<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 December 31, 1996
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period October 1, 1996 to December 31, 1996.
Commission file number 0-28472
DIGITAL VIDEO SYSTEMS, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0333728
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2710 Walsh Ave. 2nd Fl.
Santa Clara, CA 95051
-------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(408)748-2100
--------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
--- ---
Common Stock, $.0001 Par Value- 20,138,683 of January 31, 1997
1
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Index
DIGITAL VIDEO SYSTEMS, INC.
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets- December 31, 1996 and March 31, 1996
Condensed consolidated statements of income- Nine-months ended December 31,
1996 and 1995
Condensed consolidated statements of income- Three months ended December
31, 1996 and 1995
Condensed consolidated statements of cash flows- Nine-months ended December
31, 1996 and 1995
Notes to condensed consolidated financial statements- December 31, 1996
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Part II. Other Information
Item 1. Legal Proceedings
In November 1996, Janis Gemignani, the Company's former Vice President,
Secretary and Chief Financial Officer, advised the Company that she had
claims against the Company in connection with her employment by the
Company, and her termination from such employment, and informed the
Company that she had filed a charge of discrimination with the California
Department of Fair Employment and Housing alleging discrimination against
the Company and certain individuals associated with the Company. (The
Company was never served with any litigation by Ms. Gemignani in
connection with these allegations.) In February 1997, the Company entered
into a settlement agreement with Ms. Gemignani. Pursuant to the
settlement, Ms. Gemignani has released the Company from any and all
claims or rights she may have had relating to her claims of alleged
discrimination, and the terms of the settlement will not have any
materially adverse effect on the financial position of the Company.
2
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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
The following exhibits are filed herewith or incorporated
by reference:
(4) Instruments Defining the Rights of Holders:
4(1) Escrow Agreement dated as of October 17, 1996 made
by and between the Company and Dr. Edmund Sun.*
4(2) 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(3) 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(4) Form of Amendment to Warrant Agreement.*
4(5) Form of Underwriter's Unit Purchase Option.*
(10) Material Contracts
10(1) 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(2) Registration Rights Agreement dated as of October 17, 1996
by and between the Company and shareholders of ViComp
Technology, Inc. named herein.**
10(3) 1996 Stock Option Plan.**
10(4) Office Lease Agreement commencing on October 15, 1996
between the Company and Paulsen Office Park.**
(27) Financial Data Schedule
3
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* The above exhibits 4(1), 4(2), 4(3), 4(4) and 4(5) are incorporated by
reference from exhibits 4.7, 4.8, 4.9, 4.10, and 4.11, respectively, to the
Company's Registration Statement and on Form SB-2 (Reg. No. 333-15471), as filed
with the Securities and Exchange Commission on November 4, 1996.
** The above exhibits 10(1), 10(2), 10(3), and 10(4) are incorporated by
reference from exhibits 10.13, 10.14, 10.15, and 10.17, respectively, to the
Company's Registration Statement and on Form SB-2 (Reg. No. 333-15471), as filed
by the Securities and Exchange Commission on November 4, 1996.
(11) Statement re: Computation of net loss per share
(b) Reports on Form 8-K
(1) Report on Form 8-K dated October 17, 1996. Items 2 (Acquisition or
Disposition of Assets) and 7 (Financial Statements and Exhibits).
(2) Report on Form 8-K dated November 6, 1996.
Item: (Other Events).
(3) Report on Form 8-K/A dated October 17, 1996.
Item: (Financial Statements and Exhibits).
4
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Digital Video Systems, Inc.
