<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended June 30, 1997
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period
Commission file number 0-28472
DIGITAL VIDEO SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0333728
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2710 Walsh Ave. 2nd Fl.
Santa Clara, CA 95051
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(Address of principal executive offices) (Zip Code)
(408)748-2100
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(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act f
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
------- --
Class Outstanding at July 31, 1997
-------------------------------- --------------------------------
(Common Stock, $.0001 Par Value) 20,276,852
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
INDEX
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets- June 30, 1997 and March 31, 1997
Condensed consolidated statements of operations- Three months ended
June 30, 1997 and 1996
Condensed consolidated statements of cash flows-Three months ended
June 30, 1997 and 1996
Notes to condensed consolidated financial statements- June 30, 1997
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Part II. Other Information
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith or incorporated by reference:
Exhibit 11.1 Statement Regarding the Computation of Per Share Loss
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(UNAUDITED-SEE NOTE A)
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1997
--------- ----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 25,724 $ 32,221
Short-term investments 1,189 -
Accounts receivable, net 3,655 2,875
Inventories 2,024 1,016
Prepaid expenses and other current assets 1,040 485
-------- --------
Total current assets 33,632 36,597
-------- --------
Property and equipment, net 1,357 1,420
Other assets 88 56
-------- --------
$ 35,077 $ 38,073
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,068 $ 3,044
Accrued liabilities 841 854
-------- --------
Total current liabilities 2,909 3,898
Stockholders' equity:
Common stock 2 2
Additional paid-in capital 54,631 54,628
Accumulated deficit (22,292) (20,297)
Cumulative foreign currency translation adjustments (90) (72)
Deferred compensation (83) (86)
-------- --------
Total stockholders' equity 32,168 34,175
-------- --------
$ 35,077 $ 38,073
======== ========
</TABLE>
Note A-The balance sheet at March 31, 1997 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
---------------------
1997 1996
--------- ---------
<S> <C> <C>
Revenue:
Product revenue $ 3,683 $ 722
Development and services revenue - 150
Component revenue 1,705 774
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Total revenue 5,388 1,646
Cost of product revenue 3,415 766
Cost of development and services revenue - 235
Cost of component revenue 1,671 798
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Gross margin 302 (153)
Operating expenses:
Research and development 904 338
Sales and marketing 585 340
General and administrative 1,258 510
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Total operating expenses 2,747 1,188
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Loss from operations (2,445) (1,341)
Other income (expense), net 450 (197)
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Loss before extraordinary item (1,995) (1,538)
Extraordinary item - loss from early
extinguishment of bridge notes - (1,264)
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Net loss $(1,995) $(2,802)
======= =======
Net loss before extraordinary item per share $(0.17) $(0.20)
======= =======
Net loss per share $(0.17) $(0.37)
======= =======
Shares used in the calculation
of net loss per share 11,893 7,602
======= =======
</TABLE>
See accompanying notes
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED JUNE 30,
---------------------
1997 1996
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<S> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,995) $(2,802)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 182 64
Deferred financing charges and accretion
related to bridge notes - 1,491
Changes in operating assets and liabilities:
Accounts receivable (780) (395)
Inventories (1,008) (522)
Prepaid expenses and other current assets (555) 569
Accounts payable (976) 159
Accrued liabilities (13) (207)
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Net cash used in operating activities (5,145) (1,643)
INVESTING ACTIVITIES
Acquisition of property and equipment (116) (31)
Purchase of short-term investments (1,189) -
Other investing activities (50) -
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Net cash used in investing activities (1,355) (31)
FINANCING ACTIVITIES
Net proceeds from initial public offering of Units - 20,714
Repayment of bridge notes - (7,000)
Proceeds from exercise of stock options 3 1
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Net cash provided by financing activities 3 13,715
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Net increase (decrease) in cash and cash equivalents (6,497) 12,041
Cash and cash equivalents at beginning of period 32,221 4,659
------- -------
Cash and cash equivalents at end of period $25,724 $16,700
======= =======
Supplemental disclosure of cash flow information:
Interest paid $ - $ 173
See accompanying notes
</TABLE>
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT UNITS, SHARE, PER UNIT AND PER SHARE AMOUNTS)
(UNAUDITED)
Note 1-Basis of Presentation
Digital Video Systems, Inc. (the "Company") develops, manufactures and markets
digital video compression and decompression hardware and software for
entertainment, business and educational uses.
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for a fair presentation
have been included. Operating results for the three-month period ended June 30,
1997 are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 1998 or for any other future period. For further
information, refer to the financial statements and footnotes included in the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31, 1997.
