<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 September 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
-------------- ---------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Knowles Drive
Los Gatos, CA 95032
----------------------- ----------
(Address of principal executive offices) (Zip Code)
(408)874-8200
--------------------------------------------------
(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
------- --
Class Outstanding at October 31, 1997
------------------------------ ---------------------------------
(Common Stock, $.0001 Par Value) 20,889,276
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
INDEX
<TABLE>
<CAPTION>
Part I. Financial Information Page
- ----------------------------- ----
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-
September 30, 1997 and March 31, 1997 3
Condensed consolidated statements of operations-
Three and Six months ended September 30, 1997 and 1996 4
Condensed consolidated statements of cash flows-
Six months ended September 30, 1997 and 1996 5
Notes to condensed consolidated financial statements-
September 30, 1997 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 10
Part II. Other Information
- --------------------------
Item 1. Legal Proceedings --
None
Item 2. Changes in Securities and the Use of Proceeds 14
Item 3. Defaults upon Senior Securities --
None
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information --
None
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibit Index 18
</TABLE>
2
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Item 1. Financial Statements
DIGITAL VIDEO SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1997
--------------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 18,571 $ 32,221
Short-term investments 2,857 -
Accounts receivable, net 6,777 2,875
Inventories 2,530 1,016
Prepaid expenses and other current assets 1,436 485
-------- --------
Total current assets 32,171 36,597
-------- --------
Property and equipment, net 1,997 1,420
Intangible assets 2,056 -
Other assets 153 56
-------- --------
$ 36,377 $ 38,073
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,876 $ 3,044
Accrued liabilities 2,651 854
-------- --------
Total current liabilities 6,527 3,898
Deferred income 86 -
Stockholders' equity:
Common stock 2 2
Additional paid-in capital 56,475 54,628
Accumulated deficit (26,516) (20,297)
Cumulative foreign currency translation adjustments (119) (72)
Deferred compensation (78) (86)
-------- --------
Total stockholders' equity 29,764 34,175
-------- --------
$ 36,377 $ 38,073
======== ========
</TABLE>
See accompanying notes
3
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------------- ---------------------
1997 1996 1997 1996
---------- --------- ----------- --------
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 2,974 $ 1,863 $ 6,657 $ 2,584
Development and services revenue 1 - 1 150
Component revenue 738 - 2,443 775
------- ------- ------- -------
Total revenue 3,713 1,863 9,101 3,509
Cost of product revenue 2,485 2,351 5,900 3,117
Cost of development and services revenue - - - 235
Cost of component revenue 729 - 2,400 798
------- ------- ------- -------
Gross margin 499 (488) 801 (641)
Operating expenses:
Research and development 1,588 345 2,492 683
Sales and marketing 901 314 1,486 654
General and administrative 1,910 1,116 3,168 1,626
Purchased in-process research
and development 617 - 617 -
------- ------- ------- -------
Total operating expenses 5,016 1,775 7,763 2,963
------- ------- ------- -------
Loss from operations (4,517) (2,263) (6,962) (3,604)
Other income (expense), net 293 183 743 (14)
------- ------- ------- -------
Net loss before extraordinary item (4,224) (2,080) (6,219) (3,618)
------- ------- ------- -------
Extraordinary item- loss on early
extinguishment of bridge notes - - - (1,264)
------- ------- ------- -------
Net loss $(4,224) $(2,080) $(6,219) $(4,882)
======= ======= ======= =======
Net loss per share before extraordinary item $(0.34) $(0.21) $(0.51) $(0.41)
======= ======= ======= =======
Net loss per share $(0.34) $(0.21) $(0.51) $(0.55)
======= ======= ======= =======
Shares used in the calculation
of net loss per share 12,300 10,133 12,095 8,868
======= ======= ======= =======
</TABLE>
See accompanying notes
4
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED SEPTEMBER 30,
----------------------
1997 1996
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss $ (6,219) $(4,882)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 584 118
Deferred financing charges and accretion
related to bridge notes - 1,491
Purchased in-process research and development 617 -
Changes in operating assets and liabilities:
Accounts receivable (3,835) (673)
Inventories (476) 437
Prepaid expenses and other current assets (897) 146
Accounts payable 831 (398)
Accrued liabilities 775 85
-------- --------
Net cash used in operating activities (8,570) (3,676)
INVESTING ACTIVITIES
Acquisition of property and equipment (464) (71)
Acquisition of Digital Video Division of
Arris Interactive LLC (1,642) -
Purchase of short term investments (2,857) -
Other investing activities (129) (17)
-------- --------
Net cash used in investing activities (5,092) (88)
FINANCING ACTIVITIES
Net proceeds from initial public offering of Units - 20,714
Repayment of bridge notes - (7,000)
Proceeds from exercise of stock options 12 30
-------- --------
Net cash provided by financing activities 12 13,744
-------- --------
Net increase (decrease) in cash and cash equivalents (13,650) 9,980
Cash and cash equivalents at beginning of period 32,221 4,659
-------- -------
Cash and cash equivalents at end of period $ 18,571 $14,639
======== =======
Supplemental disclosure of cash flow information:
Interest paid $ - $ 173
</TABLE>
See accompanying notes
5
<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 Company offers Video CD
players, sub-assemblies and components for the consumer market, and interactive
video engines and video-on-demand systems for the hospitality, entertainment,
education and kiosk markets, and to a lesser extent, digital MPEG compression
systems and sub-assemblies. The Company also offers digital advertisement
insertion systems for the cable television market and multimedia computer
storage personal computer products.
The accompanying unaudited condensed consolidated financial statements have been
prepared by the Company 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 and should be read in conjunction
with the audited financial statements included in the Company's annual report
and Form 10-KSB for the fiscal year ended March 31, 1997.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements have been prepared on the same basis as the audited
financial statements and include all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the interim periods
presented. Operating results for the six and three-month periods ended September
30, 1997 are not necessarily indicative of the results that may be expected for
any other interim period or the full fiscal year ending March 31, 1998.
All significant intercompany balances and transactions have been eliminated.
The Company has determined that it is not yet appropriate to consolidate the
results of the newly formed joint venture in the People's Republic of China
("China") for the quarter ended September 30, 1997, pending completion of
certain administrative and regulatory matters relating to the start-up of the
joint venture, which is expected to occur during the current fiscal year.
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 other than in accordance with Securities and Exchange Commission Staff
Accounting Bulletins, common stock and common stock equivalent shares that were
issued by the Company at prices below the initial public offering price during
the period beginning one year prior to such offering. Such common stock and
common stock equivalent shares 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.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the
requirements of FAS No. 128, entities will be required to report "basic" and "
diluted" earnings per share. As the
6
<PAGE>
Company has not recorded any net income for any period to date, the new basic
and diluted earnings per share calculations will be not different from the net
loss per share currently reported.
