Securities to the Company if required pursuant to the
provisions of this Agreement.
4.
<PAGE>
8. Legends. Each of the certificates representing the Escrow Securities
-------
shall bear legends to the following effect, as well as any other legends
required by applicable law:
(i) "The sale, transfer, hypothecation, negotiation, pledge, assignment,
encumbrance or other disposition of the shares evidenced by this
certificate are restricted by and are subject to all of the terms,
conditions and provisions of a certain Escrow Agreement entered into
among Digital Video Systems, Inc., and Dr. Edmund Sun, dated as of
October 17, 1996, a copy of which may be obtained from the Secretary
of Digital Video Systems, Inc. No transfer, sale or other disposition
of these shares may be made unless specific conditions of such
agreement have been satisfied."
(ii) "The shares evidence by this certificate have not been registered
under the Securities Act of 1933, as amended. No transfer, sale or
other disposition of these shares may be made unless a registration
statement with respect to these shares has become effective under said
act, or the Company has been furnished with an opinion of counsel
satisfactory in form and substance to the Company that such
registration is not required."
Upon execution of this Agreement, the Company shall direct the transfer
agent for the Company to place stop transfer orders with respect to the Escrow
Securities and to maintain such orders in effect until the transfer agent shall
have received written notice from the Company as provided in paragraph 6 as to
such Escrow Securities.
9. Notices. Each notice, instruction or other certificate required or
-------
permitted by the terms hereof shall be in writing and shall be communicated by
personal delivery, fax or registered or certified mail, return receipt
requested, to the parties hereto at the addresses set forth below, or at such
other address as any of them may designate by notice to each of the others:
(i) If to Dr. Sun, to:
Digital Video Systems, Inc.
2710 Walsh Avenue
Santa Clara, California 95051
Attn: Dr. Edmund Sun
(ii) If the Company or the Escrow Agent, to:
Digital Video Systems, Inc.
2710 Walsh Avenue
Santa Clara, California 95051
Attn: Robert B. Pfannkuch
5.
<PAGE>
with a copy to:
Troy & Gould Professional Corporation
1801 Century Park East, Suite 1600
Los Angeles, California 90067
Attn: Sanford J. Hillsberg, Esq.
All notices, instructions or certificates given hereunder to the Escrow Agent
shall be effective upon receipt by the Escrow Agent. All notices given
hereunder by the Escrow Agent shall be effective and deemed received upon
personal delivery or transmission by fax or, if mailed, five (5) calendar days
after mailing by the Escrow Agent.
10. Amendments. This Agreement may not be modified, altered or amended in
----------
any material respect or cancelled or terminated except with the prior written
consent of all the parties hereto.
11. Termination. In the event that this Agreement shall terminate and be
-----------
of no further force and effect, the Escrow Agent, upon written notice from the
Company in accordance with paragraph 9 hereof of such termination, will return
the Escrow Securities and any Escrow Property in respect to Dr. Sun.
12. Titles. The headings of paragraphs herein are inserted for
------
convenience of reference only and are not intended to be a part of or to affect
the meaning or interpretation of this Agreement.
13. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the internal laws of California and shall be binding upon and
inure to the benefit of all parties hereto and their respective successors in
interest and assigns.
14. Counterparts. This Agreement may be executed in several counterparts,
------------
which taken together shall constitute a single instrument.
6.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers on the day and year first above
written.
DIGITAL VIDEO SYSTEMS, INC.,
for itself and as Escrow Agent
By:_______________________________
Name:
Title:
__________________________________
Dr. Edmund Sun
7.
<PAGE>
EXHIBIT 4.8
ESCROW AGREEMENT
AGREEMENT, dated as of October 17, 1996, by and among American Stock
Transfer & Trust Company, a New York corporation (hereinafter referred to as the
"Escrow Agent"), Digital Video Systems, Inc., a Delaware corporation (the
"Company") and Dr. Edmund Sun (the "Stockholder").
WHEREAS, the Company contemplates a public offering ("Public Offering") of
Units ("Units"), each Unit consisting of a maximum of 100 IPO units ("IPO
Units"), with each IPO Unit consisting of one share of its Common Stock, par
value $.0001 per share (the "Common Stock"), one redeemable Class A Warrant (the
"Class A Warrant") and one redeemable Class B Warrant ("Class B Warrant")
through D.H. Blair Investment Banking Corp. as underwriter ("Blair") pursuant to
the registration statement on Form SB-2, as amended (the "Registration
Statement"), filed with the Securities and Exchange Commission (the "SEC").
WHEREAS, in connection with the Public Offering, the Stockholder has agreed
to deposit in escrow 140,760 shares of Common Stock into an escrow.
In consideration of the mutual covenants and promises herein contained, the
parties hereto agree as follows:
1. The terms and conditions of that certain escrow agreement dated as of
April 23, 1996, by and among American Stock Transfer and Trust Company, the
Company, the stockholders of the Company listed on Exhibit A thereto and the
holders of options listed on Exhibit B thereto (the "IPO Escrow Agreement") are
hereby incorporated herein by reference in their entirety. Notwithstanding the
foregoing, for purposes of this Agreement (i) "Effective Date" shall mean the
date hereof, (ii) "Escrow Securities" shall mean 140,760 shares of the Company's
common stock delivered to the Escrow Agent on the date hereof by Dr. Edmund Sun,
and (iii) this Agreement may be modified with the written consent of the parties
hereto and no other consents shall be required.
2. (a) The Escrow Securities are subject to release to the Stockholder
only in the event the conditions set forth herein are met. The Escrow Agent,
upon notice to such effect from the Company as provided in paragraph 5 thereof,
shall deliver the Escrow Securities, together with stock powers executed in
blank, and the Escrow Property deposited in escrow with respect to such Escrow
Securities, to the Stockholder, if, and only if, one of the following conditions
is met:
(i) 70,380 of the Escrow Securities (and the related Escrow
Property) will be released in the event that 50% of the securities escrowed
pursuant to the IPO Escrow Agreement are released to the securityholders parties
thereto pursuant to the terms of the IPO Escrow Agreement; and
(ii) the remaining 70,380 of the Escrow Securities (and the
related Escrow Property) will be released in the event that the remaining 50% of
the securities
<PAGE>
escrowed pursuant to the IPO Escrow Agreement are released to the
securityholders parties thereto pursuant to the terms of the IPO Escrow
Agreement.
3. Each notice, instruction or other certificate required or permitted by
the terms hereof shall be in writing and shall be communicated by personal
delivery, fax or registered or certified mail, return receipt requested, to the
parties hereto at the addresses set forth below, or at such other address as any
of them may designate by notice to each of the others:
(i) If the Company, to:
Digital Video Systems, Inc.
2710 Walsh Avenue
Santa Clara, California 95051
Attn: Dr. Edmund Sun
(ii) If to the Stockholder to his addresses as set forth under his
name on the signature pages hereto.
(iii) If to the Escrow Agent, to:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York 10005
Attn: Donna Ansbro
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their duly authorized officers on the day and year first above
written.
DIGITAL VIDEO SYSTEMS, INC.
By:________________________
Name:
Title:
AMERICAN STOCK TRANSFER
& TRUST COMPANY
By:________________________
Name:
Title:
___________________________
2
<PAGE>
Dr. Edmund Sun
3
<PAGE>
EXHIBIT 4.9
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (this "Agreement") dated October 17, 1996 is entered
into by and among Digital Video Systems, Inc., a Delaware corporation
("Digital"), the Shareholders listed in Schedule A hereto (the "Shareholders")
and American Stock Transfer & Trust Company, as escrow agent hereunder (the
"Escrow Agent").
RECITALS:
--------
Pursuant to that certain Agreement and Plan of Reorganization dated October
17, 1996 (the "Reorganization Agreement") among Digital, Digital Video
Acquisition Co., ViComp Technology, Inc. ("ViComp") and the Shareholders, ViComp
has become a wholly owned subsidiary of Digital and the Shareholders have become
shareholders of Digital.
Section 2.13 of the Reorganization Agreement provides that an escrow fund
shall be established to secure the Shareholders' obligations to indemnify
Digital against certain Losses (the "Indemnification Fund").
Accordingly, Digital, the Shareholders and the Escrow Agent have agreed to
enter into this Agreement relating to the Indemnification Fund.
NOW THEREFORE, in consideration of the premises and the mutual covenants
contained in this Agreement, and other good and valuable consideration, the
receipt and adequacy of which the parties to this Agreement acknowledge, the
parties agree as follows:
1. The terms used in this Agreement shall have the meanings ascribed to
them in the Reorganization Agreement.
2. Pursuant to the terms and conditions of the Reorganization Agreement,
10% of the Digital Common Stock issued to each Shareholder (the "Escrow Shares")
shall be delivered to the Escrow Agent. Liabilities and indemnification
obligations arising under Section 2.13 and Article XI of the Reorganization
Agreement for any Loss are payable to Digital from the Indemnification Fund
containing all such Escrow Shares. The Indemnification Fund shall be held by
the Escrow Agent upon the terms and conditions contained herein and shall be
released by the Escrow Agent in accordance with this Agreement. The Escrow
Agent agrees that it does not and shall not have any right of set-off or other
rights or claims with respect to the Indemnification Fund.
3. (a) The Escrow Agent, upon receipt of a certificate from Digital in
substantially the form of Exhibit I attached
<PAGE>
hereto (a "Certificate of Instruction"), shall, not later than the business day
next following its receipt of such Certificate of Instruction, give written
notice to the Shareholders of its receipt, together with a copy of such
Certificate of Instruction.
(b) If the Escrow Agent (i) does not, within thirty (30) days after it
has given such notice to the Shareholders, receive from the Shareholders a
certificate in substantially the form of Exhibit II attached hereto (an
"Objection Certificate") in respect of the Certificate of Instruction to which
such notice relates or (ii) has received such an Objection Certificate within
such thirty (30) days and has thereafter received a copy of an award of a
mediator or arbitrator pursuant to Section 3(c) of this Agreement to the effect
that the Owed Amount (as defined in the Certificate of Instruction) referred to
in such Certificate of Instruction (or a specified portion thereof) is a Loss
against which Digital may apply the Indemnification Fund, then the Escrow Agent
shall, on the business day next following the expiration of such thirty (30)
days or the receipt by the Escrow Agent of a copy of such award, as applicable,
release to Digital from the Indemnification Fund that number of Escrow Shares
(pro rata on behalf of each Shareholder so liable in respect of that Loss) as in
--- ----
the aggregate equals the applicable Owed Amount and is hereby authorized and
empowered to execute stock powers on behalf of the Shareholders with respect to
the Escrow Shares in connection with such release. For purposes of such
indemnification only, the Escrow Shares shall be valued at $8.00 for each such
Escrow Share.
(c) Upon receipt of an Objection Certificate, the Escrow Agent shall,
not later than the business day next following receipt thereof, give written
notice to Digital of its receipt together with a copy of the Objection
Certificate. In the event that the Shareholders and Digital are unable to
resolve any dispute with respect to an Owed Amount, such dispute shall be
referred to arbitration as provided in paragraph 11 hereof.
(d) Upon receipt by the Escrow Agent of a copy of an award of an
arbitrator to the effect that the Owed Amount (or a specified portion thereof)
referred to in a Certificate of Instruction in respect of which the Escrow Agent
had received an Objection Certificate is not a Loss against which the
Indemnification Fund may be applied, such Certificate of Instruction (or such
specified portion of the Owed Amount set forth therein) shall be canceled.
(e) If the Escrow Agent receives any dividends or other distributions
with respect to the Escrow Shares, it shall promptly pay over such amounts to
the Shareholders entitled thereto.
4. (a) On the earlier of (i) June 30, 1998 or (ii) the date of filing
with the SEC of Digital's annual report on Form 10K for the year ended March 31,
1998, the Escrow Agent shall
-2-
<PAGE>
release to the Shareholders (on a pro rata basis unless any Loss has occurred in
--- ----
respect of any one or more Shareholder's Escrow Shares in which event the
release shall be adjusted to recognize such Loss) all of the Escrow Shares in
the Indemnification Fund that have not been applied against Losses. Upon
release by the Escrow Agent to the Shareholders pursuant to this Section 4 of
the balance remaining in the Indemnification Fund and upon notice to Digital's
transfer agent removing any stop transfer orders in effect in respect of the
Escrow Shares, this Agreement shall automatically terminate.
5. No Pledge of Escrow Shares; Further Assurances.
----------------------------------------------
(a) Each Shareholder agrees that during the term of this Agreement, it
will not sell, transfer, hypothecate, negotiate, pledge, assign, encumber or
otherwise dispose of any or all of the Escrow Securities, unless and until such
disposition is (i) proposed in connection with an agreement by which Digital is
to be acquired or merged into another entity, and (ii) approved by a vote of the
holders of at least 80% of the votes cast, in person or by proxy, by holders of
Digital's common stock eligible to vote on such matter. The restriction shall
not be applicable to transfer upon death or by operation of law; to family
members of such Shareholder or to any trust for the benefit of such Shareholder,
provided that such transferee agrees to be bound by the provisions of this
Agreement, or to Digital, provided that the consideration, if any, paid by
Digital for Escrow Shares transferred to Digital does not exceed the
consideration, if any, paid by such Shareholder for such securities.
6. Legends. Each of the certificates representing the Escrow Shares
-------
shall bear legends to the following effect, as well as any other legends
required by applicable law:
(i) "The sale, transfer, hypothecation, negotiation, pledge, assignment,
encumbrance or other disposition of the shares evidenced by this
certificate are restricted by and are subject to all of the terms,
conditions and provisions of a certain Escrow Agreement entered into
among Digital Video Systems, Inc. and the Shareholders named therein,
dated as of October 17, 1996, a copy of which may be obtained from the
Secretary of Digital Video Systems, Inc. No transfer, sale or other
disposition of these shares may be made unless specific conditions of
such agreement have been satisfied."
(ii) "The shares evidence by this certificate have not been registered
under the Securities Act of 1933, as amended. No transfer, sale or
other disposition of these shares may be made unless a registration
statement with respect to these shares has become effective under said
act, or the Company has been furnished with an opinion of counsel
satisfactory in
-3-
<PAGE>
form and substance to the Company that such registration is not
required."
Upon execution of this Agreement, the Escrow Agent shall direct the transfer
agent for Digital to place stop transfer orders with respect to the Escrow
Shares and to maintain such orders in effect until the occurrence of any of the
events in Section 4 hereof.
7. The duties and obligations of the Escrow Agent shall be determined
solely by the provisions of this Agreement, and the Escrow Agent shall not be
liable except for the performance of such duties and obligations as are
specifically set forth in this Agreement. In furtherance and not in limitation
of the foregoing:
(i) the Escrow Agent shall be fully protected in relying in good faith
upon any written certification, notice, direction, request, waiver,
consent, receipt or other document that the Escrow Agent believes to be
genuine and duly authorized, executed and delivered;
(ii) the Escrow Agent shall not be liable for any error of judgment,
or for any act done or omitted by it, or for any mistake in fact or law, or
for anything that it may do or refrain from doing in connection therewith;
provided, however, that notwithstanding any other provision of this
Agreement, the Escrow Agent shall be liable for its willful misconduct or
gross negligence;
(iii) the Escrow Agent may seek the advice of legal counsel in the
event of any dispute or question as to the construction of any of the
provisions of this Agreement or its duties hereunder, and it shall incur no
liability and shall be fully protected in respect of any action taken,
omitted or suffered by it in good faith in accordance with the opinion of
such counsel;
(iv) in the event that the Escrow Agent shall in any instance in good
faith be uncertain as to its duties or rights hereunder, it shall be
entitled to refrain from taking any action in that instance and its sole
obligation, subject to those of its duties hereunder as to which there is
no such uncertainty, shall be to keep safely all property held in escrow
until it shall be directed otherwise in writing by each of the Shareholders
and Digital or by a final order or judgment of a court of competent
jurisdiction; and
(v) the Escrow Agent shall not be required to institute legal
proceedings of any kind and shall not be required to initiate or defend any
legal proceedings which may be instituted against it in respect of the
subject matter of these instructions.
-4-
<PAGE>
8. The Shareholders and Digital hereby agree to jointly and severally
indemnify the Escrow Agent for, and to hold it harmless against any loss,
liability or expense arising out of or in connection with this Agreement and
carrying out its duties hereunder, including the costs and expenses of defending
itself against any claim of liability, except in those cases where the Escrow
Agent has been guilty of gross negligence or willful misconduct. Anything in
this Agreement to the contrary notwithstanding, in no event shall the Escrow
Agent be liable for special, indirect or consequential loss or damage of any
kind whatsoever (including, but not limited to, lost profits), even if the
Escrow Agent has been advised of the likelihood of such loss or damage and
regardless of the form of action.
9. Following the deposit of the Escrow Shares into escrow, the
Indemnification Fund shall constitute an absolute limit on the obligation of the
Shareholders to indemnify and hold Digital harmless under this Reorganization
Agreement, except to the extent claims for indemnification are made with respect
to Sections 3.4, 3.8(b), (c), 3.23 and 3.28, which are not so limited. The
Shareholders shall not be liable for indemnification under this Agreement except
in the event the aggregate amount of all Losses exceeds $50,000.
10. The Escrow Agent is entitled to its reasonable fees and costs as set
forth in Schedule B. Such fees and costs shall be divided equally between
Digital (as to 50%) and the Shareholders (pro rata as to 50%).
--- ----
11. Digital and the Shareholders agree that if any dispute arises pursuant
to this Escrow Agreement or any Certificate of Instruction or Certificate of
Objection, then in such event the dispute shall be submitted to binding
arbitration in accordance with the rules of the American Arbitration
Association, with such arbitration to be held in San Jose, California. The
results, determination, finding, judgment or award rendered through such
arbitration, shall be final and binding on each of the parties thereto and not
subject to appeal or review.
12. Digital and the Shareholders severally agree to provide the Escrow
Agent with all instruments and documents within their respective powers to
provide which may be necessary for the Escrow Agent to perform its duties and
responsibilities hereunder.
13. Any notices or other communication required or permitted under this
Agreement shall be in writing and shall be delivered personally, telegraphed,
telexed sent by facsimile transmission or sent by certified, registered or
express mail, postage prepaid. Any such notice shall be deemed given when so
delivered personally, telegraphed, telexed or sent by facsimile transmission or,
if mailed, four (4) days after the date of deposit in the United States mails,
as follows:
-5-
<PAGE>
(a) If to Digital to:
Digital Video Systems, Inc.
2710 Walsh Avenue
Santa Clara, CA 95051
Fax: (408) 727-1770
with a copy to:
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, CA 90067-2367
Fax: (310) 201-4746
Attn: Sanford J. Hillsberg, Esq.
(b) If to any Shareholder, to their respective addresses set forth
opposite each Shareholder's name on the signature pages hereto;
with a copy to:
Heller Ehrman White & McAuliffe
525 University Avenue
Palo Alto, CA 94301-1900
Fax: (415) 324-0638
Attn: Matthew P. Quilter, Esq.
(c) If to Escrow Agent to:
American Stock Transfer & Trust Company
40 Wall Street
New York, New York
Attn: Donna Ansbro
Any party may, by notice given in accordance with this Section to the other
parties, designate another address or person for receipt of notices hereunder.
14. The Escrow Agent may at any time resign hereunder by giving written
notice of its resignation to the parties hereto at their addresses set forth in
this Agreement, at least ten (10) business days prior to the date specified for
such resignation to take effect. Upon the effective date of such resignation,
all property then held by the Escrow Agent hereunder shall be delivered by it to
such person as may be designated in writing by each of the other parties hereto,
whereupon all the Escrow Agent's obligations hereunder shall, except as
hereinafter provided, cease and terminate. If no such person shall have been so
designated by such date, all obligations of the Escrow Agent hereunder shall
nevertheless, except as hereinafter provided, cease and terminate. The Escrow
Agent's sole responsibility thereafter shall be to keep safely all property then
held by it and to deliver the same to a person designated by each of the other
parties hereto or in accordance with the directions of a final order or judgment
or a court of competent jurisdiction.
-6-
<PAGE>
15. This Agreement shall be governed by and construed in accordance with
the substantive laws of the State of California.
16. The obligations of the parties hereto (including the Escrow Agent) are
unique in that time is of the essence, and any delay in performance hereunder by
any party will result in irreparable harm to the other parties hereto.
Accordingly, any party may seek specific performance and/or injunctive relief
before any court of competent jurisdiction in order to enforce this Agreement or
to prevent violations of the provisions hereof, and no party shall object to
specific performance or injunctive relief as an appropriate remedy. The Escrow
Agent acknowledges that its obligations, as well as the obligations of the
Shareholders and Digital hereunder, are subject to the equitable remedy of
specific performance and/or injunctive relief.
17. This Agreement may be amended, superseded, canceled, renewed or
extended, and the terms hereof may be waived, only by a written instrument
executed by all of the parties, or in the case of a waiver, by the party waiving
compliance. No delay on the part of any party in exercising any right, power or
privilege hereunder shall operate as a waiver thereof, nor shall any waiver on
the part of any party of any such right, power or privilege, or any single or
partial exercise of any such right, power or privilege, preclude any further
exercise thereof or the exercise of any other such right, power, or privilege.
No waivers of or exceptions to any term, condition or provision of this
Agreement, in any one or more instances, shall be deemed to be, or construed as,
a further or continuing waiver of any such term, condition or provision.
18. This Agreement shall be binding upon and inure to the benefit of the
parties and their respective successors and permitted assigns and legal
representatives. Neither this Agreement nor any of the rights, interests, or
obligations hereunder shall be assigned by any of the parties hereto without the
prior written consent of the other parties.
19. In the event that attorneys' fees or other costs are incurred to
secure performance of any of the obligations herein provided for, or to
establish damages for the breach thereof, or to obtain any other appropriate
relief, whether by way of prosecution or defense, in arbitration or litigation
(but not in mediation), the prevailing party as determined by the relevant court
or arbitrator shall be entitled to recover reasonable attorneys' fees and costs
(as determined by the relevant court or arbitrator) incurred therein.
20. This Agreement may be executed by the parties hereto in separate
counterparts, each of which when so executed and delivered shall be an original,
but all such counterparts shall together constitute one and the same instrument.
Counterpart signature pages may be executed and delivered pursuant to facsimile
transmission.
-7-
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Agreement on the
day and year first above written.
DIGITAL VIDEO SYSTEMS, INC.
By:____________________________________
Its:___________________________________
AMERICAN STOCK TRANSFER & TRUST COMPANY
By:____________________________________
Its:___________________________________
SHAREHOLDERS:
By:____________________________________
_______________________________________
Print Name
_______________________________________
_______________________________________
Address
By:____________________________________
_______________________________________
Print Name
_______________________________________
_______________________________________
Address
By:____________________________________
_______________________________________
Print Name
_______________________________________
_______________________________________
Address
By:____________________________________
-8-
<PAGE>
_______________________________________
Print Name
_______________________________________
_______________________________________
Address
By:____________________________________
_______________________________________
Print Name
_______________________________________
_______________________________________
Address
By:____________________________________
_______________________________________
Print Name
_______________________________________
_______________________________________
Address
-9-
<PAGE>
EXHIBIT I
CERTIFICATE OF INSTRUCTION
TO
-----------------------------,
as Escrow Agent
The undersigned, DIGITAL VIDEO SYSTEMS, INC., a Delaware corporation
("Digital"), pursuant to Section 3 of the Escrow Agreement dated as of
______________ (the "Escrow Agreement"), by and among Digital and certain
shareholders indicated therein (the "Shareholders") and you as the Escrow Agent
(terms defined in the Escrow Agreement have the same meanings when used herein),
hereby:
(a) certifies that (i) $______________ (the "Owed Amount") has been
incurred by Digital as Losses against which Digital may apply the
Indemnification Fund pursuant to the Escrow Agreement and (ii) Digital has
given the Shareholders written notice of such Losses and its intent to
apply the Indemnification Fund against such Losses, which written notice
sets forth in reasonable detail the facts giving rise to the liability for
such payment; and
(b) instructs you to release to Digital from the Indemnification Fund
the number of Escrow Shares equal in value to the Owed Amount, as provided
in Section 3 of the Escrow Agreement.
DIGITAL VIDEO SYSTEMS, INC.
By:_______________________________
Its:______________________________
Dated:________________________
<PAGE>
EXHIBIT II
OBJECTION CERTIFICATE
TO
-----------------------------,
as Escrow Agent
The undersigned, ____________________________ (either individually or
collectively the "Shareholders"), pursuant to Section 3 of the Escrow Agreement
dated as of _______________, 1996 (the "Escrow Agreement"), by and among DIGITAL
VIDEO SYSTEMS, INC. ("Digital"), the Shareholders and you as the Escrow Agent,
hereby:
(a) certifies that (i) the Owed Amount (or a portion thereof if such
portion is specified in a schedule attached hereto detailing such lesser
amount) referred to in the certificate to you of Digital dated
______________, is not a Loss against which Digital may apply the
Indemnification Fund in accordance with the Escrow Agreement and (ii) the
undersigned has delivered to Digital a written statement dated
______________, setting forth in reasonable detail the facts supporting the
statement contained in clause (i) above; and
(b) object to your making payment to Digital of such contested amount
as provided in such certificate of Digital and detailed herein.
Dated:________________________
By:_________________________________
<PAGE>
SCHEDULE A
James W. Kirkpatrick, Jr.
Lish Chen
Michael Mruzik
Mihailo Stojancic
Tai Sato
Francis Hung
<PAGE>
SCHEDULE B
FEES
The Escrow Agent shall be entitled to a fee of $500.00 payable on the
effective date of the Agreement for its services rendered under the Agreement.
In the event the Agreement is terminated prior to the termination date provided
therein, no refund or rebate of such payment shall be due.
<PAGE>
EXHIBIT 4.10
AMENDMENT TO WARRANT AGREEMENT
------------------------------
AMENDMENT dated October __, 1996 to the Warrant Agreement dated May 9, 1996
("Warrant Agreement") by and among Digital Video Systems, Inc., a Delaware
corporation ("Company"), American Stock Transfer & Trust Company, as Warrant
Agent ("Warrant Agent"), and D.H. Blair Investment Banking Corp., a New York
corporation ("Blair"). All terms used in this Amendment, unless otherwise
defined herein, shall have such meaning as ascribed to them in the Warrant
Agreement.
WHEREAS, in connection with (i) a public offering ("Secondary Offering") of
up to 26,450 units ("Units"), each unit consisting of _____ units (the "IPO
Units"), each IPO Unit consisting of one share of the Company's Common Stock,
$.0001 par value ("Class A Common Stock"), one redeemable Class A Warrant
("Class A Warrant") and one redeemable Class B Warrant ("Class B Warrant")
pursuant to an underwriting agreement (the "Secondary Underwriting Agreement")
dated October __, 1996 between the Company and Blair and (ii) the issuance to
Blair or its designees of Unit Purchase Options to purchase an aggregate of
2,300 additional Units, to be dated as of October __, 1996 (the "Secondary Unit
Purchase Options"), the Company may issue up to an additional ______ Class A
Warrants and ______ Class B Warrants; and
WHEREAS, each Class A Warrant entitles the Registered Holder thereof to
purchase one share of Class A Common Stock and one Class B Warrant, and
accordingly, the Company may issue up to an additional ________ Class B
Warrants; and
WHEREAS, in connection with the Secondary Offering, the parties hereto
desire to amend certain provisions of the Warrant Agreement as set forth in this
Agreement:
NOW, THEREFORE, in consideration of the premises and the mutual agreements
hereinafter set forth, the parties intending to be legally bound, hereby agree
as follows:
1. Amendments to Warrant Agreement. Upon the effective date of the
-------------------------------
registration statement relating to the Secondary Offering, the Warrant Agreement
shall be amended as follows:
(a) The number of Class A Warrants subject to issuance under the
Warrant Agreement is hereby increased to ______ Class A Warrants.
(b) The number of Class B Warrants subject to issuance under the
Warrant Agreement is hereby increased to______ Class B Warrants.
<PAGE>
(c) Subsection (d) of Section 1 of the Warrant Agreement shall be
deleted in their entirety and replaced with the following new subsection (d):
"(d) "Initial Warrant Exercise Date" shall mean as to each Class
A Warrant and Class B Warrant the date of issuance of such Class A
Warrant or Class B Warrant, as the case may be."
(d) Subsections (e) and (g) of Section 2 of the Warrant Agreement
shall be deleted in their entirety and replaced with the following new
subsections (e) and (g):
"(e) From time to time, up to the Warrant Expiration Date, the
Transfer Agent shall countersign and deliver stock certificates in
required whole number denominations representing up to an aggregate of
_______ shares of Class A Common Stock, subject to adjustment as
described herein, upon the exercise of Warrants in accordance with
this Agreement.
(g) Pursuant to the terms of the Unit Purchase Options and the
Secondary Unit Purchase Options, Blair or its designees may purchase
Units, which include up to ______ Class A Warrants and _____ Class B
Warrants. Notwithstanding anything to the contrary contained herein,
the Warrants underlying the Unit Purchase Options and the Secondary
Unit Purchase Options shall not be subject to redemption by the
Company except under the terms and conditions set forth in the Unit
Purchase Options and Secondary Unit Purchase Options, as the case may
be."
(e) Subsection (b) of Section 4 of the Warrant Agreement shall be
deleted in its entirety and replaced with the following new subsection (b):
"(b) If, at the Exercise Date, in respect of the exercise of any
Warrants (i) the market price of the Company's Class A Common Stock is
greater than the then Purchase Price of the Warrant, (ii) the exercise
of the Warrant was solicited by a member of the National Association
of Securities Dealers, Inc. ("NASD") as designated in writing on the
Warrant Certificate Subscription Form, (iii) the Warrant was not held
in a discretionary account, (iv) disclosure of compensation
arrangements was made both at the time of the original offering and at
the time of exercise; and (v) the solicitation of the exercise of the
Warrant was not in violation of Rule 10b-6 (as such rule or any
successor rule may be in effect as of such time of exercise)
promulgated under the Securities
-2-
<PAGE>
Exchange Act of 1934, then the Warrant Agent, simultaneously with the
distribution of the Warrant Proceeds to the Company shall, on behalf
of the Company, pay from the Warrant Proceeds, a fee of 5% with
respect to the Class A Warrants and 8% with respect to the Class B
Warrants (the "Blair Fee") of the Purchase Price to Blair (of which a
portion may be reallowed by Blair to the dealer who solicited the
exercise, which may also be Blair or D.H. Blair & Co., Inc.);
provided, however, (i) no Blair Fee will be payable prior to May 9,
-------- -------
1997, and (ii) in the event any Warrants are exercised after May 9,
1997 but prior to October __, 1997, Blair shall only be entitled to
receive the Blair Fee with respect to the 8,750,000 Class A Warrants
and 14,000,000 Class B Warrants (which include the 8,750,000 Class B
Warrants that may be issued on exercise of the Class A Warrants). For
purposes of determining which Warrants have been exercised, it will be
assumed that the first 8,750,000 Class A Warrants and 14,000,000 Class
B Warrants exercised were those issued in connection with the
Company's initial public offering in May 1996. In the event the Blair
Fee is not received within five days of the date on which the Company
receives Warrant Proceeds, then the Blair Fee shall begin accruing
interest at an annual rate of prime plus four (4)%, payable by the
Company to Blair at the time Blair receives the Blair Fee. Within five
days after exercise the Warrant Agent shall send to Blair a copy of
the reverse side of each Warrant exercised. Blair shall reimburse the
Warrant Agent, upon request, for its reasonable expenses relating to
compliance with this section 4(b). In addition, Blair and the Company
may at any time during business hours, examine the records of the
Warrant Agent, including its ledger of original Warrant Certificates
returned to the Warrant Agent upon exercise of Warrants. The
provisions of this paragraph may not be modified, amended or deleted
without the prior written consent of Blair."
2. Full Force and Effect. Except as provided herein, all other terms and
---------------------
provisions of the Warrant Agreement shall remain in full force and effect.
3. Counterparts. This Agreement may be executed in one or more
------------
counterparts, which taken together shall constitute a single document.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the date first above written.
-3-
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
By:___________________________________________
Robert Pfannkuch, President
AMERICAN STOCK TRANSFER & TRUST COMPANY
By:___________________________________________
D.H. BLAIR INVESTMENT BANKING CORP.
By:___________________________________________
Martin A. Bell, Vice Chairman and
General Counsel
-4-
<PAGE>
EXTENSION AGREEMENT
Agreement dated this ___ day of October, 1996 between Digital Video
Systems, Inc., a Delaware corporation (the "Company") and D.H. Blair Investment
Banking Corp. ("Blair").
WHEREAS, the Company and Blair are parties to an agreement dated May 14,
1996 regarding mergers, acquisitions and similar transactions (the "M/A
Agreement"); and
WHEREAS, on the date hereof the Company has completed an underwritten
public offering through Blair, as underwriter (the "Offering"); and
WHEREAS, in connection with, and as a condition to, the Offering, the
Company has agreed to extend the M/A Agreement.
NOW, THEREFORE, the parties hereto, for good and valuable consideration,
hereby agree as follows:
Extension. The M/A Agreement shall expire on October __, 2001, subject to
---------
the provisions thereof. Except as set forth herein, the M/A Agreement shall
continue in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
DIGITAL VIDEO SYSTEMS, INC. D.H. BLAIR INVESTMENT BANKING
CORP.
By:_________________________ By:_________________________________
Robert Pfannkuch Martin A. Bell, Vice Chairman and
General Counsel
<PAGE>
EXHIBIT 4.11
Option to Purchase
Units
Digital Video Systems, Inc.
---------------------------
Unit Purchase Option
--------------------
Dated: October ___, 1996.