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.
Note 2- 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 preferred stock
and from stock options and warrants are not included as the effect is anti-
dilutive. In accordance with Securities and Exchange Commission Staff Accounting
Bulletins, common stock and common stock equivalent shares issued by the Company
at prices below the initial public offering price during the period beginning
one year prior to such offering have been included in the calculation as if they
were outstanding for all periods presented prior to the offering (using the
treasury stock method and the initial public offering price of the Company's
units). The weighted average number of common shares used in the net loss per
share calculation are reduced by common stock, preferred stock convertible into
common stock, and outstanding options placed in escrow in connection with the
Company's initial public offering.
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128),
which is required to be adopted by the Company during its fiscal third quarter.
Under the new requirements for calculating earnings per share, the dilutive
effect of stock options and warrants will be excluded. Since the Company has not
had net income for any period to date, net loss per share calculated under SFAS
No. 128 will not be different from the net loss per share as currently reported.
<PAGE>
Note 3- Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
JUNE 30, MARCH 31,
1997 1997
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<S> <C> <C>
Inventories:
Raw materials $ 823 $ 824
Work in process 1,052 157
Finished goods 149 35
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$2,024 $1,016
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</TABLE>
Note 4- Subsequent Event- Business Acquisition
On August 1, 1997, the Company purchased substantially all of the assets
(excluding accounts receivables) of the Digital Video (DV) division of
privately held Arris Interactive L.L.C. (a joint venture between Northern
TeleCom and ANTEC). The assets acquired include inventories, property and
equipment, intellectual property rights, proprietary technology such as ad
insertion and near video on demand systems, as well as advanced MPEG-2
hardware. In exchange for these assets, the Company paid $1,500 in cash,
issued 600,000 shares of the Company's common stock (of which 300,000 shares
were placed in escrow pending the resolution of certain closing requirements),
and gave Arris an interest in future revenues from the DV division. The
acquisition will be accounted for as a purchase; accordingly, the initial
purchase price and acquisition costs will be allocated to the identifiable
assets and liabilities, including goodwill, and potentially, in-process
research and development. Additional consideration, up to $5,000 in cash, paid
upon the achievement of certain revenue milestones, if any, will be recorded
as additional purchase price at such time.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
This document contains forward-looking statements within the meaning of the
"safe-harbor" provisions of the Private Securities Litigation Act of 1995 that
involve risks and uncertainties, including, without limitation, statements with
respect to the Company's strategy, proposed sales of the Company's products,
markets for the Company's products and the development of the Company's
products. Actual results may differ materially from those described in these
forward-looking statements due to a number of factors, including, but not
limited to, the uncertainty of market acceptance of Video CD and DVD players and
sub-assemblies and other Company products, including network video, planned
rapid growth of the Company's operations, including acquisitions and potential
acquisitions of other businesses or technologies, dependence on a limited number
of suppliers of certain components used in the Company's products, risks related
to the acquisition of ViComp, including the risk associated with the development
of the ViComp MPEG-1 decoder chip, risks associated with rapid technological
change and obsolescence and product development, conducting business in foreign
countries, such as China, and the competitive market for the
Company's products, and other factors described in the Company's Annual Report
on Form 10-KSB for the fiscal year ended March 31, 1997 or in other documents
the Company files from time-to-time with the Securities and Exchange Commission,
including the Company's Current Report on Form 8-K dated January 7, 1997. The
following discussion should be read in conjunction with the Consolidated
Financial Statements and Notes thereto included in the Company's Annual Report
on Form 10-KSB for the fiscal year ended March 31, 1997 and the condensed
consolidated financial statements and notes thereto included herein for the
three months ended June 30, 1997.