Note 3- Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
1997 1997
------------- ---------
<S> <C> <C>
Inventories:
Raw materials $1,168 $ 824
Work in process 996 157
Finished goods 366 35
------ ------
$2,530 $1,016
====== ======
</TABLE>
Note 4- Business Combinations
Acquisition of Digital Video Division-
- --------------------------------------
On August 1, 1997, the Company completed the acquisition of the business and
certain assets and liabilities of the Digital Video division (the "DV Business")
of Arris Interactive L.L.C. ("Arris") in a transaction accounted for as a
purchase. Prior to the acquisition, the assets of the DV Business acquired were
used in the business of designing, manufacturing and distributing MPEG-2
decoding, switching/streaming and multiplexing solutions used to deliver
advanced video services like digital ad insertion, video on demand, and near
video on demand to subscribers.
The total purchase price of approximately $3,500 included cash of $1,500, the
issuance of 600,000 shares of common stock of which 300,000 shares were placed
in escrow pending the resolution of certain closing requirements, and related
acquisition costs of $141. Arris is not entitled to transfer or sell any of the
shares of common stock for a period of twelve months after the closing. After
the expiration of this twelve-month period, Arris will be entitled to transfer
or sell 50% of this stock and will be entitled to transfer or sell the remaining
50% after the expiration of a further twelve-month period. None of such shares
are registered under any state or federal securities laws and any sales or
transfers of such shares must be made in compliance with such laws.
In addition, the Company has agreed to pay Arris additional contingent
consideration of up to $5,000 if the DV Business achieves certain revenue
milestones. The contingent consideration paid to Arris will equal 15.5% of net
revenues of the DV Business during the period from August 1, 1997 through March
31, 1998 (subject to such revenues exceeding $3,000) and 15.5% of the net
revenues of the DV Business during the period from April 1, 1998 through January
31, 1999 (subject to such revenues exceeding $5,000). Any additional
consideration paid on the achievement of the revenue milestones will be recorded
as additional purchase price at such time.
Based upon a preliminary valuation, the purchase price has been allocated as
follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 585
Equipment 511
Intangibles 1,935
Liabilities assumed (170)
In-process research
and development 617
------
$3,478
======
</TABLE>
7
<PAGE>
In accordance with generally accepted accounting principles, in-process research
and development has been expensed. Other intangible assets will be amortized on
a straight line basis over estimated useful lives ranging from five months to
three years.
As part of the Asset Purchase Agreement, 50% of the Common Stock included in the
consideration was deposited into an escrow account. These shares will be
released from escrow on the delivery of a satisfactory legal opinion relating to
two key patent applications. Management of the Company believed that on the
date of the acquisition that it was probable that all shares subject to such
escrow were going to be distributed to Arris. As a result, such shares have
been included as part of the purchase price.
The following unaudited pro forma combined results of the Company and the DV
Business for the three and six months ended September 30, 1997 and 1996 have
been prepared assuming that the acquisition had occurred at the beginning of the
period presented. The following pro forma results are not necessarily indicative
of the results that would have occurred had the transaction been completed at
the beginning of the period indicated, nor is it indicative of future operating
results.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30
-------------------- ------------------
1997 1996 1997 1996
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Pro forma net revenues $ 3,713 $ 2,332 $10,162 $ 4,441
Pro forma net loss $(3,607) $(4,268) $(6,865) $(9,217)
Pro forma net loss per share $ (0.29) $ (0.40) $ (0.55) $ (0.97)
</TABLE>
For the three and six months ended September 30, 1997, pro forma net loss
excludes the non-recurring charge for purchased in-process research and
development. The results of the operations of the acquired business have been
included in the consolidated results of operations for the period subsequent to
the acquisition date.
Acquisition of Synchrome Technologies, Inc.
On August 25, 1997, the Company acquired substantially all of the assets of the
privately held Synchrome Technologies, Inc., ("Synchrome") a developer and
manufacturer of multimedia and computer storage PC products. The purchase price,
which was determined on October 9, 1997, was approximately $778 (including
acquisition costs) and was paid in cash. The Company has accounted for the
acquisition using the purchase method, and the results of operations of
Synchrome have been included in the Company's operations since acquisition.
The following is a summary of the purchase price allocation:
Current assets $521
Equipment 52
Goodwill 258
Liabilities assumed (53)
----
$778
=====
Panyu Joint Venture
- -------------------
On August 5, 1997 the Company, through its wholly-owned subsidiary, D.V.S. H.K.,
and Panyu Tian Le Electrical Appliance Manufacturing Co., Ltd. ("Panyu") formed
a joint venture (the "Panyu Joint Venture") in China to manufacture and
distribute Video CD players and DVD players (currently under development in the
U.S.) in China and other countries. The Panyu Joint Venture is known as "Panyu
D.V.S. Electrical Appliances Manufacturing Co., Ltd." Under the terms of the
agreement, Panyu agreed to contribute land use rights for sites, existing plant,
machinery and equipment valued by the Panyu Joint Venture at approximately
$3,920, representing 49% of the Panyu Joint
8
<PAGE>
Venture's registered capital. In September 1997, the Company approved an
aggregate financial commitment to the Panyu Joint Venture of $4,080 with a
contribution of approximately $2,000 in cash and approximately $2,080 in parts
and components. The term of the Panyu Joint Venture is 25 years from the date
that such entity obtained its business license on August 12, 1997.
During October 1997, the Company has contributed approximately $600 in cash,
with the balance of the Company's contribution being payable in accordance with
the funding and working capital requirements of the Panyu Joint Venture. During
August 1997, Panyu has contributed $480 in market value of fixed assets to the
Panyu Joint Venture.
The Company has determined that it is not yet appropriate to consolidate the
results of the newly formed Panyu Joint Venture for the quarter ended September
30, 1997, pending completion of certain administrative and regulatory matters
relating to the start-up of the joint venture, which is expected to occur during
the current fiscal year.