Condensed Consolidated Balance Sheets
(Unaudited)
<TABLE>
<CAPTION>
December 31, March 31,
1996 1996
------------ -----------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 36,340,008 $4,658,845
Accounts receivable, net 2,809,825 534,969
Inventories 1,242,424 1,925,600
Prepaid expenses and other current assets 585,881 818,584
Deferred financing charges - 832,059
------------ ----------
Total current assets 40,978,138 8,770,057
------------ ----------
Property and equipment, net 1,376,705 537,584
Other assets 97,410 95,755
------------ ----------
Total assets $ 42,452,253 $9,403,396
============ ==========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $3,581,851 $1,092,082
Accrued liabilities 332,529 383,379
Bridge loan payable - 6,340,763
------------ ----------
Total current liabilities 3,914,380 7,816,224
Commitments
Stockholders' equity:
Convertible preferred stock - 524
Common stock 2,024 672
Additional paid-in capital 54,675,843 9,153,734
Accumulated deficit (15,985,332) (7,385,418)
Foreign currency translation adjustments (64,902) (31,486)
Deferred compensation (89,760) (150,854)
------------ ----------
Total stockholders' equity 38,537,873 1,587,172
------------ ----------
Total liabilities and stockholders' equity $ 42,452,253 $9,403,396
============ ==========
</TABLE>
See accompanying notes
5
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Digital Video Systems, Inc.
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
-------------------------------- ------------------------------
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenue
Product revenue $ 2,523,669 $ 606,763 $ 5,107,989 $ 1,517,132
Development and services revenue 57,600 368,461 207,600 1,021,816
Component revenue 3,460,881 572,000 4,235,207 633,544
----------- ----------- ----------- -----------
Total revenue 6,042,150 1,547,224 9,550,796 3,172,492
Cost of product revenue 2,199,516 824,262 5,316,832 1,648,919
Cost of development and services revenue 18,664 263,569 254,012 585,282
Cost of component revenue 3,423,336 495,000 4,220,836 703,542
----------- ----------- ----------- -----------
Total cost of revenue 5,641,516 1,582,831 9,791,680 2,937,743
Gross profit (loss) 400,634 (35,607) (240,884) 234,749
Operating expenses:
Research and development 677,600 195,903 1,360,085 836,160
Sales and marketing 412,933 122,299 1,067,098 428,945
General and administrative 1,446,396 285,621 3,072,238 1,190,032
Acquired in process research and development 1,819,473 - 1,819,473 -
----------- ----------- ----------- -----------
Total operating expenses 4,356,402 603,823 7,318,894 2,455,137
----------- ----------- ----------- -----------
Operating loss (3,955,768) (639,430) (7,559,778) (2,220,388)
Other income (expenses), net 259,823 (1,283,733) 245,727 (1,303,874)
----------- ----------- ----------- -----------
Net loss before extraordinary item (3,695,945) (1,923,163) (7,314,051) (3,524,262)
Extraordinary item - early extinguishment of
bridge notes - - (1,263,796) -
----------- ----------- ----------- -----------
Net loss before provision for income taxes (3,695,945) (1,923,163) (8,577,847) (3,524,262)
Provision for income taxes (22,067) - (22,067) -
Net loss $(3,718,012) $(1,923,163) $(8,599,914) $(3,524,262)
=========== =========== =========== ===========
Net loss per share before extraordinary item ($0.39) ($0.46) ($0.80) ($0.84)
=========== =========== =========== ===========
Net loss per share ($0.39) ($0.46) ($0.95) ($0.84)
=========== =========== =========== ===========
Shares used in the calculation
of net loss per share 9,527,107 4,164,999 9,087,473 4,206,668
=========== =========== =========== ===========
</TABLE>
See accompanying notes
6
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DIGITAL VIDEO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended December 31,
-----------------------------
1996 1995
------------- ------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (8,599,914) $(3,524,262)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 158,850 189,222
Acquired in-process research and development 1,819,473 -
Foreign currency translation adjustments (12,026) (32,829)
Interest expense on convertible notes payable - 56,807
Loss on disposition of property and equipment - 8,418
Amortization of deferred compensation 12,068 12,594
Deferred financing charges and accretion from
bridge loan payable, net 1,491,298 -
Loss on write-off of investments in affiliate - 1,248,868
Changes in operating assets and liabilities:
Accounts receivable (2,296,246) (440,911)
Inventories 683,176 646,671
Prepaid expenses and other assets 261,827 (11,936)
Accounts payable 2,394,236 (48,235)
Accrued liabilities (331,039) 277,043
Other assets - 11,312
----------- -----------
Net cash (used in) operating activities (4,418,297) (1,607,238)
INVESTING ACTIVITIES:
Acquisition of furniture and equipment (837,173) (50,471)
Other investing activities 75,833 -
----------- -----------
Net cash (used in) investing activities (761,340) (50,471)
FINANCING ACTIVITIES:
Proceeds from initial public offering 20,713,843 -
Proceeds from secondary public offering 23,093,042 -
Repayment of bridge notes (7,000,000) -
Repayment on line of credit, net - (965,356)
Proceeds from note payable to stockholder - 1,500,000
Repayment on note receivable from stockholder - (8,518)
Proceeds from sale of preferred stock - 1,000,000
Proceeds from exercise of common stock options 53,915 49,400
Decrease in restricted cash - 1,053,352
----------- -----------
Net cash provided by financing activities 36,860,800 2,628,878
Net increase in cash and cash equivalents 31,681,163 971,169
Cash and cash equivalents at beginning of period 4,658,845 247,751
----------- -----------
Cash and cash equivalents at end of period $36,340,008 $ 1,218,920
=========== ===========
</TABLE>
See accompanying notes
7
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Digital Video Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
December 31, 1996
Note 1-Basis of Presentation
Digital Video Systems, Inc. (the "Company") develops, manufactures and
markets digital video compression and decompression hardware and software for
entertainment, business and educational uses.