THIS CERTIFIES THAT_______ (herein sometimes called the "Holder") is
entitled to purchase from Digital Video Systems, Inc., a Delaware corporation
(hereinafter called the "Company"), at the prices and during the periods as
hereinafter specified, up to _______ (_______) Units ("Units"), each Unit
consisting of [ ] units (the "IPO Units"), each consisting of one share of the
Company's Common Stock, $.0001 par value, as now constituted ("Common Stock"),
one Class A warrant ("Class A Warrants") and one Class B warrant ("Class B
Warrants"). Each Class A Warrant is exercisable to purchase one share of Common
Stock and one Class B Warrant at an exercise price of $6.50 until May 9, 2001,
and each Class B Warrant is exercisable to purchase one share of Common Stock at
an exercise price of $8.75 until May 9, 2001. The Class A Warrants and Class B
Warrants are herein collectively referred to as the "Warrants."
The Units have been registered under a Registration Statement on Form
SB-2, (File No. __________) declared effective by the Securities and Exchange
Commission on October __, 1996 (the "Registration Statement"). This Option,
together with options of like tenor, constituting in the aggregate options (the
"Options") to purchase 2,000 Units, subject to adjustment in accordance with
Section 8 of this Option (the "Option Units"), was originally issued pursuant to
an underwriting agreement between the Company and D.H. Blair Investment Banking
Corp., as underwriter (the "Underwriter") in connection with a public offering
(the "Offering") of 23,000 Units (the "Public Units") through the Underwriter,
in consideration of $23 received for the Options.
Except as specifically otherwise provided herein, the Common Stock and
the Warrants issued pursuant to the option herein granted (the "Option") shall
bear the same terms and conditions as described under the caption "Description
of Securities" in the Registration Statement, and the Warrants shall be governed
by the terms of the Warrant Agreement dated as of May 9, 1996, as amended on
October __, 1996, executed in connection with such public offering (the "Warrant
Agreement"), and except that (i) the holder shall have registration rights under
the Securities Act of 1933, as amended (the "Act"), for the Option, the Common
Stock and the Warrants included in the Option Units, and the shares of Common
Stock underlying the Warrants, as more fully described in Section 6 of this
Option and (ii) the Warrants issuable upon exercise of the Option will be
subject to redemption by the Company pursuant to the Warrant
<PAGE>
Agreement at any time after the Option has been exercised and the Warrants
underlying the Option Units are outstanding. Any such redemption shall be on the
same terms and conditions as the Warrants included in the Public Units (the
"Public Warrants"). The Company will list the Common Stock underlying this
Option and, at the Holder's request the Warrants, on the Nasdaq National Market,
the Nasdaq Small Cap Market or such other exchange or market as the Common Stock
or Public Warrants may then be listed or quoted. In the event of any extension
of the expiration date or reduction of the exercise price of the Public
Warrants, the same changes to the Warrants included in the Option Units shall be
simultaneously effected.
1. The rights represented by this Option shall be exercised at the
prices, subject to adjustment in accordance with Section 8 of this Option ("the
"Exercise Price"), and during the periods as follows:
(a) During the period from ______, 1996 to ________, 1998
inclusive, the Holder shall have no right to purchase any Option Units
hereunder, except that in the event of any merger, consolidation or sale of
all or substantially all the capital stock or assets of the Company or in
the case of any statutory exchange of securities with another corporation
(including any exchange effected in connection with a merger of another
corporation into the Company) subsequent to May 9, 1996 the Holder shall
have the right to exercise this Option and the Warrants included herein at
such time and receive the kind and amount of shares of stock and other
securities and property (including cash) which a holder of the number of
shares of Common Stock underlying this Option and the Warrants included in
this Option would have owned or been entitled to receive had this Option
been exercised immediately prior thereto.
(b) Between ________, 1998 and _________, 2001 inclusive, the
Holder shall have the option to purchase Option Units hereunder at a price
of $____ per Unit. For purposes of the adjustments under Section 8 hereof,
the Per Share Exercise Price shall be deemed to be $____, subject to
further adjustment as provided in such Section 8.
(c) After _________, 2001 the Holder shall have no right to
purchase any Units hereunder.
2. (a) The rights represented by this Option may be exercised at
any time within the period above specified, in whole or in part, by (i) the
surrender of this Option (with the purchase form at the end hereof properly
executed) at the principal executive office of the Company (or such other office
or agency of the Company as it may designate by notice in writing to the Holder
at the address of the Holder appearing on the books of the Company); and (ii)
payment to the Company of the exercise price then in effect for the number of
Option Units
-2-
<PAGE>
specified in the above-mentioned purchase form together with applicable stock
transfer taxes, if any. This Option shall be deemed to have been exercised, in
whole or in part to the extent specified, immediately prior to the close of
business on the date this Option is surrendered and payment is made in
accordance with the foregoing provisions of this Section 2, and the person or
persons in whose name or names the certificates for shares of Common Stock and
Warrants shall be issuable upon such exercise shall become the holder or holders
of record of such Common Stock and Warrants at that time and date. The
certificates for the Common Stock and Warrants so purchased shall be delivered
to the Holder as soon as practicable but not later than ten (10) days after the
rights represented by this Option shall have been so exercised.
(b) At any time during the period above specified, during which this
Option may be exercised, the Holder may, at its option, exchange this Option, in
whole or in part (an "Option Exchange"), into the number of Option Units
determined in accordance with this Section (b), by surrendering this Option at
the principal office of the Company or at the office of its stock transfer
agent, accompanied by a notice stating such Holder's intent to effect such
exchange, the number of Option Units into which this Option is to be exchanged
and the date on which the Holder requests that such Option Exchange occur (the
"Notice of Exchange"). The Option Exchange shall take place on the date
specified in the Notice of Exchange or, if later, the date the Notice of
Exchange is received by the Company (the "Exchange Date"). Certificates for the
shares of Common Stock and Warrants issuable upon such Option Exchange and, if
applicable, a new Option of like tenor evidencing the balance of the Option
Units remaining subject to this Option, shall be issued as of the Exchange Date
and delivered to the Holder within seven (7) days following the Exchange Date.
In connection with any Option Exchange, this Option shall represent the right to
subscribe for and acquire the number of Option Units (rounded to the next
highest integer on the first such Option Exchange and rounded down to the next
lowest integer on subsequent exercises) equal to (x) the number of Option Units
specified by the Holder in its Notice of Exchange up to the maximum number of
Option Units subject to this option (the "Total Number") less (y) the number of
Option Units equal to the quotient obtained by dividing (A) the product of the
Total Number and the existing Exercise Price by (B) the Fair Market Value.
"Fair Market Value" shall mean first, if there is a trading market as indicated
in Subsection (i) below for the Units, such Fair Market Value of the Units and
if there is no such trading market in the Units, then Fair Market Value shall
have the meaning indicated in Subsections (ii) through (v) below for the
aggregate value of all shares of Common Stock and Warrants which comprise a
Unit:
(i) If the Units are listed on a national securities exchange
or listed or admitted to unlisted trading privileges on such exchange or
listed for trading on the Nasdaq National Market or the Nasdaq Small Cap
Market, the Fair Market Value shall be the average of the last reported
sale prices or the average of the means of the last reported bid and asked
prices, respectively, of the Units on such exchange or market for the
twenty (20) business days ending on the last business day prior to the
Exchange Date; or
-3-
<PAGE>
(ii) If the Common Stock or Warrants are listed on a national
securities exchange or admitted to unlisted trading privileges on such
exchange or listed for trading on the Nasdaq National Market or the Nasdaq
Small Cap Market, the Fair Market Value shall be the average of the last
reported sale prices or the average of the means of the last reported bid
and asked prices, respectively, of Common Stock or Warrants, respectively,
on such exchange or market for the twenty (20) business days ending on the
last business day prior to the Exchange Date; or
(iii) If the Common Stock or Warrants are not so listed or
admitted to unlisted trading privileges, the Fair Market Value shall be the
average of the means of the last reported bid and asked prices of the
Common Stock or Warrants, respectively, for the twenty (20) business days
ending on the last business day prior to the Exchange Date; or
(iv) If the Common Stock is not so listed or admitted to
unlisted trading privileges and bid and asked prices are not so reported,
the Fair Market Value shall be an amount, not less than book value thereof
as at the end of the most recent fiscal year of the Company ending prior to
the Exchange Date, determined in such reasonable manner as may be
prescribed by the Board of Directors of the Company; or
(v) If the Warrants are not so listed or admitted to unlisted
trading privileges, and bid and asked prices are not so reported for
Warrants, then Fair Market Value for the Warrants shall be an amount equal
to the difference between (i) the Fair Market Value of the shares of Common
Stock and Warrants which may be received upon the exercise of the Warrants,
as determined herein, and (ii) the Warrant Exercise Price.
3. Neither this Option nor the underlying securities shall be
transferred, sold, assigned, or hypothecated for a period of two years
commencing on the effective date of the Registration Statement except that they
may be transferred to successors of the Holder, and may be assigned in whole or
in part to any person who is an officer of the Holder, any member participating
in the selling group relating to the Offering or any officer of such selling
group member. Any such assignment shall be effected by the Holder (i) executing
the form of assignment at the end hereof and (ii) surrendering this Option for
cancellation at the office or agency of the Company referred to in Section 2
hereof, accompanied by a certificate (signed by an officer of the Holder if the
Holder is a corporation), stating that each transferee is a permitted transferee
under this Section 3 hereof; whereupon the Company shall issue, in the name or
names specified by the Holder (including the Holder) a new Option or Options of
like tenor and representing in the aggregate rights to purchase the same number
of Option Units as are purchasable hereunder.
-4-
<PAGE>
4. The Company covenants and agrees that all shares of Common Stock
which may be issued as part of the Option Units purchased hereunder and the
Common Stock which may be issued upon exercise of the Warrants will, upon
issuance, be duly and validly issued, fully paid and nonassessable and no
personal liability will attach to the holder thereof. The Company further
covenants and agrees that during the periods within which this Option may be
exercised, the Company will at all times have authorized and reserved a
sufficient number of shares of its Common Stock to provide for the exercise of
this Option and that it will have authorized and reserved a sufficient number of
shares of Common Stock for issuance upon exercise of the Warrants included in
the Option Units.
5. This Option shall not entitle the Holder to any voting rights or
any other rights, or subject the Holder to any liabilities, as a stockholder of
the Company.
6. (a) The Company shall advise the Holder or its transferee,
whether the Holder holds the Option or has exercised the Option and holds Option
Units or any of the securities underlying the Option Units, by written notice at
least four weeks prior to the filing of any post-effective amendment to the
Registration Statement or of any new registration statement or post-effective
amendment thereto under the Act (other than a registration statement on form S-8
or other comparable or successor form) covering any securities of the Company,
for its own account or for the account of others, and will for a period of seven
years from the effective date of the Registration Statement, upon the request of
the Holder, include in any such post-effective amendment or registration
statement, such information as may be required to permit a public offering of
the Option, all or any of the Option Units, the Common Stock or Warrants
included in the Option Units or the Common Stock issuable upon the exercise of
the Warrants (the "Registrable Securities"), to the extent that the form of any
new registration statement being utilized by the Company permits such securities
to be registered.
(b) If D.H. Blair Investment Banking Corp. or J. Morton Davis (the
"Majority Holder") shall give notice to the Company at any time to the effect
that such holder desires to register under the Act this Option, the Option Units
or any of the underlying securities contained in the Option Units under such
circumstances that a public distribution (within the meaning of the Act) of any
such securities will be involved then the Company will promptly, but no later
than two weeks after receipt of such notice, file a post-effective amendment to
the current Registration Statement or a new registration statement on Form S-1
or such other form as the holder requests pursuant to the Act, to the end that
the Option, the Option Units and/or any of the securities underlying the Option
Units may be publicly sold under the Act as promptly as practicable thereafter
and the Company will use its best efforts to cause such registration to become
and remain effective (including the taking of such steps as are necessary to
obtain the removal of any stop order); provided, that such holder shall furnish
the Company with appropriate information in connection therewith as the Company
may reasonably request in writing. The Majority Holder may, at its option,
request the filing of a post-effective amendment to the current Registration
Statement or a new registration statement under the Act on one
-5-
<PAGE>
occasion during the five year period beginning one year from the effective date
of the Registration Statement. The Holder may, at its option request the
registration of the Option and/or any of the securities underlying the Option in
a registration statement made by the Company as contemplated by Section 6(a) or
in connection with a request made pursuant to this Section 6(b) prior to
acquisition of the Option Units issuable upon exercise of the Option and even
though the Holder has not given notice of exercise of the Option. The Majority
Holder may, at its option, request such post-effective amendment or new
registration statement during the described period with respect to the Option,
the Option Units as a unit, or separately as to the Common Stock and/or Warrants
included in the Option Units and/or the Common Stock issuable upon the exercise
of the Warrants, and such registration rights may be exercised by the Majority
Holder prior to or subsequent to the exercise of the Option.
Within ten days after receiving any such notice pursuant to this
Section 6(b), the Company shall give notice to the other holders of the Options,
advising that the Company is proceeding with such post-effective amendment or
registration statement and offering to include therein the securities underlying
the Options of the other holders, provided that they shall furnish the Company
with such appropriate information (relating to the intentions of such holders)
in connection therewith as the Company shall reasonably request in writing. In
the event the registration statement is not filed within the period specified
herein and in the event the registration statement is not declared effective
under the Act prior to May 9, 2001, then, at the holders' request, the Company
shall purchase the Options from the holder for a per option price equal to the
difference between (i) the Fair Market Value of the Common Stock on the date of
notice multiplied by the number of shares of Common Stock issuable upon exercise
of the Option and the underlying Warrants and (ii) the average per share
purchase price of the Option and each share of Common Stock underlying the
Option. All costs and expenses of the first such post-effective amendment or
new registration statement under this paragraph 6(b) shall be borne by the
Company, except that the holders shall bear the fees of their own counsel and
any underwriting discounts or commissions applicable to any of the securities
sold by them. If the Company determines to include securities to be sold by it
in any registration statement originally requested pursuant to this Section
6(b), such registration shall instead be deemed to have been a registration
under Section 6(a) and not under this Section 6(b).
The Company will maintain such registration statement or post-
effective amendment current under the Act for a period of at least six months
(and for up to an additional three months if requested by the Holder) from the
effective date thereof.
(c) Whenever pursuant to Section 6 a registration statement relating
to any Registrable Securities is filed under the Act, amended or supplemented,
the Company shall (i) supply prospectuses and such other documents as the Holder
may request in order to facilitate the public sale or other disposition of the
Registrable Securities, (ii) use its best efforts to register and qualify any of
the Registrable Securities for sale in such states as such Holder designates,
(iii) furnish indemnification in the manner provided in Section 7 hereof, (iv)
notify each Holder
-6-
<PAGE>
of Registrable Securities at any time when a prospectus relating thereto is
required to be delivered under the Securities Act, of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, contains an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading and, at the request of any such Holder,
prepare and furnish to such Holder a reasonable number of copies of a supplement
to or an amendment of such prospectus as may be necessary so that, as thereafter
delivered to the purchasers of such Registrable Securities, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading and (v) do any and all other acts and things which may be
necessary or desirable in connection with the foregoing to enable such Holders
to consummate the public sale or other disposition of the Registrable
Securities. The Holder shall furnish appropriate information in connection
therewith and indemnification as set forth in Section 7.
(d) The Company shall not permit the inclusion of any securities other
than the Registrable Securities to be included in any registration statement
filed pursuant to Section 6(b) hereof without the prior written consent of the
Majority Holder.
(e) The Company shall furnish to each Holder participating in the
offering and to each underwriter, if any, a signed counterpart, addressed to
such Holder or underwriter, of (i) an opinion of counsel to the Company, dated
the effective date of such registration statement (or, if such registration
includes an underwritten public offering, an opinion dated the date of the
closing under the underwriting agreement), and (ii) if such registration
includes an underwritten public offering, a "cold comfort" letter dated the
effective date of such registration statement and dated the date of the closing
under the underwriting agreement signed by the independent public accountants
who have issued a report on the Company's financial statements included in such
registration statement, in each case covering substantially the same matters
with respect to such registration statement (and the prospectus included
therein) and, in the case of such accountants' letter, with respect to events
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountants' letters delivered to
underwriters in underwritten public offerings of securities.
(f) The Company shall deliver promptly to each Holder participating in
the offering requesting the correspondence and memoranda described below and to
the managing underwriter copies of all correspondence between the Commission and
the Company, its counsel or auditors and all memoranda relating to discussions
with the Commission or its staff with respect to the registration statement and
permit each Holder and underwriter to do such investigation, upon reasonable
advance notice, with respect to information contained in or omitted from the
registration statement as it deems reasonably necessary to comply with
applicable securities laws or rules of the National Association of Securities
Dealers, Inc. ("NASD"). Such investigation shall include access to non-
confidential books, records and properties and opportunities to discuss the
business of the Company with its officers and
-7-
<PAGE>
independent auditors, all to such reasonable extent and at such reasonable times
as any such Holder shall reasonably request.
7. (a) Whenever pursuant to Section 6 a registration statement
relating to the Registrable Securities is filed under the Act, amended or
supplemented, the Company will indemnify and hold harmless each holder of the
Registrable Securities covered by such registration statement, amendment or
supplement (such holder being hereinafter called the "Distributing Holder"), and
each person, if any, who controls (within the meaning of the Act) the
Distributing Holder, and each underwriter (within the meaning of the Act) of
such securities and each person, if any, who controls (within the meaning of the
Act) any such underwriter, against any losses, claims, damages or liabilities,
joint or several, to which the Distributing Holder, any such controlling person
or any such underwriter may become subject, under the Act or otherwise, insofar
as such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in any such registration statement or any
preliminary prospectus or final prospectus constituting a part thereof or any
amendment or supplement thereto, or arise out of or are based upon the omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading; and will reimburse the Distributing
Holder and each such controlling person and underwriter for any legal or other
expenses reasonably incurred by the Distributing Holder or such controlling
person or underwriter in connection with investigating or defending any such
loss, claim, damage, liability or action; provided, however, that the Company
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon an untrue statement or
alleged untrue statement or omission or alleged omission made in said
registration statement, said preliminary prospectus, said final prospectus or
said amendment or supplement in reliance upon and in conformity with written
information furnished by such Distributing Holder specifically for use in the
preparation thereof.
(b) If requested by the Company prior to the filing of any
registration statement covering the Registrable Securities, each Distributing
Holder will agree, severally but not jointly, to indemnify and hold harmless the
Company against any losses, claims, damages or liabilities to which the Company
may become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities arise out of or are based upon any untrue or alleged
untrue statement of any material fact contained in said registration statement,
said preliminary prospectus, said final prospectus, or said amendment or
supplement, or arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent that such untrue statement or alleged untrue
statement or omission or alleged omission was made in said registration
statement, said preliminary prospectus, said final prospectus or said amendment
or supplement in reliance upon and in conformity with written information
furnished by such Distributing Holder specifically for use in the preparation
thereof; except that the maximum amount which may be recovered from the
Distributing Holder pursuant
-8-
<PAGE>
to this Section 7 or otherwise shall be limited to the amount of net proceeds
received by the Distributing Holder from the sale of the Registrable Securities.
(c) Promptly after receipt by an indemnified party under this Section
7 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party, give the
indemnifying party notice of the commencement thereof; but the omission so to
notify the indemnifying party will not relieve it from any liability which it
may have to any indemnified party otherwise than under this Section 7.
(d) In case any such action is brought against any indemnified party,
and it notifies an indemnifying party of the commencement thereof, the
indemnifying party will be entitled to participate in, and, to the extent that
it may wish, jointly with any other indemnifying party similarly notified to
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party, and after notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof, the
indemnifying party will not be liable to such indemnified party under this
Section 7 for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof other than reasonable
costs of investigation.
(8) In addition to the provisions of Section 1(a) of this Option, the
Exercise Price in effect at any time and the number and kind of securities
purchasable upon the exercise of the Options shall be subject to adjustment from
time to time upon the happening of certain events as follows:
(a) In case the Company shall (i) declare a dividend or make a
distribution on its outstanding shares of Common Stock in shares of Common
Stock, (ii) subdivide or reclassify its outstanding shares of Common Stock
into a greater number of shares, or (iii) combine or reclassify its
outstanding shares of Common Stock into a smaller number of shares, the
Exercise Price in effect at the time of the record date for such dividend
or distribution or of the effective date of such subdivision, combination
or reclassification shall be adjusted so that it shall equal the price
determined by multiplying the Exercise Price by a fraction, the denominator
of which shall be the number of shares of Common Stock outstanding after
giving effect to such action, and the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
action. Such adjustment shall be made successively whenever any event
listed above shall occur.
(b) Whenever the Exercise Price payable upon exercise of each
Option is adjusted pursuant to Subsection (a) above, (i) the number of
shares of Common Stock included in an Option Unit shall simultaneously be
adjusted by multiplying
-9-
<PAGE>
the number of shares of Common Stock included in Option Unit immediately
prior to such adjustment by the Exercise Price in effect immediately prior
to such adjustment and dividing the product so obtained by the Exercise
Price, as adjusted and (ii) the number of shares of Common Stock or other
securities issuable upon exercise of the Warrants included in the Option
Units and the exercise price of such Warrants shall be adjusted in
accordance with the applicable terms of the Warrant Agreement.
(c) No adjustment in the Exercise Price shall be required unless
such adjustment would require an increase or decrease of at least five
cents ($0.05) in such price; provided, however, that any adjustments which
by reason of this Subsection (c) are not required to be made shall be
carried forward and taken into account in any subsequent adjustment
required to be made hereunder. All calculations under this Section 8 shall
be made to the nearest cent or to the nearest one-hundredth of a share, as
the case may be. Anything in this Section 8 to the contrary
notwithstanding, the Company shall be entitled, but shall not be required,
to make such changes in the Exercise Price, in addition to those required
by this Section 8, as it shall determine, in its sole discretion, to be
advisable in order that any dividend or distribution in shares of Common
Stock, or any subdivision, reclassification or combination of Common Stock,
hereafter made by the Company shall not result in any Federal Income tax
liability to the holders of Common Stock or securities convertible into
Common Stock (including Warrants issuable upon exercise of this Option).
(d) Whenever the Exercise Price is adjusted, as herein provided,
the Company shall promptly but no later than 10 days after any request for
such an adjustment by the Holder, cause a notice setting forth the adjusted
Exercise Price and adjusted number of Option Units issuable upon exercise
of each Option and, if requested, information describing the transactions
giving rise to such adjustments, to be mailed to the Holders, at the
address set forth herein, and shall cause a certified copy thereof to be
mailed to its transfer agent, if any. The Company may retain a firm of
independent certified public accountants selected by the Board of Directors
(who may be the regular accountants employed by the Company) to make any
computation required by this Section 8, and a certificate signed by such
firm shall be conclusive evidence of the correctness of such adjustment.
(e) In the event that at any time, as a result of an adjustment
made pursuant to Subsection (a) above, the Holder of this Option thereafter
shall become entitled to receive any shares of the Company, other than
Common Stock, thereafter the number of such other shares so receivable upon
exercise of this Option shall be subject to adjustment from time to time in
a manner and on terms
-10-
<PAGE>
as nearly equivalent as practicable to the provisions with respect to the
Common Stock contained in Subsections (a) to (c), inclusive above.
(f) In case any event that is substantially the same as the
events described in this Section 8 shall occur as to which the other
provisions of this Section 8 or Section 1(a) hereof are not strictly
applicable but as to which the failure to make any adjustment would not
fairly protect the purchase rights represented by this Option in accordance
with the essential intent and principles hereof, then, in each such case,
the Holders of Options representing the right to purchase a majority of the
Option Units may appoint a firm of independent public accountants
reasonably acceptable to the Company, which shall give their opinion as to
the adjustment, if any, on a basis consistent with the essential intent and
principles established herein, necessary to preserve the purchase rights
represented by the Options. Upon receipt of such opinion, the Company will
promptly mail a copy thereof to the Holder of this Option and shall make
the adjustments described therein. The fees and expenses of such
independent public accountants shall be borne by the Company.
9. This Agreement shall be governed by and in accordance with the
laws of the State of New York, without giving effect to the principles of
conflicts of law thereof.
IN WITNESS WHEREOF, Digital Video Systems, Inc. has caused this Option
to be signed by its duly authorized officers under its corporate seal, and this
Option to be dated October ___, 1996.
DIGITAL VIDEO SYSTEMS, INC.
By: ____________________________
Robert Pfannkuch, President
(Corporate Seal)
Attest:
__________________________
_________________, Secretary
-11-
<PAGE>
PURCHASE FORM
-------------
(To be signed only upon exercise of option)
The undersigned, the holder of the foregoing Option, hereby
irrevocably elects to exercise the purchase rights represented by such Option
for, and to purchase thereunder, Units of Digital Video Systems, Inc., each
Unit consisting of ___ IPO Units, which consist of one share of $.0001 Par Value
Common Stock, one Class A Warrant to purchase one share of Common Stock and one
Class B Warrant, and one Class B Warrant to purchase one share of Common Stock
and herewith makes payment of $_________ thereof
Dated: _________, 19__. Instructions for Registration of Stock and Warrants
________________________________________
Print Name
________________________________________
Address
________________________________________
Signature
-12-
<PAGE>
OPTION EXCHANGE
---------------
The undersigned, pursuant to the provisions of the foregoing Option,
hereby elects to exchange its Option for _________ Units of Digital Video
Systems, Inc., each Unit consisting of ___ IPO Units consisting of one share of
$.0001 Par Value Common Stock, one Class A Warrant to purchase one share of
Common Stock and one Class B Warrant and one Class B Warrant to purchase one
share of Common Stock, pursuant to the Option Exchange provisions of the Option.
Dated: _____________, 19__.
__________________________________________
Print Name
__________________________________________
Address
__________________________________________
Signature
-13-
<PAGE>
TRANSFER FORM
-------------
(To be signed only upon transfer of the Option)
For value received, the undersigned hereby sells, assigns, and
transfers unto the right to purchase Units represented by the foregoing Option
to the extent of Units , and appoints _____________ attorney to transfer such
rights on the books of _____________, with full power of substitution in the
premises.
Dated: _______________, 19__
D.H. BLAIR INVESTMENT BANKING CORP.
By: _____________________________________
________________________________________
Address
In the presence of:
-14-
<PAGE>
EXHIBIT 5.1
[LETTERHEAD OF TROY & GOULD PROFESSIONAL CORPORATION]
November 4, 1996
DIG3-9
Digital Video Systems, Inc.
2710 Walsh Avenue
Santa Clara, California 95051
Re: Registration Statement on Form SB-2
-----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Digital Video Systems, Inc., a Delaware
corporation (the "Company") in connection with the public offering of up to
26,450 units (the "Units") (including 3,450 Units to cover over-allotments, if
any), each Unit consisting of a minimum of 70 and a maximum of 100 IPO units
(the "IPO Units"). Each IPO Unit consists of one share of the Company's Common
Stock (the "Common Shares"), one redeemable Class A Warrant to purchase one
share of the Company's Common Stock and one Class B Warrant (as hereinafter
defined) (the "Class A Warrants"), and one redeemable Class B Warrant to
purchase one share of the Company's Common Stock (the "Class B Warrants" and,
together with the Class A Warrants, the "Warrants"). The shares of Common Stock
issuable upon exercise of the Warrants are referred to herein as the "Underlying
Shares."
The Warrants are to be in the form described in, and subject to the terms
and conditions of, the Warrant Agreement by and among the Company, American
Stock Transfer & Trust Company, as Warrant Agent and D.H. Blair Investment
Banking Corp., a New York corporation ("Blair"), as amended (the "Amended
Warrant Agreement"). The Units are to be sold by the Company pursuant to an
Underwriting Agreement (the "Underwriting Agreement") between the Company and
Blair.
This opinion is being furnished in accordance with the requirements of Item
601(b)(5) of Regulation SB under the Securities Act of 1933, as amended (the
"1933 Act").
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
such documents as we have deemed necessary or appropriate as a basis for the
opinions set forth herein, including (i) the Registration Statement of the
Company on Form SB-2 relating to the Units, filed with the Securities and
Exchange Commission (the "Commission") on
1
<PAGE>
Digital Video Systems, Inc.
November 4, 1996
Page 2
November 4, 1996 (the "Registration Statement"); (ii) the Amended and Restated
Certificate of Incorporation and Bylaws of the Company, as amended to date;
(iii) the form of the Underwriting Agreement; (iv) the Amended Warrant
Agreement, together with the forms of Warrants; (v) the form of Common Stock
Certificate; (vi) copies of certain resolutions (the "Resolutions") adopted by
the Board of Directors of the Company relating to the issuance of the Units, the
filing of the Registration Statement and any amendments or supplements thereto
and related matters; and (vii) such other documents as we have deemed necessary
or appropriate as a basis for the opinions set forth below.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed by parties other than the Company, we have
assumed that such parties had the power, corporate or other, to enter into and
perform all obligations thereunder and have also assumed the due authorization
by all requisite action, corporate or other, and execution and delivery by such
parties of such documents and the validity and binding effect thereof. As to
any facts material to the opinions expressed herein which were not independently
established or verified, we have relied upon oral or written statements and
representations of officers and other representatives of the Company and others.
Members of our firm are admitted to the bar in the State of California, and
we do not express any opinion as to the laws of any other jurisdiction, other
than the laws of the United States of America to the extent referred to
specifically herein.
Based on such examination, we are of the opinion that:
1. The Units and the IPO Units have been duly and validly authorized.
2. The Common Shares have been duly and validly authorized and, when
certificates therefor have been duly authenticated, delivered and paid for in
accordance with the Underwriting Agreement, will be duly and validly issued,
fully paid and nonassessable.
2
<PAGE>
Digital Video Systems, Inc.
November 4, 1996
Page 3
3. The Underlying Shares have been duly and validly authorized and, (a)
assuming the Underlying Shares will be duly and validly authorized as of the
date of issuance; and (b) when certificates therefor have been duly
authenticated, delivered and the Underlying Shares have been paid for in
accordance with the Underwriting Agreement and the Amended Warrant Agreement,
the Underlying Shares will be duly and validly issued, fully paid and
nonassessable.
4. The Warrants have been duly and validly authorized and, when (a) the
Amended Warrant Agreement shall have been duly executed and delivered (assuming
due authorization, execution and delivery thereof by the Warrant Agent and
Blair); and (b) the Warrants shall have been duly authenticated, delivered and
paid for in accordance with the Underwriting Agreement and the Amended Warrant
Agreement, the Warrants will be valid and binding obligations of the Company.
We consent to the use of our name under the caption "Legal Matters" in the
Registration Statement, and to the filing of this opinion as an exhibit to the
Registration Statement. By giving you this opinion and consent, we do not admit
that we are experts with respect to any part of the Registration Statement
within the meaning of the term "expert" as used in Section 11 of the 1933 Act,
or the rules and regulations promulgated thereunder, nor do we admit that we are
in the category of persons whose consent is required under Section 7 of the 1933
Act.
Very truly yours,
By: /s/ TROY & GOULD
----------------------------
TROY & GOULD
Professional Corporation
3
<PAGE>
EXHIBIT 10.13
AGREEMENT AND
PLAN OF MERGER
BY AND AMONG
DIGITAL VIDEO SYSTEMS, INC.,
DIGITAL VIDEO ACQUISITION CO.,
VICOMP TECHNOLOGY, INC.
AND
THE SHAREHOLDERS
LISTED IN EXHIBIT A HERETO
DATED AS OF OCTOBER 17, 1996
<PAGE>
AGREEMENT AND
PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER, dated as of October 17, 1996 is by and
among Digital Video Systems, Inc., a Delaware corporation ("Digital"), Digital
Video Acquisition Co., a Delaware corporation and wholly owned subsidiary of
Digital ("Digital Sub"), ViComp Technology Inc., a Delaware corporation
("ViComp"), and the Shareholders of ViComp listed in Exhibit A hereto (the
"Shareholders").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the respective Boards of Directors of Digital, Digital Sub and
ViComp have approved the acquisition of ViComp by Digital pursuant to this
Agreement;
WHEREAS, this Agreement provides for the merger of Digital Sub with and
into ViComp with ViComp as the surviving corporation in such merger in a
transaction intended to qualify as a reorganization within the meaning of
Section 368(a)(1)(A) of the Code, all in accordance with the provisions of this
Agreement;
WHEREAS, the Shareholders own beneficially and of record all of the issued
and outstanding capital stock of ViComp; and
WHEREAS, Digital, Digital Sub, ViComp and each of the Shareholders believe
that it is in their best interests to adopt and consummate the Merger (as
hereinafter defined);
NOW THEREFORE, in consideration of the mutual covenants and promises
contained herein and for other good and valuable consideration, the receipt and
adequacy of which is hereby acknowledged, Digital, Digital Sub, ViComp and the
Shareholders agree as follows:
ARTICLE I
DEFINITIONS
-----------
1.1 Defined Terms. As used herein, the terms below shall have the
-------------
following meanings. Any of such terms, unless the context otherwise requires,
may be used in the singular or plural, depending upon the reference.
"Affiliate" shall mean a Person that directly or indirectly through
---------
one or more intermediaries controls, is controlled by or is under common control
with the Person specified. For purposes of this definition, the term "control"
(including the terms "controlling" "controlled by" and "under common control
with") of a Person means the possession, direct or indirect, of the power to (i)
vote or control 50% or more of the voting securities or equity ownership
interest of such Person or (ii) direct or cause the direction of the management
and policies of such Person, whether by contract or otherwise.