On August 1, 1997, the Company purchased substantially all of the assets
(excluding accounts receivables) of the Digital Video (DV) division of
privately held Arris Interactive L.L.C. (a joint venture between Northern
TeleCom and ANTEC). The assets acquired include inventories, property and
equipment, intellectual property rights, proprietary technology such as ad
insertion and near video on demand systems, as well as advanced MPEG-2
hardware. In exchange for these assets, the Company paid $1.5 million in cash,
issued 600,000 shares of the Company's common stock (of which 300,000
shares were placed in escrow pending the resolution of certain closing
requirements), and gave Arris an interest in future revenues from the DV
division. The acquisition will be accounted for as a purchase; accordingly,
the initial purchase price and acquisition costs will be allocated to the
identifiable assets and liabilities, including goodwill, and potentially, in-
process research and development. Additional consideration of up to $5 million
in cash, maybe paid by the Company upon the achievement of certain revenue
milestones. Such additional consideration, if any, will be recorded as
additional purchase price at that time. Any allocation of the purchase price
to in-process research and development will be charged to operations in the
period incurred.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 1997 COMPARED TO THREE
MONTHS ENDED JUNE 30, 1996
REVENUE AND COST OF REVENUE. Total revenue increased $3.7 million, or 227%, to
$5.4 million for the three months ended June 30, 1997 from $1.6 million for the
three months ended June 30, 1996. This increase reflects increased market
penetration of the Company's products, particularly in Asia. Product revenue,
including Video CD players, encoding systems, and sub-assemblies, increased $3.0
million, or 410%, to $3.7 million for the three months ended June 30, 1997 from
$0.7 million for the three months ended June 30, 1996. There was no revenue
generated from development and services contracts during the three months ended
June 30, 1997 compared to $0.2 million during the three months ended June 30,
1996. Component revenue increased $0.9 million, or 120%, to $1.7 million in the
three months ended June 30, 1997 from $0.8 million in the three months ended
June 30, 1996. Component revenue is primarily derived from the sale of certain
inventory parts in excess of current manufacturing needs of the Company, and was
used to generate working capital and to establish relationships for sales of
other Company products with certain Video CD manufacturers in China.
The gross margin for the three months ended June 30, 1997 was $0.3 million, or
6% of sales. The gross margin for the three months ended June 30, 1996 was a
negative 9% of sales. The gross margin improvement is the result of increased
sales volume and profitable sales of products and components.
Although the Company's gross margin improved in the three months ended June 30,
1997, prices for Video CD players, sub-assemblies and components continue to
decline as a result of intense competition in the China market and significant
reductions in the cost of Video CD components
<PAGE>
which has further reduced the market price of Video CD players. Component
revenue, which generally has low to negative gross margin, contributed 32% of
the total revenue for the three months ended June 30, 1997. The Company is
developing its proprietary ViComp MPEG-I chip through its subsidiary, ViComp
Technology, Inc. There can be no assurances, however, that the Company will be
able to utilize these chips in its products on a timely basis or at all, or that
the cost of these chips will be significantly lower than other comparable chips
then available to the Company's competitors.
OPERATING EXPENSES. Total operating expenses increased by $1.6 million, or
131%, to $2.7 million during the three months ended June 30, 1997, from $1.2
million during the three months ended June 30, 1996.
Research and development expenses, which consist primarily of personnel and
equipment costs required to conduct the Company's product development efforts,
increased $0.6 million, or 167%, to $0.9 million during the three months ended
June 30, 1997 from $0.3 million during the three months ended June 30, 1996.
This increase resulted primarily from the research and development expenses
incurred by ViComp since its acquisition in October 1996 and the continued
development of the Company's products. For the quarter ended June 30, 1997,
research and development expenses as a percentage of total revenue was 17%
compared to 21% for the quarter ended June 30, 1996. The Company expects that
research and development expenses in dollar terms will continue to increase as
the Company expands its development efforts.
Sales and marketing expenses, which consist primarily of personnel and
consulting costs involved in the sales process and in the marketing of the
Company's products, sales commissions, and expenses of trade shows, increased
$0.2 million, or 72%, to $0.6 million during the three months ended June 30,
1997 from $0.3 million in the three months ended June 30, 1996. Sales and
marketing expenses increased primarily due to the increase in personnel and
sales, and the costs associated with the establishment of the Company's wholly-
owned sales subsidiary in Hong Kong. As a percentage of total revenue, sales and
marketing expenses decreased from 21% of sales in the three months ended June
30, 1996 to 11% of sales in the three months ended June 1997. As the Company
continues its marketing efforts, sales and marketing expenses in dollar terms
are expected to continue to increase; however, sales and marketing expenses as a
percentage of total revenues are expected to be in the 13% to 15% range.
General and administrative expenses, which consist of administrative salaries
and benefits, insurance and other business support costs, including legal and
audit expenses, increased $0.7 million, or 147%, to $1.3 million for the three
months ended June 30, 1997 from $0.5 million for the three months ended June 30,
1996. This increase was the result of hiring of additional administrative
personnel, including the personnel supporting the Company's subsidiary in Hong
Kong. As a percentage of total revenues, general and administrative expenses
were 23% of sales in the three months ended June 30, 1997 and 31% of sales in
the three months ended June 30, 1996. The Company expects that general and
administrative costs will increase in dollar terms as the Company expands its
businesses; however, general and administrative expenses as a percentage of
total revenues are expected to decline.