Although the Company determined that it is not yet appropriate to consolidate
the Panyu Joint Venture's results, the Company's results, if reported on a
consolidated basis, would have been as follows for the three-month and six-month
periods ended September 30, 1997:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1997 SIX MONTHS ENDED SEPTEMBER 30, 1997
------------------------------------------------ --------------------------------------------------
Panyu Panyu
Joint Venture Joint Venture
Digital Video August 12, 1997 Digital Video August 12, 1997
Systems, Inc. (inception) to Systems, Inc. (inception) to
($000's) Actual September 30, 1997 Total Actual September 30, 1997 Total
- -------- ------ ------------------ ----- ------ ------------------ -----
<S> <C> <C> <C> <C> <C> <C>
Total revenue 3,713 4,802 8,515 9,101 4,802 13,903
Operation income
(loss) (4,517) 452 (4,065) (6,962) 452 (6,510)
Other income
(expense) 293 - 293 743 - 743
Minority interest - (222) (222) - (222) (222)
Net income (loss) (4,224) 230 (3,994) (6,219) 230 (5,989)
</TABLE>
Included in the Panyu Joint Venture's cost of sales is $4,099 of inventory
purchased from Panyu and included in the Panyu Joint Venture's revenues is
approximately $4,802 of finished goods sold to Panyu during the three months
ended September 30, 1997. Panyu acts as a distributor for the Company's finished
goods and owns 49% of the Panyu Joint Venture's capital. (See Note 4 - Business
combinations).
Note 5 - Related party transactions
- -----------------------------------
For the three and six months ended September 30, 1997, the Company sold
approximately $700 and $1,350, respectively, of component inventory to Wyan, a
company located in China. The Company's receivable outstanding from Wyan was
approximately $700 as of September 30, 1997. The Company owns less than 20% of
Wyan's equity.
9
<PAGE>
Item 2. 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 Hong Kong, China and Taiwan, the need to complete certain
matters necessary to enable the Company to consolidate the Panyu Joint Venture
results for financial reporting purposes and to continue its operations as a
joint venture (including obtaining all required governmental approvals and
licenses, the transfer of certain assets by the Company's joint venture partner
into the joint venture and the appropriate payment and recording of various
transactions on behalf of the joint venture) and the competitive market for the
Company's products, and other factors described in Exhibit 99.1 to this Form 10-
QSB, 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. 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 September 30, 1997.
RESULTS OF OPERATIONS FOR THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED
TO THE THREE AND SIX MONTHS ENDED SEPTEMBER 30, 1996
REVENUE AND COST OF REVENUE. Total revenue increased $1.9 million, or 99%, to
$3.7 million for the three months ended September 30, 1997 compared with the
three months ended September 30, 1996. Total revenue for the six months ended
September 30, 1997 was $9.1 million, an increase of $5.6 million or 159% from
the corresponding period in 1996. These increases reflect increased market
penetration of the Company's products, as well as the acquisitions of the
Digital Video Division (the "DV Business") of Arris Interactive LLC ("Arris")
and Synchrome Technology, Inc. ("Synchrome") during the quarter. Product
revenue, including Video CD players, encoding systems, and sub-assemblies,
increased $1.1 million, or 60% to $3.0 million for the three months ended
September 30, 1997 compared with the three months ended September 30, 1996.
Product revenue for the six months ended September 30, 1997 was $6.7 million, an
increase of $4.1 million or 158% from the preceding year. There was no
significant revenue generated from development and services contracts during the
three or six months ended September 30, 1997 or 1996 respectively. Component
revenue increased to $0.7 million in the three months ended September 30, 1997
from $ 0 in the three months ended September 30, 1996 and totaled $2.4 million
for the six months ended September 30, 1997 compared to $0.8 million for the
same period in 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.
Although the Company determined that it is not yet appropriate to consolidate
the results of the Company's newly-formed joint venture (the "Panyu Joint
Venture"), pending the completion of certain administrative and regulatory
matters relating to the start-up of the joint venture, which expected to occur
during the current fiscal year. The Company, through its wholly-owned subsidiary
D.V.S.H.K., owns 51% of the Panyu Joint Venture. The other 49% of the Panyu
Joint Venture is owned by Panyu Tian Le Electrical Appliance Manufacturing Co.,
Ltd. ("Panyu"), a company organized under the laws of China. Giving full effect
to the acquisitions of the DV Business and Synchrome as if the Company had
acquired them on July 1, 1997 and the Panyu Joint Venture as if its results had
been consolidated on July 1, 1997, the Company's revenue for the three months
ended September 30, 1997 would have been approximately $10 million.
10
<PAGE>
Gross margin for the three months ended September 30, 1997 was $0.5 million, or
13% of revenue as compared to a negative $0.5 million or (26% of revenue) for
the three months ended September 30, 1996. Gross margin for the six months ended
September 30, 1997 and 1996 were $0.8 million (9% of revenue) and a negative
$0.6 million (18% of revenue) respectively. The gross margin improvement is the
result of improved manufacturing efficiencies from increased sales volume and
better margin performances from the DV Business and Synchrome which was offset
partially by the low margin of component sales. Component revenue, which
generally has low to negative gross margin, contributed 20% and 27% of total
revenue for the three and six months ended September 30, 1997 compared with 0%
and 22% for the same periods in 1996.
Although the Company's gross margin improved in the three and six months ended
September 30, 1997 compared with the same periods in fiscal 1996, prices for
Video CD players, sub-assemblies and components continue to decline as a result
of intense competition in the Chinese market and significant reductions in the
cost of Video CD components which has further reduced the market price of Video
CD players. The Company is developing its proprietary MPEG-I chip through its
subsidiary, ViComp Technology, Inc. for use in its Video CD products. There can
be no assurances, however, that the Company will be able to complete the
development of this chip on a timely basis or at all, or that the cost of this
chip will be significantly lower than other comparable chips available to the
Company's competitors.
OPERATING EXPENSES. Total operating expenses increased by $3.2 million, or
183%, to $5.0 million during the three months ended September 30, 1997 compared
with the three months ended September 30, 1996. Total operating expenses for
the six months ended September 30, 1997 were $7.8, million an increase of 162%
from the corresponding period in 1996.
Research and development expenses, which consist primarily of personnel and
equipment costs required to conduct the Company's product development efforts,
increased $1.2 million or 360%, to $1.6 million during the three months ended
September 30, 1997 compared with the three months ended September 30, 1996. For
the six months ended September 30, 1997 research and development expenses were
$2.5 million, an increase of $1.8 million or 265% from the same period in 1996.
These increases were primarily a result of the business combinations that
occurred in the three months ended September 30, 1997 and the continued
development of the Company's products, including the ViComp MPEG-1 chip.