1
<PAGE>
"Agreement" shall mean this Agreement and Plan of Merger, together
---------
with all schedules (including the Disclosure Schedule) and exhibits referenced
herein.
"Alternative Transaction" shall mean, with respect to any Person, any
-----------------------
merger, consolidation, sale of substantial assets, sale of shares of capital
stock or other equity securities, recapitalization, debt restructuring or
similar transaction involving such Person or any of its Subsidiaries or any
divisions, other than as contemplated by this Agreement.
"Closing" shall mean the consummation of the Merger and the
-------
transactions contemplated thereby by Digital, Digital Sub, ViComp and the
Shareholders which shall take place on or before the Effective Date.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and
----
the rules and regulations thereunder.
"Digital Common Stock" shall mean the common stock, par value $.0001
--------------------
per share, of Digital.
"Disclosure Schedule" shall mean, collectively, the schedules attached
-------------------
hereto and delivered by the parties as of the date hereof which set forth the
exceptions to the representations and warranties contained in Article III hereof
(as to ViComp and each of the Shareholders) and Article IV hereof (as to
Digital) and certain other information called for by this Agreement. Unless
otherwise specified, each reference in this Agreement to any numbered schedule
is a reference to that numbered schedule which is included in the Disclosure
Schedule. Any information disclosed on a particular schedule on the Disclosure
Schedule or subparts thereof shall be deemed disclosed on any and all schedules.
"Effective Date" shall mean the date on which the Certificate of
--------------
Merger (as hereinafter defined) is filed with the Secretary of State of the
State of Delaware.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended.
"Person" shall mean any individual, partnership, joint venture,
------
corporation, limited liability company, trust, unincorporated association,
governmental authority or any department or agency thereof or any other entity
of any nature whatsoever.
"Representative" shall mean any officer, director, principal,
--------------
attorney, agent, employee or other representative.
"SEC" shall mean the Securities and Exchange Commission.
---
"SEC Reports" shall mean Digital's Registration Statement on Form SB-
-----------
2, which became effective with the SEC on May 9, 1996, and all forms, reports,
statements and documents required to be filed by Digital with the SEC under the
Exchange Act since March 31, 1996, including, but not limited to, (i) the
Digital Quarterly Reports on Form 10-QSB for
2
<PAGE>
the quarters ended March 31, 1996 and June 30, 1996, (ii) the current report of
Digital on Form 8-K filed on August 11, 1996; (iii) all other reports or
registrations filed by Digital with the SEC since March 31, 1996, and all
amendments thereto through the date of this Agreement.
"Securities Act" shall mean the Securities Act of 1933, as amended.
--------------
"Subsidiaries" shall mean all corporations, partnerships, limited
------------
liability companies, joint ventures or other entities in which a Person has a
direct or indirect stock or other equity or ownership interest.
"Tax" shall mean any federal, state, local, foreign or other tax,
---
levy, impost, fee, assessment or other government charge, including without
limitation income, estimated income, business, occupation, franchise, property,
payroll, personal property, sales, transfer, use, employment, commercial rent,
occupancy, franchise or withholding taxes, and interest, penalties and additions
to tax in connection therewith.
"ViComp Common Stock" shall mean shares of common stock, par value
-------------------
$.001 per share, of ViComp.
"ViComp Preferred Stock" shall mean shares of Series A convertible
----------------------
preferred stock, par value $.001 per share.
ARTICLE II
THE MERGER
----------
2.1 The Merger. Digital has formed Digital Sub as a wholly owned
----------
subsidiary under the laws of the State of Delaware. Upon the terms and subject
to the conditions hereof, and in accordance with Delaware General Corporation
Law (the "GCL") Digital will cause Digital Sub to execute and deliver, and
Digital agrees to execute and deliver an Agreement of Merger substantially in
the form of Exhibit B hereto (the "Merger Agreement"), providing for the merger
of Digital Sub with and into ViComp (the "Merger"). ViComp shall be the
surviving corporation in the Merger (the "Surviving Corporation") and as a
result thereof shall become a wholly owned subsidiary of Digital.
2.2 Effects of the Merger. The Merger shall have the effects set forth
---------------------
in Section 259 of the GCL. As of the Effective Date, ViComp shall be a wholly
owned subsidiary of Digital.
2.3 Effective Date. As soon as practicable following fulfillment or
--------------
waiver of the conditions specified in Articles VIII and IX hereof, but in no
event later than two business days thereafter, unless the parties shall
otherwise agree, and provided that this Agreement has not been terminated
pursuant to Section 10.1 hereof, the parties hereto will cause an appropriate
Certificate of Merger (the "Certificate of Merger"), in the form attached as
Exhibit C to be filed with the Secretary of State of the State of Delaware, as
provided in Section 251 of the GCL.
3
<PAGE>
The Merger shall become effective on the date on which the Certificate of Merger
is so filed with the Secretary of State of the State of Delaware. Prior to the
filing of the Certificate of Merger, a closing shall take place at the offices
of Troy & Gould Professional Corporation, 1801 Century Park East, Suite 1600,
Los Angeles, California 90067, or such other place, and at such time as the
parties shall agree.
2.4 Certificate of Incorporation and Bylaws. From and after the
---------------------------------------
Effective Date, the Certificate of Incorporation of the Surviving Corporation
will be in the form attached hereto as Exhibit D. From and after the Effective
Date, the Bylaws of Digital Sub set forth in Exhibit E, as in effect immediately
prior to the Effective Date, shall be the Bylaws of the Surviving Corporation,
and shall thereafter be its Bylaws until changed or amended as provided therein
or under Delaware law.
2.5 Directors and Officers. From and after the Effective Date, the
----------------------
directors of the Surviving Corporation shall be the directors of Digital Sub
immediately prior to the Effective Date as set forth on Exhibit F, and the
officers of the Surviving Corporation shall be the officers of Digital Sub
immediately prior to the Effective Date as set forth on Exhibit F, in each case
until their successors shall have been elected and shall qualify or until
otherwise provided by law or the Certificate of Incorporation or Bylaws of the
Surviving Corporation.
2.6 Conversion of Shares. By virtue of the Merger and without any action
--------------------
on the part of the holder thereof, each share of ViComp Common Stock and ViComp
Preferred Stock that is issued and outstanding immediately prior to the
Effective Date shall be converted into and become .0938403 of one validly
issued, fully paid and nonassessable share of Digital Common Stock, subject to a
rounding adjustment to a whole share for elimination of fractional shares, and
no cash consideration shall be paid in any event.
2.7 Conversion of Digital Sub Common Stock. Each share of common stock,
--------------------------------------
par value $.0001 per share, of Digital Sub issued and outstanding immediately
prior to the Effective Date shall, by virtue of the Merger and without any
action on the part of the holder thereof, be converted into and thereafter
represent one validly issued, fully paid and nonassessable share of common
stock, par value $.001 per share, of the Surviving Corporation.
2.8 Exchange of Certificates. After the Effective Date, each holder of
------------------------
an outstanding certificate or certificates (the "ViComp Stock Certificates")
theretofore representing shares of ViComp Common Stock and/or ViComp Preferred
Stock, upon surrender thereof to such bank, trust company or other person as
shall be designated by Digital (the "Transfer Agent"), shall be entitled to
receive in exchange therefor a certificate or certificates representing the
number of whole shares of Digital Common Stock into which the shares of ViComp
Common Stock and ViComp Preferred Stock theretofore represented by such
surrendered certificate or certificates shall have been converted. Until so
surrendered, each outstanding certificate theretofore representing shares of
ViComp Common Stock and ViComp Preferred Stock shall be deemed for all purposes
in respect of Digital Common Stock, to represent the number of whole shares of
Digital Common Stock into which the shares of ViComp Common Stock and ViComp
Preferred Stock theretofore represented thereby shall have been converted.
4
<PAGE>
No dividend or distribution, if any, payable to holders of shares of Digital
Common Stock shall be paid to the holders of certificates theretofore
representing shares of ViComp Common Stock or ViComp Preferred Stock; provided,
--------
however, that upon surrender and exchange of such ViComp Stock Certificates,
- -------
there shall be paid to the record holders of the stock certificate or
certificates issued in exchange therefor, the amount, without interest thereon,
of dividends or other distributions, if any, which theretofore but subsequent to
the Effective Date have been declared and become payable with respect to the
number of whole shares of Digital Common Stock into which the shares of ViComp
Common Stock and ViComp Preferred Stock theretofore represented thereby shall
have been converted. The certificate or certificates representing the shares of
Digital Common Stock into which the shares of ViComp Common Stock and ViComp
Preferred Stock shall have been converted shall bear the following legend:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED AND ARE SUBJECT TO A REGISTRATION
RIGHTS AGREEMENT (A COPY OF WHICH IS ON FILE WITH SECRETARY OF THE
COMPANY). SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED
OF EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF SUCH REGISTRATION RIGHTS
AGREEMENT AND UNLESS REGISTERED UNDER SAID ACT OR UNLESS AN EXEMPTION FROM
SUCH REGISTRATION IS AVAILABLE IN THE OPINION OF COUNSEL FOR THE ISSUER."
2.9 Digital to Make Shares Available. By the Effective Date, Digital
--------------------------------
shall make available, by transferring directly to the Transfer Agent, for the
benefit of the Shareholders, such number of shares of Digital Common Stock as
shall be required as a result of the conversion of ViComp Common Stock and
ViComp Preferred Stock in accordance with this Agreement.
2.10 Further Documents. From time to time, on and after the Effective
-----------------
Date, as and when requested by Digital, the appropriate officers and directors
of ViComp as of the Effective Date shall, for and on behalf and in the name of
ViComp or otherwise, execute and deliver all such deeds, bills of sale,
assignments and other instruments, and shall take or cause to be taken such
further or other actions as Digital may deem necessary or desirable in order to
confirm of record or otherwise to Digital title to and possession of all of the
properties, rights, privileges, powers, franchises and immunities of ViComp and
otherwise to carry out fully the provisions and purposes of this Agreement.
2.11 Agreement and Plan of Merger. This Agreement is intended by the
----------------------------
parties to constitute an "Agreement of Merger" for the purposes of Section 252
of the GCL, and has been duly adopted by each party as such.
2.12 Internal Revenue Code. The parties hereto intend that the
---------------------
transactions contemplated by this Agreement shall qualify as a reorganization
under Section 368(a)(1)(A) of the Code, and each party hereto will take all
necessary actions in order to accomplish such
5
<PAGE>
intent. This Agreement constitutes a "Plan of Reorganization" as required by
Treasury Regulation Section 1.368-3(a) and has been duly adopted by each party
hereto as such.
2.13 Escrow of Shares. One-half (140,760 shares) of the total 281,520
----------------
shares of Digital Common Stock issued to Dr. Edmund Sun in connection with the
Merger shall be placed in an escrow (the "Sun Escrow") pursuant to an escrow
agreement in substantially the form attached hereto as Exhibit G (the "Sun
Escrow Agreement"). In addition, 10% of the shares of Digital Common Stock
issued to each Shareholder, other than Dr. Edmund Sun, in connection with the
Merger shall be placed in an escrow (the "Shareholder Escrow") pursuant to an
Escrow Agreement substantially in the form attached hereto as Exhibit H
("Shareholder Escrow Agreement"). The shares of Digital Common Stock placed in
the Sun Escrow and the Shareholder Escrow, respectively, will be subject to
cancellation under the circumstances described therein, but Digital shall retain
all other rights and remedies in addition to or, at its sole option, in lieu of
cancellation of such shares, in the event of any breach of the terms and
conditions or representations and warranties hereunder by ViComp or any of the
Shareholders.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VICOMP;
-----------------------------------------
AND THE SHAREHOLDERS
--------------------
Except as set forth on the Disclosure Schedules delivered by ViComp
hereunder, (i) ViComp and Dr. Edmund Sun hereby jointly and severally represent
and warrant, and (ii) each of the other Shareholders hereby severally represents
and warrants, to Digital as set forth below. Notwithstanding the foregoing, the
liability of each Shareholder (other than Dr. Edmund Sun) under this Article III
shall be limited to the shares of Digital Common Stock held in escrow for such
Shareholder pursuant to the Shareholder Escrow Agreement; provided, however,
-------- -------
that (i) each Shareholder's maximum liability for the representations and
warranties set forth in Sections 3.4, 3.8(b), (c) and 3.23 shall be several, but
shall be increased to an amount not to exceed the amount calculated by
multiplying the number of shares of Digital Common Stock received by such
Shareholder times $8.00 notwithstanding any provisions to the contrary herein or
in the Shareholder Escrow Agreement and (ii) each Shareholder's liability with
respect to the representation and warranty in Section 3.28 shall be unlimited
notwithstanding any provisions to the contrary herein or in the Shareholder
Escrow Agreement.
3.1 Organization of ViComp. ViComp is a corporation duly organized,
----------------------
validly existing and in good standing under the laws of the State of Delaware,
has full corporate power and authority to conduct its business as it is
presently being conducted and to own, lease and operate its properties and
assets, and is duly qualified to do business and is in good standing in each
jurisdiction in which the ownership of its property or the conduct of its
business requires such qualification, except for jurisdictions in which the
failure to be so qualified or to be in good standing would not have a material
adverse effect on the business, prospects or financial condition of ViComp.
Copies of the Certificate of Incorporation and Bylaws of ViComp, and all
amendments thereto, heretofore delivered to Digital are complete and correct and
in full force and effect as of the date hereof.
6
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3.2 Subsidiaries. ViComp has no Subsidiaries and shall not create or
------------
otherwise acquire any subsidiaries prior to the Closing.
3.3 ViComp Capital Stock. The authorized capital stock of ViComp
--------------------
consists of 16,000,000 shares of ViComp Common Stock, 2,235,000 shares of which
were issued and outstanding as of the date of this Agreement and 4,000,000
shares of ViComp Preferred Stock, 3,000,000 shares of which were issued and
outstanding as of the date of this Agreement. No shares of any other class or
series of capital stock are authorized, issued or outstanding. 2,235,000
shares, or 100% of the outstanding shares of ViComp Common Stock are held by the
Shareholders and 3,000,000 shares or 100% of the shares of ViComp Preferred
Stock are held by Dr. Edmund Sun. All of the outstanding shares of the ViComp
Common Stock and ViComp Preferred Stock have been duly and validly authorized
and issued, are fully paid and nonassessable and were issued in compliance with
the applicable securities laws. Except as set forth in Schedule 3.3, there are
no subscriptions, offers, options, warrants, calls, commitments, preemptive
rights or other rights of any kind outstanding for the purchase of, nor any
securities convertible into or exchangeable for, any securities of ViComp, and
prior to the Effective Date, all such securities will be cancelled or exchanged
or converted into ViComp Common Stock. There are no restrictions upon the
voting or transfer of any shares of ViComp Common Stock or ViComp Preferred
Stock pursuant to ViComp's Certificate of Incorporation, Bylaws or other
governing documents or any agreement or other instrument to which ViComp is a
party or by which ViComp is bound. There are no stock appreciation rights
outstanding of ViComp.
There are no restrictions upon the voting or transfer of any shares of
ViComp Common Stock or ViComp Preferred Stock pursuant to any agreement or other
instrument to which any Shareholder is a party or by which any of them is bound
which would affect their ability to consummate the transactions contemplated
hereby.
3.4 No Liens on ViComp Capital Stock. Each of the Shareholders is the
--------------------------------
owner of ViComp Common Stock or ViComp Preferred Stock, as the case may be, as
reflected on Exhibit A, free and clear of all liens or encumbrances on the
shares such Shareholder has contracted to exchange.
3.5 Authorization Relative to this Agreement. ViComp has the requisite
----------------------------------------
corporate power and authority to enter into this Agreement and to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly and validly authorized by the
Board of Directors of ViComp and each of the Shareholders. ViComp has taken all
action necessary, in accordance with Delaware law and its Certificate of
Incorporation and Bylaws, to obtain the approval of shareholders of 100% of the
ViComp Common Stock and 100% of the ViComp Preferred Stock for this Agreement
and the transactions contemplated hereby, and in that connection ViComp has
provided the Shareholders with full disclosure of all terms of this transaction.
No other corporate proceedings on the part of ViComp are necessary to authorize
this Agreement and the transactions contemplated hereby. This Agreement has
been duly executed and delivered by ViComp and each Shareholder and, assuming
this Agreement constitutes a valid and binding agreement of the other parties
hereto,
7
<PAGE>
constitutes a valid and binding obligation of each of them, enforceable against
each of them in accordance with its terms, except to the extent that its
enforceability may be limited by applicable bankruptcy, insolvency,
reorganization or other laws affecting the enforcement of creditors' rights
generally or by general equitable principles.
3.6 Absence of Certain Changes or Events. Except as set forth on
------------------------------------
Schedule 3.6, since August 31, 1996, there has not been any change in the
financial condition, results of operations or business of ViComp which could be
expected to result in a material adverse effect on the business, prospects or
financial condition of ViComp, and ViComp has not:
(a) except for the transactions contemplated by this Agreement,
entered into any material commitment or transaction (including, but not limited
to, any borrowing, capital expenditure or sale of assets), or conducted its
business or operations, other than in the ordinary and usual course of business
and consistent with past practices;
(b) except as set forth on Schedule 3.6(b), amended or changed its
Certificate of Incorporation, Bylaws or other organizational documents;
(c) agreed to take, whether in writing or otherwise, any action which,
if taken prior to the date hereof, would have made any representation or
warranty in this Article III untrue or incorrect;
(d) declared, set aside, made or paid any dividend in respect of
ViComp capital stock or redeemed any ViComp capital stock;
(e) except as set forth on Schedule 3.6(e), increased the annual
level of compensation of any employee by an amount greater than 10% over his
compensation for the year ended December 31, 1995, or increased at all the
annual level of compensation of any person whose compensation from ViComp in the
fiscal year ended December 31, 1995 exceeded $75,000, or granted any unusual or
extraordinary bonuses, benefits or other forms of direct or indirect
compensation to any employee, officer, director or consultant;
(f) increased, terminated, amended or otherwise modified any plan for
the benefit of the employees;
(g) issued any equity securities or rights;
(h) borrowed any funds, under existing lines of credit or otherwise,
except as reasonably necessary for the ordinary operation of ViComp's business
in a manner, and in amounts, in keeping with historical practices;
(i) solicited or initiated the submission of proposals or offers from
any person for, participated in any discussion pertaining to, or furnished any
information to any person other than Digital relating to, any Alternative
Transaction; or
8
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(j) made any loans or advances to any Affiliate or officer or
director of ViComp, or Affiliate of any such officer or director.
3.7 Permits. ViComp has all material licenses and permits required to
-------
conduct its business as presently conducted, and all such licenses and permits
are valid and in full force and effect. Other than in connection with or in
compliance with the provisions of the Securities Act, the Exchange Act or the
securities or blue sky laws of the various states, and except as disclosed on
Schedule 3.7 hereto, no material notice to, declaration, filing or registration
with, license or permit from, any domestic or foreign governmental or regulatory
body or authority, or any other Person, is required to be made or obtained by
ViComp in connection with the execution, delivery or performance of this
Agreement and the consummation of the transactions contemplated hereby.
3.8 No Conflict or Violation. Subject in the case of subsections (b),
------------------------
(c) and (e) below to receipt of the permits contemplated by Section 3.7, neither
the execution and delivery of this Agreement nor the consummation of the
transactions contemplated hereby will result in (a) a violation of or a conflict
with any provision of the Certificate of Incorporation, Bylaws or other
organizational document of ViComp, (b) a breach of, or a default under, any
material term or provision of any material contract, encumbrance, license or
permit to which ViComp or any of the Shareholders is a party or is subject or by
which any assets of ViComp are bound, including, without limitation, any such
breach or default which would interfere in any way with their respective
abilities to consummate the transactions contemplated by this Agreement, (c) a
material violation by ViComp or any Shareholder of any statute, rule,
regulation, ordinance, code, order, judgment, writ, injunction, decree or award,
including any violation which would interfere with their respective abilities to
consummate the transactions contemplated by this Agreement, (d) the imposition
of any material encumbrance on the business or assets of ViComp, or (e) except
as set forth in Schedule 3.8(e), give rise to any right of termination,
cancellation or acceleration under any contract to which ViComp is a party or by
or to which it or any of its material assets or properties may be bound or
subject.
3.9 Financial Statements. ViComp has heretofore delivered to Digital
--------------------
draft audited financial statements for the period from inception through August
31, 1996 (the "ViComp Financial Statements"). The ViComp Financial Statements
(a) are in accordance with the books and records of ViComp (which are true and
complete in all material respects), and (b) fairly present the assets,
liabilities (including all reserves) and consolidated financial position of
ViComp as of the respective dates thereof and the consolidated results of
operations and changes in cash flows for the periods then ended, except that
unaudited interim financial statements are subject to normal and recurring year-
end adjustments that are not expected to be material in amount. At August 31,
1996, there were no liabilities of ViComp, which, in accordance with GAAP,
should have been shown or reflected therein or in the notes thereto, which are
not shown or reflected therein or the notes thereto for annual financial
statements. Since August 31, 1996, there have been no changes from ViComp's
financial condition as reflected in the ViComp Financial Statements for August
31, 1996 which could result in a material adverse effect upon the business,
prospects or financial condition of ViComp.
9
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3.10 Liabilities. ViComp has no material liabilities, obligations or
-----------
commitments of any nature (whether absolute, accrued, contingent or otherwise
and whether matured or unmatured), including, without limitation, tax
liabilities due, except (a) liabilities reflected in, reserved against or
disclosed in the footnotes of, the ViComp Financial Statements, (b) obligations
or commitments arising under agreements set forth in Schedule 3.10, and (c)
liabilities, obligations or commitments incurred since August 31, 1996 in the
ordinary course of ViComp's business and consistent with ViComp's past
practices. There are no material transactions that have not been properly
recorded in the accounting records underlying the ViComp Financial Statements.
3.11 Litigation. There are no claims, suits, arbitrations, government
----------
proceedings or investigations pending or threatened or which, based on facts
presently known to ViComp, that ViComp believes could occur (a) against, related
to or affecting ViComp, which actions, if determined adversely to ViComp, would
have a material adverse effect on the business, prospects or financial condition
of ViComp, or (b) seeking to delay, limit or enjoin the transactions
contemplated by this Agreement. Except as set forth in Schedule 3.11, ViComp is
not in default with respect to or subject to any judgment, order, writ,
injunction or decree of any court or governmental agency, and there are no
unsatisfied judgments against ViComp.
3.12 Labor Matters. Except as set forth on Schedule 3.12, ViComp is not
-------------
(a) a party to any employment agreement or to any labor agreement with respect
to its employees with any labor organization, union, group or association, and
there are no employee unions (nor any other similar labor or employee
organizations) under local statutes, custom or practice, or (b) aware of any
labor strike or labor disturbance pending or threatened against it, or any
employment grievance currently being asserted or likely to be asserted against
it in connection with consummation of the transactions contemplated by this
Agreement. ViComp is in compliance, in all material respects with all
applicable laws respecting employment practices (including, but not limited to,
laws relating to sexual harassment and discrimination), employee documentation,
terms and conditions of employment and wages and hours and is not and has not
engaged in any unfair labor practice.
3.13 Compliance with Law. ViComp has not, and the conduct of its business
-------------------
has not, violated in any material respect any, and is in compliance in all
material respects with all, laws, statutes, ordinances, regulations, rules and
orders of any foreign, federal, state or local government and any other
governmental department or agency, and any judgment, decision, decree or order
of any court or governmental agency, department or authority, including, without
limitation, environmental laws, relating to ViComp.
3.14 No Agreements to Sell the Assets. ViComp has not made any commitment
--------------------------------
or legal obligation, absolute or contingent, to any Person to sell, assign,
transfer or effect a sale of any of the assets of ViComp (other than inventory
or non-material assets in the ordinary course of business). ViComp does not
have any commitment or legal obligation to sell or effect a sale of any capital
stock of ViComp, to effect any merger, consolidation, liquidation, dissolution
or other reorganization of ViComp, or to enter into any agreement or cause the
entering into of an agreement with respect to any of the foregoing.
10
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3.15 Employee Benefit Plans.
----------------------
(a) Schedule 3.15 lists (i) each "employee pension benefit plan," as
defined in Section 3(2) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), (other than a ViComp Multiemployer Plan) maintained by
ViComp, or to which ViComp makes or has made contributions (the "ViComp Pension
Plans"); (ii) each "employee welfare benefit plan," as defined in Section 3(l)
of ERISA, (other than a ViComp Multiemployer Plan) maintained by ViComp, or to
which ViComp makes or has made contributions (the "ViComp Welfare Plans"); (iii)
each "multiemployer plan," as defined in Section 4001(a)(3) of ERISA, maintained
by ViComp, or to which ViComp makes or, at any time during the last six years,
has made contributions (the "ViComp Multiemployer Plans") and (iv) each
collective bargaining, bonus, profit sharing, compensation or other plans,
agreements, trusts, funds or arrangements (other than a ViComp Pension Plan,
ViComp Welfare Plan or ViComp Multiemployer Plan) maintained by ViComp for the
benefit of its directors, officers or employees, and each employment,
consulting, severance or indemnification arrangement or understanding between
ViComp, on the one hand, and any current or former directors, officers or other
employees (or affiliates thereof) of ViComp, on the other hand (collectively
"ViComp Benefit Arrangements"). ViComp has no plan or commitment, whether
legally binding or not, to create any additional ViComp Pension Plans, ViComp
Welfare Plans or ViComp Benefit Arrangements (collectively, "ViComp Employee
Plans") or modify or change any existing ViComp Employee Plan that would affect
any employee or former employee of ViComp, except as may be required to maintain
the qualified status of any ViComp Pension Plans which are intended to be
qualified under Section 401(a) of the Code.
(b) With respect to each of the ViComp Employee Plans, ViComp has
heretofore made available to Digital true, complete and correct copies of all
existing material documents related to such ViComp Employee Plans, including,
but not limited to, a copy of the plan or arrangement and related trust or other
funding vehicle, if any; the most recent summary plan description, if any, and
all written material employee communications related to such plan or arrangement
since December 31, 1995; and any other contracts related to the plan or
arrangement with respect to which ViComp may have material liability.
(c) Except as disclosed on Schedule 3.15, neither of ViComp nor any
ViComp Welfare Plan has any present or future obligation to make any payment to
or with respect to any present or former employee of ViComp pursuant to any
retiree medical benefit plan, or other retiree ViComp Welfare Plan.
3.16 Tax Matters.
-----------
(a) Filing of Tax Returns. Since December 31, 1995, ViComp has
---------------------
timely filed with the appropriate taxing authorities all returns (including,
without limitation, information returns, statements, declarations, reports and
other information) in respect of Taxes required to be filed through the date
hereof and will timely file any such returns and other information required to
be filed on or prior to the Effective Date. The returns and other information,
when
11
<PAGE>
filed, were complete and accurate in all material respects and nothing has
occurred which would require the filing of an amendment to such returns.
(b) Payment of Taxes. Since December 31, 1995, all Taxes, in respect
----------------
of periods beginning before the Effective Date, have been timely paid, or will
be timely paid, or an adequate reserve has been established therefor, as set
forth in the ViComp Financial Statements, and ViComp does not have any material
liability for Taxes in excess of the amounts so paid or reserves so established.
(c) Audits, Investigations or Claims. Since December 31, 1995, the
--------------------------------
federal income tax returns of ViComp have not been audited by the Internal
Revenue Service. No deficiencies for Taxes not adequately reserved for have
been claimed, proposed or assessed by any taxing or other governmental authority
against ViComp. There are no pending or threatened audits, investigations or
claims for or relating to any material additional liability in respect of Taxes
not adequately reserved for, and there are no matters under discussion between
ViComp and any governmental authorities with respect to Taxes that in the
reasonable judgment of ViComp is likely to result in such additional liability
for Taxes. ViComp has not been notified that any taxing authority intends to
audit a return for any period. Except as specified on Schedule 3.16, no
extension of a statute of limitations relating to Taxes is in effect with
respect to ViComp.
(d) Other Tax Representations. Except as set forth on Schedule 3.16:
-------------------------
(i) ViComp has not made any election under Section 341(f) of
the Code (or any comparable state income tax provision);
(ii) ViComp has not agreed to and is not required to make any
adjustment pursuant to Section 481(a) of the Code by reason of a change in
accounting method initiated by ViComp;
(iii) there are no elections in effect made by or with respect
to ViComp pursuant to Section 338 or Section 336(e) of the Code or the
regulations thereunder;
(iv) ViComp is not, nor has it been, a member of any
consolidated group for purposes of filing tax returns or paying Taxes at any
time; and
(v) there are no liens for delinquent Taxes upon the assets of
ViComp.
3.17 Insurance. Schedule 3.17 contains a complete and accurate list of
---------
all policies or binders of fire, liability, builder's risk, property, worker's
compensation, product liability, and other forms of insurance (showing as to
each policy or binder the carrier, policy number, coverage limits, expiration
dates, annual premiums and a general description of the type of coverage
provided) maintained by or on behalf of ViComp. ViComp maintains insurance
which provides, and during the periods of coverage provided, coverage to the
extent and in the manner
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customary for the industry in which ViComp is engaged. ViComp is not in default
under any of such policies or binders, and ViComp has not failed to give any
notice or to present any claim under any such policy or binder in a due and
timely fashion. All policies and binders are in full force and effect on the
date hereof and shall be kept in full force and effect through the Effective
Date.
3.18 Compliance With Environmental Laws. ViComp's operations have
----------------------------------
complied with all applicable environmental laws and regulations since ViComp's
inception. The ViComp MPEG-I chip (the "ViComp Chip") is being designed with
the intention that its manufacturing specifications will permit commercial
manufacture of the chip in the United States and other contemplated countries in
compliance with all applicable environmental laws and regulations, and ViComp
has no reason to believe that the ViComp Chip will fail to meet this
requirement.
3.19 Contracts and Commitments. Except as set forth on Schedule 3.19,
-------------------------
ViComp is not a party to any:
(a) Employment contracts or severance agreements, including, without
limitation, contracts (i) to employ, terminate or compensate its executive
officers or other personnel or other contracts with its present or former
officers, directors or shareholders or (ii) that will result in the payment by
ViComp, or the creation of any commitment or obligation (absolute or contingent)
to pay on its behalf, any severance, termination, "golden parachute," or other
similar payments to any of its present or former personnel following termination
of employment or otherwise as a result of the consummation of the transactions
contemplated by this Agreement or otherwise;
(b) Options or other contracts with respect to the purchase or sale
of any real property, whether it shall be the grantor or grantee thereunder
which will require payment of $5,000 or more;
(c) Contracts involving expenditures, actual or potential, of $10,000
or more and not cancelable by ViComp (without liability) within 30 calendar
days;
(d) Other contracts involving the payment of $10,000 or more;
(e) Promissory notes, loans, agreements, indentures, evidences of
indebtedness, letters of credit, guarantees, or other instruments relating to an
obligation to pay money, individually equal to or in excess of or in the
aggregate in excess of $10,000, whether it shall be the borrower, lender or
guarantor thereunder or whereby any assets are pledged;
(f) Contracts containing covenants limiting its freedom or the
freedom of any of its officers, directors, or shareholders to engage in any line
of business or compete with any Person; or
(g) Leases or subleases of real property.
13
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ViComp is not (and, to the knowledge of ViComp, no other party is) in
material breach or violation of, or default under, any material contract to
which it is a party.
3.20 Transactions with Certain Persons. Except as set forth on Schedule
---------------------------------
3.20, or as contemplated by this Agreement, no officer, director, employee or
shareholder of ViComp or any Affiliate of ViComp presently has a direct or
indirect interest in any transaction to which ViComp is a party in which the
amount involved exceeds $5,000, including, without limitation, any contract,
agreement or other arrangement (a) providing for the furnishing of services by,
(b) providing for the purchase or rental of material real or personal property
from, (c) providing for the loan or advance of money to or from, or (d)
otherwise requiring payments to (other than for services as officers, directors
or employees of ViComp) any Person in which any such Person has a direct or
indirect material interest as a shareholder, officer, director, trustee or
partner.
3.21 Assets. Except as set forth on Schedule 3.21, ViComp has good and
------
marketable title to, or valid and subsisting leasehold interests in, its
material assets necessary for the conduct of its business as presently
conducted, free of all material encumbrances.
3.22 Board Approval and Recommendation. By a unanimous vote the Board of
---------------------------------
Directors of ViComp (a) approved and adopted this Agreement, (b) determined that
the transactions contemplated by this Agreement are in the best interests of
ViComp and the Shareholders and (c) resolved to recommend that the Shareholders
approve this Agreement and the transactions contemplated hereby.
3.23 Shareholder Investment Representations. Each Shareholder who
--------------------------------------
receives Digital Common Stock in connection with the transactions contemplated
by this Agreement represents that (i) he is an accredited investor as defined in
Regulation D under the Securities Act, or (ii) by reason of his business and
financial experience, and the business and financial experience of those persons
unaffiliated with Digital retained by him, if any, to advise him with respect to
his investment in the shares of Digital Common Stock, such Shareholder, together
with his advisers, have such knowledge, sophistication and experience in
business and financial matters as to be capable of evaluating the merits and
risk of the prospective investment, and that he is acquiring the shares of
Digital Common Stock for his own account for investment and not with a view to
the distribution thereof except in compliance with the Securities Act or an
exemption available thereunder. Each Shareholder who receives Digital Common
Stock in connection with the transactions contemplated by this Agreement
understands and agrees that such shares of Digital Common Stock have not been
registered under the Securities Act, will be subject to the Registration Rights
Agreement in substantially the form attached hereto as Exhibit I (the
"Registration Rights Agreement") and may be resold only pursuant to this
Agreement if registered pursuant to the applicable provisions of the Securities
Act or if an exemption from registration is available.