The accompanying unaudited condensed 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.
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-and nine-month periods ended December 31, 1996
are not necessarily indicative of the results that may be expected for the
fiscal year ending March 31, 1997 or for any other future period. For further
information, refer to the financial statements for the year ended December 31,
1995 and footnotes thereto included in the Company's Registration Statement on
Form SB-2 that became effective on November 21, 1996.
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 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 placed in escrow in connection with the
Company's initial public offering.
8
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Note 3- Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31, 1996 March 31, 1996
----------------- --------------
<S> <C> <C>
Inventories:
Raw materials $ 621,765 $ 741,714
Work in process $ 489,917 $1,015,574
Finished goods $ 130,742 $ 168,312
---------- ----------
$1,242,424 $1,925,600
</TABLE>
Note 4- Stock Split
In January 1996, the Board of Directors approved a stock split of 1.078-
for-1 of all outstanding shares of common stock. All share and per share
information has been adjusted to give effect to the stock split in the
accompanying financial statements.
Note 5- Private Placement
In March 1996, the Company completed a $7,000,000 private placement of 140
units at $50,000 per unit, each unit consisting of a $50,000 principal amount
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. On May 14, 1996 the Company repaid these bridge notes in
full from the proceeds received pursuant to its initial public offering of
Units.
Note 6- Closing of Initial Public Offering
On May 14, 1996, the Company closed its initial public offering which
consisted of 4,200,000 units ("Units") each consisting of one share of common
stock, one Class A warrant and one Class B warrant, priced at $5.00 per Unit. On
May 22, 1996, the Company's underwriter exercised its overallotment option to
purchase an additional 630,000 units at $5.00 per unit. The Company received net
offering proceeds from the sale of units of approximately $20,714,000 after
deducting underwriting discounts and commissions and other expenses of the
offering. Upon the closing of the Offering, the Company agreed to grant to the
underwriter an option to purchase up to 420,000 Units. The Option is exercisable
during the three-year period commencing two years from the date of the Company's
initial public offering at an exercise price of $6.50 per Unit.
9
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Note 7- Escrow Securities
In April 1996 and in conjunction with the Company's IPO described above,
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, their shares and options to purchase shares of
common stock, into escrow. Also 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, certain options reserved for future grant
under the Company's 1993 Stock Option Plan are subject to escrow upon grant.
The common stock and options in escrow 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 initial 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 initial public offering.
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.
Note 8- Secondary Offering of Units with Underwriter
On November 21, 1996, the Company closed its second public offering, which
consisted of 23,000 units. The units consist of 100 units which are identical to
the units issued in the Company's initial public offering of units as described
above. In December 1996, the Company's underwriter exercised its overallotment
option to purchase an additional 3,450 units. The Company received net offering
proceeds from the sale of units of approximately $23,093,000 after deducting
underwriting discounts and commissions and other expenses of the offering.
Additionally, the Company issued an option to its underwriter to purchase up to
2,300 units (each consisting of 100 units identical to the ones issued in the
IPO) at an exercise price of $1,300 per unit. The option is exercisable over a
period of three years commencing two years from the date of the offering.