Research and development expenses as a percentage of total revenue was 43% for
the three months ended September 30, 1997 and 19% for the three months ended
September 30, 1996. For the six months ended September 30, 1997 and 1996,
research and development expenses were 27% and 19% of revenue, respectively. The
Company expects that these expenses will continue to increase in dollar terms as
the Company expands its product 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
$0.6 million, or 187%, to $0.9 million during the three months ended September
30, 1997 compared with the three months ended September 30, 1996. For the six
months ended September 30, 1997 sales and marketing expenses increased by $0.8
million or 127% when compared to the same period in 1996. These increases were
primarily a result of the business combinations that occurred in the three
months ended September 30, 1997 and headcount additions. As a percentage of
total revenue, sales and marketing expenses increased from 17% in the three
months ended September 30, 1996 to 24% in the three months ended September 30,
1997. For the six months ended September 30, 1997 and 1996 these expenses were
16% and 19% of total revenues respectively. As the Company continues its
marketing efforts, sales and marketing expenses in dollar terms are expected to
continue to increase.
General and administrative expenses, which consist of administrative salaries
and benefits, insurance and other business support costs, including legal and
audit expenses, increased $0.8 million, or 71%, to $1.9 million for the three
months ended September 30, 1997 compared to the three months ended September
11
<PAGE>
30, 1996. These expenses were $3.2 million and $1.6 million respectively for the
six months ended September 30, 1997 and 1996, representing a 95% increase. This
increase was the result of hiring additional administrative personnel, as well
as business combinations during the period. As a percentage of total revenues,
general and administrative expenses were 51% in the three months ended September
30, 1997 and 60% in the three months ended September 30, 1996 and 35% and 46%
for the six months ended September 30, 1997 and 1996 respectively. The Company
expects that general and administrative costs will increase in dollar terms as
the Company expands its businesses.
OTHER INCOME (EXPENSE), NET. During the three and six months ended September
30, 1997, the Company realized other income of $0.3 million and $0.7 million
respectively, was realized primarily from interest income generated by funds
raised in the Company's public offerings. During the comparable periods in
fiscal 1996, the Company realized other income of approximately $0.2 million
and other expense of less than $0.1 million, respectively.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1997, the Company had working capital of $25.6 million,
including cash and cash equivalents and short-term investments of $21.4 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 $8.6 million for the six months ended
September 30, 1997 compared to $3.7 million for the six months ended September
30, 1996. Substantially all of the net cash used in operating activities in the
six months ended September 30, 1997 represented the net loss of $6.2 million
adjusted for non-cash charges for depreciation and amortization of $0.6 million
and net cash used to fund increases in accounts receivable of $3.8 million and
inventories of $0.5 million, offset by increases in accounts payable and accrued
liabilities of $1.6 million. Substantially all the net cash used in operating
activities in the six months ended September 30, 1996 represented the net loss
of $4.9 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 $5.1 million for the six months ended
September 30, 1997 compared to less than $0.1 million for the six months ended
September 30, 1996. The $5.1 million cash used for investing activities
includes the purchase of short-term investments ($2.9 million), acquisition of
the DV Business ($1.6 million), and acquisition of property and equipment ($0.5
million).
Net cash provided by financing activities was minimal for the six months ended
September 30, 1997 compared to $13.7 million for the six months ended September
30, 1996. Cash provided by financing activities in the six month ended
September 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
$13.7 million for the six months ended September 30, 1997 compared to an
increase in cash and cash equivalents of $10.0 million for the six months ended
September 30, 1996.
During October 1997, the Company contributed approximately $600,000 in cash to
the Panyu Joint venture, with the balance of the Company's contribution
(approximately $3.5 million) being payable over the next three years in
accordance with the needs of the Panyu Joint Venture as determined by its board
of directors. Also in October 1997, the Company paid $753,000 in cash for the
purchase of Synchrome (total purchase price was approximately $778,000 including
$25,000 of acquisition costs). In addition, the Company has agreed to pay Arris
additional contingent consideration of up to $5 million if the DV Business
achieves certain revenue milestones. The contingent consideration paid to Arris
will equal 15.5% of net revenues of the DV Business during the period from
August 1, 1997 through March 31, 1998 (subject to such revenues exceeding $3
million) and 15.5% of the net revenues of the DV Business during the period from
April 1, 1998 through January 1, 1999 (subject to such revenues exceeding $5
million).
12
<PAGE>
The Company anticipates that the DV Business, Synchrome and the Panyu Joint
Venture will utilize a portion of the Company's working capital during the
balance of the current fiscal year to fund expected operating losses for the DV
Business and Synchrome and for the expansion of the Panyu Joint Venture's
operations. The Company continues to pursue additional acquisitions and
strategic alliances to acquire or develop complementary business 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.
13
<PAGE>
PART II. OTHER INFORMATION
Except as listed below, all information required by items in Part II is omitted
because the items are inapplicable or the answer is negative.
Item 2. Changes in Securities and the Use of Proceeds
In connection with the acquisition of the DV Business, the Company issued
600,000 shares of the Company's common stock to Arris in August 1997. Arris did
not pay any cash consideration for the 600,000 shares of Common Stock. Of these
shares, 300,000 are subject to an escrow arrangement. Such shares shall be
released from escrow provided that a satisfactory legal opinion (relating to two
key patent applications acquired in connection with the acquisition) is
delivered to the Company within 90 days following the closing date of the
acquisition (or such longer period of time as Arris' counsel believes is
required to conduct the patent search described in the agreed upon form of
opinion and to deliver such opinion).
The Company issued shares to Arris in reliance on Rule 506 under the
Securities Act of 1933 (the "Securities Act"). The Company's reliance on Rule
506 is based on the following facts: (i) the offer and sale of the 600,000
shares of Common Stock satisfies the terms and conditions of Rules 501 and 502
under the Securities Act; (ii) there was a single purchaser (the "Purchaser");
and (iii) the Purchaser is an accredited investor as defined in Rule 501(a) of
the Securities Act.