3.24 Purchases and Sales. Except as set forth in Schedule 3.24, since
-------------------
August 31, 1996, ViComp has not placed any orders for materials, merchandise or
supplies in exceptional or unusual quantities based upon past operating
practices or has entered into contracts with
14
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customers under conditions relating to price, terms of payment, time of
performance or like matters materially different from the conditions regularly
and usually specified in contracts entered into by ViComp in the ordinary course
of business prior to such date.
3.25 Status of Development of ViComp Chip. There is no reason to believe
------------------------------------
that ViComp's development schedule (which calls for commencement of commercial
manufacturing of the ViComp Chip in July 1997) cannot be met in accordance with
the provisions thereof, except to the extent that the development of the ViComp
Chip is delayed or prevented, in whole or in part, by any force beyond ViComp's
control, including without limitation (i) acts of God, (ii) strikes, (iii) labor
disputes, (iv) laws, ordinances, rules or regulations, (v) unavailability of
necessary materials, facilities and equipment in the open market, or (vi) any
other similar occurrence which has a material adverse impact on the ability of
ViComp to perform its obligations under this Agreement.
3.26 Intellectual Property and Technology.
------------------------------------
(a) Except as described on Schedule 3.26(a), ViComp owns, or is
licensed to use, all of its Intellectual Property (as defined herein) and
Technology (as defined herein) used in the conduct of its business as now
conducted and no service marks or trade names or registration or applications
therefor, trademarks, trademark registrations or applications, copyrights,
copyright registrations or applications, patents, patent registrations or
applications or otherwise are necessary for the conduct of its business as
presently conducted by it.
(b) Except as disclosed in Schedule 3.26(b), ViComp is not obligated
pursuant to any contract to make any payments by way of royalties, fees or
otherwise with respect to any of its Intellectual Property or Technology and
ViComp has not received any written notice of any written claim that it has
infringed upon or is in conflict with any Intellectual Property or Technology of
any third party. Except as disclosed in Schedules 3.26(a) or 3.26(b), ViComp,
by virtue of the business conducted by it, is not in violation of any service
mark or trade name or registration or application therefor, trademark, trademark
registration or application, copyright, copyright registration or application,
patent, patent registration or application of any other person. Except as
disclosed in Schedules 3.26(a) or 3.26(b), the use by ViComp of its Technology
does not infringe any trade secret or patent of any third party.
(c) None of the rights of ViComp to its Intellectual Property or
Technology will be impaired in any way by the consummation of the Merger or by
any other transactions contemplated by this Agreement, and all of the rights of
ViComp to its Intellectual Property and Technology will be fully enforceable by
ViComp after the consummation of the transactions contemplated by this Agreement
to the same extent as such rights would have been enforceable by ViComp prior to
the consummation of the Merger or the other transactions contemplated hereby,
without the consent or agreement of any other party. For the purposes of this
Section 3.26 (c) "Intellectual Property" shall mean all of ViComp's right, title
and interest in and to (i) all patents, patent registrations, patent
applications, trademarks, trademark registrations, trademark applications, trade
names, copyrights, copyright applications, copyright registrations, franchises,
permits and licenses used by, or available for use by ViComp, and all rights to
sue
15
<PAGE>
for past infringement, if any and (ii) "Technology" shall mean all of ViComp's
processes, formulae, proprietary technology, inventions, trade secrets, know-
how, product descriptions and specifications used by, or available for use by
ViComp.
3.27 Obligation to Former Employer; No Breach or Conflict. No Shareholder
----------------------------------------------------
has, during such Shareholder's employment with ViComp, improperly used or
disclosed any confidential information or trade secrets, if any, of any former
or concurrent employer, and such Shareholder has not brought onto the premises
of ViComp any unpublished documents or any property belonging to any former or
concurrent employer unless consented to in writing by that former or concurrent
employer. No Shareholder's performance of all the terms of this Agreement and
as an employee to ViComp has breached any agreement to keep in confidence
information acquired by such Shareholder in confidence or in trust prior to such
Shareholder's employment by ViComp.
3.28 No Shareholder has any claim against ViComp based on (i) such
Shareholder's employment with or termination of employment by ViComp, (ii) such
Shareholder's investment in or status as a Shareholder of ViComp or (iii) any
other matter.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF DIGITAL AND DIGITAL SUB
---------------------------------------------------------
Except as set forth in a Disclosure Schedule delivered by Digital
hereunder, and except for the transactions contemplated by this Agreement,
Digital hereby represents and warrants to ViComp and the Shareholders as
follows:
4.1 Organization of Digital and Digital Sub. Each of Digital and Digital
---------------------------------------
Sub is a corporation duly organized, validly existing and in good standing under
the laws of the State of Delaware, has full corporate power and authority to
conduct its business as it is presently being conducted and to own, lease and
operate its properties and assets, and is duly qualified to do business and is
in good standing in each jurisdiction in which the ownership of its property or
the conduct of its business requires such qualification, except for
jurisdictions in which the failure to be so qualified or to be in good standing
would not have a material adverse effect on the business, prospects or financial
condition of Digital, in the case of Digital, and Digital Sub, in the case of
Digital Sub. Copies of the Certificate of Incorporation and Bylaws of Digital
and Digital Sub, and all amendments thereto, heretofore delivered to ViComp are
complete and correct and in full force and effect as of the date hereof.
4.2 Digital and Digital Sub Capital Stock. The authorized capital stock
-------------------------------------
of Digital consists of 60,000,000 shares of common stock, par value $.0001 per
share ("Digital Common Stock"), 17,500,933 shares of which were issued and
outstanding as of the date of this Agreement, and 5,000,000 shares of preferred
stock, par value $.0001 per share ("Digital Preferred Stock"), none of which are
issued and outstanding. No shares of any other class or series of capital stock
of Digital are authorized, issued or outstanding. All of the outstanding shares
of Digital Common Stock have been duly and validly authorized and issued, are
fully paid
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<PAGE>
and nonassessable. Except as set forth in the SEC Reports, there are no
subscriptions, options, warrants, calls, commitments, preemptive rights or other
rights of any kind outstanding for the purchase of, nor any securities
convertible into or exchangeable for, any securities of Digital. The authorized
capital stock of Digital Sub consists solely of 1,000 shares of common stock,
par value $.0001 per share, 100 shares of which were issued and outstanding as
of the date of this Agreement and are owned beneficially and of record by
Digital.
4.3 Authorization Relative to this Agreement. Each of Digital and
----------------------------------------
Digital Sub has the requisite corporate power and authority to enter into this
Agreement, to perform its obligations hereunder and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by the Boards of Directors of each of Digital and Digital Sub
and by Digital, as the sole stockholder of Digital Sub, and no other corporate
proceedings on the part of Digital or Digital Sub are necessary to authorize
this Agreement and the transactions contemplated hereby. This Agreement has
been duly executed and delivered by each of Digital and Digital Sub and,
assuming this Agreement constitutes a valid and binding agreement of the other
parties hereto, constitutes a valid and binding obligation of Digital and
Digital Sub, enforceable against Digital and Digital Sub in accordance with its
terms, except to the extent that its enforceability may be limited by applicable
bankruptcy, insolvency, reorganization or other laws affecting the enforcement
of creditors' rights generally or by general equitable principles.
4.4 Absence of Certain Changes or Events. Since June 30, 1996, and
------------------------------------
except as set forth in the SEC Reports, there has not been any material adverse
change in the business, prospects or financial condition of Digital and neither
Digital nor Digital Sub has:
(a) amended or changed its Certificate of Incorporation, Bylaws or
other organizational documents;
(b) agreed to take, whether in writing or otherwise, any action
which, if taken prior to the date hereof, would have made any representation or
warranty in this Article IV untrue or incorrect; or
(c) declared, set aside, made or paid any dividend in respect of its
capital stock or redeemed any of its capital stock.
4.5 Permits. Digital has all material permits and licenses required to
-------
conduct its business as presently being conducted, and all such permits and
licenses are valid and in full force and effect. Other than in connection with
or in compliance with the provisions of the Securities Act, the Exchange Act or
the securities or blue sky laws of the various states and except as disclosed on
Schedule 4.5 hereto, no material notice to, declaration, filing or registration
with or permit or license from, any domestic governmental or regulatory body or
authority, or any other Person, is required to be made or obtained by Digital in
connection with the execution, delivery or performance of this Agreement and the
consummation of the transactions contemplated hereby.
17
<PAGE>
4.6 No Conflict or Violation. Subject in the case of subsections (b),
------------------------
(c) and (e) below to receipt of the licenses and permits contemplated by Section
4.5, neither the execution and delivery of this Agreement nor the consummation
of the transactions contemplated hereby will result in (a) a violation of or a
conflict with any provision of the Certificates of Incorporation or Bylaws of
Digital or Digital Sub, (b) a breach of, or a default under, any material term
or provision of any material contract, indebtedness, encumbrance, permit or
license to which Digital is a party or is subject or by which any assets of
Digital or Digital Sub are bound, including, without limitation, any such breach
or default which would interfere in any way with its ability to consummate the
transactions contemplated by this Agreement, (c) a material violation by Digital
or Digital Sub of any statute, rule, regulation, ordinance, code, order,
judgment, writ, injunction, decree or award, including any violation which would
interfere with its ability to consummate the transactions contemplated by this
Agreement, (d) the imposition of any material encumbrance, restriction or charge
on the business or assets of Digital or Digital Sub, or (e) give rise to any
right of termination, cancellation or acceleration under any material contract
or other agreement to which Digital or Digital Sub is a party or by or to which
it or any of its material assets or properties may be bound or subject.
4.7 SEC Filings; Digital Financial Statements.
-----------------------------------------
(a) Digital has timely filed all of the SEC Reports. The SEC Reports
(i) were each prepared in accordance with, and at the time of filing complied in
all material respects with, the requirements of the Securities Act or the
Exchange Act, as the case may be, and the rules and regulations thereunder, and
(ii) did not at the time they were filed contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein, or
necessary in order to make the statements therein, in light of the circumstances
under which they were made, not misleading.
(b) Each of the consolidated financial statements (including, in each
case, any related notes thereto) contained in the SEC Reports has been prepared
in accordance with GAAP applied on a consistent basis throughout the periods
involved (except as may be indicated in the notes thereto and except that the
quarterly financial statements do not contain all of the footnote disclosures
required to be contained in audited financial statements prepared in accordance
with GAAP), and each presents fairly the consolidated financial position of
Digital at the respective dates thereof and the consolidated results of
operations and changes in cash flows for the periods indicated, except that the
unaudited interim financial statements were or are subject to normal and
recurring year-end adjustments which were not or are not expected to be material
in amount.
4.8 Board Approval. By a vote of the directors present at a meeting of
--------------
the Board of Directors (which meeting was duly called and held and at which a
quorum was present at all times), or by unanimous written consent, the Boards of
Directors of both Digital and Digital Sub approved and adopted this Agreement.
4.9 Validity of Shares Issued to the Shareholders. The shares of Digital
---------------------------------------------
Common Stock to be issued to the Shareholders hereunder will, when issued in
accordance with this Agreement, be duly and validly issued, fully paid and
nonassessable shares free and clear of any
18
<PAGE>
and all encumbrances, and will be issued in compliance with all applicable
federal and state securities laws.
4.10 Liabilities. Except as disclosed in the SEC Reports, Digital does
-----------
not have any material liabilities, obligations or commitments of any nature
(whether absolute, accrued, contingent or otherwise and whether matured or
unmatured), including, without limitation, Tax liabilities due, except (a)
liabilities reflected in, reserved against or disclosed in the footnotes of, its
audited consolidated financial statements for the fiscal year ended December 31,
1995 and its unaudited consolidated financial statements for the quarter ended
June 30, 1996 as filed with the SEC (the "Digital Financial Statements"), (b)
obligations or commitments arising under material contracts, and (c)
liabilities, obligations or commitments incurred since June 30, 1996 in the
ordinary course of Digital's business and consistent with Digital's past
practices. There are no material transactions that have not been properly
recorded in the accounting records underlying the Digital Financial Statements.
There have been no (a) "irregularities" (within the meaning of Statement on
Auditing Standards No. 53) involving management or those employees who have
significant roles in the internal control structure, or (b) irregularities
involving other employees that would have a material effect on the Digital
Financial Statements. There are no material liabilities or gain or loss
contingencies that are required to be accrued or disclosed by Statement of
Financial Accounting Standards No. 5 that have not been accrued or disclosed.
Digital has no plans or intentions that may materially affect the carrying value
or classification of assets and liabilities.
4.11 No Activities. Digital Sub was formed solely to participate in the
-------------
transactions contemplated hereby and has not conducted any operations or
incurred any liabilities or obligations other than in connection with its
formation and the transactions contemplated hereby.
ARTICLE V
COVENANTS OF EACH PARTY
-----------------------
ViComp and the Shareholders and Digital each covenant with the other for
the period from the date hereof through the Effective Date as follows:
5.1 Access to Information. Each of ViComp and Digital shall, upon
---------------------
reasonable notice, afford one another and one another's Representatives,
reasonable access during normal business hours, throughout the period prior to
the earlier of the Effective Date or the Termination Date (as hereinafter
defined), to its personnel, facilities, contracts, commitments, books, computer
software application systems, files and records and to furnish such financial
and operating data and other information with respect to its business, assets
and properties, and shall use its best efforts to cause its Representatives to
furnish promptly to the other party and its Representatives such additional
financial and operating data and other information as to its business and
properties as the other or its duly authorized Representatives may from time to
time reasonably request.
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5.2 Notification of Certain Matters. From the date hereof through the
-------------------------------
Effective Date, ViComp and Digital shall each give prompt notice to the other of
(a) the occurrence, or failure to occur, of any event which occurrence or
failure would be likely to cause any representation or warranty contained in
this Agreement or in any exhibit or schedule hereto to be untrue or inaccurate
in any material respect and (b) any material failure of ViComp, or Digital, as
the case may be, or any of their respective Affiliates, shareholders or
Representatives, to comply with or satisfy any covenant, condition or agreement
to be complied with or satisfied by it under this Agreement or any exhibit or
schedule hereto; provided, however, that such disclosure shall not be deemed to
cure any breach of a representation, warranty, covenant or agreement or to
satisfy any condition, but each party shall use all reasonable efforts to cure
such failure.
5.3 Public Statements and Press Releases. Except as provided for
------------------------------------
hereinbelow, Digital and ViComp shall not from and after the date hereof make,
issue or release any public announcement, press release, statement or
acknowledgment of the existence of, or reveal publicly the terms, conditions and
status of, the transactions provided for herein, without the prior written
consent of the other party as to the content and time of release of such
statement or announcement; provided, however, that in the case of announcements,
statements, acknowledgments or revelations which any party is required by law to
make, issue or release, the making, issuing or releasing of any such
announcement, statement, acknowledgment or revelation by the party so required
to do so by law shall not constitute a breach of this Agreement if such party
shall have given, to the extent reasonably possible, not less than one calendar
day prior notice to the other party, and shall have attempted, to the extent
reasonably possible, to clear such announcement, statement, acknowledgment or
revelation with the other party. Each party hereto agrees that it will not
unreasonably withhold any such consent or clearance.
5.4 Confidential Information.
------------------------
(a) Preservation of Confidentiality. In connection with the
-------------------------------
negotiation of this Agreement, the preparation for the consummation of the
transactions contemplated hereby, and the performance of obligations hereunder,
each of the parties hereto acknowledges that it will have access to confidential
information relating to the other parties. Each party shall treat such
information as confidential, preserve the confidentiality thereof and not
disclose such information, except to its respective Representatives and
Affiliates in connection with the transactions contemplated hereby. Each party
agrees to maintain in confidence, and not to disclose to any third party, any
ideas, methods, developments, inventions, improvements and business plans and
information which are the confidential information of the other party. If,
however, confidential information is disclosed, the disclosing party shall
immediately notify the other parties in writing and take all reasonable steps
required to prevent further disclosure.
(b) Property Right in Confidential Information. Until the Effective
------------------------------------------
Date or the Termination Date (as hereinafter defined), all confidential
information shall remain the property of the party who originally possessed such
information. In the event of the termination of this Agreement for any reason
whatsoever, ViComp shall return to Digital, and Digital shall
20
<PAGE>
return to ViComp, all documents, work papers and other material (including all
copies thereof) obtained from the other party in connection with the
transactions contemplated hereby and will use all reasonable efforts, including,
without limitation, instructing its employees and others who have had access to
such information, to keep confidential and not to use any such information,
unless such information is now, or is hereafter disclosed, through no act or
omission of such party, in any manner making it available to the general public.
If Digital or any of its Affiliates is required by legal process or by operation
of law to disclose any confidential information in anticipation of a possible
acquisition of ViComp by Digital or any such Affiliate, Digital shall provide
ViComp with written notice of such request at least 48 hours prior to making
such disclosure (or, if it is not practicable to give at least 48 hours' prior
notice, written notice shall be given as promptly as practicable) and, without
any need to obtain the consent of such other parties, shall be entitled to make
such disclosure. If any party is compelled by legal process to disclose any
confidential information, such party shall provide the other parties with prompt
written notice of such request and, without any need to obtain the consent of
such other parties, shall be entitled to make such disclosure.
(c) Termination of Agreement. Subject to the requirements of law,
------------------------
each party hereto and its Affiliates shall, and shall use all reasonable efforts
to cause their Representatives who obtain such information from the other party
to, hold in confidence all such non-public information until such time as such
information is otherwise publicly available, and, if this Agreement is
terminated and if so requested by another party, each party and its Affiliates
shall, and shall use all reasonable efforts to cause their Representatives who
obtain such information to, deliver to such other party all documents, work
papers and other material (including copies of extracts and summaries thereof)
obtained by or on behalf of any of them directly or indirectly as a result of
this Agreement or in connection herewith, whether so obtained before or after
the execution hereof.
(d) Digital Business. Digital develops, manufactures and markets
----------------
digital video compression and decompression hardware and software for
entertainment, business and educational uses (the "Digital Business"). ViComp
is in the business of developing, manufacturing and selling integrated circuits
for use in video CD players of a type manufactured and sold by Digital. The
parties hereto agree and acknowledge that Digital intends to continue developing
its encoding boards and video CD players and that receipt of any confidential
information from ViComp will not prevent Digital from continuing the Digital
Business or from developing, manufacturing or selling integrated circuits or
other components for use in video CD players or other products in the future.
5.5 Rule 144 Reporting. Digital agrees to use its best efforts to:
------------------
(a) Make and keep public information available as those terms are
understood and defined in Rule 144 under the Securities Act, at all times from
and after the Effective Date;
(b) File with the SEC in a timely manner all reports and other
documents required of Digital under the Securities Act and the Exchange Act; and
21
<PAGE>
(c) So long as any Shareholder owns any Digital Common Stock issued
to such Shareholder pursuant to this Agreement, inform such person upon request
as to its compliance with the reporting requirements of Rule 144 and of the
Securities Act and the Exchange Act, and provide a copy of the most recent
annual or quarterly report of Digital and such other reports and documents so
filed as may reasonably be requested in availing such Shareholder of any rule or
regulation of the SEC allowing a sale of any such securities without
registration.
5.6 Registration Rights. (a) If, at any time during the period ending 24
-------------------
calendar months from the Effective Date, the Company proposes to register shares
of Digital Common Stock under the Securities Act on Forms S-1, S-2, S-3 or SB-2
or any successor or similar forms (except for (i) registrations on such forms
solely for registration of Digital Common Stock in connection with any warrants,
option, employee benefit or dividend reinvestment plan or a merger or
consolidation, (ii) registrations of Digital Common Stock relating to the
exercise of warrants that were included in the units sold in Digital's initial
public offering and (iii) any underwritten public offering for which a
registration statement is filed with the SEC within 90 days of the Effective
Date) in connection with an underwritten public offering, the Shareholders shall
have the right, upon written request, to participate by registering and selling
all or a portion of the Digital Common Stock issued in connection with the
consummation of the Merger. The right of the Shareholders to participate in any
such offering shall be subject to the qualifications and limitations set forth
in the Registration Rights Agreement, including without limitation the right of
the lead underwriter in any such offering to reduce pro rata the number of
--- ----
shares of Digital Common Stock offered by the Shareholders, if in the opinion of
such underwriter the number of such shares proposed to be registered in such
offering would adversely affect its ability to effect such offering. All
expenses of any such offering shall be borne pro rata by all persons, including
--- ----
the Shareholders, registering securities in connection with such offering.
(b) If at any time commencing ten months from the date of the
Company's initial public offering on Form SB-2, the Company shall receive from
holders of at least 50% of the shares of Digital Common Stock held by
Shareholders other than Dr. Edmund Sun, a written request that the Company
effect any registration of Digital Common Stock, the Company will:
(i) promptly give written notice of the proposed registration
to all other Shareholders; and
(ii) file a registration statement (on Form S-3 or any successor
form or on Form S-1 if Form S-3 is not then available) with the SEC within 75
days after the initiating Shareholders request and use its best efforts to
effect such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act) as would permit or
facilitate the sale and distribution of such shares of Digital Common Stock as
are specified in such request, together with all Digital Common Stock of any
Shareholders joining in such request as are
22
<PAGE>
specified in a written request received by the Company within 30 days after
receipt of such written notice from the Company;
Provided, however, that the Company shall not be obligated to take any
action to effect any such registration:
A. In any particular jurisdiction in which the Company
would be required to execute a general consent to service of process in
effecting such registration, qualification or compliance unless the Company is
already subject to service in such jurisdiction and except as may be required by
the Securities Act;
B. If, at such time as a request for registration
pursuant to Section 3.1 of the Registration Rights Agreement is pending, the
Company has already effected one such registration pursuant to Section 3.1 of
the Registration Rights Agreement, and such registration has been declared or
ordered effective; or
C. During the period starting with the date 60 days
prior to the filing of, and ending on a date three months following the
effective date of, a registration statement (other than with respect to a
registration statement relating to a Rule 145 transaction, an offering solely to
employees or any other registration which is not appropriate for the
registration of Digital Common Stock held by Shareholders).
5.7 Termination of Stock Option Plan Prior to Effective Date.
--------------------------------------------------------
(a) Prior to the Effective Date, all outstanding options to purchase
any common stock or other securities of ViComp (whether vested or unvested) and
any agreements under which ViComp would be obligated to grant options to
purchase any securities of ViComp will be cancelled. Concurrently with the
Closing, Digital will grant to each of the Shareholders listed on Exhibit A the
number of options to purchase shares of Digital Common Stock shown opposite
their respective names on Exhibit A (the "Shareholder Digital Options"). The
Shareholder Digital Options will have an exercise price equal to the closing
price of the Digital Common Stock on the Nasdaq National Market on the Effective
Date and will vest in accordance with the customary vesting schedule prescribed
for options granted to Digital employees under Digital's 1993 Stock Option Plan.
The options will be exercisable for a period of 10 years from the date of grant.
The Shareholder Digital Options will be granted as part of a new Digital
employee option plan (the "Digital 1996 Option Plan"), which will be adopted by
Digital's Board of Directors prior to the Closing and will be submitted to the
shareholders of Digital for approval within twelve months following such
adoption, and no Shareholder Digital Options will be exercisable until such
shareholder approval is obtained. The Digital 1996 Option Plan will have
vesting, forfeiture and payment provisions substantially identical to those
contained in Digital's 1993 Stock Option Plan. Digital will reserve under the
Digital 1996 Option Plan a total of 250,000 options for future grants to the
Shareholders or any new employees hired by Digital to work on the ViComp chip
project, with any such grants and the terms and conditions thereof, to be at the
sole and absolute discretion of Digital's Board of Directors or the committee
thereof responsible for administering the Digital 1996 Option Plan.
23
<PAGE>
(b) ViComp agrees that its employee benefit plans, programs and
arrangements (in addition to those for non-employee directors), and if required
by such plans, programs and arrangements, any agreements entered thereunder and
awards and options granted thereunder, shall be terminated, to the extent
necessary or appropriate, to reflect the transactions contemplated by this
Agreement.
5.8 Invention, Non-Disclosure and Non-Competition Agreements. At or
--------------------------------------------------------
prior to the Effective Date, each of James W. Kirkpatrick, Jr., Michael Mruzik
and Mihailo Stojancic shall have executed an invention, non-disclosure and non-
competition agreement (the "Invention, Non-Disclosure and Non-Compete
Agreements") in favor of Digital, in substantially the form attached hereto as
Exhibit J.
5.9 Sun Escrow Agreement. At the Effective Date, Dr. Edmund Sun shall
--------------------
have executed the Escrow Agreement and 140,760 of the shares of Digital Common
Stock issued to Dr. Sun in connection with the consummation of the Merger shall
be placed in the Sun Escrow.
5.10 Shareholder Escrow Agreement. At the Effective Date, each
----------------------------
Shareholder, other than Dr. Edmund Sun, shall have executed a Shareholder Escrow
Agreement and 10% of the shares of Digital Common Stock issued to such
Shareholder in connection with the consummation of the Merger shall be placed in
the Shareholder Escrow.
ARTICLE VI
ADDITIONAL COVENANTS OF VICOMP AND THE SHAREHOLDERS
---------------------------------------------------
6.1 Conduct of Business. From the date hereof through the Effective Date
-------------------
or the date, if any, on which this Agreement is earlier terminated pursuant to
Section 10.1 (the "Termination Date"), except as contemplated or as may be
required by this Agreement, or as set forth on Schedule 6.1, or as consented to
by Digital in writing, ViComp shall diligently carry on its business and in the
ordinary course only, and will use its best efforts to preserve its present
business organization intact and to keep available the services of its present
officers, agents or employees with (nothing herein implying an obligation of
ViComp to maintain or retain any specific officer, agent or employee), and
preserve its present relationships with customers and other Persons having
business dealings with it, and will not take any action inconsistent with this
Agreement or with the consummation of the transactions contemplated hereby.
Without limiting the generality of the foregoing, ViComp shall not, except as
specifically contemplated by this Agreement:
(a) change or amend its Certificate of Incorporation or Bylaws;
(b) enter into, extend, modify, terminate or renew any (i) material
contract, except in the ordinary course of business, or (ii) any contract
involving $10,000 or more;
(c) sell, assign, transfer, convey, lease, mortgage, pledge or
otherwise dispose of or encumber any material assets, or any interests therein;
24
<PAGE>
(d) incur any obligations or liability for long-term interest bearing
indebtedness, or incur any other obligation or liability of $10,000 or more
except in the ordinary course of business, or any obligations or liability of
$10,000 or more;
(e) (i) take any action with respect to the grant of any bonus,
severance or termination pay (otherwise than pursuant to policies or agreements
of ViComp in effect on the date hereof that are described on the Disclosure
Schedule) or with respect to any increase of benefits payable under its
severance or termination pay policies or agreements in effect as of August 31,
1996 or increase in any manner the compensation or fringe benefits of any
employee or pay any benefit not required by any existing ViComp Employee Plan or
policy;
(ii) make any change in the key management structure of
ViComp, including, without limitation, the hiring of additional officers or the
termination without cause of existing officers;
(iii) adopt, enter into or amend any ViComp Employee Plan,
agreement (including, without limitation, any collective bargaining or
employment agreement), trust, fund or other arrangement for the benefit or
welfare of any employee;
(f) acquire by merger or consolidation with, or merge or consolidate
with, or purchase substantially all of the assets of, or otherwise acquire any
material assets or business of any corporation, partnership, association or
other business organization or division thereof;
(g) declare, set aside, make or pay any dividend or other
distribution in respect of ViComp's capital stock;
(h) fail to expend funds for budgeted capital expenditures or
commitments;
(i) willingly allow or permit to be done, any act by which any of
ViComp's insurance policies may be suspended, impaired or canceled;
(j) fail to pay its accounts payable and any debts owed or
obligations due to it, or pay or discharge when due any liabilities, in the
ordinary course of business;
(k) enter into, renew, modify or revise any agreement or transaction
with any of its Affiliates;
(l) fail to maintain any assets in substantially their current state
of repair, excepting normal wear and tear or failure to replace consistent with
ViComp's past practice inoperable, worn-out or obsolete or destroyed assets;
(m) make any loans or advances to any partnership, firm, corporation,
officer, director or Affiliate, or, except for expenses incurred in the ordinary
course of business, any individual who is not an officer, director or Affiliate;
25
<PAGE>
(n) make any material income tax election or settlement or compromise
with tax authorities;
(o) fail to comply in any material respect with all laws applicable
to it;
(p) intentionally do any other act which would cause any
representation or warranty of ViComp in this Agreement to be or become untrue in
any material respect;
(q) issue any shares of ViComp Common Stock, any shares of ViComp
Preferred Stock or any other equity interest in ViComp, or any options,
warrants, rights or other securities convertible into, or exercisable or
exchangeable for, ViComp Common Stock, ViComp Preferred Stock or other equity
interest in ViComp; or
(r) enter into any agreement, arrangement or understanding or
otherwise become obligated, to do any action prohibited hereunder.
6.2 No Solicitation. Prior to the Effective Date (or the earlier
---------------
termination of this Agreement in accordance with its terms), neither ViComp nor
any of its Affiliates, nor any of their respective Representatives, shall
directly or indirectly, solicit or initiate any discussions, submissions of
proposals or offers or negotiations with, or, subject to any fiduciary
obligations under applicable law after taking into account the advice of counsel
with respect thereto, participate in any negotiations or discussions with, or
provide any information or data of any nature whatsoever to, or otherwise
cooperate in any other way with, or assist or participate in, facilitate or
encourage any effort or attempt by, any Person, other than Digital and its
Representatives and Affiliates, concerning any Alternative Transaction with
respect to ViComp. ViComp shall promptly notify Digital if any proposal, offer,
inquiry or other contact is received by, any information is requested from, or
any discussions or negotiations are sought to be initiated or continued with,
ViComp in respect of an Alternative Transaction, and shall, in any such notice
to Digital, indicate the identity of the offeror and the terms and conditions of
any proposals or offers or the nature of any inquiries or contacts, and
thereafter shall keep Digital informed, on a current basis, of the status and
terms of any such proposals or offers and the status of any such discussions or
negotiations. ViComp shall not release any third party from, or waive any
provision of, any confidentiality or standstill agreement to which ViComp is a
party.
6.3 Delivery of ViComp Common Stock and ViComp Preferred Stock. ViComp
----------------------------------------------------------
and the Shareholders shall deliver to Digital stock certificates representing
all issued and outstanding capital stock of ViComp at or prior to the Effective
Date.
ARTICLE VII
ADDITIONAL COVENANTS OF DIGITAL
-------------------------------
7.1 Conduct of Business. From the date hereof through the Effective Date
-------------------
or the Termination Date, except as contemplated or as may be required by this
Agreement, or as set
26
<PAGE>
forth on Schedule 7.1, or as consented to by ViComp, Digital shall diligently
carry on its business in the ordinary course, and will use its best efforts to
preserve its present business organization intact and to keep available the
services of its present officers, agents or employees (nothing herein implying
an obligation of Digital to maintain or retain any specific officer, agent or
employee), and preserve its present relationships with Persons having business
dealings with it, and will not take any action inconsistent with this Agreement
or with the consummation of the transactions contemplated hereby.
7.2 Federal Income Tax Treatment. It is intended that the Merger qualify
----------------------------
as a "reorganization" under Sections 368(a)(1)(A) and (a)(2)(E) of the Code.
Digital and Digital Sub shall (and, following the Effective Date, Digital shall
cause ViComp to) take no action with respect to the capital stock, assets or
liabilities of ViComp (including the filing of any tax return) that would cause
the Merger to fail to qualify as a "reorganization" as so defined. Without
limiting the generality of the foregoing, following the Effective Date, Digital
shall cause ViComp to either continue the historic business of ViComp or to use
a significant portion of ViComp's historic business assets in a business.
7.3 Digital Common Stock in Escrow. Unless and until (and then only to
------------------------------
the extent of) any of the shares of Digital Common Stock held in the Sun Escrow
and the Shareholder Escrow pursuant to Section 2.13 of this Agreement are used
to satisfy an indemnity obligation pursuant to the Sun Escrow Agreement or the
Shareholder Escrow Agreement, (i) Digital will include on its balance sheet as
issued and outstanding shares of Digital Common Stock, and will treat the
Shareholders as the owners of, all the shares of Digital Common Stock to be held
in the Sun Escrow and the Shareholder Escrow, and (ii) each Shareholder shall be
entitled to exercise the voting rights of the shares of Digital Common Stock
held in escrow and attributable to him. If Digital pays any dividend to its
shareholders while any shares of Digital Common Stock are still in the Sun
Escrow or the Shareholder Escrow, (i) such dividends paid with respect to shares
of Digital Common Stock held in escrow shall be distributed currently to the
Shareholder with respect to which the escrowed shares were issued, and (ii)
Digital shall file a Form 1099 with respect to such dividend for each
Shareholder to whom such dividend is paid. Digital will not, for tax purposes,
take the position that there is original issue discount or imputed interest with
respect to the subsequent release from the Sun Escrow or the Shareholder Escrow
to the persons entitled thereto of shares of Digital Common Stock initially held
in escrow.
ARTICLE VIII
CONDITIONS TO THE OBLIGATIONS OF VICOMP
---------------------------------------
AND THE SHAREHOLDERS
--------------------
The obligations of ViComp and the Shareholders to consummate the
transactions provided for hereby are subject, in the sole discretion of ViComp,
to the satisfaction, at or prior to the Effective Date, of each of the following
conditions, any of which may be waived by ViComp:
27
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8.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
warranties of Digital contained in this Agreement shall be true and correct at
and as of the date of this Agreement and at and as of the Effective Date as if
such representations and warranties were made at and as of the Effective Date,
and Digital and Digital Sub shall have performed all agreements and covenants
required hereby to be performed by it prior to or at the Closing.