Note 9- Business Combination with Related Party
In October 1996 the Company acquired all of the outstanding stock of ViComp
Technology, Inc. ("ViComp"), a development stage company engaged in the design
and development of integrated circuits for use in video CD players. Pursuant to
such acquisition, the Company issued
10
<PAGE>
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 party, 140,760 shares are subject to an escrow
having substantially identical terms to the escrow agreement described in Note
7. 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 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-1 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 has been accounted for
as a purchase and, accordingly, the initial purchase price and acquisition costs
have been allocated to the identifiable assets and liabilities, including in-
process research and development which has been 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.
Unaudited pro forma combined results of the Company and ViComp as if the
acquisition occurred as of April 1, 1996 for the nine month period ended
December 31, 1996 are as follows: (The effect on results for the nine months
ended December 31, 1995 of the acquisition is not material).
<TABLE>
<S> <C>
Total Revenue $9,550,796
Net Loss ($8,599,914)
Net Loss Per Share ($0.95)
</TABLE>
Note 10- Employee Matter
In October 1996, the Company removed Janis Gemignani as the Company's Vice
President, Secretary and Chief Financial Officer. In February 1997, the Company
settled all claims with Ms. Gemignani. The terms of that settlement will not
have a material adverse effect on the financial position of the Company.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THREE-MONTH PERIOD ENDED DECEMBER 31, 1996 COMPARED TO THREE-MONTH PERIOD ENDED
DECEMBER 31, 1995
The Company had an operating loss of approximately $3,956,000 for the quarter
ended December 31, 1996 as compared to an operating loss of approximately
$639,000 for the quarter ended December 31, 1995 and a net loss of approximately
$3,718,000 in the December 31, 1996 quarter as compared to a net loss of
approximately $1,923,000 for the December 31, 1995 quarter.
Total revenue increased 291% in the quarter ended December 31,1996 to
approximately $ 6,042,000, up approximately $4,495,000 over the quarter ended
December 31, 1995. The 1996 sales increase was due to increases in unit sales of
digital video CD players, sub-assemblies and components during the quarter ended
December 31,1996 as compared to the quarter ended December 31, 1995.
The total gross margin and gross margin percentage for the December 31, 1996
quarter was approximately $401,000 or 7% of sales, respectively. For the
December 31, 1995 quarter the gross margin percentage was slightly negative.
The gross margin improvement is the result of increased sales volumes and
profitable sales of products and components.
Although the Company's gross margin improved in the December 31, 1996 quarter,
prices for digital video CD players and components have continued to decline as
a result of intense competition in the China market and significant reductions
in the cost of MPEG-I chips which has further reduced the market price of video
CD players. In order to offset at least in part the impact of declining selling
prices for the Company's CD players and components on its future gross margins,
the Company has secured a new source of chips from an Asian manufacturer that
the Company is production testing, and the Company expects to begin utilizing
this chip in some of its products in the fourth fiscal quarter. The Company also
is developing its proprietary ViComp MPEG-I chip through its newly acquired
subsidiary ViComp Technology, Inc. There can be no assurances, however, that the
Company will be able to utilize either of 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.
Total operating expenses increased by approximately $3,753,000 or 621% during
the December 31, 1996 quarter, from approximately $604,000 in the December
31,1995 quarter to approximately $4,356,000 in the December 31, 1996 quarter.
This increase resulted primarily from the non-recurring in process research and
development charge incurred pursuant to the ViComp Technology, Inc. acquisition,
and the Company's increased research and development, marketing, and general and
administrative expenses, in the December 31, 1996 quarter as described below.
12
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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 $482,000 or 246% from
approximately $196,000 in the December 31, 1995 quarter to approximately
$678,000 in the December 31, 1996 quarter. As a percentage of total revenue,
research and development expenses decreased from 13% in the December 31, 1995
quarter to 11% in the December 31, 1996 quarter due to the increase in sales in
the December 31, 1996 quarter compared to the December 31, 1995 quarter. Total
research and development expenses increased as a result of hiring additional
personnel, equipment cost and the development costs of ViComp Technology, Inc.
subsequent to its acquisition.