The net proceeds of the Company's initial public offering ("IPO") completed in
May 1996, net of $3.4 million of underwriting discounts and expenses and other
expenses, were $20.7 million. The registration statement filed with the
Securities and Exchange Commission (the "Commission") in connection with the IPO
(the "IPO Registration Statement") became effective on May 9, 1996. As of
September 30, 1997, the Company had used its IPO proceeds for the following uses
approximately $7.0 million for repayment of bridge notes, approximately $5.4
million for acquisition of inventory (including components of Video CD players
such as integrated circuits, circuit boards and Video CD drivers); approximately
$1.4 million for sales and marketing (including the establishment of new sales
offices in Hong Kong and Japan, and hiring sales and marketing personnel and
outside consultants); and approximately $6.9 million for working capital
(including hiring of management executives and other personnel, purchasing
systems and demonstration equipment) The Company's use of such proceeds does not
represent a material change in the use of proceeds described in the prospectus
contained in the registration statement filed in connection with the IPO. Except
as set forth above, none of the items reported by the Company on its Form SR
filed with the Commission on August 7, 1996 have changed since the date of such
filing.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Shareholders on September 11, 1997 to
vote on the proposals summarized in items 1 through 6 below:
1. To elect seven directors;
2. To approve an amendment to the Company's Amended and Restated Certificate
of Incorporation, to increase the number of shares of Common Stock authorized
for issuance from 60,000,000 to 80,000,000;
3. To approve the Company's 1997 Employee Stock Purchase Plan;
4. To approve an amendment to the Company's 1993 Amended and Restated Stock
Option Plan to permit compliance with the requirements of Section 162(m) of the
Internal Revenue Code of 1986, as amended, applicable to qualified performance-
based compensation;
5. To ratify the adoption of the Company's 1996 Stock Option Plan, as amended;
6. To ratify the appointment by the Board of Director's of Ernst & Young LLP
as the Company's independent auditors for the fiscal year ending March 31, 1998;
In order for the proposals summarized in items 1 through 6 above to be
approved, a majority of the Company's outstanding shares of Common Stock were
required to be present at the Annual Meeting in person or by proxy. The
requisite number of shares was present at the Annual Meeting. In the election of
directors, the seven candidates receiving the highest number of votes were
elected. The names of such directors, along with the number of shares voting for
such director, are listed in the table below. Approval of the Amendment to the
Company's Amended and Restated Articles of Incorporation required the vote of a
majority of the Company's outstanding shares of Common Stock. All of the other
proposals were required to be approved by a majority of the shares present and
entitled to vote at the Annual Meeting. All of the proposals were approved by
the requisite number of shares. The table below sets forth the number of shares
voted for, against, withheld or abstained for each of the six proposals.
<TABLE>
<CAPTION>
Votes Votes
PROPOSAL 1 For Withheld
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Election of Directors
Edmund Y. Sun 13,217,177 58,770
Thomas R. Parkinson 13,218,577 57,370
Robert B. Pfannkuch 13,202,181 73,766
Sung Hee Lee 13,215,077 60,870
Sanford C. Sigoloff 13,216,117 59,830
Philip B. Smith 13,216,617 59,330
Joseph F. Troy 13,213,277 62,670
------------------------------------------------------------------------------------------
Votes Votes Votes
PROPOSAL 2 For Against Abstain
- -------------------------------------------------------------------------------------------
Approval to increase the number
of shares of Common Stock authorized
from 60,000,000 to 80,000,000 13,047,317 175,210 53,420
- -------------------------------------------------------------------------------------------
Votes Votes Votes
PROPOSAL 3 For Against Abstain
- -------------------------------------------------------------------------------------------
Approval of the Company's 1997
Employee Stock Purchase Plan 8,738,524 268,590 68,460
- -------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
Votes Votes Votes
PROPOSAL 4 For Against Abstain
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Approval to amend the Company's 1993
Amended and Restated Stock Option Plan
to permit compliance with Internal Revenue Code 9,608,554 320,497 78,010
- -------------------------------------------------------------------------------------------
Votes Votes Votes
PROPOSAL 5 For Against Abstain
- -------------------------------------------------------------------------------------------
Ratify adoption of the Company's
1996 Stock Option Plan 8,645,637 319,497 78,210
- -------------------------------------------------------------------------------------------
Votes Votes Votes
PROPOSAL 6 For Against Abstain
- -------------------------------------------------------------------------------------------
Ratify the appointment of Ernst & Young
as the Company's independent auditors 13,219,628 29,100 27,219
- -------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith or incorporated by reference:
(10) Material contracts incorporated by reference
10.1 Joint Venture Agreement dated as of August 5, 1997 by and between
D.V.S. H.K., a wholly-owned subsidiary of the Company, and Panyu
Tian Le Electrical Appliance Manufacturing Co., Ltd. (1)
10.2 Asset Purchase Agreement dated as of July 25, 1997 by and between
the Company and Arris Interactive LLC. (2)
10.3 Amendment No. 1 to Asset Purchase Agreement by and between the
Company and Arris Interactive LLC dated as of August 1, 1997. (2)
10.4 Form of Escrow Agreement by and between the Company and Arris
Interactive LLC. (3)
10.5 1997 Employee Stock Purchase Plan. (3)
10.6 1993 Amended and Restated Stock Option Plan. (3)
10.7 1996 Amended and Restated Stock Option Plan. (3)
10.8 Employment Agreement dated as of August 1, 1997 by and between the
Company and Gary Franza.
10.9 Employment Agreement dated as of August 1, 1997 by and between the
Company and Mike Maslaney.
10.10 Letter agreement dated April 10, 1997 by and between Robert B.
Pfannkuch.
(1) Incorporated by reference to the Company's Current Report on Form 8-
K filed with the Commission on August 15, 1997.
(2) Incorporated by reference to the Company's Current Report on Form 8-
K filed with the Commission on September 26, 1997.
(3) Incorporated by reference to the Company's Definitive Proxy
Statement filed with the Commission on August 11, 1997.
11.1 Statement Regarding the Computation of Per Share Loss
27.1 Financial Data Schedule
99.1 Certain Considerations
(b) Reports on Form 8-K:
(1) REPORT ON FORM 8-K FILED ON JULY 31, 1997. ITEM 5 (OTHER EVENTS)
(2) Report on Form 8-K filed on August 15, 1997. Item 2 (Acquisition or
Disposition of Assets) and 7 (Financial Statements and Exhibits).
(3) Report on Form 8-K filed September 26, 1997. Item 2 (Acquisition or
Disposition of Assets) and Item 7 (Financial Statements and
Exhibits)
16
<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: November 19, 1997 /s/ Tom Parkinson
----------------- --------------------------
Tom Parkinson President--
Chief Operating Officer and
Principal Financial Officer
17
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Number
- --------------
<S> <C>
10.1 Joint Venture Agreement dated as of August 5, 1997 by and between D.V.S. H.K.,
a wholly-owned subsidiary of the Company, and Panyu Tian Le Electrical Appliance
Manufacturing Co., Ltd.(1)
10.2 Asset Purchase Agreement dated as of July 25, 1997 by and between the Company and
Arris Interactive LLC.(2)
10.3 Amendment No. 1 to Asset Purchase Agreement by and between the Company and Arris
Interactive LLC dated as of August 1, 1997.(2)
10.4 Form of Escrow Agreement by and between the Company and Arris Interactive LLC.(3)
10.5 1997 Employee Stock Purchase Plan.(3)
10.6 Amended and Restated Stock Option Plan.(3)
10.7 1996 Amended and Restated Stock Option Plan.(3)
10.8 Employment Agreement dated as of August 1, 1997 by and between the Company and
Gary Franza.