8.2 Permits. All material permits and licenses, waivers and approvals
-------
from governmental authorities and other parties necessary to permit Digital and
Digital Sub to consummate the transactions contemplated hereby shall have been
obtained.
8.3 Opinion of Counsel. Digital and Digital Sub shall have delivered to
------------------
ViComp an opinion of Troy & Gould Professional Corporation, counsel to Digital
and Digital Sub, in substantially the form attached hereto as Exhibit L.
8.4 Certificates. Digital and Digital Sub will furnish ViComp with such
------------
certificates of its officers and others to evidence compliance with the
conditions set forth in this Article VIII as may be reasonably requested by
ViComp, including a certificate to the effect that all representations and
warranties of Digital and Digital Sub contained in this Agreement are true and
correct in all material respects at and as of the date of this Agreement and at
and as of the Effective Date as if such representations and warranties were made
at and as of the Effective Date, and Digital and Digital Sub shall have
performed in all material respects all agreements and covenants required hereby
to be performed by it prior to or at the Effective Date, which certificate may
include a statement of exceptions listing additional disclosure items not
included in the Disclosure Schedule, which statement shall be delivered to
ViComp at least three business days prior to the Effective Date. Except as
specifically provided in Article XI, such statement of exceptions shall not
modify the representations and warranties for purposes of this Agreement,
including for purposes of Section 8.1.
8.5 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
8.6 No Material Adverse Change. Since June 30, 1996, there shall not
--------------------------
have occurred any change in the business, financial condition or prospects of
Digital, except for changes contemplated hereby or changes which have not,
individually or in the aggregate, had a material adverse effect on the business,
financial condition or prospects of Digital.
8.7 Corporate Resolutions. ViComp shall have received from Digital and
---------------------
Digital Sub certified resolutions adopted by the Boards of Directors of Digital
and Digital Sub approving this Agreement and the transactions contemplated
hereby.
28
<PAGE>
ARTICLE IX
CONDITIONS TO THE OBLIGATIONS OF DIGITAL AND DIGITAL SUB
--------------------------------------------------------
The obligations of Digital and Digital Sub to consummate the transactions
provided for hereby are subject, in the sole discretion of Digital and Digital
Sub, to the satisfaction, at or prior to the Effective Date, of each of the
following conditions, any of which may be waived by Digital:
9.1 Representations, Warranties and Covenants. All representations and
-----------------------------------------
warranties of ViComp and the Shareholders contained in this Agreement shall be
true and correct at and as of the date of this Agreement, and at and as of the
Effective Date as if such representations and warranties were made at and as of
the Effective Date, and ViComp and the Shareholders shall have performed all
agreements and covenants required hereby to be performed by them prior to or at
the Effective Date.
9.2 Permits. All permits and licenses, waivers and approvals from
-------
governmental authorities and other parties, necessary to permit ViComp and the
Shareholders to consummate the transactions contemplated hereby shall have been
obtained.
9.3 Opinion of Counsel. ViComp shall have delivered to Digital an
------------------
opinion of Heller Ehrman White & McAulliffe, counsel to ViComp and the
Shareholders, in substantially the form attached hereto as Exhibit M.
9.4 Certificates. ViComp will furnish Digital with such certificates of
------------
its officers and others to evidence compliance with the conditions set forth in
this Article IX as may be reasonably requested by Digital, including a
certificate to the effect that all representations and warranties of ViComp and
the Shareholders contained in this Agreement are true and correct in all
material respects at and as of the date of this Agreement and at and as of the
Effective Date as if such representations and warranties were made at and as of
the Effective Date, and ViComp and the Shareholders shall have performed in all
material respects all agreements and covenants required hereby to be performed
by it prior to or at the Effective Date, which certificate may include a
statement of exceptions listing additional disclosure items, which statement
shall be delivered to Digital at least two business days prior to the Effective
Date. Except as specifically provided in Article XI, such statement of
exceptions shall not modify the representations and warranties for purposes of
this Agreement, including for purposes of Section 9.1.
9.5 No Governmental Actions. No governmental action or proceeding shall
-----------------------
have been commenced or threatened seeking any injunction, restraining or other
order which seeks to prohibit, restrain, invalidate or set aside the
effectuation of the Merger and no order, statute, rule, regulation, executive
order, stay, decree, judgment or injunction shall have been enacted, entered,
issued, promulgated or enforced by any court or governmental authority which
prohibits or restricts the effectuation of the Merger.
9.6 No Material Adverse Change. Since August 31, 1996, there shall not
--------------------------
have occurred any change in the business, prospects or financial condition of
ViComp, except for
29
<PAGE>
changes contemplated hereby or changes which could not be expected to have a
material adverse effect upon the business, prospects or financial condition of
ViComp.
9.7 Corporate Resolutions. Digital shall have received from ViComp
---------------------
certified resolutions adopted by the Board of Directors of ViComp approving this
Agreement and the transactions contemplated hereby.
9.8 Covenant Not to Compete; etc. The Invention, Non-Disclosure and Non-
-----------------------------
Compete Agreements shall have been duly executed and delivered and have not been
revoked, rescinded or modified.
9.9 Delivery of Stock Certificates. Stock certificates representing all
------------------------------
of the issued and outstanding capital stock of ViComp shall have been delivered
to Digital.
9.10 Escrow Agreements. The Sun Escrow Agreement and the Shareholder
-----------------
Escrow Agreement shall have been duly executed and delivered and have not been
revoked, rescinded or modified.
ARTICLE X
TERMINATION, AMENDMENTS, WAIVERS AND POST-CLOSING COVENANTS
-----------------------------------------------------------
10.1 Termination.
-----------
(a) Termination. Notwithstanding any prior approval by the
-----------
Shareholders, this Agreement and the Merger and other transactions contemplated
hereby may be terminated at any time prior to the Effective Date:
(i) By mutual written consent of the Boards of Directors of
ViComp and Digital;
(ii) By either ViComp or Digital, if the Closing shall not have
occurred on or before October 30, 1996; provided however, that this provision
shall not be available to ViComp if Digital has the right to terminate this
Agreement under clause (iv) of this Section 10.1, and this provision shall not
be available to Digital if ViComp has the right to terminate this Agreement
under clause (iii) of this Section 10.1;
(iii) By ViComp, if there is a breach of any representation or
warranty set forth in Article IV hereof or any covenant or agreement to be
complied with or performed by Digital pursuant to the terms of this Agreement or
an occurrence of any event which results or would result in the failure of a
condition set forth in Article VIII to be satisfied at or prior to the Effective
Date; or
(iv) By Digital, if there is a breach of any representation or
warranty set forth in Article III hereof or of any covenant or agreement to be
complied with or performed
30
<PAGE>
by ViComp or the Shareholders pursuant to the terms of this Agreement or the
occurrence of any event which results or would result in the failure of a
condition set forth in Article IX to be satisfied at or prior to the Effective
Date.
(b) Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 10.1, this Agreement shall forthwith become
void and no party hereto shall have any liability or further obligation to any
other party hereto under or by reason of this Agreement or the transactions
contemplated hereby, except for any breach of this Agreement occurring prior to
or as a result of termination of this Agreement, and except that:
(i) Each party shall redeliver all documents, work papers and
other material of any other party relating to the transactions contemplated
hereby, whether so obtained before or after the execution hereof, to the party
furnishing the same; and
(ii) The provisions of Sections 5.4 and 12.6 shall continue in
full force and effect.
The foregoing provisions shall not limit or restrict the availability of
specific performance or other injunctive relief to the extent that specific
performance or such other relief would otherwise be available to a party
hereunder.
10.2 Amendments. This Agreement may not be amended except by action of
----------
each of the parties hereto set forth in an instrument in writing signed by or on
behalf of each of the parties hereto.
10.3 Waivers. At any time prior to the Effective Date, any party hereto
-------
may (i) extend the time for the performance of any of the obligations or other
acts of any other party hereto, (ii) waive any inaccuracies in the
representations and warranties of any other party contained herein or in any
document delivered pursuant hereto, or (iii) waive compliance with any of the
agreements of any other party or with any conditions to its own obligations.
Any agreement on the part of a party hereto to any such extension or waiver
shall be valid only if set forth in an instrument in writing signed on behalf of
such party by a duly authorized officer. No waiver of any of the provisions of
this Agreement shall be deemed or shall constitute a waiver of any other
provision hereof (whether or not similar), nor shall such waiver constitute a
continuing waiver unless otherwise expressly provided.
ARTICLE XI
INDEMNIFICATION; SURVIVAL
-------------------------
11.1 Survival of Representations, Etc. The representations, warranties,
--------------------------------
covenants and agreements of ViComp and each Shareholder contained herein and the
indemnification by ViComp and the Shareholders under Section 11.2 with respect
thereto, shall survive the Effective Date until the earlier of June 30, 1998 or
the date that Digital files its Form 10-K for the year ending March 31, 1998
with the Securities and Exchange Commission, except for Section 3.16
31
<PAGE>
(Tax Matters) which shall survive the Effective Date for five years. For
purposes of this Article XI, "representations" and "warranties" of ViComp and
each Shareholder shall mean collectively those representations and warranties of
ViComp and each Shareholder set forth in Article III, the Schedules referenced
therein and additional disclosure items, if any, included in or attached to the
certificate delivered pursuant to Section 9.4, and "representations" and
"warranties" of Digital shall mean collectively those representations and
warranties of Digital set forth in Article IV, the Schedules referenced therein
and additional disclosure items, if any, included in or attached to the
certificate delivered pursuant to Section 8.4.
11.2 Indemnification by ViComp and the Shareholders. Subject to, and in
----------------------------------------------
the manner described in, this Article XI, (i) ViComp and Dr. Edmund Sun, jointly
and severally and (ii) each other Shareholder severally, shall indemnify and
hold harmless Digital, Digital Sub and their Representatives and Affiliates (the
"Digital Indemnified Parties") to the fullest extent lawful, from and against
any and all losses, damages, diminution in value, claims, liabilities, actions
and expenses (including, without limitation, costs of investigating, preparing
or defending any such claim or action and reasonable legal fees and expenses),
net of any amounts actually received under any insurance policy as a result of
such loss, damage, diminution in value, claim, liability, action, or expense
(collectively "Losses") arising out of or in connection with the breach of any
representation, warranty (each as defined in Section 11.1), covenant or
agreement of ViComp or any Shareholder contained in this Agreement; provided,
--------
that the liability of each Shareholder (other than Dr. Edmund Sun) shall, except
in the case of fraud, be subject to the limitations set forth in the preamble to
Article III. The term "Losses" as used in this Section 11.2 is not limited to
matters asserted by third parties against an Digital Indemnified Party, but
includes Losses incurred or sustained by an Digital Indemnified Party in the
absence of third party claims.
11.3 Indemnification by Digital. Subject to, and in the manner described
--------------------------
in, this Article XI, for a period of two years from the Effective Date, Digital
shall indemnify and hold harmless ViComp and the Shareholders and their
respective Representatives and Affiliates (the "ViComp Indemnified Parties") to
the fullest extent lawful, from and against any and all losses, damages,
diminution in value, claims, liabilities, actions and expenses (including
without limitation, costs of investigating, preparing or defending any such
claim or action and reasonable legal fees and expenses) net of amounts actually
received under any insurance policy (collectively "Losses") arising out of or in
connection with the breach of any representation, warranty, covenant or
agreement of Digital, except for tax matters covered by Sections 7.2 and 7.3
for which Digital shall indemnify the ViComp Indemnified Parties for a period of
five years from the Effective Date. The term "Losses" as used in this Section
11.3 is not limited to matters asserted by third parties against an ViComp
Indemnified Party, but includes Losses incurred or sustained by an ViComp
Indemnified Party in the absence of third party claims.
11.4 Basket. Digital and Digital Sub shall be indemnified by ViComp and
------
the Shareholders, and ViComp and the Shareholders shall be indemnified by
Digital, in each case in the event that the aggregate of all Losses, determined
without regard to whether any particular loss was material or not, exceeds
$50,000 (the "Basket Amount").
32
<PAGE>
11.5 Indemnification Procedure.
-------------------------
(a) If a third party asserts a claim against any indemnified party
for which indemnification would be available under this Article XI (a "Claim"),
the indemnified party shall promptly give notice of such Claim, describing such
Claim with reasonable specificity, to the indemnifying party. If the amount of
the Claim exceeds, or the aggregate amount of Losses incurred prior to such date
have exceeded, the Basket Amount, the indemnifying party shall be entitled to
assume the defense of such Claim, including the employment of counsel reasonably
satisfactory to the indemnified party; provided, however, that if the
indemnified party reasonably determines in good faith that its interests with
respect to such Claim cannot appropriately be represented by the indemnifying
party, such indemnified party shall have the right to assume control of the
defense of such Claim and to have its expenses reimbursed promptly with respect
to such Claim to the extent entitled thereto. In addition, in the event that
such indemnifying party, within a reasonable time after notice that any such
Claim or the total Losses incurred exceeds the Basket Amount, fails to defend
any indemnified party, such indemnified party will (upon further notice to such
indemnifying party) have the right to undertake its defense of such Claim for
the account of such indemnifying party and to have its expenses reimbursed
promptly with respect to such Claim to the extent entitled thereto. Regardless
of which party is controlling the defense of any Claim, (i) both the
indemnifying party and the indemnified party shall act in good faith; (ii) no
settlement of such Claim may be agreed to without the written consent of the
indemnifying party, which consent shall not be unreasonably withheld; and (iii)
no part of any Claim shall be paid without such consent or unless a final
judgment from which no appeal may be taken is entered on such Claim against the
indemnified party, and then only to the extent the aggregate of all Losses
exceeds the Basket Amount. The controlling party shall deliver, or cause to be
delivered, to the other party copies of all correspondence, pleadings, motions,
briefs, appeals or other written statements relating to or submitted in
connection with the defense of any such Claim, and timely notices of any hearing
or other court proceeding relating to such Claim.
(b) In the absence of a third party Claim, if any party shall have a
claim that another is liable for Losses, the party seeking indemnification shall
provide notice within 90 days of the discovery of the Loss of the nature and
extent thereof (with a copy to the Escrow Agent if applicable), and the other
party shall within 90 days thereafter repay such Losses to the extent the Losses
exceed the Basket Amount (or, if applicable, instruct the Escrow Agent to make
payment or release shares) or shall inform the party seeking indemnification
that it is denying in good faith all or a portion of such Claim. If the party
seeking indemnification disputes the denial of such Claim, it may thereupon
proceed to enforce its rights under this Agreement.
ARTICLE XII
GENERAL PROVISIONS
------------------
12.1 ViComp Shareholder Representative.
---------------------------------
(a) From and after the date hereof, each Shareholder by executing
this Agreement irrevocably appoints James W. Kirkpatrick, Jr., (the "ViComp
Shareholder
33
<PAGE>
Representative"), his or her agent and attorney-in-fact, with full and exclusive
power and authority to act in such Shareholder's name, place and stead with
respect to all matters relating to this Agreement and the transactions
contemplated hereby, including, without limitation:
(i) To modify and amend, execute and acknowledge and deliver
to Digital and Digital Sub such modifications and amendments to the
Agreement as he shall approve, the approval of such amendments and
modifications by the ViComp Shareholder Representative and all of the terms
and conditions thereof to be conclusively evidenced by the execution and
delivery of such amendments and modifications by such ViComp Shareholder
Representative.
(ii) To complete, modify, amend, execute, acknowledge and
deliver all instruments, documents, certificates and instructions as the
ViComp Shareholder Representative deems necessary in order to effect the
transactions contemplated by this Agreement.
(iii) To retain legal counsel in connection with all matters and
things set forth or necessary herein.
(iv) To ask, demand, sue for, levy, recover and receive all
sums of money, debts, dues and other demands whatsoever which may be due,
owing and payable to such Shareholder under the terms of this Agreement.
(v) To negotiate, defend and settle all claims asserted by,
and to resolve all disputes with, Digital or Digital Sub in connection with
this Agreement and the transactions contemplated hereby or to promise on
behalf of the Shareholders to make payment of any amounts due to Digital or
Digital Sub.
(vi) To receive all notices under this Agreement and any
agreement in connection with the transactions contemplated by this
Agreement.
(vii) To make any other decision or election or take any other
action on behalf of such Shareholder relating to the subject matter of this
Agreement and the transactions contemplated hereby.
(b) This appointment is coupled with an interest and is irrevocable
until such time as all claims asserted by, and disputes with, Digital or Digital
Sub have been finally satisfied, waived or otherwise resolved, except that (i)
if James W. Kirkpatrick, Jr. shall be incapacitated, Lish Chen shall act as a
ViComp Shareholder Representative and (ii) a successor or successors may be
appointed by written instrument signed by at least two-thirds of the
Shareholders and delivered to Digital, provided such successor is an Shareholder
and is approved by Digital. Any and all action taken hereunder by the ViComp
Shareholder Representatives, acting jointly, shall be binding on each
Shareholder.
34
<PAGE>
(c) Each Shareholder agrees to hold the ViComp Shareholder
Representative, and Digital, free and harmless from any and all loss, cost,
claim, expense, damage or liability which he, she, or it may incur or sustain as
a result of any action taken by the ViComp Shareholder Representative in good
faith pursuant to the ViComp Shareholder Representative's appointment as agent
and attorney-in-fact.
12.2 Assignment. Neither this Agreement nor any of the rights or
----------
obligations hereunder may be assigned by any party without the prior written
consent of the other parties. Subject to the foregoing, this Agreement shall be
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, and no other Person shall have any right,
benefit or obligation under this Agreement as a third party beneficiary or
otherwise.
12.3 Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy, electronic or digital transmission
method; the day after it is sent, if sent for next day delivery to a domestic
address by recognized overnight delivery service (e.g., Federal Express) and
----
upon receipt, if sent by certified or registered mail, return receipt requested.
In each case notice shall be sent:
If to ViComp or the Shareholders, addressed to:
ViComp Technology, Inc.
Paulsen Office Park Building
4020 Moorpark Avenue
Suite 116, 1st Floor
San Jose, California 95117
Fax:
Attn: James W. Kirkpatrick, Jr.
With a copy to:
Heller Ehrman White & McAulliffe
525 University Avenue
Palo Alto, California 94301-1900
Fax: (415) 324-0638
Attn: Matthew P. Quilter, Esq.
If to Digital or Digital Sub, addressed to:
Digital Video Systems, Inc.
2710 Walsh Avenue
Santa Clara, CA 95051
Fax: (408) 727-1888
Attn: Robert B. Pfannkuch
35
<PAGE>
With a copy to:
Troy & Gould Professional Corporation
1801 Century Park East, 16th Floor
Los Angeles, California 90067-2367
Fax: (310) 201-4746
Attn: Sanford J. Hillsberg, Esq.
or to such other place and with such other copies as each party hereto may
designate as to itself by written notice to the other parties hereto.
12.4 Governing Law. This Agreement shall be governed by, and construed,
-------------
interpreted and the rights of the parties determined in accordance with the laws
of the State of California without regard to choice of law principles thereof.
12.5 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
12.6 Expenses. Each party hereto shall pay its own legal, accounting,
--------
out-of-pocket and other expenses incident to this Agreement and to any action
taken by such party in preparation for carrying this Agreement and the
transactions contemplated hereby into effect.
12.7 Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
12.8 Titles. The titles, captions or headings of the Articles and
------
Sections herein are inserted for convenience of reference only and are not
intended to be a part of or to affect the meaning or interpretation of this
Agreement.
12.9 Cumulative Remedies. All rights and remedies of either party hereto
-------------------
are cumulative of each other and of every other right or remedy such party may
otherwise have at law or in equity, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
12.10 Entire Agreement. This Agreement, together with all exhibits and
----------------
schedules hereto and thereto (including the Disclosure Schedule), constitutes
the entire agreement among the parties pertaining to the subject matter hereof
and supersedes all prior agreements, understandings, negotiations and
discussions, whether oral or written, of the parties hereto.
36
<PAGE>
12.11 Attorneys' Fees. In the event of any legal action or proceeding to
---------------
enforce or interpret the provisions hereof, the prevailing party shall be
entitled to reasonable attorneys' fees, whether or not the proceeding results in
a final judgment.
12.12 Waiver of Right to Trial by Jury. Each party to this Agreement
--------------------------------
hereby waives its rights to a trial by jury.
12.13 ViComp and Shareholders Represented by Counsel. Each of ViComp and
----------------------------------------------
the Shareholders party hereto acknowledges that it was represented by counsel in
connection with the negotiation, execution and delivery of this Agreement and
consummation of the Merger and the transactions contemplated hereby and thereby,
and that such party, together with its counsel and other advisers, if any, made
its own independent evaluation of this Agreement, the Merger and the
transactions contemplated hereby and thereby without reliance on Digital, its
officers, directors, employees, agents or counsel.
12.14 Each Party Represented by Counsel. Each of the parties hereto
---------------------------------
acknowledges that it was represented by counsel, or has had the opportunity to
be represented by counsel, in connection with the negotiation, entering into and
consummation of the Merger and the other transactions contemplated by this
Agreement, and that such party, together with its counsel and other advisers, if
any, made its own independent evaluation of the Merger and the other
transactions contemplated by this Agreement without reliance on Digital, its
officers, directors, employees, agents or counsel.
12.15 Arbitration. In the event that the Shareholders and Digital are
-----------
unable to resolve any dispute with respect to any amount owed pursuant to
Article XI, such dispute shall be submitted to binding arbitration in accordance
with the rules of the American Arbitration Association, with such arbitration to
be held in San Jose, California. The results, determination, finding, judgment
or award rendered through such arbitration shall be final and binding on each of
the parties thereto and not subject to appeal or review.
37
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date and year first above written.
DIGITAL VIDEO SYSTEMS, INC.
By:
--------------------------
Name:
Title:
DIGITAL VIDEO ACQUISITION CO.
By:
--------------------------
Name:
Title:
VICOMP TECHNOLOGY, INC.
By:
--------------------------
Name:
Title:
SHAREHOLDERS:
------------------------------
Dr. Edmund Sun
------------------------------
James W. Kirkpatrick, Jr.
------------------------------
Lish Chen
38
<PAGE>
------------------------------
Michael Mruzik
------------------------------
Mihailo Stojancic
------------------------------
Tai Sato
------------------------------
Francis Hung
39
<PAGE>
<TABLE>
<CAPTION>
EXHIBITS
<S> <C> <C>
A - ViComp Shares Tendered and Digital Shares Issued; Digital
Shareholder Options
B - Merger Agreement
C - Certificate of Merger
D - Certificate of Incorporation of Surviving Corporation
E - Bylaws of Surviving Corporation
F - Directors and Officers of Surviving Corporation
G - Form of Sun Escrow Agreement
H - Form of Shareholder Escrow Agreement
I - Form of Registration Rights Agreement
J - Form of Invention, Non-Disclosure and Non-Competition
Agreement
K - Form of Opinion of Counsel to Digital
L - Form of Opinion of Counsel to ViComp
</TABLE>
v
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I DEFINITIONS............................................... 1
1.1 Defined Terms............................................. 1
ARTICLE II THE MERGER................................................ 3
2.1 The Merger................................................ 3
2.2 Effects of the Merger..................................... 3
2.3 Effective Date............................................ 3
2.4 Certificate of Incorporation and Bylaws................... 4
2.5 Directors and Officers.................................... 4
2.6 Conversion of Shares...................................... 4
2.7 Conversion of Digital Sub Common Stock.................... 4
2.8 Exchange of Certificates.................................. 4
2.9 Digital to Make Shares Available.......................... 5
2.10 Further Documents......................................... 5
2.11 Agreement and Plan of Merger.............................. 5
2.12 Internal Revenue Code..................................... 5
2.13 Escrow of Shares.......................................... 6
ARTICLE III REPRESENTATIONS AND WARRANTIES OF VICOMP;
AND THE SHAREHOLDERS...................................... 6
3.1 Organization of ViComp.................................... 6
3.2 Subsidiaries.............................................. 7
3.3 ViComp Capital Stock...................................... 7
3.4 No Liens on ViComp Capital Stock.......................... 7
3.5 Authorization Relative to this Agreement.................. 7
3.6 Absence of Certain Changes or Events...................... 8
3.7 Permits................................................... 9
3.8 No Conflict or Violation.................................. 9
3.9 Financial Statements...................................... 9
3.10 Liabilities............................................... 10
3.11 Litigation................................................ 10
3.12 Labor Matters............................................. 10
3.13 Compliance with Law....................................... 10
3.14 No Agreements to Sell the Assets.......................... 10
3.15 Employee Benefit Plans.................................... 11
3.16 Tax Matters............................................... 11
3.17 Insurance................................................. 12
3.18 Compliance With Environmental Laws........................ 13
3.19 Contracts and Commitments................................. 13
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
3.20 Transactions with Certain Persons......................... 14
3.21 Assets.................................................... 14
3.22 Board Approval and Recommendation......................... 14
3.23 Shareholder Investment Representations.................... 14
3.24 Purchases and Sales....................................... 14
3.25 Status of Development of ViComp Chip...................... 15
3.26 Intellectual Property and Technology...................... 15
3.27 Obligation to Former Employer; No Breach or Conflict...... 16
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF DIGITAL
AND DIGITAL SUB........................................... 16
4.1 Organization of Digital and Digital Sub................... 16
4.2 Digital and Digital Sub Capital Stock..................... 16
4.3 Authorization Relative to this Agreement.................. 17
4.4 Absence of Certain Changes or Events...................... 17
4.5 Permits................................................... 17
4.6 No Conflict or Violation.................................. 18
4.7 SEC Filings; Digital Financial Statements................. 18
4.8 Board Approval............................................ 18
4.9 Validity of Shares Issued to the Shareholders............. 18
4.10 Liabilities............................................... 19
4.11 No Activities............................................. 19
ARTICLE V COVENANTS OF EACH PARTY................................... 19
5.1 Access to Information..................................... 19
5.2 Notification of Certain Matters........................... 20
5.3 Public Statements and Press Releases...................... 20
5.4 Confidential Information.................................. 20
5.5 Rule 144 Reporting........................................ 21
5.6 Registration Rights....................................... 22
5.7 Termination of Stock Option Plan Prior to Effective
Date...................................................... 23
5.8 Invention, Non-Disclosure and Non-Competition
Agreements................................................ 24
5.9 Sun Escrow Agreement...................................... 24
5.10 Shareholder Escrow Agreement.............................. 24
ARTICLE VI ADDITIONAL COVENANTS OF VICOMP AND
THE SHAREHOLDERS.......................................... 24
6.1 Conduct of Business....................................... 24
6.2 No Solicitation........................................... 26
6.3 Delivery of ViComp Common Stock and ViComp Preferred
Stock..................................................... 26
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE VII ADDITIONAL COVENANTS OF DIGITAL........................... 26
7.1 Conduct of Business....................................... 26
7.2 Federal Income Tax Treatment.............................. 27
7.3 Digital Common Stock in Escrow............................ 27
ARTICLE VIII CONDITIONS TO THE OBLIGATIONS OF VICOMP
AND THE SHAREHOLDERS....
8.1 Representations, Warranties and Covenants................. 27
8.2 Permits................................................... 28
8.3 Opinion of Counsel........................................ 28
8.4 Certificates.............................................. 28
8.5 No Governmental Actions................................... 28
8.6 No Material Adverse Change................................ 28
8.7 Corporate Resolutions..................................... 28
28
ARTICLE IX CONDITIONS TO THE OBLIGATIONS OF DIGITAL AND
DIGITAL SUB.............
9.1 Representations, Warranties and Covenants................. 29
9.2 Permits................................................... 29
9.3 Opinion of Counsel........................................ 29
9.4 Certificates.............................................. 29
9.5 No Governmental Actions................................... 29
9.6 No Material Adverse Change................................ 29
9.7 Corporate Resolutions..................................... 29
9.8 Covenant Not to Compete; etc.............................. 30
9.9 Delivery of Stock Certificates............................ 30
9.10 Escrow Agreements......................................... 30
30
ARTICLE X TERMINATION, AMENDMENTS, WAIVERS AND
POST-CLOSING COVENANTS.................................... 30
10.1 Termination............................................... 30
10.2 Amendments................................................ 30
10.3 Waivers................................................... 31
31
ARTICLE XI INDEMNIFICATION; SURVIVAL
11.1 Survival of Representations, Etc.......................... 31
11.2 Indemnification by ViComp and the Shareholders............ 31
11.3 Indemnification by Digital................................ 32
11.4 Basket.................................................... 32
11.5 Indemnification Procedure................................. 32
</TABLE>................................................................ 33
iii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE XII GENERAL PROVISIONS........................................ 33
12.1 ViComp Shareholder Representative......................... 33
12.2 Assignment................................................ 35
12.3 Notices................................................... 35
12.4 Governing Law............................................. 36
12.5 Counterparts.............................................. 36
12.6 Expenses.................................................. 36
12.7 Invalidity................................................ 36
12.8 Titles.................................................... 36
12.9 Cumulative Remedies....................................... 36
12.10 Entire Agreement.......................................... 36
12.11 Attorneys' Fees........................................... 37
12.12 Waiver of Right to Trial by Jury.......................... 37
12.13 ViComp and Shareholders Represented by Counsel............ 37
12.14 Each Party Represented by Counsel......................... 37
12.15 Arbitration............................................... 37
</TABLE>
iv
<PAGE>
EXHIBIT 10.14
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT dated as of October 17, 1996, by and
between Digital Video Systems, Inc., a Delaware corporation (the "Company"), and
the individuals named on the signature pages hereto (the "Shareholders").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, pursuant to the Agreement and Plan of Merger dated as of
October , 1996, by and among the Company, Digital Video Acquisition Co.
("Acquisition Co."), ViComp Technology, Inc., a Delaware corporation ("ViComp")
and the Shareholders (the "Merger Agreement"), Acquisition Co. will be merged
with and into ViComp with ViComp as the surviving corporation in such merger in
a transaction intended to qualify as a reorganization within the meaning of
Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the
"Merger"); and
WHEREAS, the Merger Agreement provides that the Shareholders will have
certain incidental registration rights and it is a condition to the consummation
of the Merger that each of the Shareholders and the Company enter into this
Registration Rights Agreement;
NOW, THEREFORE, in order to implement the foregoing and in
consideration of the mutual representations, warranties, covenants and
agreements contained herein, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
-----------
1.1 Defined Terms. Capitalized terms used herein but not otherwise
-------------
defined shall have the meaning given to such terms in the Merger Agreement.
"Closing" shall mean the consummation of the Merger and the
-------
transactions contemplated thereby by the Company, Acquisition Co., ViComp and
the Shareholders.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
------------
amended, and the rules and regulations promulgated thereunder as the same may be
amended from time to time.
"Fair Market Value" shall mean the closing sales price for the
-----------------
Company's common stock or other traded securities of the Company, or the closing
bid if no sales were reported, as quoted on the Nasdaq National Market or Nasdaq
Small Cap Market, or on the principal established stock exchange as the
Company's stock shall become listed for the date the value is to be determined
(or if there are no sales for such date, then for the last preceding business
day on which there were sales), as reported in the Wall Street Journal or
similar publication.
<PAGE>
"Person" shall mean any individual, partnership, joint venture,
------
corporation, limited liability company, trust, joint stock company, business
trust, unincorporated association, joint venture, governmental authority or any
department or agency thereof or other entity of any nature whatsoever.
"SEC" shall mean the Securities and Exchange Commission.
---
"Securities Act" shall mean the Securities Act of 1933, as amended,
--------------
and all rules and regulations promulgated thereunder as the same may be amended
from time to time.
"Shareholder Common Stock" shall mean the 491,253 shares of the
------------------------
Company's common stock issued to the Shareholders pursuant to the Merger
Agreement.
ARTICLE II
TRANSFERS OF SHARES
-------------------
2.1 Investment Intention; No Resales. Each Shareholder hereby
--------------------------------
represents and warrants that he is acquiring the Shareholder Common Stock for
investment solely for his own account and not with a view to, or for resale in
connection with, the distribution or other disposition thereof. The Shareholder
agrees and acknowledges that he will not, directly or indirectly, offer,
transfer, sell, assign, pledge, hypothecate or otherwise dispose of any shares
of the Shareholder Common Stock, or solicit any offers to purchase or otherwise
acquire or take a pledge of any shares of the Shareholder Common Stock, unless
such offer, transfer, sale, assignment pledge, hypothecation or other
disposition complies with the provisions of this Agreement and (i) such
transfer, sale, assignment, pledge or hypothecation or other disposition is
pursuant to an effective registration statement under the Securities Act and has
been registered under all applicable state securities or "blue sky" laws or (ii)
the Shareholder shall have furnished the Company with a written opinion in form
and substance reasonably satisfactory to the Company of counsel reasonably
satisfactory to the Company to the effect that no such registration is required
because of the availability of an exemption from registration under the
Securities Act and all applicable state securities or "blue sky" laws.
2.2 Restrictive Legend. Each certificate representing shares of
------------------
Shareholder Common Stock which is issued to the Shareholder on or after the date
hereof shall bear the following legend on the face thereof:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED AND ARE SUBJECT TO A
REGISTRATION RIGHTS AGREEMENT (A COPY OF WHICH IS ON FILE WITH THE
SECRETARY OF THE COMPANY). SUCH SHARES MAY NOT BE SOLD, TRANSFERRED,
OR OTHERWISE DISPOSED OF EXCEPT IN ACCORDANCE WITH THE PROVISIONS OF
SUCH REGISTRATION
2.