OTHER INCOME (EXPENSE), NET. During the three months ended June 30, 1997, other
income of $0.5 million was realized primarily from interest income generated by
funds raised in the Company's public offerings. Other expense for the three
months ended June 30, 1996 reflects interest expense of $0.2 million incurred on
the bridge notes.
<PAGE>
EXTRAORDINARY ITEM. During the three months ended June 30, 1996, the Company
recorded an extraordinary item of $1.3 million for the early extinguishment of
bridge notes. The bridge notes were issued in January and March 1996 and were
repaid in May 1996 from the proceeds of the Company's initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had working capital of $30.7 million, including
cash and cash equivalents and short-term investments of $26.9 million, compared
to working capital at March 31, 1997 of $32.7 million, including cash and cash
equivalents of $32.2 million.
Net cash used in operating activities was $5.1 million for the three months
ended June 30, 1997 compared to $1.6 million for the three months ended June 30,
1996. Substantially all of the net cash used in operating activities in the
three months ended June 30, 1997 represented the net loss of $2.0 million
adjusted for non-cash charges for depreciation and amortization of $0.2 million
and net cash used to fund increases in accounts receivable of $0.8 million and
inventories of $1.0 million, and decreases in accounts payable of $1.0 million.
Substantially all of the net cash used in operating activities in the three
months ended June 30, 1996 represented the net loss of $2.8 million adjusted by
non-cash charges for depreciation and amortization of $0.1 million and deferred
financing charges and accretion from bridge notes of $1.5 million.
Net cash used in investing activities was $1.4 million for the three months
ended June 30, 1997 (including $1.2 million for the purchase of short-term
investments) compared to less than $0.1 million for the three months ended June
30, 1996.
Net cash provided by financing activities was minimal for the three months ended
June 30, 1997 compared to $13.7 million for the three months ended June 30,
1996. Cash provided by financing activities in the three month ended June 30,
1996 included net proceeds generated by the Company's initial public offering of
$20.7 million, offset by the repayment of $7.0 million in bridge notes.
The above activities resulted in a decrease in cash and cash equivalents of $6.5
million for the three months ended June 30, 1997 compared to an increase in cash
and cash equivalents of $12.0 million for the three months ended June 30, 1996.
The Company anticipates that the Digital Video operations acquired in August
1997 will utilize a portion of the Company's working capital during the next
twelve months to fund expected operating losses. The Company is currently
pursuing additional acquisitions and strategic alliances to acquire or develop
complementary business or technologies and such acquisitions or alliances, if
consummated, could utilize additional working capital of the Company.
The Company anticipates that its existing working capital will be sufficient to
satisfy the Company's cash requirements for at least the next twelve months.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Digital Video Systems, Inc.
----------------------------
(Registrant)
Date: August 13, 1997 /s/ Tom Parkinson
------------------- -----------------------------
Tom Parkinson President--
Chief Operating Officer and
Principal Financial Officer
<PAGE>
EXHIBIT 11.1
DIGITAL VIDEO SYSTEMS, INC.
STATEMENT REGARDING THE COMPUTATION OF PER SHARE LOSS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months
Ended June 30,
------------------
1997 1996
------- -------
<S> <C> <C>
Net loss $(1,995) $(2,802)
======= =======
Weighted average common shares outstanding 11,893 5,610
Common equivalent shares from common stock,
preferred stock, and options to purchase common
stock and warrants issued during the twelve months
prior to the Company's initial public offering -- 1,992
------- -------
Shares used in computing net loss per share (1) 11,893 7,602
======= =======
Net loss per share $ (0.17) $ (0.37)
======= =======
</TABLE>
(1) Does not include shares and options in escrow.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 25,724
<SECURITIES> 1,189
<RECEIVABLES> 4,391
<ALLOWANCES> 736
<INVENTORY> 2,024
<CURRENT-ASSETS> 33,632
<PP&E> 2,294
<DEPRECIATION> 937
<TOTAL-ASSETS> 35,077
<CURRENT-LIABILITIES> 2,909
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 32,166
<TOTAL-LIABILITY-AND-EQUITY> 35,077
<SALES> 5,388
<TOTAL-REVENUES> 5,388
<CGS> 5,086
<TOTAL-COSTS> 5,086
<OTHER-EXPENSES> 2,747
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,995)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,995)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,995)
<EPS-PRIMARY> (0.17)
<EPS-DILUTED> (0.17)
</TABLE>
