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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) January 7, 1997
DIGITAL VIDEO SYSTEMS, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware
(State or Other Jurisdiction of Incorporation)
0-28472 77-0333728
(Commission File Number) (I.R.S. Employer Identification No.)
2710 Walsh Avenue
Santa Clara, California 95051 95051
(Address of Principal Executive Offices) (Zip Code)
(408) 748-2100
Registrant's Telephone Number, Including Area Code
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(Former Name or Former Address, if Changed Since Last Report)
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Item 5. Other Events.
In connection with the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995, Digital Video Systems, Inc. (the "Company") is
hereby filing cautionary statements identifying important factors that could
cause the Company's actual results to differ materially from those projected in
any forward looking statements of the Company made by, or on behalf of, the
Company.
Item 7. Financial Statements and Exhibits.
The following is filed as an Exhibit to this report.
Exhibit 99. Cautionary Statement for purposes of the "Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Digital Video Systems, Inc.
a Delaware corporation
Date: January 7, 1997 By: /s/ Arvin S. Erickson
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Arvin S. Erickson
Chief Financial Officer
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EXHIBIT 99
CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
Digital Video Systems, Inc. (the "Company") desires to take advantage of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of 1995
and is filing this Form 8-K to do so. Many of the following important factors
have been discussed in the Company's prior filings with the Securities and
Exchange Commission (the "SEC").
The Company wishes to caution readers that the following important factors,
among others, in some cases have affected, or in the future could affect, the
Company's actual results and could cause the Company's actual results for future
periods to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
HISTORY OF LOSSES AND ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES.
Since its inception in October 1992, the Company has incurred significant
losses. Such losses have resulted principally from limited revenues from
operations and significant costs associated with the development of the
Company's technologies. The Company 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'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, 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 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
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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 Microsystems Inc. ("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 secured from an Asian manufacturer a new 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. The Company
anticipates that it will complete the integration of this chip into the
Company's Video CD board by the end of January 1997. However, no assurances can
be given that the integration will be successfully completed within such time
period 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 as the Company incorporates
it into its products. It is the Company's intention ultimately to utilize the
ViComp MPEG-I Chip (described below) 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 Technology, Inc. ("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.
RISKS OF VICOMP ACQUISITION. In October 1996, the Company acquired all of the
outstanding capital stock of ViComp Technology, Inc. ("ViComp Acquisition") in
exchange for 491,253 shares of the Company's common stock (the "Acquisition
Shares"). 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 (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.
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 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.
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 Medial
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. The success of ViComp's design and development
work will be heavily dependent upon the efforts of Mr. Kirkpatrick. The Company
does
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not have an employment contract with Mr. Kirkpatrick, and the loss of his
services could have a materially adverse effect on the Company. Dr. Sun received
281,520 of the Acquisition Shares 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 ViComp fails to meet certain performance conditions.
The other 140,760 of the Sun Escrow Acquisition Shares have been deposited in
escrow in connection with the Company's secondary public offering completed in
November 1996, and will be subject to cancellation upon the same terms and
conditions as the arrangement with respect to the escrow securities deposited
into escrow by certain holders of the Company's securities in connection with
the Company's initial public offering.
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, 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).
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 China and Taiwan accounting for substantially all of the Company's
product revenues in 1995 and during the nine-month period ended September 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
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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.
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. 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
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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 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,
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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.
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 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 experience quality control problems or require 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. 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
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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-I decoder chip in its Video CD products that is
being manufactured by an Asian company that is substantially equivalent to an
MPEG-I 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 successfully bar such sale
at a time when the ViComp MPEG-I 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 in excess of 50% of the total voting power
of the Company. 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 for the foreseeable future.
CHARGE TO INCOME IN THE EVENT OF RELEASE OF ESCROWED SECURITIES. In the event
securities of the Company owned by officers, directors, consultants or employees
of the Company that have been escrowed in connection with the Company's prior
public offerings or the ViComp Acquisition are released from escrow as a result
of the conditions for such release being satisfied, substantial expense will be
recorded by the Company for financial reporting purposes. Although the amount of
any expense recognized by the Company (which will be a non-cash charge) 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.
EFFECT OF OUTSTANDING OPTIONS AND WARRANTS. The Company previously has issued
or granted warrants and stock options, some of which are currently exercisable,
for a substantial number of shares of the Company's common stock. 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. If the trading price of the Company's common stock at the time of
exercise of any such options or warrants exceeds the exercise price, as the
Company anticipates it will, such exercise will have a dilutive effect on the
Company's shareholders.
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