<PAGE>
RIGHTS AGREEMENT AND UNLESS REGISTERED UNDER SAID ACT, OR UNLESS AN
EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE IN THE OPINION OF
COUNSEL FOR THE COMPANY.
2.3 Shareholder Common Stock Unregistered. Each Shareholder acknowledges
-------------------------------------
and represents that he has been advised by the Company that:
(a) the offer and sale of the Shareholder Common Stock have not been
registered under the Securities Act;
(b) the Shareholder Common Stock must be held and the Shareholder must
continue to bear the economic risk of the investment in the Shareholder Common
Stock until (i) the Shareholder Common Stock is registered pursuant to an
effective registration statement under the Securities Act and all applicable
state securities laws or (ii) an exemption from such registration is available;
(c) when and if shares of the Shareholder Common Stock may be disposed
of without registration under the Securities Act in reliance on Rule 144, such
disposition can be made only in limited amounts in accordance with the terms and
conditions of such Rule;
(d) if the Rule 144 exemption is not available, public offer or sale
of Shareholder Common Stock without registration will require compliance with
some other exemption under the Securities Act;
(e) a restrictive legend in the form set forth Section 2.2 above shall
be placed on the certificates representing the Shareholder Common Stock; and
(f) a notation shall be made in the appropriate records of the Company
indicating that the Shareholder Common Stock is subject to restrictions on
transfer, and appropriate stop-transfer instructions will be issued to the
Company's transfer agent with respect to the Shareholder Common Stock.
2.4 Rule 144 Reporting. The Company agrees to use its best efforts to:
------------------
(a) Make and keep public information available as those terms are
understood and defined in Rule 144 under the Securities Act, at all times from
and after the Effective Date;
(b) File with the SEC in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange Act;
and
(c) So long as any Shareholder owns any Shareholder Common Stock
issued to such Shareholder pursuant to the Merger Agreement, inform such person
upon request as to its compliance with the reporting requirements of Rule 144
and of the Securities Act and the
3.
<PAGE>
Exchange Act, and provide a copy of the most recent annual or quarterly report
of the Company and such other reports and documents so filed as may reasonably
be requested in availing such Shareholder of any rule or regulation of the SEC
allowing a sale of any such securities without registration.
Anything to the contrary contained in this Section 2.4 notwithstanding, the
Company may deregister any of its securities under the Exchange Act if it is
then permitted to do so pursuant to the Exchange Act. Nothing in this Section
shall be deemed to limit in any manner the restriction on sales of Shareholder
Common Stock contained in this Agreement.
ARTICLE III
REGISTRATION RIGHTS
-------------------
3.1 Demand Registration. If at any time commencing ten months from the
-------------------
date of the Company's initial public offering on Form SB-2, the Company shall
receive from holders of at least 50% of the shares of Shareholder Common Stock
held by Shareholders other than Dr. Edmund Sun, a written request that the
Company effect any registration of Shareholder Common Stock, the Company will:
(a) promptly give written notice of the proposed registration to all
other Shareholders; and
(b) file a registration statement (on Form S-3 or any successor form
or on Form S-1 if Form S-3 is not then available) with the SEC within 75 days
after the initiating Shareholders request and use its best efforts to effect
such registration (including, without limitation, the execution of an
undertaking to file post-effective amendments, appropriate qualification under
applicable blue sky or other state securities laws and appropriate compliance
with applicable regulations issued under the Securities Act) as would permit or
facilitate the sale and distribution of such shares of Shareholder Common Stock
as are specified in such request, together with all Shareholder Common Stock of
any Shareholders joining in such request as are specified in a written request
received by the Company within 30 days after receipt of such written notice from
the Company;
Provided, however that the Company shall not be obligated to take any
action to effect any such registration, qualification or compliance pursuant to
this Section 3.1:
(i) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, qualification or compliance unless the Company is already subject
to service in such jurisdiction and except as may be required by the Securities
Act;
4.
<PAGE>
(ii) If, at such time as a request for registration pursuant to this
Section 3.1 is pending, the Company has already effected one such registration
pursuant to this Section 3.1, and such registration has been declared or ordered
effective; or
(iii) During the period starting with the date 60 days prior to the
filing of, and ending on a date three months following the effective date of, a
registration statement (other than with respect to a registration statement
relating to a Rule 145 transaction, an offering solely to employees or any other
registration which is not appropriate for the registration of Shareholder Common
Stock).
3.2 Right to Include Securities. If at any time during the period ending
---------------------------
24 calendar months from the Effective Date the Company proposes to register any
shares of its common stock under the Securities Act on Forms S-1, S-2, S-3 or
SB-2 or any successor or similar forms (except for (i) registrations on such
forms solely for registration of Shareholder Common Stock in connection with any
warrants, option, employee benefit or dividend reinvestment plan or a merger or
consolidation, (ii) registrations of Shareholder Common Stock relating to the
exercise of warrants that were included in the units sold in the Company's
initial public offering and (iii) any underwritten public offering for which a
registration statement is filed with the SEC within 90 days of the Effective
Date), whether or not for sale for its own account, it will each such time as
soon as practicable give written notice of its intention to do so to the
Shareholders. Upon the written request (which request shall specify the total
number of shares of Shareholder Common Stock intended to be disposed of by the
Shareholders) of any Shareholder made within 15 days after the receipt of any
such notice (10 days if the Company gives telephonic notice with written
confirmation to follow promptly thereafter, stating that (i) such registration
will be on Form S-3 and (ii) such shorter period of time is required because of
a planned filing date), the Company will use all reasonable efforts to effect
the registration under the Securities Act of all Shareholder Common Stock held
by the Shareholders which the Company has been so requested to register for sale
in the manner initially proposed by the Company. If the Company thereafter
determines for any reason in its sole discretion not to register or to delay
registration of the common stock, the Company may, at its election, give written
notice of such determination to the Shareholder and (i) in the case of a
determination not to register, shall be relieved of the obligation to register
any Shareholder Common Stock in connection with such registration and (ii) in
the case of a determination to delay registering, shall be permitted to delay
registering any Shareholder Common Stock of the Shareholder for the same period
as the delay in registration of such other securities.
3.3 Priority in Incidental Registration. In a registration pursuant to
-----------------------------------
this Article III, if the managing underwriter of any such underwritten offering
shall inform the Company by letter of its belief that the number of shares of
Shareholder Common Stock to be included in such registration would adversely
affect its ability to effect such offering, then the Company will be required to
include in such registration only that number of shares of Shareholder Common
Stock which it is so advised should be included in such offering. Shares of
Shareholder Common Stock proposed by the Company to be registered for issuance
by the Company shall have the first priority and all other shares of Shareholder
Common Stock to be registered,including any and
5.
<PAGE>
all shares of Shareholder Common Stock owned by the Shareholders shall be given
second priority without preference among the relevant holders. If less than all
of the shares of Shareholder Common Stock are to be registered, such shares of
Shareholder Common Stock shall be included in the registration pro rata based on
the total number of shares sought to be registered other than for issuance by
the Company.
3.4 Custody Agreement and Power of Attorney. Upon delivering a request
---------------------------------------
under this Article III, each of the Shareholders seeking registration of its
shares of Shareholder Common Stock will, if requested by the Company, execute
and deliver a custody agreement and power of attorney in form and substance
reasonably satisfactory to the Company with respect to such Selling
Securityholder's (defined below) shares of Shareholder Common Stock to be
registered pursuant to this Article III (a "Custody Agreement and Power of
Attorney"). The Custody Agreement and Power of Attorney will provide, among
other things that such Selling Securityholder will deliver to and deposit in
custody with the custodian and attorney-in-fact named therein a certificate or
certificates representing such Shareholder Common Stock (duly endorsed in blank
by the registered owner or owners thereof or accompanied by duly executed stock
powers in blank) and irrevocably appoint said custodian and attorney-in-fact as
such Selling Securityholder's agent and attorney-in-fact with full power and
authority to act under the Custody Agreement and Power of Attorney on such
Selling Securityholder's behalf with respect to the matters specified therein.
Such Selling Securityholder shall also execute such other agreements as the
Company may reasonably request to further evidence the provisions of this
Article III.
3.5 Registration Procedures. In connection with the Company's obligations
-----------------------
pursuant to this Article III, the Company will use all reasonable efforts to
effect such registration and the Company will promptly:
(a) prepare and file with the SEC as soon as practicable after request
for registration hereunder the requisite registration statement to effect such
registration and use all reasonable efforts to cause such registration statement
to become effective and to remain continuously effective until the earlier to
occur of (x) 180 days following the date on which such registration statement is
declared effective or (y) the termination of the offering being made thereunder;
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection therewith as
may be necessary to keep such registration statement effective and to comply
with the provisions of the Securities Act with respect to the disposition of all
shares of Shareholder Common Stock covered by such registration statement until
such Shareholder Common Stock has been sold or such lesser period of time as the
Company, any seller of such Shareholder Common Stock or any underwriter is
required under the Securities Act to deliver a prospectus in accordance with the
intended methods of disposition by the sellers of such Shareholder Common Stock
set forth in such registration statement or supplement to such prospectus;
6.
<PAGE>
(c) furnish to each and any stockholder which owns shares of
Shareholder Common Stock covered by such registration statement (the "Selling
Securityholders") and the managing underwriter, if any, at least one executed
original of the registration statement and such number of conformed copies of
such registration statement and of each such amendment and supplement thereto
(in each case including all exhibits) such number of copies of the prospectus
contained in such registration statement (including each preliminary prospectus
and any summary prospectus) and any other prospectus filed under Rule 424 under
the Securities Act, in conformity with the requirements of the Securities Act as
may reasonably be requested by such Selling Securityholder.
(d) use all reasonable efforts (i) to register or qualify all shares
of Shareholder Common Stock covered by such registration statement under the
securities or "blue sky" laws of such jurisdictions where an exemption is not
available as the Selling Securityholders shall reasonably request, (ii) to keep
such registration or qualification in effect for so long as such registration
statement remains in effect and (iii) to take any other action which may be
reasonably necessary or advisable to enable the Selling Securityholders to
consummate the disposition in such jurisdictions of such Shareholder Common
Stock, provided that the Company will not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified, subject itself
to taxation in any such jurisdiction or take any action which would subject it
to general service of process in any such jurisdiction;
(e) notify the Selling Securityholders and the managing underwriter,
if any, promptly, and confirm such advice in writing (i) when a prospectus or
any prospectus supplement or post-effective amendment has been filed, and, with
respect to a registration statement or any post-effective amendment, when the
same has become effective, (ii) of any request by the SEC for amendments or
supplements to a registration statement or related prospectus or for additional
information, (iii) of the issuance by the SEC of any stop order suspending the
effectiveness of a registration statement or the initiation of any proceedings
for that purpose, (iv) of the receipt by the Company of any notification with
respect to the suspension of the qualification of any of the registered
securities for sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose, (v) of the happening of any event or information
becoming known which requires the making of any changes in a registration
statement or related prospectus so that such documents will not contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary to make the statements therein not misleading
and (vi) of the Company's reasonable determination that a post-effective
amendment to a registration statement would be appropriate;
(f) make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of a registration statement, or the lifting of any
suspension of the qualification of any of the registered securities for sale in
any jurisdiction, at the earliest possible moment;
(g) upon the occurrence of any event contemplated by clause (e)(v)
above, prepare a supplement or post-effective amendment to the applicable
registration statement or
7.
<PAGE>
related prospectus or any document incorporated therein by reference or file any
other required document so that, as thereafter delivered to the purchasers of
the securities being sold thereunder, such prospectus will not contain any
untrue statement of a material fact or omit to state any material fact necessary
to make the statements therein not misleading;
(h) use its best efforts to furnish to the Selling Securityholders a
signed counterpart, addressed to the Selling Securityholders and the
underwriters, if any, of (A) an opinion of counsel for the Company, and (B) a
"comfort" letter, signed by the independent public accountants who have
certified the Company's financial statements included or incorporated by
reference in such registration statement, covering substantially the same
matters with respect to such registration statement (and the prospectus included
therein) and, in the case of the accountant's letter, with respect to events
subsequent to the date of such financial statements, as are customarily covered
in opinions of issuer's counsel and in accountant's letters delivered to
underwriters in underwritten public offerings of securities (and dated the dates
such opinions and comfort letters are customarily dated) and, in the case of the
accountant's letter, such other financial matters, and in the case of the legal
opinion, such other legal matters, as the Selling Securityholders or the
underwriters may reasonably request;
(i) otherwise use its best efforts to comply with all applicable rules
and regulations of the SEC, and make available to the Selling Securityholders an
earnings statement satisfying the provisions of Section 11(a) of the Securities
Act and Rule 158 promulgated thereunder, no later than 90 days after the end of
any 12-month period beginning after the effective date of a registration
statement pursuant to which shares of Shareholder Common Stock are sold, which
statement shall cover such 12-month period;
(j) cooperate with Selling Securityholders and the managing
underwriters if any, to facilitate the timely preparation and delivery of
certificates representing shares of Shareholder Common Stock to be sold; and
enable such shares of Shareholder Common Stock to be in such denominations and
registered in such names as the Selling Securityholders or the managing
underwriters, if any, may request at least two business days prior to any sale
of shares of Shareholder Common Stock to the underwriters;
(k) use its best efforts to cause the shares of Shareholder Common
Stock covered by the applicable registration statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the Selling Securityholder(s) or the underwriters, if any, to
consummate the disposition of such shares of Shareholder Common Stock;
(l) cause all shares of Shareholder Common Stock covered by the
registration statement to be listed on each securities exchange, if any, or
Nasdaq, on which securities of such class, series and form issued by the
Company, if any, are then listed or traded if requested by the managing
underwriters, if any, or the holders of a majority of the shares or units of
Shareholder Common Stock covered by the registration statement and entitled
hereunder to be so listed;
8.
<PAGE>
(m) cooperate and assist in any filings required to be made with the
National Association of Securities Dealers, Inc. (the "NASD") and in the
performance of any due diligence investigation by any underwriter (including any
qualified independent underwriter that is required to be retained in accordance
with the rules and regulations of the NASD); and
(n) as soon as practicable prior to the filing of any document which
is to be incorporated by reference into the registration statement or the
prospectus (after initial filing of the registration statement) provide copies
of such document to the Selling Securityholders and to the managing
underwriters, if any, and make the Company's representatives available for
discussion of such document and consider in good faith making such changes in
such document prior to the filing thereof as the Selling Securityholders or such
underwriters may reasonably request.
The Company may require each Selling Securityholder to furnish to the
Company such information regarding such Selling Securityholder and the
distribution of such securities as the Company may from time to time reasonably
request in writing in order to comply with the Securities Act.
Each of the Shareholders agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section
3.5(e)(ii), (iii), (iv), (v) or (vi) hereof, it will forthwith discontinue
disposition pursuant to such registration statement of any shares of Shareholder
Common Stock covered by such registration statement or prospectus until its
receipt of the copies of the supplemented or amended prospectus relating to such
registration statement or prospectus or until it is advised in writing by the
Company that the use of the applicable prospectus may be resumed (and the period
of such discontinuance shall be excluded from the calculation of the period
specified in clause (x) of Section 3.5(a)) and, if so directed by the Company,
will deliver to the Company (at the Company's expense) all copies, other than
permanent file copies then in their possession, of the prospectus covering such
securities in effect at the time of receipt of such notice. Each of the
Shareholders agrees to furnish the Company a signed counterpart, addressed to
the Company and the underwriters, if any, of an opinion of counsel covering
substantially the same matters with respect to such registration statement (and
the prospectus included therein) as are customarily covered in opinions of
selling stockholder's counsel delivered to the underwriters in underwritten
public offerings of securities (and dated the dates such opinions are
customarily dated) and such other legal matters as the Company or the
underwriters may reasonably request.
3.6 Incidental Underwritten Offerings. If the Company at any time
---------------------------------
proposes to register any shares of its common stock under the Securities Act as
contemplated by Section 3.2 and such shares are to be distributed by or through
one or more underwriters, the Company and the Securityholders who hold shares of
Shareholder Common Stock to be distributed by such underwriters in accordance
with Section 3.2 hereof shall be parties to the underwriting agreement between
the Company and such underwriters and may, at their option, require that any or
all of the representations and warranties by, and the other agreements on the
part of, the Company to and for the benefit of such underwriters shall also be
made to and for the benefit of them and that
9.
<PAGE>
any or all of the conditions precedent to the obligations of such underwriters
under such underwriting agreement be conditions precedent to their obligations.
The Company may, at its option, require that any or all of the representations
and warranties by, and the other agreements on the part of the Selling
Securityholders to and for the benefit of such underwriters shall also be made
to and for the benefit of the Company.
3.7 Preparation; Reasonable Investigation. In connection with the
-------------------------------------
preparation and filing of each registration statement under the Securities Act
pursuant to this Agreement, the Company will give the Selling Securityholders,
the underwriters and their respective counsel and accountants the opportunity
(but such Persons shall not have the obligation) to participate in the
preparation of such registration statement, each prospectus included therein or
filed with the SEC, and, to the extent practicable, each amendment thereof or
supplement thereto, and will give each of them such access to its books and
records (to the extent customarily given to the underwriters of the Company's
securities) and such opportunities to discuss the business of the Company with
its officers and the independent public accountants who have certified its
financial statements as shall be necessary, in the opinion of the Selling
Securityholders, and the underwriters' respective outside counsel to conduct a
reasonable investigation within the meaning of the Securities Act.
3.8 Limitations, Conditions and Qualifications to Obligations under
---------------------------------------------------------------
Registration Covenants. The obligations of the Company to use its reasonable
- ----------------------
efforts to cause shares of Shareholder Common Stock to be registered under the
Securities Act are subject to each of the following limitations, conditions and
qualifications:
(a) The Company shall be entitled to postpone for a reasonable period
of time the filing or effectiveness of, or suspend the rights of Selling
Securityholders to make sales pursuant to, any registration statement otherwise
required to be prepared, filed and made and kept effective by it hereunder (but
the duration of such postponement or suspension may not exceed the earlier to
occur of (w) 15 days after the cessation of the circumstances described in
clauses (i) and (ii) below or (x) 120 days after the date of the determination
of the Board of Directors referred to below, and the duration of such
postponement or suspension shall be excluded from the calculation of the period
specified in clause (x) of Section 3.5(a)) if the Board of Directors of the
Company determines in good faith that (i) there is a material undisclosed
development in the business or affairs of the Company (including any pending or
proposed financing, recapitalization, acquisition or disposition), the
disclosure of which at such time could be adverse to the Company's interests or
(ii) the Company has filed a registration statement with the SEC. such
registration statement has not yet been declared effective, the Company is using
its reasonable best efforts to have such registration statement declared
effective, and the underwriters with respect to such registration advise that
such registration would be adversely affected. If the Company shall so delay the
filing of a registration statement, it shall, as promptly as possible, notify
the Selling Securityholders of such determination, and the Selling
Securityholders shall have the right (y) in the case of a postponement of the
filing or effectiveness of a registration statement to withdraw the request for
registration by giving written notice to the Company within 10 days after
receipt of the Company's notice or (z) in the case of a suspension of the right
to
10.
<PAGE>
make sales, to receive an extension of the registration period equal to the
number of days of the suspension.
(b) The Company's obligations shall be subject to the obligations of
the Selling Securityholders, which each of the Shareholders hereby acknowledges,
to furnish all information and materials and to take any and all actions as may
be required under applicable federal and state securities laws and regulations
to permit the Company to comply with all applicable requirements of the SEC and
to obtain any acceleration of the effective date of such registration statement.
(c) The Company shall not be obligated to cause any special audit to
be undertaken in connection with any registration pursuant hereto unless such
audit is requested by the underwriters with respect to such registration.
3.9 Expenses. The Company will pay all reasonable out-of-pocket costs and
--------
expenses incurred in connection with each registration of Shareholder Common
Stock pursuant to this Agreement, including, without limitation, any and all
filing fees payable to the SEC, fees with respect to filings required to be made
with stock exchanges, Nasdaq and the NASD, fees and expenses of compliance with
state securities or blue sky laws, printing expenses, fees and disbursements of
counsel and accountants of the Company, including costs associated with comfort
letters, and fees and expenses of other Persons retained by the Company, but
excluding underwriters' expenses (including discounts, commissions and fees of
underwriters and expenses included therein of selling brokers, dealer managers
or similar securities industry professionals relating to the distribution of the
securities being registered) and legal expenses of any Person other than the
Company) but including fees and expenses of any qualified independent
underwriter required to participate in such registration pursuant to applicable
law or the requirements of the NASD, The Company shall pay its internal expenses
(including, without limitation, all salaries and expenses of its officers and
employees performing legal or accounting duties), and the expense of securities
law liability insurance and rating agency fees, if any.
3.10 Indemnification.
---------------
(a) Indemnification by the Company. In connection with any
------------------------------
registration pursuant hereto in which shares of Shareholder Common Stock are to
be disposed of, the Company shall indemnify and hold harmless, to the full
extent permitted by law, each of the Shareholders and, when applicable, its
officers, directors, agents and employees and each Person who controls any of
the Shareholders (within the meaning of the Securities Act or the Exchange Act)
against all losses, claims, damages, liabilities and expenses caused by any
untrue or alleged untrue statement of a material fact contained in any
registration statement, prospectus or preliminary prospectus or any omission or
alleged omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, including, without
limitation, any loss, claim, damage, liability or expense resulting from the
failure to keep a prospectus current, except insofar as the same (i) are caused
by or contained in any information furnished in writing to the Company by any
member of the Shareholder Group
11.
<PAGE>
expressly for use therein or (ii) are caused by any of the Shareholders'
failure to deliver a copy of the current prospectus after the Company has
furnished any such Shareholders with a sufficient number of copies of such
prospectus or (iii) arise in respect of any offers to sell or sales made during
any period when any of the Shareholders is required to discontinue sales under
Section 3.5(e). The Company shall also indemnify underwriters, selling brokers,
dealer managers and similar securities industry professionals participating in
the distribution, their officers and directors and each person who controls such
Persons (within the meaning of the Securities Act and the Exchange Act) to the
same extent as provided above with respect to the indemnification of the
Shareholders and shall enter into an indemnification agreement with such Persons
containing such terms, if requested.
(b) Indemnification by the Shareholders. In connection with each
-----------------------------------
registration statement effected pursuant hereto in which shares of Shareholder
Common Stock are to be disposed of, each of the Shareholders shall, severally
and jointly, indemnify and hold harmless, to the full extent permitted by law,
the Company, each other Selling Securityholder and their respective directors
officers agents and employees and each Person who controls the Company and each
other Selling Securityholder (within the meaning of the Securities Act and the
Exchange Act) against any losses, claims, damages, liabilities and expenses
resulting from any untrue statement of a material fact or any omission of a
material fact required to be stated in such registration statement or prospectus
or preliminary prospectus or necessary to make the statements therein not
misleading, to the extent but only to the extent, that such untrue statement or
omission is contained in any information furnished in writing by such
Shareholders to the Company expressly for inclusion in such registration
statement or prospectus. In no event shall the liability of the Shareholders
hereunder be greater in amount than the dollar amount of the proceeds received
by the Shareholders upon the sale of the securities giving rise to such
indemnification obligation.
(c) Conduct of Indemnification Proceedings. Any Person entitled to
--------------------------------------
indemnification hereunder shall give prompt notice to the indemnifying party of
any claim with respect to which it shall seek indemnification and shall permit
such indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party; provided, however, that any
-------- -------
Person entitled to indemnification hereunder shall have the right to employ
separate counsel and to participate in the defense of such claim, but the fees
and expenses of such counsel shall be at the expense of such Person unless (i)
the indemnifying party shall have agreed to pay such fees or expenses, or (ii)
the indemnifying party shall have failed to assume the defense of such claim and
employ counsel reasonably satisfactory to such Person or (iii) in the opinion of
outside counsel to such Person there may be one or more legal defenses available
to such Person which are different from or in addition to those available to the
indemnifying party with respect to such claims (in which case, if the Person
notifies the indemnifying party in writing that such Person elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such claim on behalf of
such Person), If such defense is not assumed by the indemnifying party, the
indemnifying party shall not be subject to any liability for any settlement made
without its consent (but such consent shall not be unreasonably withheld). No
indemnified party shall be
12.
<PAGE>
required to consent to entry of any judgment or enter into any settlement
that does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a written release in form and
substance reasonably satisfactory to such indemnified party from all liability
in respect of such claim or litigation. An indemnifying party who is not
entitled to, or elects not to, assume the defense of a claim shall not be
obligated to pay the fees and expenses of more than one firm of counsel (and, if
necessary, local counsel) for all parties indemnified by such indemnifying party
with respect to such claim, unless in the written opinion of outside counsel to
an indemnified party a conflict of interest as to the subject matter exists
between such indemnified party and another indemnified party with respect to
such claim, in which event the indemnifying party shall be obligated to pay the
fees and expenses of additional counsel for such indemnified party.
(d) Contribution. If for any reason the indemnification provided for
------------
herein is unavailable to an indemnified party or is insufficient to hold it
harmless as contemplated hereby, then the indemnifying party shall contribute to
the amount paid or payable by the indemnified party as a result of such loss,
claims damage or liability in such proportion as is appropriate to reflect not
only the relative benefits received by the indemnified party and the
indemnifying party, but also the relative fault of the indemnified party and the
indemnifying party, as well as any other relevant equitable considerations,
provided that in no event shall the liability of the Shareholders for such
contribution and indemnification exceed, in the aggregate, the dollar amount of
the proceeds received by the Shareholders upon the sale of securities giving
rise to such indemnification and contribution obligation.
3.11 Participation in Underwritten Registrations. None of the Shareholders
-------------------------------------------
or their Permitted Transferees may participate in any underwritten registration
hereunder unless each of the Shareholders or their Permitted Transferees which
is a Selling Securityholder (a) agrees to sell such its shares of Shareholder
Common Stock on the basis provided in and in compliance with any underwriting
arrangements approved by the persons entitled hereunder to approve such
arrangements and to comply with Rules 10b-6 and 10b-7 under the Exchange Act,
and (b) completes and executes all questionnaires, appropriate and limited
powers-of-attorney, escrow agreements, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements; provided that all such documents shall be consistent with the
--------
provisions hereof.
ARTICLE IV
MISCELLANEOUS
-------------
4.1 Recapitalizations, Exchanges, Etc. Affecting Shareholder Common Stock.
---------------------------------------------------------------------
The provisions of this Agreement shall apply, to the full extent set forth
herein with respect to Shareholder Common Stock, to any and all shares of
capital stock of the Company or any successor or assign of the Company (whether
by merger, consolidation, sale of assets or otherwise) which may be issued in
respect of, in exchange for, or in substitution of the Shareholder Common Stock,
by reason of any stock dividend, stock split, stock issuance, reverse
13.
<PAGE>
stock split, combination recapitalization, reclassification, merger,
consolidation or otherwise. Upon the occurrence of any of such events, amounts
hereunder shall be appropriately adjusted by the Board of Directors of the
Company.
4.2 Binding Effect. The provisions of this Agreement shall be binding
--------------
upon and accrue to the benefit of the parties hereto and their respective heirs,
legal representatives, successors and assigns. In the case of a transferee
permitted under this Agreement, such transferee shall be deemed the Shareholder
hereunder; provided, however, that no transferee shall derive any rights under
--------
this Agreement unless and until such transferee has executed and delivered to
the Company a valid undertaking and becomes bound by the terms of this
Agreement.
4.3 Amendment; Waiver. This Agreement may be amended only by a written
-----------------
instrument signed by the parties hereto. No waiver by either party hereto of
any of the provisions hereof shall be effective unless set forth in a writing
executed by the party so waiving.
4.4 Notices. All notices, requests, demands and other communications
-------
which are required or may be given under this Agreement shall be in writing and
shall be deemed to have been duly given when received if personally delivered;
when transmitted if transmitted by telecopy, electronic or digital transmission
method; the day after it is sent, if sent for next day delivery to a domestic
address by recognized overnight delivery service (e.g., Federal Express) and
----
upon receipt, if sent by certified or registered mail, return receipt requested.
In each case notice shall be sent to:
(a) if to the Company, addressed to:
Digital Video Systems, Inc.
2710 Walsh Avenue
Santa Clara, CA 95051
Attn: Robert B. Pfannkuch
with a copy to:
Troy & Gould
1801 Century Park East
Suite 1600
Los Angeles, CA 90067
Attn: Sanford J. Hillsberg, Esq.
(b) If to a Shareholder, to him at his address set forth on the
signature pages hereto.
14.
<PAGE>
4.5 Governing Law. This Agreement shall be governed by and construed,
-------------
interpreted and the rights of the parties determined in accordance with the laws
of the State of California without regard to choice of law principles hereof.
4.6 Counterparts. This Agreement may be executed in one or more
------------
counterparts, each of which shall be deemed an original, and all of which
together shall constitute one and the same instrument.
4.7 Invalidity. In the event that any one or more of the provisions
----------
contained in this Agreement or in any other instrument referred to herein,
shall, for any reason, be held to be invalid, illegal or unenforceable in any
respect, then to the maximum extent permitted by law, such invalidity,
illegality or unenforceability shall not affect any other provision of this
Agreement or any other such instrument.
4.8 Cumulative Remedies. All rights and remedies of the party hereto are
-------------------
cumulative of each other and of every other right or remedy such party may
otherwise have at law or in equity, and the exercise of one or more rights or
remedies shall not prejudice or impair the concurrent or subsequent exercise of
other rights or remedies.
4.9 Waiver of Right to Trial by Jury. Each party to this Agreement hereby
--------------------------------
waives its rights to a trial by jury.
4.10 Injunctive Relief. The Shareholder and his Permitted Transferees each
-----------------
acknowledges and agrees that a violation of any of the terms of this Agreement
will cause the Company irreparable injury for which adequate remedy at law is
not available. Accordingly, it is agreed that the Company shall be entitled to
an injunction restraining order or other equitable relief to prevent breaches of
the provisions of this Agreement and to enforce specifically the terms and
provisions hereof in any court of competent jurisdiction in the United States or
any state thereof, in addition to any other remedy to which it may be entitled
at law or equity.
15.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
DIGITAL VIDEO SYSTEMS, INC.
By:
-----------------------------------
Name:
Title:
SHAREHOLDERS:
--------------------------------------
Name: Dr. Edmund Sun
Address:
--------------------------------------
Name: James W. Kirkpatrick, Jr.
Address:
--------------------------------------
Name: Lish Chen
Address:
--------------------------------------
Name: Michael Mruzik
Address:
--------------------------------------
Name: Mihailo Stojancic
Address:
--------------------------------------
Name: Tai Sato
Address:
--------------------------------------
Name: Francis Hung
Address:
16
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Page
<S> <C>
ARTICLE I DEFINITIONS................................... 1
1.1 Defined Terms................................. 1
ARTICLE II TRANSFERS OF SHARES........................... 2
2.1 Investment Intention; No
Resales....................................... 2
2.2 Restrictive Legend............................ 2
2.3 Shareholder Common Stock
Unregistered.................................. 3
2.4 Rule 144 Reporting............................ 3
ARTICLE III REGISTRATION RIGHTS........................... 4
3.1 Right to Include Securities................... 4
3.2 Priority in Incidental
Registration.................................. 5
3.3 Custody Agreement and Power
of Attorney................................... 5
3.4 Registration Procedures....................... 5
3.5 Incidental Underwritten
Offerings..................................... 9
3.6 Preparation; Reasonable
Investigation................................. 9
3.7 Limitations, Conditions and
Qualifications to obligation
under Registration Covenants.................. 9
3.8 Expenses...................................... 10
3.9 Indemnification............................... 10
3.10 Participation in
Underwritten Registrations.................... 12
ARTICLE IV MISCELLANEOUS................................. 13
4.1 Recapitalizations, Exchanges, Etc.
Affecting Shareholder
Common Stock................................ 13
4.2 Binding Effect................................ 13
4.3 Amendment; Waiver............................. 13
4.4 Notices....................................... 13
4.5 Governing Law................................. 14
4.6 Counterparts.................................. 14
4.7 Invalidity.................................... 14
4.8 Cumulative Remedies........................... 14
4.9 Waiver of Right to Trial by
Jury.......................................... 14
4.10 Injunctive Relief............................. 14
</TABLE>
i
<PAGE>
Exhibit 10.15
1996 STOCK OPTION PLAN
OF
DIGITAL VIDEO SYSTEMS, INC.
1. PURPOSES OF THE PLAN
--------------------
The purposes of the 1996 Stock Option Plan (the "Plan") of Digital Video
Systems, Inc., a Delaware corporation (the "Company"), are to:
(a) Encourage selected employees, directors and consultants to improve
operations and increase profits of the Company;
(b) Encourage selected employees, directors and consultants to accept
or continue employment or association with the Company or its Affiliates; and
(c) Increase the interest of selected employees, directors and
consultants in the Company's welfare through participation in the growth in
value of the common stock of the Company (the "Common Stock").
Options granted under this Plan ("Options") may be "incentive stock
options" ("ISOs") intended to satisfy the requirements of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), or "nonqualified
options" ("NQOs").
2. ELIGIBLE PERSONS
----------------
Every person who at the date of grant of an Option is a full-time employee
of the Company or of any Affiliate (as defined below) of the Company is eligible
to receive NQOs or ISOs under this Plan. Every person who at the date of grant
is a consultant to, or non-employee director of, the Company or any Affiliate
(as defined below) of the Company is eligible to receive NQOs under this Plan.
The term "Affiliate" as used in the Plan means a parent or subsidiary
corporation as defined in the applicable provisions (currently Sections 424(e)
and (f), respectively) of the Code. The term "employee" includes an officer or
director who is an employee, of the Company. The term "consultant" includes
persons employed by, or otherwise affiliated with, a consultant.