10.9 Employment Agreement dated as of August 1, 1997 by and between the Company and
Mike Maslaney.
10.10 Letter Agreement dated April 10, 1997 by and between Robert B. Pfannkuch.
11.1 Statement Regarding the Computation of per Share Loss.
27.1 Financial Data Schedule.
99.1 Certain Considerations.
</TABLE>
(1) Incorporated by reference to the Company's Current Report on Form 8-K filed
with the Commission on August 15, 1997.
(2) Incorporated by reference to the Company's Current Report on Form 8-K filed
with the Commission on September 26, 1997.
(3) Incorporated by reference to the Company's Definitive Proxy Statement filed
with the Commission on August 11, 1997.
18
<PAGE>
Exhibit 10.8
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into as of August
1, 1997, by and between Digital Video Systems, Inc., a Delaware corporation (the
"Company"), and Gary Franza ("Franza").
1. Employment.
----------
1.1 Employment as Executive Vice President and Chief Operating
----------------------------------------------------------
Officer (Atlanta). The Company agrees to employ Franza, and Franza agrees to be
- -----------------
employed by the Company, as the Executive Vice President of Business Development
for the Company and Chief Operating Officer of the Company's Atlanta, Georgia
operations (the "Division") for the period beginning on August 1, 1997 or such
earlier date as the Company and Franza may agree to (the "Commencement Date")
and ending on the second anniversary of the Commencement Date, unless such
employment is terminated earlier pursuant to Section 3 (the "Employment
Period").
1.2 Duties as Employee. Franza agrees to serve as Executive Vice
------------------
President of Business Development for the Company and Chief Operating Officer of
the Division during the Employment Period. Franza's duties shall be those
customary for holders of similar positions at a company similar to the Company
and such other duties as are specified by the Company's President or Board of
Directors (the "Board"). Franza shall report directly to Thomas R. Parkinson,
the Company's President. In case of a reorganization, merger, consolidation,
liquidation, dissolution, sale of all or substantially all of the Company's
assets or similar event, the Board reserves the right, in its sole discretion,
to change or modify Franza's duties hereunder as it deems appropriate in good
faith. During the Employment Period, Franza shall devote full time to, and use
his best efforts to advance, the business and welfare of the Company. Franza
shall not directly or indirectly render any service of a business, commercial,
or professional nature to any other person, organization or other entity,
whether for compensation or otherwise, directly or indirectly, without the prior
written consent of a majority of the members of the Board.
1.3 Salary and Benefits.
-------------------
(a) Salary and Bonus. The Company shall pay Franza a salary at
----------------
the annual rate of $180,000 per year payable at least as frequently as monthly
and subject to such payroll deductions as may be necessary or customary in
respect of the Company's salaried employees in general. The Company shall pay
Franza an annual bonus (payable at the end of each year of the Employment
Period) of a minimum of $40,000 and a maximum of $80,000, with the amount of the
total annual bonus for each year of the Employment Period to be based upon
performance standards to be determined by the Company's President. Franza's
salary and bonus for the period after the first year of the Employment Period
shall continue at the same rate of salary as for the first year of the
Employment Period, and with a bonus to be paid at the end of the second year in
an amount determined in the same manner as in the first year of the Employment
Period, unless otherwise mutually agreed to by the Board and Franza.
<PAGE>
(b) Incentive, Savings and Retirement Plans. Franza shall be
---------------------------------------
entitled to participate at the discretion of the Board in all annual bonus,
incentive, stock option, savings and retirement plans, practices, policies and
programs applicable generally to other senior executives of the Company.
(c) Welfare Benefit Plans. Franza shall be eligible for
---------------------
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company to the extent
applicable generally to other senior executives of the Company.
(d) Vacations. Franza shall be entitled to three weeks paid time
---------
off per year of service during the Employment Period. To the extent paid time
off is not taken in any year, it shall be accrued and may be taken in subsequent
years.
(e) Expenses. Franza shall be entitled to receive prompt
--------
reimbursement for all reasonable employment expenses incurred by him in
accordance with the policies, practices and procedures as in effect generally
with respect to other senior executives of the Company.
(f) Fringe Benefits. Franza shall be entitled to fringe benefits
---------------
in accordance with the plans, practices, programs and policies as in effect
generally with respect to other senior executives of the Company.
2. Additional Compensation.
-----------------------
2.1 1996 Plan Options.
-----------------
(a) In further consideration for Franza's performance of his
obligations under this Agreement, and pursuant to an option agreement to contain
such terms as are customarily provided for by the Company's 1996 Stock Option
Plan (the "Option Plan"), the Company, subject to the approval of the Option
Plan by its shareholders and the approval of the grant by the Company's Board,
shall grant to Franza options (the "Options") to purchase 125,000 shares of the
Company's common stock (the "Shares") during the five-year period from the date
of grant, at an exercise price per share equal to the closing price of the
Company's common stock on the Nasdaq National Market on the later of the date of
this Agreement or the date on which the Board approves this grant.
(b) The Shares vested and subject to exercise shall be 2.083333%
of such Shares at the end of each month after the grant date during which Franza
continues to be employed as the Company's Executive Vice President of Business
Development and Chief Operating Officer of the Division, so that all of the
Shares may be purchased on or after the fourth anniversary of the grant date if
Franza has continued to be employed as the Company's Executive Vice President of
Business Development and Chief Operating Officer of the Division
2.
<PAGE>
through that date. In the event that Franza's employment with the Company
terminates for any reason, all Options shall either be vested or cancelled as
set forth in Section 3.4 hereof.
3. Termination. The term of Franza's employment under this Agreement may
-----------
terminate as hereinafter provided, in which case (i) Franza shall be entitled to
the amounts set forth in Section 3.4 hereof and (ii) Franza shall remain subject
to the provisions of Sections 4, 5 and 6 hereof to the extent applicable. The
Employment Period shall not extend for any period beyond the second anniversary
of the Commencement Date unless agreed to in writing by Franza and the Company.
3.1 Death or Disability. If Franza dies or becomes disabled during
-------------------
the Employment Period, Franza's employment under this Agreement shall
automatically terminate upon death or after three consecutive months of
disability, as the case may be. "Disability" shall mean any physical or mental
illness that renders Franza unable to perform his agreed-upon services under
this Agreement for any three consecutive months. Such disability shall be
determined by a licensed physician not affiliated with the parties to this
Agreement. In the event of Franza's death, the amounts due him pursuant to this
Agreement through the date of his death shall be paid to whomever he has
previously designated or, in the event no such designation is made, to his
estate, or to the beneficiaries of his estate.