Sales and marketing expenses consist primarily of personnel and consulting costs
involved in the sales process, including sales commissions. These expenses
increased approximately 238% in the December 31, 1996 quarter to approximately
$413,000 from approximately $122,000 in the comparable quarter of 1995. As a
percentage of total revenue, sales and marketing expenses decreased from 8% in
the December 31, 1995 quarter to 7% in the comparable quarter of 1996. Total
sales and marketing expenses increased due primarily to the increase in
headcount and trade show expenses for the December 31, 1996 quarter.
General and administrative expenses, which consist of administrative salaries
and benefits, insurance and other business support costs, increased
approximately 406% to approximately $1,446,000, up approximately $1,161,000 in
the December 31, 1996 quarter compared to the December 31, 1995 quarter. This
increase was the result of hiring of additional administrative personnel, and
increased legal and accounting fees. As a percentage of total revenue, general
and administrative expenses was 18% in the December 31, 1995 quarter and 24% in
the comparable quarter of 1996.
Other income, in the December 31, 1996 quarter primarily reflects interest
income generated by funds raised in the Company's public offerings, as compared
to the comparable quarter of 1995 where the Company incurred losses on
investments in affiliates.
NINE-MONTH PERIOD ENDED DECEMBER 31, 1996 COMPARED TO NINE-MONTH PERIOD ENDED
DECEMBER 31, 1995
The Company had an operating loss of approximately $ 7,560,000 for the nine-
month period ended December 31, 1996 as compared to an operating loss of
approximately $2,220,000 for the nine-month period ended December 31, 1995 and a
net loss of approximately $8,600,000 in the December 31, 1996 nine-month period
as compared to a net loss of approximately $3,524,000 for the December 31, 1995
nine-month period.
Total revenue increased 201% in the nine-month period ended December 31,1996 to
approximately $9,551,000, up approximately $6,378,000 over
13
<PAGE>
the nine-month period ended December 31,1995. The 1996 sales increase was due to
increases in unit sales of digital video CD players, sub-assemblies and
components during the nine-month period ended December 31, 1996 as compared to
the nine-month period ended December 31,1995.
The negative gross margin percentage for the December 31, 1996 nine-month period
was due to the fact that, early in the year, the Company was not able to produce
products in quantities which could result in greater economies of scale, and the
gross profit percentage for the 1995 nine-month period of 7% was significantly
greater due to the fact that $250,000 of the revenues recognized as contract
revenue during this nine-month period had minimal associated direct costs in
this period.
Total operating expenses increased by approximately $4,864,000 or 198% during
the December 31, 1996 nine-month period, from approximately $2,455,000 in the
December 31, 1995 nine-month period to approximately $7,319,000 in the December
31,1996 nine-month period. This increase resulted primarily from the Company's
acquisition of ViComp Technology, Inc. and the related non-recurring charge for
acquired in-process research and development, increased headcount, increased
sales and marketing expenses, registration costs relating to a warrant exchange
offer that was abandoned by the Company, and increased general and
administrative expenses in the December 31, 1996 nine-month period described
below.
Research and development expenses increased approximately $524,000 or 63% from
approximately $836,000 in the December 31, 1995 nine-month period to
approximately $1,360,000 in the December 31, 1996 nine-month period. As a
percentage of total revenue, research and development expenses decreased from
26% in the December 31, 1995 nine-month period to 14% in the December 31, 1996
nine-month period due to the increase in sales in the December 31, 1996 nine-
month period compared to the December 31, 1995 nine-month period. Total research
and development spending increased as a result of hiring additional personnel,
greater equipment costs, and the development costs of ViComp Technology, Inc.
subsequent to its acquisition.
Sales and marketing expenses increased approximately 149% in the December 31,
1996 nine-month period to approximately $1,067,000 from approximately $429,000
in the comparable nine-month period of 1995. As a percentage of total revenue,
sales and marketing expenses were 14% in the December 31, 1995 nine-month period
and 11% in the comparable nine-month period of 1996. The increase in total
expenses is due primarily to the increase in sales and marketing personnel for
the December 31, 1996 nine-month period.