3. STOCK SUBJECT TO THIS PLAN
--------------------------
Subject to the provisions of Section 6.1.1 of the Plan, the total number of
shares of stock which may be issued under options granted pursuant to this Plan
shall not exceed [1,000,000] shares of Common Stock. The shares covered by the
portion of any grant under the Plan which expires unexercised shall become
available again for grants under the Plan.
<PAGE>
4. ADMINISTRATION
--------------
(a) It is intended that this Plan shall be administered in accordance
with the disinterested administration requirements of Rule 16b-3 promulgated by
the Securities and Exchange Commission ("Rule 16b-3"), or any successor rule
thereto.
(b) The Plan shall be administered by the Board of Directors of the
Company (the "Board"), either in its entirety or by a committee (the
"Committee") to which administration of the Plan, or of part of the Plan, is
delegated (in either case, the "Administrator"). The Board shall appoint and
remove members of the Committee in its discretion subject only to the
requirements set forth herein. The Committee shall be comprised of two or more
"Non-Employee Directors" of the Board as defined in Rule 16b-3 (or any successor
rule) promulgated by the Securities and Exchange Commission pursuant to the
Exchange Act, or such other persons as may be permitted under Rule 16b-3, as
such may be amended from time to time, in order to preserve the status of this
Plan as a 16b-3 Plan.
(c) Subject to the other provisions of this Plan, the Administrator
shall have the authority, in its discretion: (i) to grant options; (ii) to
determine the fair market value of the Common Stock subject to options; (iii) to
determine the exercise price of Options granted; (iv) to determine the persons
to whom, and the time or times at which, Options shall be granted, and the
number of shares subject to each Option; (v) to interpret this Plan; (vi) to
prescribe, amend, and rescind rules and regulations relating to this Plan; (vii)
to determine the terms and provisions of each Option granted (which need not be
identical), including but not limited to, the time or times at which Options
shall be exercisable; (viii) with the consent of the optionee, to modify or
amend any Option; (ix) to defer (with the consent of the optionee) the exercise
date of any option; (x) to authorize any person to execute on behalf of the
Company any instrument evidencing the grant of an Option; and (xi) to make all
other determinations deemed necessary or advisable for the administration of
this Plan. The Administrator may delegate nondiscretionary administrative
duties to such employees of the Company as it deems proper.
(d) All questions of interpretation, implementation, and application
of this Plan shall be determined by the Administrator. Such determinations
shall be final and binding on all persons.
(e) With respect to persons subject to Section 16 of the Exchange Act,
if any, transactions under this Plan are intended to comply with the applicable
conditions of Rule 16b-3, or any successor rule thereto. To the extent any
provision of this Plan or action by the Administrator fails to so comply, it
shall be deemed null and void, to the extent permitted by law and deemed
advisable by the Administrator. Notwithstanding the above, it shall be the
responsibility of such persons, not of the Company or the Administrator, to
comply with the requirements of Section 16 of the Exchange Act; and neither the
Company nor the Administrator shall be liable if this
2.
<PAGE>
Plan or any transaction under this Plan fails to comply with the applicable
conditions of Rule 16b-3 or any successor rule thereto, or if any such person
incurs any liability under Section 16 of the Exchange Act.
5. GRANTING OF OPTIONS; OPTION AGREEMENT
-------------------------------------
(a) No Options shall be granted under this Plan after 10 years
from the date of adoption of this Plan by the Board.
(b) Each Option shall be evidenced by a written stock option
agreement, in form satisfactory to the Company, executed by the Company and the
person to whom such Option is granted; provided, however, that the failure by
the Company, the optionee, or both to execute such an agreement shall not
invalidate the granting of an option, although the exercise of each option shall
be subject to Section 6.1.3.
(c) The stock option agreement shall specify whether each
option it evidences is a NQO or an ISO.
(d) Subject to Section 6.3.3 with respect to ISOs, the
Administrator may approve the grant of Options under this Plan to persons who
are expected to become employees, directors or consultants of the Company, but
are not employees, directors or consultants at the date of approval, and the
date of approval shall be deemed to be the date of grant unless otherwise
specified by the Administrator.
6. TERMS AND CONDITIONS OF OPTIONS
-------------------------------
Each Option granted under this Plan shall be subject to the terms and
conditions set forth in Section 6.1, NQOs shall be also subject to the terms and
conditions set forth in Section 6.2, but not those set forth in Section 6.3,
ISOs shall also be subject to the terms and conditions set forth in Section 6.3,
but not those set forth in Section 6.2.
6.1 Terms and Conditions to Which All Options Are Subject. All Options
-----------------------------------------------------
granted under this Plan shall be subject to the following terms and conditions:
6.1.1 Changes in Capital Structure. Subject to Section 6.1.2, if
----------------------------
the stock of the Company is changed by reason of a stock split, reverse stock
split, stock dividend, or recapitalization, combination or reclassification,
appropriate adjustments shall be made by the Board in (a) the number and class
of shares of stock subject to this Plan and each Option outstanding under this
Plan, and (b) the exercise price of each outstanding Option; provided, however,
that the Company shall not be required to issue fractional shares as a result of
any such adjustments. Each such adjustment shall be subject to approval by the
Board in its sole discretion.
6.1.2 Corporate Transactions. In the event of the proposed
----------------------
dissolution or liquidation of the Company, the Administrator shall notify each
optionee
3.
<PAGE>
at least 30 days prior to such proposed action. To the extent not previously
exercised, all Options will terminate immediately prior to the consummation of
such proposed action. In the event of a merger or consolidation of the Company
with or into another corporation or entity in which the Company does not
survive, or in the event of a sale of all or substantially all of the assets of
the Company in which the stockholders of the Company receive securities of the
acquiring entity or an affiliate thereof, all Options shall be assumed or
equivalent options shall be substituted by the successor corporation (or other
entity) or a parent or subsidiary of such successor corporation (or other
entity). If such successor does not agree to assume the Options or to
substitute equivalent options therefor, unless the Administrator shall determine
otherwise, the options will expire upon such event.
6.1.3 Time of Option Exercise. Subject to Section 5 and Section
-----------------------
6.3.4, Options granted under this Plan shall be exercisable (a) immediately as
of the effective date of the stock option agreement granting the Option, or (b)
in accordance with a schedule related to the date of the grant of the Option,
the date of first employment, or such other date as may be set by the
Administrator (in any case, the "Vesting Base Date") and specified in the
written stock option agreement relating to such Option; provided, however, that
the right to exercise an option must vest at the rate of at least 20% per year
over five years from the date the option was granted. In any case, no Option
shall be exercisable until a written stock option agreement in form satisfactory
to the Company is executed by the Company and the optionee.
6.1.4 Option Grant Date. Except in the case of advance approvals
-----------------
described in Section 5(d), the date of grant of an Option under this Plan shall
be the date as of which the Administrator approves the grant.
6.1.5 Nontransferability of Option Rights. No Option granted under
-----------------------------------
this Plan shall be assignable or otherwise transferable by the optionee except
by will or by the laws of descent and distribution. During the life of the
optionee, an Option shall be exercisable only by the optionee.
6.1.6 Payment. Except as provided below, payment in full, in cash,
-------
shall be made for all stock purchased at the time written notice of exercise of
an option is given to the Company, and proceeds of any payment shall constitute
general funds of the Company. At the time an Option is granted or exercised,
the Administrator, in the exercise of its absolute discretion after considering
any tax or accounting consequences, may authorize any one or more of the
following additional methods of payment:
(a) Acceptance of the optionee's full recourse promissory note
for all or part of the Option price, payable on such terms and bearing such
interest rate as determined by the Administrator (but in no event less than the
minimum interest rate specified under the Code at which no additional interest
would be imputed), which promissory note may be either secured or unsecured in
such manner as the Administrator
4.
<PAGE>
shall approve (including, without limitation, by a security interest in the
shares of the Company); and
(b) Subject to the discretion of the Administrator and the
terms of the stock option agreement granting the Option, delivery by the
optionee of Common Stock already owned by the optionee for all or part of the
option price, provided the value (determined as set forth in Section 6.1.11) of
such Common Stock is equal on the date of exercise to the option price, or such
portion thereof as the optionee is authorized to pay by delivery of such stock.
6.1.7 Termination of Employment. If for any reason other than death
-------------------------
or permanent and total disability, an optionee ceases to be employed by the
Company or any of its Affiliates (such event being called a "Termination"),
Options held at the date of Termination (to the extent then exercisable) may be
exercised in whole or in part at any time within three months of the date of
such Termination, or such other period of not less than 30 days after the date
of such Termination as is specified in the Option Agreement (but in no event
after the Expiration Date); provided, that if such exercise of the Option would
result in liability for the optionee under Section 16(b) of the Exchange Act,
then such three-month period automatically shall be extended until the tenth day
following the last date upon which optionee has any liability under Section
16(b) (but in no event after the Expiration Date). If an optionee dies or
becomes permanently and totally disabled (within the meaning of Section 22(e)(3)
of the Code) while employed by the Company or an Affiliate or within the period
that the Option remains exercisable after Termination, Options then held (to the
extent then exercisable) may be exercised, in whole or in part, by the optionee,
by the optionee's personal representative or by the person to whom the option is
transferred by devise or the laws of descent and distribution, at any time
within six months after the death or six months after the permanent and total
disability of the optionee or any longer period specified in the Option
Agreement (but in no event after the Expiration Date). For purposes of this
Section 6.1.7, "employment" includes service as a director or as a consultant.
For purposes of this Section 6.1.7, an optionee's employment shall not be deemed
to terminate by reason of sick leave, military leave or other leave of absence
approved by the Administrator, if the period of any such leave does not exceed
90 days or, if longer, if the optionee's right to reemployment by the Company or
any Affiliate is guaranteed either contractually or by statute.
6.1.8 Withholding and Employment Taxes. At the time of exercise of
--------------------------------
an Option or at such other time as the amount of such obligations becomes
determinable (the "Tax Date"), the optionee shall remit to the Company in cash
all applicable federal and state withholding and employment taxes. If
authorized by the Administrator in its sole discretion after considering any tax
or accounting consequences, an optionee may elect to (i) deliver a promissory
note on such terms as the Administrator deems appropriate, (ii) tender to the
Company previously owned shares of Stock or other securities of the company, or
(iii) have shares of Common Stock which are acquired upon exercise of the option
withheld by the Company of all of the amount of tax that is
5.
<PAGE>
required by law to be withheld by the Company as a result of the exercise of
such Option, subject to the following limitations:
(a) Any election pursuant to clause (iii) above by an optionee
subject to Section 16 of the Exchange Act shall either (x) be made at least six
months before the Tax Date and shall be irrevocable; or (y) shall be made in (or
made earlier to take effect in) any 10-day period beginning on the third
business day following the date of release for publication of the Company's
quarterly or annual summary statements of earnings and shall be subject to
approval by the Administrator, which approval may be given at any time after
such election has been made. In addition, in the case of (y), the Option shall
be held at least six months prior to the Tax Date.
(b) Any election pursuant to clause (ii) above, where the
optionee is tendering Common Stock issued pursuant to the exercise of an option,
shall require that such shares be held at least six months prior to the Tax
Date.
Any of the foregoing limitations may be waived (or additional limitations
may be imposed) by the Administrator, in its sole discretion, if the
Administrator determines that such foregoing limitations are not required (or
that such additional limitations are required) in order that the transaction
shall be exempt from Section 16(b) of the Exchange Act pursuant to Rule 16b-3,
or any successor rule thereto. In addition, any of the foregoing limitations
may be waived by the Administrator, in its sole discretion, if the Administrator
determines that Rule 16b-3, or any successor rule thereto, is not applicable to
the exercise of the Option by the optionee or for any other reason.
Any securities tendered or withheld in accordance with this Section 6.1.9
shall be valued by the Company as of the Tax Date.
6.1.9 Other Provisions. Each option granted under this Plan may
----------------
contain such other terms, provisions, and conditions not inconsistent with this
Plan as may be determined by the Administrator, and each ISO granted under this
Plan shall include such provisions and conditions as are necessary to qualify
the Option as an "incentive stock option" within the meaning of Section 422 of
the Code.
6.1.10 Determination of Value. For purposes of the Plan, the value
----------------------
of Common Stock or other securities of the Company shall be determined as
follows:
(a) If the stock of the Company is regularly quoted by a
recognized securities dealer but selling prices are not reported, its fair
market value shall be the mean between the high bid and low asked prices for the
stock on the date the value is to be determined (or if there are no quoted
prices for the date of grant, then for the last preceding business day on which
there were quoted prices).
(b) In the absence of an established market for the stock, the
fair market value thereof shall be determined in good faith by the
Administrator, with
6.
<PAGE>
reference to the Company's net worth, prospective earning power, dividend-paying
capacity, and other relevant factors, including the goodwill of the Company, the
economic outlook in the Company's industry, the Company's position in the
industry, the Company's management, and the values of stock of other
corporations in the same or a similar line of business.
6.1.11 Option Term. Subject to Section 6.3.5, no option shall be
-----------
exercisable more than 10 years after the date of grant, or such lesser period of
time as is set forth in the stock option agreement (the end of the maximum
exercise period stated in the stock option agreement is referred to in this Plan
as the "Expiration Date").
6.1.12 Exercise Price. The exercise price of any option granted to
--------------
any person who owns, directly or by attribution under the Code (currently
Section 424(d)), stock possessing more than ten percent of the total combined
voting power of all classes of stock of the Company or of any Affiliate (a "Ten
Percent Stockholder") shall in no event be less than 110% of the fair market
value (determined in accordance with Section 6.1.11) of the stock covered by the
Option at the time the Option is granted.
6.2 Terms and Conditions to Which Only NQOs Are Subject. Options granted
---------------------------------------------------
under this Plan which are designated as NQOs shall be subject to the following
terms and conditions:
6.2.1 Exercise Price. Except as set forth in Section 6.1.13, the
--------------
exercise price of a NQO shall be not less than 85% of the fair market value
(determined in accordance with Section 6.1.11) of the stock subject to the
Option on the date of grant.
6.3 Terms and Conditions to Which Only ISOs Are Subject. Options granted
---------------------------------------------------
under this Plan which are designated as ISOs shall be subject to the following
terms and conditions:
6.3.1 Exercise Price. Except as set forth in Section 6.1.13, the
--------------
exercise price of an ISO shall be determined in accordance with the applicable
provisions of the Code and shall in no event be less than the fair market value
(determined in accordance with Section 6.1.11) of the stock covered by the
Option at the time the Option is granted.
6.3.2 Disqualifying Dispositions. If stock acquired by exercise of
--------------------------
an ISO granted pursuant to this Plan is disposed of in a "disqualifying
disposition" within the meaning of Section 422 of the Code, the holder of the
stock immediately before the disposition shall promptly notify the Company in
writing of the date and terms of the disposition and shall provide such other
information regarding the Option as the Company may reasonably require.
6.3.3 Grant Date. If an ISO is granted in anticipation of
----------
employment as provided in Section 5(d), the option shall be deemed granted,
without further approval,
7.
<PAGE>
on the date the grantee assumes the employment relationship forming the basis
for such grant, and, in addition, satisfies all requirements of this Plan for
Options granted on that date.
6.3.4 Vesting. Notwithstanding any other provision of this Plan,
-------
ISOs granted under all incentive stock option plans of the Company and its
subsidiaries may not "vest" for more than $100,000 in fair market value of stock
(measured on the grant dates(s)) in any calendar year. For purposes of the
preceding sentence, an option "vests" when it first becomes exercisable. If, by
their terms, such ISOs taken together would vest to a greater extent in a
calendar year, and unless otherwise provided by the Administrator, the vesting
limitation described above shall be applied by deferring the exercisability of
those ISOs or portions of ISOs which have the highest per share exercise prices;
but in no event shall more than $100,000 in fair market value of stock (measured
on the grant date(s)) vest in any calendar year. The ISOs or portions of ISOs
whose exercisability is so deferred shall become exercisable on the first day of
the first subsequent calendar year during which they may be exercised, as
determined by applying these same principles and all other provisions of this
Plan including those relating to the expiration and termination of ISOs. In no
event, however, will the operation of this Section 6.3.4 cause an ISO to vest
before its terms or, having vested, cease to be vested.
6.3.5 Term. Notwithstanding Section 6.1.12, no ISO granted to any
----
Ten Percent Stockholder shall be exercisable more than five years after the date
of grant.
7. MANNER OF EXERCISE
------------------
(a) An optionee wishing to exercise an Option shall give
written notice to the Company at its principal executive office, to the
attention of the officer of the Company designated by the Administrator,
accompanied by payment of the exercise price as provided in Section 6.1.6. The
date the Company receives written notice of an exercise hereunder accompanied by
payment of the exercise price will be considered as the date such Option was
exercised.
(b) Promptly after receipt of written notice of exercise of an
Option, the Company shall, without stock issue or transfer taxes to the optionee
or other person entitled to exercise the Option, deliver to the optionee or such
other person a certificate or certificates for the requisite number of shares of
stock. An optionee or permitted transferee of an optionee shall not have any
privileges as a stockholder with respect to any shares of stock covered by the
Option until the date of issuance (as evidenced by the appropriate entry on the
books of the Company or a duly authorized transfer agent) of such shares.
(c) Unless exempted by the Administrator, if an officer or
director who is subject to the provisions of Section 16(b) of the Exchange Act
exercises an Option within six months of the grant of such Option, the shares
acquired upon
8.
<PAGE>
exercise of such Option may not be disposed of until six months after the date
of grant of such Option.
8. EMPLOYMENT OR CONSULTING RELATIONSHIP
-------------------------------------
Nothing in this Plan or any Option granted hereunder shall interfere with
or limit in any way the right of the Company or of any of its Affiliates to
terminate any optionee's employment or consulting at any time, nor confer upon
any optionee any right to continue in the employ of, or consult with, the
Company or any of its Affiliates.
9. CONDITIONS UPON ISSUANCE OF SHARES
----------------------------------
Shares of Common Stock shall not be issued pursuant to the exercise of an
Option unless the exercise of such Option and the issuance and delivery of such
shares pursuant thereto shall comply with all relevant provisions of law,
including, without limitation, the Securities Act of 1933, as amended (the
"Securities Act").
10. NONEXCLUSIVITY OF THE PLAN
--------------------------
The adoption of the Plan shall not be construed as creating any limitations
on the power of the Company to adopt such other incentive arrangements as it may
deem desirable, including, without limitation, the granting of stock options
other than under the Plan.
11. MARKET STANDOFF
---------------
Each optionee, if so requested by the Company or any representative of the
underwriters in connection with any registration of the offering of any
securities of the Company under the Securities Act shall not sell or otherwise
transfer any shares of Common Stock acquired upon exercise of Options during the
180-day period following the effective date of a registration statement of the
Company filed under the Securities Act; provided, however, that such restriction
shall apply only to the first registration statement of the Company to become
effective under the Securities Act after the date of adoption of this Plan which
includes securities to be sold on behalf of the Company to the public in an
underwritten public offering under the Securities Act. The Company may impose
stop-transfer instructions with respect to securities subject to the foregoing
restriction until the end of such 180-day period.
12. AMENDMENTS TO PLAN
------------------
The Board may at any time amend, alter, suspend or discontinue this Plan.
Without the consent of an optionee, no amendment, alteration, suspension or
discontinuance may adversely affect outstanding Options except to conform this
Plan and ISOs granted under this Plan to the requirements of federal or other
tax laws relating to incentive stock options. No amendment, alteration,
suspension or discontinuance shall
9.
<PAGE>
require stockholder approval unless (a) stockholder approval is required to
preserve incentive stock option treatment for federal income tax purposes, or
(b) the Board otherwise concludes that stockholder approval is advisable;
provided, however, that no such amendment shall, without the approval of the
stockholders of the Company, effectuate a change for which stockholder approval
is required in order for the Plan to continue to qualify under Rule 16b-3 (while
it is in effect) or any successor rule thereto.
13. EFFECTIVE DATE OF PLAN
----------------------
This Plan shall become effective upon adoption by the Board provided,
however, that no Option shall be exercisable unless and until written consent of
the stockholders of the Company, or approval of stockholders of the Company
voting at a validly called stockholders' meeting, is obtained within 12 months
after adoption by the Board. If such stockholder approval is not obtained
within such time, options granted hereunder shall terminate and be of no force
and effect from and after expiration of such 12-month period. Options may be
granted and exercised under this Plan only after there has been compliance with
all applicable federal and state securities laws.
10.
<PAGE>
EXHIBIT 10.16
[LETTERHEAD OF SITRICK AND COMPANY INC.]
September 26, 1996
Mr. Robert Pfannkuch
President
Digital Video Systems
2710 Walsh Avenue
Santa Clara, California 95051
Dear Bob:
This will confirm our agreement (the "Agreement") as follows:
1. Digital Video Systems (the "Company") has retained Sitrick And Company
("Sitrick") as investor relations and public relations counsel for an
initial six-month period commencing September 26, 1996, plus an additional
six-month extension period if such an extension is mutually agreed upon.
Services to be provided by Sitrick shall include without limitation the
following:
(a) Preparation of Company press releases
(b) Preparation of Company reports to shareholders, including annual
and quarterly reports
(c) Arranging for Company road shows
(d) Assisting the Company to obtain analyst coverage for the Company
(e) Assisting the Company to obtain additional market makers for the
Company's securities
(f) Assisting the Company to obtain financial and other news media
coverage of its activities
(g) Responding to broker and shareholder inquiries concerning the
status of the Company's activities
2. The Company will pay Sitrick a monthly retainer (the "Monthly Retainer")
consisting of $10,000 in cash and 599 shares of the Company's common stock
to be issued by the Company. Time charges will be billed for professional
fees against the Monthly Retainer at the hourly rate range of $150 to
$375; Sitrick will advise the Company in advance should its anticipated
fees for any month exceed $15,016 on a cumulative basis (the "Excess
Fees") calculated on a semi-annual basis. The excess fees will be paid by
the Company 65% in cash and 35% in the Company's Common Stock (valued at
$8.375 per share, the closing price on September 24, 1996. Sitrick will
have customary "piggyback" registration rights (at no cost to Sitrick)
with respect to all shares of common stock issued under this agreement.
<PAGE>
Mr. Robert Pfannkuch
September 25, 1996
Page 2
3. In addition to the compensation described in paragraph 2 above, Sitrick will
be issued each month during the term of this Agreement a five-year warrant
to purchase 2995 shares of common stock at $8.375 per share as part of its
monthly retainer and five warrants for each share of stock issued as payment
of excess fees. Stock and warrants issued under this Agreement will be
issued quarterly.
4. Sitrick further agrees to advance funds on behalf of the Company for
out-of-pocket expenses incurred. The Company will place $2,500 in cash on
deposit with Sitrick against out-of-pocket expenses, which will include
travel, production and related costs, and which will be rebilled directly
for cash reimbursement in a separate detailed monthly statement. Any
expenses in excess of $2,500 shall be billed and paid by the Company as
incurred.
5. The Company will indemnify and hold harmless Sitrick, its controlling
persons, officers, directors, employees and agents from and against any and
all losses, claims, damages, liabilities, costs and expenses (including, but
not limited to reasonable attorney's fees) which Sitrick or any of the
foregoing persons may be subject to or incur in connection with the services
to be rendered by Sitrick to the Company (including, but not limited to, its
or their reliance upon or use of any information, documents,
representations, reports or data furnished by or prepared by the Company.).
This paragraph shall not apply to any action or inaction which has been
judicially determined to be willful misconduct or gross negligence on the
part of Sitrick; and Sitrick will indemnify and hold the Company harmless
for any loss, costs or expenses (including but not limited to reasonable
attorneys' fees) resulting from any such misconduct or gross negligence.
6. Sitrick's engagement hereunder may be terminated by either party on 30-days
written notification, it being understood that the provision hereof relating
to the payment of unpaid fees and accrued expenses and indemnification will
survive any such termination.
If this conforms to your understanding of our agreement, please sign the
attached copy and return it to me for our files.
Sincerely,
Agreed: Sitrick And Company Agreed: Digital Video Systems
By: /s/ Jeffrey S. Lloyd By: /s/ Robert Pfannkuch
------------------------ ------------------------
Jeffrey S. Lloyd Robert Pfannkuch
Date: 9/26/96 Date: 9/27/96
------------- -------------
<PAGE>
EXHIBIT 10.17
OFFICE LEASE AGREEMENT
THIS LEASE IS MADE BETWEEN PAULSEN OFFICE PARK, CALLED "LANDLORD" AND
DIGITAL VIDEO SYSTEMS, A DELAWARE CORPORATION, CALLED "TENANT."
IT IS AGREED BETWEEN LANDLORD AND TENANT AS FOLLOWS:
1. PREMISES: Landlord hereby leases and Tenant hereby hires, upon the terms
and conditions herein set forth, the office space known as Suite 116 on the
---
First floor of the PAULSEN OFFICE PARK Building, hereinafter referred to as the
"Building," located at 4020 Moorpark Avenue, San Jose, California 95117 as
----
outlined on the floor plan attached hereto as Exhibit "A" and hereby made a part
hereof, such office space referred to as the "Premises."
2. TERMS: The term of this Lease shall be for a period of 14 1/2 Months,
-------------
commencing on the 15th day of October, 1996 and terminating on the 31st day of
---- ----
December, 1997.
3. RENT: Tenant will pay to Landlord, at the office of the Building, as
rent for the premises, the total sum and rental of Forty-Five Thousand Seven
-------------------------
Hundred Fifty-Four Dollars and 65/100 ($45,754.65) lawful money of the United
- ------------------
States, payable Three Thousand One Hundred Forty-Five Dollars and 00/100
-------------------------------------
($3,145.00) concurrent herewith as and for rent for the first month of the
lease term, and Three Thousand One Hundred Forty Five Dollars and 00/100
-------------------------------------
($3,145.00) per month on the first day of each and every month thereafter
during the full term thereof. Tenant agrees that he will promptly pay said
rent at the times above stated; that he will pay all other charges, if any, for
the premises during the term of this Lease.
The parties agree that in the event Tenant fails to make any rental payment
within ten days of the due date, it will be impracticable and extremely
difficult to fix the actual damages to Landlord. Therefore, the parties agree
that Tenant will pay Landlord the sum of $100.00 if the rent payment is not
received within ten (10) days of the due date, and an additional sum of $100.00
if the rent is not received within twenty (20) days of the due date. The
assessment of the damages hereinabove set forth shall be in addition to remedies
available to Landlord as set forth on paragraph # 25 hereof.
4. DEPOSIT: As additional consideration for the execution of this Lease
agreement by Landlord, Tenant has paid to Landlord the sum of Three Thousand One
------------------
Hundred Forty-Five Dollars and 00/100 ($3,145.00) concurrent herewith, receipt
- ------------------
whereof is hereby acknowledged. Landlord may apply any portion or all of said
deposit to unperformed obligations of Tenant under this Lease, and in said event
Tenant shall replace the portion so applied within ten (10) days of notice from
Landlord. At the end of the Lease term, any portion of the deposit remaining
shall be returned to Tenant.
5. TAXES: Tenant shall pay all taxes and assessments levied against any
personal property, trade fixtures, or other improvements on the Premises
belonging to Tenant. Tenant shall also pay any sales, use or rental tax which
may be assessed by any governmental body during the time of this Lease.
6. UTILITIES: Landlord will use reasonable efforts to provide the Premises
with hot and cold water, heat, air conditioning, ventilation, gas, light and
janitor service during such hours and of such character and amounts as Landlord,
in its sole judgment, may deem reasonable, without liability for failures or
interruptions resulting from any cause or from good faith acts or decisions of
Landlord.
7. USE: Tenant will use the Premises only for office purposes, unless the
Landlord shall give Tenant previous written consent for a different use. In
connection with his use of and activities in and about the Premises and the
Building, Tenant at his expense will comply and will cause his employees, agents
and invitees to comply, with all applicable rules and regulations of
governmental agencies, and Tenant will conduct himself and cause his employees,
agents and invitees to conduct themselves, with full regard for the rights,
convenience, and welfare of all other tenants in the Building. Landlord
--------
approves Digital Video Systems and its affiliated company's (Vicom Technology,
- ------------------------------------------------------------------------------
Inc.) use of the premises to include development and testing of semiconductor
- -----------------------------------------------------------------------------
chips.
- ------
<PAGE>
- 2 -
8. SIGNS: Tenant will not permit any signs, advertisements or notices to be
displayed, inscribed upon or affixed on any part of the outside or inside of the
premises, or in the building of which they are a part, except on the directory
board to be provided by Landlord and on the entrance doors of the Premises, and
then only of such size, color and style as Landlord may
approve.
9. CONDITION OF PREMISES AT COMMENCEMENT: Tenant acknowledges that his
acceptance of possession of the Premises constitutes a conclusive admission that
he has inspected the Premises and has found it in good condition and repair in
all respects in accordance with the obligation of Landlord under this Lease.
10. UNDERTAKINGS BY TENANT-INDEMNIFICATION OF LANDLORD: Tenant will hold
Landlord and all other tenants of the Building, and their employees, agents and
invitees, harmless from any loss, damage, or liability caused by Tenant or his
employees, agents or invitees. Tenant will not claim damages, other than a
prorated abatement of the rent, if delivery of possession of the Premises will
be delayed beyond commencement of the term of this Lease, regardless of the
cause.
11. NOTICE OF DISREPAIR: Upon observing that any part of the Premises or of
the Building, including the fixtures and facilities, is or appears to be
defective, damaged or in disrepair, regardless of the nature or cause, Tenant
will notify Landlord immediately.
12. ACTS AFFECTING INSURANCE: Tenant will not conduct any activities or
keep any materials, substances, or articles in or about the Premises which will
impair or invalidate, or increase the premium cost of, insurance policies
carried by Landlord.
13. MAINTENANCE: During the term Tenant will maintain the Premises in good
condition and repair in compliance with Landlord's written instructions, except
such repair and maintenance which are the obligations of Landlord as provided
hereafter in Paragraph 19 of this Lease and except for damages not caused by any
negligence of Tenant or any employee, agent or invitee of Tenant. Tenant will
maintain all of his furniture, furnishings, and equipment located in the
Premises in good, neat, and attractive condition and in good repair.
14. ALTERATIONS: Tenant will not make any alterations or additions to or
install partitions or built-in fixtures or facilities in the Premises without
Landlord's previous written consent. Any alterations, partitions, or built-in
fixtures or facilities made to or installed in the Premises by Tenant with
Landlord's consent will be done in accordance with and subject to the written
directions and conditions issued by Landlord, and shall become a part of the
Building and the property of Landlord. Landlord may repair, alter, improve
or remodel any portion of the Premises or the Building, but without obligation
so to do, without liability to Tenant for any damage or convenience to or
temporary impairment of enjoyment of the Premises by Tenant.
15. LIENS: Tenant will not cause or permit any lien to be imposed upon the
Premises or the Building and will pay all taxes and license fees imposed by
reason of any improvements made by Tenant to the Premises or imposed upon any
personal property located in the Premises. Tenant agrees to give Landlord not
less than (5) days notice prior to commencement of any alteration or repair
permitted under the terms of the Lease so that Landlord may post Notice of
Non-Responsibility.
16. REIMBURSEMENT: Tenant will reimburse Landlord for all expenditures made
by Landlord for the account or benefit of Tenant.
17. CONDEMNATION: Should any part of the Premises or the Building be taken
from Landlord as a result of condemnation proceedings, threatened or filed,
Tenant does and will relinquish to Landlord any interest in the proceeds or the
award. Should all or a substantial part of the Premises be taken or
relinquished by a public utility or a governmental agency by condemnation or
otherwise, Landlord or Tenant may terminate this Lease on not less than thirty
(30) days written notice to either party.
18. RIGHT OF ENTRY: Tenant will permit any officer, agent, or employee of
Landlord to enter the Premises, with a passkey or otherwise at any reasonable
time for inspection, janitor service, or other reasonable purposes, and Tenant
releases Landlord from any responsibility for any resulting theft or damage.
Tenant shall be given exterior door keys to provide access to the premises at
any time.
<PAGE>
- 3 -
19. UNDERTAKINGS BY LANDLORD-RULES AND SERVICE: Landlord will endeavor, but
without liability for failure, to establish, maintain, and enforce rules and
regulations in connection with the use and occupancy of the Building which will
be conducive to the welfare and comfort of all tenants of the Building, and
shall furnish the Premises during reasonable and usual business hours the
following services at Landlord's sole expense.
(a) HEAT - Heat and air conditioning during the customary periods of the
year, Monday through Friday, when and to the same extent Landlord
furnishes heat and air conditioning for other portions of the Building
of which the Premises are a part should Tenant require heat or cooling.
Tenant shall be provided after hours HVAC at no charge throughout the
term of this lease through the building's overide system.
(b) ELECTRICITY - Electric current consisting of 110/208 service for
lighting and ordinary business appliances;
(c) JANITORIAL SERVICES - Usual janitorial and maintenance service
including the sweeping and waxing of floors. Landlord shall also
maintain and keep lighted the common stairs, entries, and toilet rooms
in the Building;
(d) REPAIRS - Tenant will, at his sole cost and expense, supply chair mats
for all desk chairs, keep and maintain the said leased premises, and
every part thereof, including the interior of the premises, glazing,
and plumbing and electrical fixtures, in good and sanitary order,
condition and repair. Lessor will, at his sole cost and expense, keep
and maintain the structure, roof and exterior walls of the Building
(excluding glazing), the heating and air conditioning equipment, the
off premises sewer and water lines, and the landscaping, sidewalks and
parking areas used in common by other tenants, in good and sanitary
order, condition and repair.