3.2 Good Cause. Franza's employment under this Agreement may be
----------
terminated by the Company for "good cause," as determined in good faith by the
Board. The term "good cause" is defined as any one or more of the following
occurrences:
(a) Franza's continuing repeated willful failure or refusal to
perform his duties as required by this Agreement or other material breach of
this Agreement, provided, that termination of Franza's employment pursuant to
this subsection (a) shall not constitute valid termination for cause unless
Franza shall have first received written notice from the Board stating with
specificity the nature of such failure or refusal and affording Franza at least
15 days to correct the act or omission complained of;
(b) Gross negligence, material violation by Franza of any duty of
loyalty to the Company or any other material misconduct on the part of Franza,
provided that termination of Franza's employment pursuant to this subsection (b)
shall not constitute valid termination for cause unless Franza shall have first
received written notice from the Board stating with specificity the nature of
such failure or refusal and affording Franza at least 15 days to fully correct
the act or omission complained of and to indemnify the Company for any damage
caused to it by such act or omission;
(c) Franza's conviction by, or entry of a plea of guilty or nolo
con tendere in, a court of competent and final jurisdiction for any crime
involving moral turpitude or punishable by imprisonment in excess of six months
in the jurisdiction involved; or
3.
<PAGE>
(d) Franza's commission of an act of fraud, whether prior to or
subsequent to the date hereof, upon the Company.
3.3 Other Termination.
-----------------
(a) By Franza. Franza may terminate this Agreement at any time
upon 90 days prior written notice.
(b) By the Company. The Company may terminate this Agreement at
any time during the first year of the Employment Period upon nine months prior
written notice. Thereafter, the Company may terminate this Agreement at any time
upon 180 days prior written notice. If Franza receives a notice of termination
under this Section 3.3(b), Franza shall facilitate an orderly transition of his
duties within 30 days, after which time he may continue to report to his work at
his option.
(c) The foregoing notice requirements shall not apply to any
termination pursuant to Section 3.2 of this Agreement.
3.4 Payments Upon Termination.
-------------------------
(a) Completion of Employment Period. If at the end of the Employ
-------------------------------
ment Period the parties have not agreed in writing to extend the term of
Franza's employment with the Company, Franza shall receive his salary and any
guaranteed minimum bonus through the date of such termination. Options vested at
such termination date shall be exercisable in accordance with the terms of the
Option Plan. Options not vested at such termination date shall be immediately
cancelled. In no event shall Franza be entitled to receive additional salary,
bonus, options or compensation of any other kind hereunder.
(b) Death or Disability. In the event of Franza's termination as
-------------------
set forth in Section 3.1 hereof, he shall receive his salary and the pro rata
portion of any guaranteed minimum bonus through the date of such termination.
Options vested at such termination date shall be exercisable in accordance with
the terms of the Option Plan. Options not vested at such termination date shall
be immediately cancelled. In no event shall Franza be entitled to receive
additional salary, bonus, options or compensation of any other kind hereunder.
(c) Good Cause. In the event of Franza's termination as set forth
----------
in Section 3.2 hereof, he shall receive his salary through the date of such
termination. Options vested at such termination date shall be exercisable in
accordance with the terms of the Option Plan. Options not vested at such
termination date shall be immediately cancelled. In no event shall Franza be
entitled to receive additional salary, bonus, options or compensation of any
other kind hereunder.
(d) Other Termination. In the event of Franza's termination as
-----------------
set forth in Section 3.3 hereof, he shall receive his salary and the pro rata
portion of any guaranteed
4.
<PAGE>
minimum bonus through the date of such termination. Options vested at such
termination date shall be exercisable in accordance with the terms of the Option
Plan. Options not vested at such termination date shall be immediately
cancelled. In no event shall Franza be entitled to receive any other additional
salary, bonus, options or compensation of any other kind hereunder.
4. Ownership of Intangibles. Franza hereby grants and assigns to the
------------------------
Company all of his right, title and interest in and to any ideas, designs,
techniques, processes, trademarks, inventions and improvements (collectively,
"Inventions") arising during the term of this Agreement, which Inventions relate
to the business of the Company or any of its affiliates, or to actual or
demonstrably anticipated research or development of the Company or any of its
affiliates, or results from work performed by Franza for the Company or any of
its affiliates, together with all patents that are pending or have been issued
in the United States and in all foreign countries during the term of this
Agreement with respect to such Inventions (the "Proprietary Rights"). All such
Proprietary Rights shall be the sole and exclusive property of the Company and
shall remain such notwithstanding the subsequent termination of employment under
this Agreement. To the extent that any Proprietary Rights or other ideas,
designs, techniques, processes, trademarks, inventions or improvements used by
the Company during the term of this Agreement rely upon or use patented or
unpatented Inventions that Franza has made or conceived prior to the date of
this Agreement that has not otherwise been transferred to the Company pursuant
to the Asset Purchase Agreement dated as of August 1, 1997 by and between the
Company and Arris Interactive L.L.C., Franza hereby grants an exclusive,
perpetual, royalty-free, worldwide license to use such Invention.
5. Confidential Information. Franza agrees that during the Employment
------------------------
Period, he will be dealing with proprietary, nonpublic and confidential
information, including inventions and processes developed by the Company or any
of its affiliates, relating to the present and prospective business, assets and
good will of the Company or any of its affiliates (all of the foregoing referred
to as "confidential information"). Without limiting the generality of the
foregoing, it is understood that Franza will have access to information
regarding intellectual property of the Company or any of its affiliates,
inventions and ideas under development by them, and information regarding the
actual and prospective business and customers of the Company or any of its
affiliates. Franza agrees that he will not disclose to anyone, directly or
indirectly, any of such confidential matters, or use them other than in the
course of performing his obligations under this Agreement. All documents
prepared by Franza in connection with the services provided herein, and all
confidential information (however embodied or recorded) that might be given to
him are the exclusive property of the Company and shall be returned to the
Company at its request. After termination of Franza's employment with the
Company, he shall not, without the prior written consent of the Company, or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it in writing. Franza acknowledges that such actions could cause
irreparable harm to the Company and that the Company may obtain an injunction or
other equitable relief to enforce this provision. Furthermore, upon termination
of this Agreement, Franza shall promptly deliver to the Company all books,
memoranda, records
5.
<PAGE>
and written data in original form of every kind relating to the business and
affairs of the Company that may then be in his personal possession.