General and administrative expenses increased approximately $1,882,000, to
approximately $3,072,000 in the December 31, 1996 nine-month period compared to
approximately $1,190,000 for the December 31, 1995 nine-month period. This
increase was the result of hiring of additional administrative personnel and
increased legal and accounting fees. As a percentage of total revenue, general
and administrative expenses decreased from 38% in the December 31, 1995 nine-
month period to 32% in the comparable nine-month period of 1996 due to the
increase in sales in
14
<PAGE>
the December 31, 1996 nine-month period compared to the December 31, 1995 nine-
month period.
The Company recognized Acquired in process R&D, a non-cash charge in the quarter
ended December 31, 1996 of approximately $1,819,000 resulting from the
acquisition of ViComp Technology, Inc.
The Company recorded an extraordinary non-cash charge in the quarter ended June
30, 1996 of approximately $1,264,000 related to the repayment of the bridge
notes issued in the bridge financing which were repaid in May 1996 from proceeds
of the Company's initial public offering.
This document 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, 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, including integrated circuits and integrated circuit
products. The Company's actual results may differ materially from those
described in those forward-looking statements due to a number of factors,
including, but not limited to, the uncertainty of market acceptance of Video CD
players and components, planned rapid growth of the Company's business, the
risks relating to the Company's acquisition of ViComp Technology, Inc.,
conducting business in foreign countries and the competitive market for the
Company's products as described in the Company's Form 8-K dated January 7, 1997
filed with the SEC.
LIQUIDITY AND SOURCES OF CAPITAL
The Company had working capital of approximately $37,064,000 as of December 31,
1996 and cash and cash equivalents of approximately $36,340,000. The Company
believes that its existing financial resources will be sufficient to finance its
working capital requirements through at least March 31, 1998.
Cash flows used in operations were approximately $4,418,000 for the December 31,
1996 nine-month period as compared to cash flows used in operations of
approximately $1,607,000 in the comparable period in 1995. Net cash provided by
financing activities was approximately $36,861,000 for the December 31, 1996
nine-month period as compared to approximately $2,629,000 for the December 31,
1995 nine-month period. Cash provided by financing activities in the nine-month
period ended December 31, 1996 includes funds generated pursuant to the
Company's initial public offering of approximately $20,714,000 net of offering
costs, which were partially offset by the repayment of the $7,000,000 in bridge
notes and additionally, funds were also generated pursuant to the Company's
secondary offering in November 1996 of approximately $23,094,000, net of
offering costs.
15
<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: February 11, 1997 /s/ Arvin S. Erickson
--------------------------------------
Arvin S. Erickson Vice President--
Chief Financial Officer and Secretary
16
<PAGE>
EXHIBIT 11.1
DIGITAL VIDEO SYSTEMS, INC.
STATEMENT REGARDING THE COMPUTATION OF PER SHARE LOSS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
-------------------------- --------------------------
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Net loss $(3,718,012) $(1,923,163) $(8,599,914) $(3,524,262)
=========== =========== =========== ===========
Weighted average common shares outstanding 9,527,107 2,173,231 8,029,717 2,214,900
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 proposed initial public offering - 1,991,768 1,057,756 1,991,768
----------- ----------- ----------- -----------
Shares used in computing net loss per share 9,527,107 4,164,999 9,087,473 4,206,668
=========== =========== =========== ===========
Net loss per share $ (0.39) $ (0.46) $ (0.95) $ (0.84)
=========== =========== =========== ===========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 36,340,008
<SECURITIES> 0
<RECEIVABLES> 2,809,825
<ALLOWANCES> 0
<INVENTORY> 1,242,424
<CURRENT-ASSETS> 40,978,138
<PP&E> 2,053,704
<DEPRECIATION> (676,999)
<TOTAL-ASSETS> 42,452,253
<CURRENT-LIABILITIES> 3,914,380
<BONDS> 0
0
0
<COMMON> 2,024
<OTHER-SE> 54,675,883
<TOTAL-LIABILITY-AND-EQUITY> 42,452,253
<SALES> 9,550,796
<TOTAL-REVENUES> 9,550,796
<CGS> 9,791,680
<TOTAL-COSTS> 7,318,894
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (7,314,051)
<INCOME-TAX> (22,067)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> (1,263,796)
<CHANGES> 0
<NET-INCOME> (8,599,914)
<EPS-PRIMARY> (.95)
<EPS-DILUTED> (.95)
</TABLE>