20. FLOORLOAD: Tenant will not overlaid the floors, nor install any heavy
business machines or any heavy equipment of any kind, without prior written
approval of Landlord, which, if granted, may be conditioned upon moving by
skilled licensed handlers and installation and maintenance at Tenant's expense
of special reinforcing and settings adequate to absorb and prevent noise and
vibration. In no event will Tenant be allowed to place a load exceeding fifty
(50) pounds per square inch on any floor of the building without prior written
consent.
21. NONLIABILITY OF LANDLORD: Landlord shall not be liable to Tenant for
any damage to Tenant or to Tenant's property, or for any disruption of Tenant's
business or professional activities in the Premises, resulting from leaky
plumbing, gas, water, steam, electrical, heating, cooling, ventilating or air-
conditioning fixtures, facilities or conduits; from disrepair or faulty
construction of the building; from acts of officers, agents, or employees of
Landlord or of other tenants in the building or their employees, agents or
invitees; or from any trespass or public offense committed in or about the
Premises of the building except that Landlord agrees to take reasonable steps to
correct any such conditions after first receiving written notice thereof from
Tenant.
22.(A) ASSIGNMENT AND SUBLETTING: Tenant shall not voluntarily assign or
encumber its interest in this Lease or in the Premises, or sublease all or any
part of the Premises, or allow any other person or entity to occupy or use all
or any part of the Premises, without first obtaining Landlord's prior written
consent. Any assignment, encumbrance, or sublease without Landlord's prior
written consent shall be voidable, at Landlord's election, and shall constitute
a default. No consent to any assignment, encumbrance, or sublease shall
constitute a further waiver of the provisions of the paragraph. Tenant shall
notify Landlord within thirty (30) days of receipt of such written notice, elect
one of the following:
(a) Consent to such proposed assignment, encumbrance or sublease;
(b) Refuse such consent, which refusal shall be on reasonable grounds; or
(c) Elect to terminate this Lease.
As a condition for granting its consent to any assignment, encumbrance or
sublease, Landlord may require that the sublease or assignee remit directly to
Landlord on a monthly basis, all monies due to Tenant by said assignee or
sublease. If for any proposed assignment or sublease Tenant receives rent or
other consideration, either initially or over the term of the assignment or
sublease, in excess of the rent called for hereunder, or, in case of the
sublease of a portion of the Premises, in excess of such rent fairly allocable
such portion, after appropriate adjustments to
<PAGE>
-4-
assure that all other payments called for hereunder are taken into account,
Tenant shall pay Landlord as additional rent hereunder ninety percent (90%) of
the excess of each such payment of rent or other consideration received by
Tenant promptly after its receipt. Landlord's waiver or consent to any
assignment or subletting shall not relieve Tenant from any obligation under this
Lease. Occupancy of all or part of the Premises by parent, subsidiary, or
affiliated companies of Tenant shall not be deemed an assignment or subletting.
Landlord acknowledges and approves occupancy of Tenant as DIGITAL VIDEO SYSTEMS
and pending acquisition of VICOMP TECHNOLOGY, INC. Landlord accepts the
occupancy of VICOMP TECHNOLOGIES as an approved affiliated company.
(B) SUBORDINATION: Without the necessity of any additional document being
executed by Tenant for the purpose of effecting a subordination, and at the
election of Landlord or any first mortgagee with a lien on the Building or any
ground Lessor with respect to the building, this Lease shall be subject and
subordinate at all times to: (a) all ground leases or underlying leases which
may now exist or hereafter be executed affecting the building or the land upon
which the Building is situated or both, and (b) the lien of any mortgage or deed
of trust which may now exist or hereafter be executed in any amount for which
the Building, land, ground leases or underlying leases, or Landlord's interest
or estate in any of said items is specified as security. Notwithstanding the
foregoing, Landlord shall have the right the subordinate or cause to be
subordinated any such ground leases or underlying leases or any such liens to
this Lease. In the event that any ground lease or underlying lease terminates
for any reason or any mortgage or deed of trust is foreclosed or a conveyance in
lien of foreclosure is made for any reason, Tenant shall, notwithstanding any
subordination, attorn to and becomes the Tenant of the successor in interest to
Landlord, at the option of such successor in interest. Tenant convenants and
agrees to execute and deliver, upon demand by Landlord and in the form requested
by Landlord, any additional documents evidencing the priority or subordination
of this Lease with respect to any such ground leases or underlying leases or the
lien of any such mortgage or deed of trust. Tenant hereby irrevocably appoints
Landlord as attorney-in-fact of Tenant to execute, deliver and record any such
documents in the name and on behalf of Tenant.
23. DESTRUCTION OF LEASEHOLD: Should the leasehold, or any part of the
building, be damaged or destroyed, Landlord may elect to terminate this Lease or
continue it in force and, without affecting Tenant's liability under Paragraph
10, repair or rebuild the leasehold or Building, provided Tenant, upon giving to
Landlord written notice within 10 days after the damage or destruction, may
terminate this Lease if the leasehold cannot be made tenantable within 120 days.
Landlord may occupy as much of the leasehold as may be necessary to accomplish
the repair or reconstruction, pending the completion of which an equitable
reduction or abatement of the rent will be made by Landlord if this Lease should
not be terminated under this paragraph. Landlord shall not be liable to Tenant
for any loss or damage to or destruction of the leasehold or from the repairing
or rebuilding of the leasehold of Building.
24. RULES AND REGULATIONS: Tenant will comply, and will cause his
employees, agents and invitees to comply, with all reasonable rules and
regulations adopted by Landlord in connection with the use and occupancy of the
Premises and of the Building, and with all supplements and amendments which
Landlord may adopt hereafter. Any violation by Tenant, or by his employees,
agents, or invitees, of any rule or regulation heretofore or hereafter adopted,
amended, or supplemented by Landlord, shall constitute a default under this
Lease and shall make available to Landlord the remedies provided herein.
25. DEFAULT: If tenant should become in default under this Lease, Landlord,
at its option and without notice, (1) may terminate this Lease, take possession
of the Premises at any rent obtainable, recovering from Tenant, in successive
actions or a single action, any deficit between the rent received and the rent
provided to be paid under this Lease, plus all the expenses, including
attorney's fees, incurred in the taking of possession and reletting; or (2)
without attempting to relet the premises and with or without terminating this
Lease, may (a) sue, at regular or irregular intervals and in successive suits,
to recover the unpaid installments of rent, or (b) bring a single action to
recover unpaid rent for the remaining term of this Lease, or (c) sue for general
and special damages. If Landlord should take possession of the Premises under
the provisions of this paragraph or at the end of the term, Landlord may remove
to any place of storage, or any dumping ground, at Tenant's risk and expense and
without incurring any responsibility to Tenant for loss, damage, or theft, all
property in or about the leasehold belonging to or in the custody of Tenant. The
remedies provided in this paragraph are cumulative and may be exercised
simultaneously with, in addition to, or independently of, any other legal
remedy.
26. ABANDONMENT: Tenant covenants that he will occupy the premises
continuously except for normal
<PAGE>
-5-
vacation periods and agrees that any absence therefrom for more than one week,
during any part of which time rental is delinquent shall be conclusively
presumed to be an abandonment of the premises at the option of the Landlord.
27. RESTORATION OF PREMISES: Upon termination of this Lease or by
expiration of the term or by election of Landlord, Tenant will restore the
Premises to Landlord in the same condition as it existed at the commencement of
the term except as otherwise permitted or required by this Lease, and except for
reasonable use and wear.
28. HOLDING OVER: Should Tenant hold over the Premises after the term of
this Lease, he will be a Tenant by sufferance from day to day, with a rental of
120% of the then current daily rental rate unless Landlord shall consent in
writing to a different tenancy.
29. INSURANCE: Tenant agrees to and shall secure from a responsible company
or companies doing insurance business in the State of California, and maintain
during the entire term of this Lease, public liability insurance in the minimum
amount of One Million Dollars and 00/100 ($1,000,000.00) and fire and extended
coverage insurance upon Tenant's personal property in an amount sufficient to
cover all losses. Tenant agrees that Landlord shall be named as an additional
insured on the aforementioned policies of insurance. On securing said coverage
the Tenant shall deliver to Landlord a copy of the appropriate policies, or
certificates of said insurance, which shall provide that same shall not be
cancelled without ten (10) days' prior written notice to Landlord.
30. INTEREST ON MONETARY OBLIGATION: All monetary obligations of Tenant to
Landlord under this Lease shall carry nine percent (9%) interest per annum from
the due date until paid.
31. TIME OF ESSENCE: Time is of the essence of this Lease.
32. CONDITION: Each term of this Lease shall constitute a condition.
33. NOTICES: Notices shall be deemed served upon Tenant when left at the
Premises or mailed, postage prepaid, addressed to Tenant at 4020 Moorpark
----
Avenue, Suite 116, San Jose, California 95117.
---
34. LANDLORD DEFAULT: In the event of any default by the Landlord hereunder
Tenant agrees to give notice of such default, by registered mail, to the holder
of any first deed of trust covering the demised premises and to said holder a
reasonable opportunity to cure such default on Landlords behalf.
35. WAIVER: No waiver, benefit, privilege, or service, voluntarily granted
or performed by landlord to or for Tenant, or any other tenant in the Building
shall be construed to vest any contractual right in Tenant by custom, estoppel,
or otherwise. No waiver by Landlord of a default by Tenant under this Lease
shall constitute a waiver of a subsequent default and after a waiver, expressed
or implied, no notice need be given that strict compliance in the future will be
required.
36. ATTORNEY'S FEES: In any action or proceeding between Landlord and
Tenant the prevailing party shall be awarded costs and attorney's fees.
37. PARTIAL INVALIDITY: No partial invalidity of this Lease shall affect
the remainder.
38. HEADINGS: Headings shall not limit or affect any paragraph in this
Lease.
<PAGE>
-6-
39. ENTIRE AGREEMENT: This Lease contains the complete agreement between
Landlord and Tenant and no supplement, amendment, or other commitment will be
binding unless in writing and signed by the obligated party, except that Tenant
shall be bound, without signature, to all supplements and amendments to the
rules and regulation hereafter adopted by Landlord in accordance with Paragraph
24.
Executed on October 15, 1996, at the Paulsen Office Park.
LESSEE: LESSOR
DIGITAL VIDEO SYSTEMS PAULSEN OFFICE PARK
BY: /s/ BY: /s/ Linda Stockhus
----------------------- ---------------------------------
Peter Paulsen BY: Linda Stockhus
ATTORNEY IN FACT
TITLE: CFO
--------------------
DATE: 10/15/96 DATE: 10/15/96
--------------------- --------------------------
PLEASE PAY RENT WHEN DUE,
NO STATEMENTS WILL BE SENT,
EXCEPT FOR EXTRAS AND LATE
CHARGES.
<PAGE>
ADDENDUM
--------
This lease addendum is attached hereto and becomes a part hereof, that certain
lease agreement commencing October 15, 1996, by and between DIGITAL VIDEO
SYSTEMS, A DELAWARE CORPORATION, as Lessee, and PAULSEN OFFICE PARK, as Lessor,
for property located at 4020 Moorpark Avenue, Suite 116, San Jose, California:
It is agreed between Lessee and Lessor:
1) OPTION TO RENEW:
Tenant shall have option to extend the term of this lease for One (1)
additional period of (6) Months on the same terms, covenants and
conditions provided in this lease except that during the extension
the fixed minimum rental (base rent) shall be increased to current
market rate. Said increase shall not exceed 10% of the then current
base rent. Tenant may exercise the option by giving Landlord written
notice ninety (90) days prior to the expiration of the original term
on the then current extension period.
2) All other terms and conditions to remain the same and in full force
and effect.
LESSEE: LESSOR
DIGITAL VIDEO SYSTEMS PAULSEN OFFICE PARK
BY: /s/ BY: /s/ Linda Stockhus
----------------------- ---------------------------------
Peter Paulsen BY: Linda Stockhus
ATTORNEY IN FACT
TITLE: CFO
--------------------
DATE: 10/15/96 DATE: 10/15/96
--------------------- ----------------------------
<PAGE>
RULES AND REGULATIONS
The Tenant agrees to abide by the following rules and regulations:
1. The sidewalks, entrances, passages, courts, elevators, vestibules,
stairways, and halls shall not be obstructed or encumbered by any Tenant or used
for any purposes other than ingress and egress to and from the demised premises.
2. No awnings of other projections shall be attached to the outside walls of
the building without the prior written consent of the landlord. No curtains,
blinds, shades, or screens shall be attached to or hung in, or used in
connection with, any window or door of the demised premises without the prior
written consent of the landlord. Such awnings, projections, curtains, blinds,
shades, screens, or other fixtures must be of a quality type, design and color,
and attached in the manner approved by the Landlord.
3. No sign, advertisement, notice, or other lettering shall be exhibited,
inscribed, painted, or affixed by the Tenant on any part of the outside or
inside of the demise premises or building without the prior written consent of
the Landlord. In the event of the violation of the foregoing, by any Tenant,
Landlord may remove same without any liability, and may charge the expenses
incurred by such removal to the Tenant or Tenants violating this rule. Interior
signs on doors and directory tablet shall be inscribed, painted, or affixed at
the expense of the Tenant, and shall be of a size, color, and style acceptable
to the Landlord.
4. The utility sinks and other plumbing fixtures shall not be used for any
purpose other than those for which they were constructed and no sweepings,
rubbish, rags, or other substances shall be thrown therein. All damages
resulting from any misuse of the fixtures shall be borne by the Tenant who, or
whose servants, employees, agents, visitors, or licensees shall have caused the
same.
5. No Tenant shall mark, paint, drill into, or in any way deface any part of
the demised premises of the building of which they form a part. No boring,
cutting or stringing of wires shall be permitted, except with the prior written
consent of the Landlord, and as it may direct.
6. No bicycles, vehicles, or animals of any kind shall be brought into or kept
in or about the premises, and no cooking shall be done or permitted by any
Tenant on said premises. No Tenant shall cause or permit any unusual or
objectional odors to be produced upon or permeate from the demised premises.
7. No Tenant shall make, or permit to be made, any unseemly or disturbing
noises or disturb or interfere with occupants of this or neighboring buildings
or premises or those having business with them, whether by the use of any
musical instrument, radio, talking machine, unmusical noise, whistling, singing
or in any other way.
8. In the event of the loss of any keys furnished by the Landlord, Tenant shall
pay to the Landlord the cost thereof.
9. All removals, or the carrying in or out of any safes, freight, furniture, or
bulky matter of any description must take place during the hours which the
Landlord or its agent may determine from time to time. The Landlord reserves the
right to prescribe the weight and position of all safes, which must be placed
upon 2-inch thick plank strips to distribute the weight. The moving of safes or
other fixtures or bulky matter of any kind must be made after previous notice to
the Manager of the building. Any damage done to the building or to the tenants
or to other persons in bringing in or removing safes, furniture, or other bulky
or heavy articles, shall be paid for by Tenant.
10. No Tenant shall occupy or permit any portion of the premises demised to him
to be used for manufacturing or for the possession, storage, manufacture, or
sale of liquor or narcotics, or as a barber or manicure shop, or as an
employment bureau. No Tenant shall engage or pay any employees on the demised
premises, except those actually working for such Tenant on said premises, nor
advertise for laborers giving an address at said premises.
11. Each Tenant, before leaving the said premises at any time, shall see that
all windows, sliding doors, and hall doors are securely locked, and that all
front and rear doors are locked after 6:00 pm.
12. The premises shall not be used for gambling, lodging, or sleeping or for any
immoral or illegal purposes.
13. The requirement of Tenants will be attended to only upon application at the
office of the building. Landlord's employees shall not perform any work or do
anything outside of the regular duties, unless under special instructions from
the office of the Landlord.
14. Canvassing, soliciting, and peddling in the building are prohibited, and
each Tenant shall cooperate to prevent the same.
15. Tenants or tenants' guests shall park between designated parking lines only,
and shall not occupy two parking spaces with one car. Vehicles in violation of
the above shall be subject to tow away. Contract San Jose Police at 277-4000 or
Schaller Towing at 294-3102.
16. Vehicles parked on premises in excess of fifteen (15) days without prior
written consent of the Landlord shall be deemed abandoned and subject to tow
away.
17. Tenant is furnished with two keys for each outside entry door, but is
responsible for providing keys to employees. Tenant is also responsible for any
lock changes due to employee turnover.
<PAGE>
PAULSEN OFFICE PARK
4020 Moorpark Avenue, Suite 116
San Jose, CA 95117
1696 Square Feet
[OFFICE] [OFFICE] [OFFICE]
[OFFICE]
[OFFICE] [RECEPTION]
1) Touch up painting will be done as necessary
2) Carpeting will be repaired and steam cleaned
3) Damaged and discolored ceiling tiles will be replaced
4) Windows will be cleaned and repaired as required
<PAGE>
EXHIBIT 10.18
KUEN YANG INTERNATIONAL COMMERCIAL COMPLEX LEASE AGREEMENT
Lessor: Ken Yang Real Estate (Shanghai) Co., Ltd.
(HEREAFTER called "KY")
Address: No. 798 Zhao Jia Pin Rd., Xu Hui District, Shanghai
Tel. No.: 86-20-64679797
Lessee: (To be Named)
__________________________________________________
(HEREAFTER called "DVS"??)
Company
Registration
No.: __________________________________________________
Contact Person: ______________________________
Sex: ______________________________
Identity No./
Passport No.: __________________________________________________
Company
Registered
Address: __________________________________________________
Contact
Phone No.: __________________________________________________
Both parties agreed to be bound by the following lease terms and
conditions for the rental of Ken Yang International Commercial Complex
(HEREAFTER called "The Complex"):
1. Location of The Complex
No. 798 Zhao Jia Pin Rd., Xu Hui District, Shanghai
Rental Area
"KY" agrees to lease one of the units of the complex to "DVS", the exact
Location, Space and Fixture etc. will be per Appendix A-1.
The Unit
Fourth Floor, Room 2, Unit B, 386.61 Square Meters
------ - - ------
Exclude common area of 85.76 Square Meters
See Appendix A-2
Parking Space: Basement 1, No. , Total 1 unit.
- -- -
2. Rental Purpose
Strictly restricted for office use only. No other commercial activities
are allowed.
3. Length of Lease
3.1 The lease should commence from August 1, 1996 and expire on July 31,
-------------- --------
1998.
----
3.2 The leased unit is one of the "KY" development's unsold units, "KY"
reserves the right of sales to a third party (The Buyer), in case the
sales of the unit to "The Buyer" occurred during the lease period, "KY"
will guarantee that the master lease agreement which "KY" and "DVS"
enter into will also be binding on "The Buyer". "The Buyer" will have
to continue the lease agreement until its expiration. "DVS" will have
to sign a fresh lease agreement with "The Buyer" on the same terms and
condition per master lease.
3.3 In case where either party to the contract wishes to extend the rental
period, must do so in three months before the lease expired, and enter
into new lease agreement under terms and conditions agreed upon by both
parties.
<PAGE>
4. Rents
4.1 Rental charge is US$12,000 per month for the unit and parking charge of
---------
US$200 per month, total monthly rental charge therefore equal to
------
US$12,200 per month including the parking charge. If in any case that
---------
the lease is quit before the end of the month, full rental must be
paid.
4.2 Thirty days free rental period commence from July 1, 1996 to July 31,
------ ------------ --------
1996. During this period, "DVS" has the right to access the unit to
----
carry out such activities like renovation work, furnishing, etc.
However, any utilities incurred during this period, like water and
power consumption must be paid by "DVS". "DVS" enjoy the same free
parking charge for the same period.
5. Rental Deposit
5.1 In order to ensure proper execution of the lease agreement, "DVS" is
required to pay rental deposit equivalent to three months rental which
is equal to US$36,600 (including parking).
---------
5.1A At the time of signing the first letter of intent, "DVS" has to
pay an agreed amount of initial deposit of US$X and "DVS" must
----
pay the full amount of rental deposit before July 1, 1996 to
"KY".
5.1B Terms canceled.
5.2 Rental deposit does not earn interest.
5.3 During the period of the lease agreement, "DVS" has no right to use
rental deposit for rental payment and other related expense.
5.4 When the lease agreement terminates, "DVS" is obliged to empty the unit
and settle whatever related expense in order to bring the unit into
its original condition. "KY" after the satisfaction of the unit
inspection must pay back the full rental deposit to "DVS" within a
period of fourteen days.
5.5 "DVS" has no right to transfer the rental deposit to the third party or
pledge the rental deposit or other guarantees.
6. Payment Method
6.1 Rental Payment: Three months advanced rental payment is required for
each payment by way of post dated checks with each check dated for each
rental month.
6.2 "DVS" should deposit the checks into the bank and account number either
in US Dollars or RMB account nominated by "KY". For instance, Rental
deposit paid in RMB, the rate of exchange must follow the day's rate
issued by "The National Foreign Exchange Control Board".
6.3 In case of late rental payment, "KY" has the right to impose a late
payment rate of 0.5% for every day of delay. Late payment exceed sixty
days, it is treated as automatic termination of the lease by "DVS".
"KY" has the right to execute termination of the lease. "DVS" must
leave the premises without cause and to pay all other rental in arrears
together with any other expense related to the lease and any other
expense incurred by "KY" in relation thereto. If necessary, "KY" has
the right to retain the rental deposit and execute the Term Sixteen
under this lease agreement.
7. Other Rental Related Expenses:
7.1 Management fee is US$464 per month. (Management fee is to be paid to
New Shanghai International Property Management Company.) Payable every
three months in advance. In case of delay payment, there will be late
payment of 0.5% for every day overdue. When rent is quit before the end
of the month, the management fee is to be paid in full.
7.2 "DVS" is responsible for power consumption based on the actual meter
reading, payment method follow Term No. 6.
7.3 "KY" will provide Five telephone lines, telephone system and
installation is the responsibility of "DVS". There will be a rental
deposit of RMB10,000 for every telephone line. This payment should be
paid ten days before the commencement of lease agreement. At the
expiration of lease, if "DVS" decided to discontinue the rental, "KY"
will pay back the telephone line deposit without interest within
fourteen days after the inspection. "DVS" has to pay for each telephone
line maintenance fee of RMB50 each line 10 days before the beginning of
each month. The total telephone management fee equal RMB250 per month.
Method of payment follow Term No. 6.
<PAGE>
7.4 "DVS" actual usage of telephone and fax should be based on the meter
reading by the telecommunication authority. Method of payment follows
Term No. 5. If "DVS" delay payment, telecommunication authority has the
right to impose a 50% penalty.
7.5 Cleaning of the rental premises is the responsibility of "DVS", but
"DVS" can request "KY" to handle with a fee charged to "DVS".
8. "KY" Rights and Legal Responsibilities
8.1 "KY" has no right to take back the premises without rightful cause
within the lease period. If "KY" wish to take back premises, "DVS" has
the right to reject.
8.2 "KY" will have to maintain the complex regularly.
8.3 "KY" will have to ensure the safety and security of the complex.
8.4 "KY" has to provide satisfactory service.
8.5 "KY" has the authority to organize exhibition activities or product
promotion activities but must do it not at the expense or inconvenience
of "DVS" normal business operations.
8.6 "KY" and KY's maintenance staff in the process of carrying out building
maintenance work, hygienic, theft alarm system, fire alarm system,
rescue requirement or other property management needs may be given
advance notice to enter "DVS" units to carry out above maintenance. If
necessary, "KY" may execute reasonable action but in time of emergency,
"KY" may have to take immediate action without notice being given. But
"DVS" should be informed after the occurrence of the events.
8.7 "DVS" must prepare to provide maximum assistance and cooperation to
"KY" for carrying out Term No. 8.6.
9. "KY" is not responsible for
9.1 Any damage to the complex, "DVS" premises or its contents due to
earthquake, flood, or fire and theft not due to KY's lack of security
or safety measure.
9.2 If "DVS" damages are the result of misbehavior actions by the other
units, "KY" is also not responsible.
10. "DVS" Legal Rights and Responsibilities
10.1 "DVS" must utilize the rental premises and common area with due
diligence.
10.2 "DVS" must not do the following within "The Complex"
10.2A To take in any excessive weight, flammable, explosive, corrosive
materials or other materials which will endanger the public
safety into the complex and prohibits "DVS" from any other action
which will endanger the public safety.
10.2B Prohibit from staying in the office or keeping animals which will
have the impact of obstructing the execution of building
management activities.
10.2C Prohibit from any action which will jeopardize "KY" complex or
other units property.
10.3 "DVS" also prohibited from the following behaviors:
10.3A Transfer of lease or use it as a pledge
10.3B Transfer the resources of the lease unit to third parties or
allow third parties to use the resources of the lease unit.
10.3C Share the lease unit resources with third parties without the
consent from "KY" office.
10.4 Whenever "DVS" detects any fixture or other equipment which require
repairs, "DVS" should inform "KY" management office.
10.5 "KY" is responsible for the maintenace of 10.4 above, but if the
defect is due to the act of "DVS", then "DVS" should be responsible
for its cost of repairs.
10.6 Any furniture and fixture or equipment belongs to "DVS", "DVS" is
responsible for its repairs.
10.7 If "DVS" wish to do any structural alteration or rearranging the
original layout or installing signboards, etc. must obtain "KY's"
approval in writing before any action is carried out. All cost of
carrying such alteration is the responsibility of "DVS".
10.8 "DVS" must always keep in touch with "KY" in the process of carrying
out any of those engineering or construction work. And for any major
construction each individual consent from "KY's" is required.
<PAGE>
10.9 Any actions either intentionally or carelessly committed relating to
the job carried out by "DVS" employees, subcontractors or other related
parties which have caused damage to KY's property or other units or
third parties is the sole responsibility of "DVS".
11. Appendix
11.1 Appendix B (Kuen Yang International Commercial Complex Management
Agreement) to lease agreement, is legally enforceable as per the lease
agreement.
11.2 "DVS" and all its employees, subcontractors must follow the terms and
conditions of the appendix.
12. Rights of Notice
12.1 Any notice by both parties must be in writing.
12.2 Any changes of contact person, Registration No., Registration address,
etc., "DVS" has the duty to inform "KY" immediately.
13. Lawful Enforcement of the lease agreement:
In the events of natural disasters or other un-defeasible events which
cause the collapse of the complex or partial collapse or distraction thus
resulting in "DVS" units being un-operational. This lease agreement is
automatically void without any compensation.
14. Forced termination of lease agreement by "KY"
"KY" has the right to terminate the lease agreement and reserve the right
for compensation without notifying "DVS". If "DVS" is in breach of the
following conditions:
14.1 Default in payment of rental and others for more than two months.
14.2 The usage of the leased unit is ultra vires Term No. 2 of the lease
agreement.
14.3 Has caused obvious obstruction to the normal operation of other units.
14.4 Leave the leased unit empty for more than six months without written
notice to "KY" office.
14.5 If "DVS" has been ordered to close for investigation by the
authorities, or fined for illegal activities or declared bankrupt,
enter into agreement with creditors or unable to pay debts or being
managed by court order.
15. Mutual agreement to terminate the contract
15.1 During the lease period, "DVS" has no right to terminate the agreement.
Unless written notice is given to "KY" and approval is obtained from
"KY" office. In such case, "DVS" rental deposit will be forfeited.
15.2 After the signing of the lease agreement and before the lease
commenced, if the request of "DVS" to terminate the lease agreement,
"DVS" must pay the three months rental deposit as a penalty.
16. Return of the lease units
16.1 When the lease expired, "DVS" must clean up the unit, including
renovation work and return the lease unit to its original condition
which must be certified and approved by "KY" office, all such related
expense is to be paid by "DVS".
16.2 After the lease unit return to the "KY" office, any material, etc.,
remain in the unit is at the free exposure of "KY" office.
16.3 From the lease expired date, if "DVS" is unable to return the lease
unit on time, "DVS" is to be fully liable to compensate all the
consequential losses incurred by "KY".
17. Arbitration is null and void.
This lease agreement is based on "KY" and "DVS" mutual agreement as to its
terms, principle, and will to execute them in the most honorable way.
18. Dispute and resolution tribunal
Any dispute arising from the honest execution of this lease agreement, will
have to be resolved through mutual agreement, if both parties cannot resolve
the dispute, then the issue should be referred to "The Chinese International
Economic and Trade Dispute Committee, Shanghai Branch" which will
<PAGE>
decide the case by reference to the "Chinese International Economic and
Trade Dispute Tribunal Law."
19. Enforcement of lease agreement
This lease agreement is subject to the law governed by "The People's
Republic of China".
20. Others
20.1 Any matter not included in this agreement must be resolved by mutual
agreement between "KY" and "DVS".
20.2 This lease agreement is based only on Chinese version as final legally
enforceable agreement.
20.3 This lawful agreement is effective from the date both parties signed in
duplicate. Each party will get one copy.
<PAGE>
KY: Kuen Yang Real Estate Development (Shanghai) Co., Ltd.
Name:
Representative: Chan, Chou Nan
Position:
DVS:
Name: Christopher Hu
Representative:
Position: General manager
KY's Bank and Account Detail:
Kuen Yang Real Estate Development (Shanghai) Co., Ltd.
Bank of Communication, Shanghai Branch
Address: No. 200, Jian Jee Zhong Rd., Shanghai
US$ account No.: 03004K01142014025411817
RMB account No.: 666100121009386
Date of this agreement: July 17, 1996
<PAGE>
EXHIBIT 11.1
DIGITAL VIDEO SYSTEMS, INC.
STATEMENT REGARDING THE COMPUTATION OF PER SHARE LOSS
<TABLE>
<CAPTION>
Six Month Periods
Years Ended December 31, Ended June 30,
------------------------ ------------------------
1994 1995 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss................................................. ($1,653,661) ($4,483,311) ($1,287,931) ($4,162,665)
=========== =========== =========== ===========
Weighted average common shares outstanding............. 2,203,380 2,220,129 2,235,735 4,455,293
Common equivalent shares from preferred stock
issued during the twelve month period prior to
the Company's proposed initial public offering(1)..... 688,297 688,297 688,297 688,297
Common equivalent shares from warrants
issued during the twelve month period prior to
the Company's proposed initial public offering(1)..... 700,000 700,000 700,000 700,000
Common equivalent shares from stock options
issued during the twelve month period prior to
the Company's proposed initial public offering........ 451,145 451,145 451,140 451,140
Common equivalent shares from common stock
issued during the twelve month period prior
to the Company's proposed initial public offering(1).. 152,326 152,326 152,326 152,326
----------- ----------- ----------- -----------
Shares used in computing net loss per share.............. 4,195,148 4,211,897 4,227,498 6,447,056
========== ==========
Net loss per share....................................... ($.39) ($1.06) ($.30) ($.65)
========== ========== ========== ==========
Convertible preferred stock issued more than twelve
months prior to the proposed initial public offering(1). 1,125,791 4,227,498 4,227,498
---------- ---------- ----------
Pro forma weighted average shares outstanding............ 5,337,688 5,353,289 6,447,056
========== ========== ==========
Pro forma net loss per share............................. ($.84) ($.24) ($.65)
========== ========== ==========
</TABLE>
___________________
(1) Excludes shares to be placed in escrow according to the "Escrow Agreement."
<PAGE>
EXHIBIT 23.1-A
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 31, 1996, in the Registration Statement
(Form SB-2) and the related Prospectus of Digital Video Systems, Inc. for the
registration of 26,450 units consisting of a minimum of 70 and a maximum of
100 IPO Units, each consisting of one share of common stock, one Redeemable
Class A Warrant and one Redeemable Class B Warrant.
By: /s/ Ernst & Young
----------------------------------
Ernst & Young
Walnut Creek, California
November 1, 1996
<PAGE>
EXHIBIT 23.1-B
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated October 18, 1996 for ViComp Technology, Inc. in
the Registration Statement (Form SB-2) and the related Prospectus of Digital
Video Systems, Inc. for the registration of 26,450 units consisting of a
minimum of 70 and a maximum of 100 IPO Units, each consisting of one share of
common stock, one Redeemable Class A Warrant and one Redeemable Class B
Warrant.
By: /s/ Ernst & Young
----------------------------------
Ernst & Young
Walnut Creek, California
November 1, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF SUTTER SECURITIES INCORPORATED
We hereby consent to the reference to our opinion and to our firm under the
heading "Certain Transactions" in the Prospectus forming part of the
Registration Statement on Form SB-2 of Digital Video Systems, Inc. In giving
such consent, we do not admit that we come within the category of persons whose
consent is required under Section 7 of the Securities Act of 1933 and the rules
and regulations of the Securities and Exchange Commission issued thereunder.
Sutter Securities Incorporated
By: /s/ Gil Matthews
------------------------------
Gil Matthews
Senior Managing Director
Dated: October 30, 1996
<PAGE>
EXHIBIT 24.1
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Dr. Edmund Y. Sun and Robert B. Pfannkuch, and
each of them, his true and lawful attorneys-in-fact and agents, with full power
of substitution and resubstitution, for him and in his name, place, and stead,
in any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and to file the same, with
all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
- ---------------------- ----------------------- ----------------
<S> <C> <C>
/s/ Arvin S. Erickson Chief Financial Officer October 31, 1996
- -----------------------
Arvin S. Erickson
/s/ Sung Hee Lee Director October 31, 1996
- -----------------------
Sung Hee Lee
/s/ Sanford C. Sigoloff Director October 31, 1996
- -----------------------
Sanford C. Sigoloff
/s/ Philip B. Smith Director October 31, 1996
- -----------------------
Philip B. Smith
/s/ Joseph F. Troy Director October 31, 1996
- -----------------------
Joseph F. Troy
</TABLE>