6. Noncompetition.
--------------
6.1 No Competing Activities. Franza agrees that, while he is
-----------------------
employed by the Company, he shall not engage or participate in any state of the
United States, directly or indirectly, either as an owner, partner, director,
trustee, officer, employee, consultant, advisor or in any other individual or
representative capacity, in any activity which is the same as, similar to or
competitive in any manner with the business of the Company or its members or
affiliates (herein, a "Competing Activity") or have any investment in a business
which is engaged in a Competing Activity (other than an ownership interest of
less than 5% of any company whose securities are listed on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market). Franza
further agrees that in the event of a termination for good cause as set forth in
Section 3.2 hereof upon the expiration of the term of this Agreement, or
Franza's election to terminate employment pursuant to Section 3.3 hereof, he
shall not, for a two-year period following such termination of employment,
engage in a Competing Activity or have any investment in a business which is
engaged in a Competing Activity (other than an ownership interest of less than
5% of any company whose securities are listed on the New York Stock Exchange,
the American Stock Exchange or the Nasdaq National Market).
6.2 Reasonable Limitations. Franza acknowledges that, given the
----------------------
nature of the Company's business, the covenants contained in this Section 6
contain reasonable limitations as to time, geographical area and scope of
activity to be restrained, and do not impose a greater restraint than is
necessary to protect the legitimate business interests of the Company. If,
however, this Section 6 is determined by any court of competent jurisdiction, or
in any arbitration, as the case may be, to be unenforceable by reason of its
extending for too long a period of time or over too large a geographic area or
by reason of its being too extensive in any other respect or for any other
reason it will be interpreted to extend only over the longest period of time for
which it may be enforceable and/or over the largest geographical area as to
which it may be enforceable and/or to the maximum extent in all other aspects as
to which it may be enforceable, all as determined by such court, or in such
arbitration, as the case may be.
6.3 Acknowledgement. Franza understands that the restrictions in
---------------
Section 6.1 hereof may limit his ability to earn a livelihood in a business
similar to the business of the Company, but he nevertheless believes that he has
received and will receive sufficient consideration hereunder and otherwise as an
employee of the Company to justify such restrictions which, in any event, given
his education, abilities and skills, Franza does not believe would prevent him
from earning a living.
7. WAIVER OF JURY. WITH RESPECT TO ANY DISPUTE ARISING UNDER OR IN
--------------
CONNECTION WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, EACH PARTY HEREBY
IRREVOCABLY WAIVES ALL RIGHTS IT MAY HAVE TO DEMAND A JURY TRIAL. THIS WAIVER IS
KNOWINGLY, INTENTIONALLY, AND
6.
<PAGE>
VOLUNTARILY MADE AND EACH PARTY ACKNOWLEDGES THAT NONE OF THE OTHER PARTIES NOR
ANY PERSON ACTING ON BEHALF OF THE OTHER PARTIES HAS MADE ANY REPRESENTATION OF
FACT TO INDUCE THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY
ITS EFFECT. THE PARTIES EACH FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED
(OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE SIGNING OF THIS AGREEMENT
AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT LEGAL COUNSEL, SELECTED OF THEIR
OWN FREE WILL, AND THAT THEY HAVE HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER
WITH COUNSEL. THE PARTIES EACH FURTHER ACKNOWLEDGE THAT THEY HAVE READ AND
UNDERSTAND THE MEANING AND RAMIFICATIONS OF THIS WAIVER PROVISION.
8. Miscellaneous.
-------------
8.1 Modification and Waiver of Breach. No waiver or modification of
---------------------------------
this Agreement shall be binding unless it is in writing signed by the parties
hereto. No waiver of a breach hereof shall be deemed to constitute a waiver of
a future breach, whether of a similar or dissimilar nature.
8.2 Assignment. This Agreement shall inure to the benefit of and
----------
shall be binding upon the Company, its successors and assigns. The obligations
and duties of Franza hereunder are personal and not assignable, whether
voluntarily or involuntarily or by operation of law or otherwise.
8.3 Notices. All notices and other communications required or
-------
permitted under this Agreement shall be in writing, served personally on, or
mailed by certified or registered United States mail to, the party to be charged
with receipt thereof. Notices and other communications served by mail shall be
deemed given hereunder 72 hours after deposit of such notice or communication in
the United States Post Office as certified or registered mail with postage
prepaid and duly addressed to whom such notice or communication is to be given,
in the case of (a) the Company, 2710 Walsh Avenue, Santa Clara, California
95051, Attention: Secretary, or (b) Franza, to the address set forth below his
name on the signature page hereof. Any such party may change said party's
address for purposes of this Section 9.3 by giving to the party intended to be
bound thereby, in the manner provided herein, a written notice of such change.
8.4 Counterparts. This instrument may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
8.5 Governing Law. This Agreement shall be construed in accordance
-------------
with, and governed by, the internal laws of the State of California.
7.
<PAGE>
8.6 Legal Fees. If any legal action or other proceeding is brought
----------
for the enforcement of this Agreement, or because of any alleged dispute,
breach, default or misrepresentation in connection with this Agreement, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs it incurred in that action or proceeding, in
addition to any other relief to which it may be entitled.
8.7 Savings Clause. If any provision of this Agreement or the
--------------
application thereof is held invalid, the invalidity shall not affect other
provisions or applications of the Agreement which can be given effect without
the invalid provisions or applications and to this end the provisions of this
Agreement are declared to be severable.
8.8 Complete Agreement. This instrument constitutes and contains the
------------------
entire agreement and understanding concerning Franza's employment and the other
subject matters addressed herein between the parties, and supersedes and
replaces all prior negotiations and all agreements proposed or otherwise,
whether written or oral, concerning the subject matters hereof. This is an
integrated document.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the day
and year first above written.
GARY FRANZA: THE COMPANY:
DIGITAL VIDEO SYSTEMS, INC.
___________________________ By:__________________________
Gary Franza
Address:
___________________________
___________________________
___________________________
8.
<PAGE>
Exhibit 10.9
FORM OF EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into as of August
1, 1997, by and between Digital Video Systems, Inc., a Delaware corporation (the
"Company"), and Michael Maslaney ("Maslaney").
1. Employment.
----------
1.1 Employment as Executive Vice President of Engineering. The
-----------------------------------------------------
Company agrees to employ Maslaney, and Maslaney agrees to be employed by the
Company, as the Company's Executive Vice President of Engineering for the period
beginning on August 1, 1997 or such earlier date as the Company and Maslaney may
agree to (the "Commencement Date") and ending on the third anniversary of the
Commencement Date, unless such employment is terminated earlier pursuant to
Section 3 (the "Employment Period").
1.2 Duties as Employee. Maslaney agrees to serve the Company as
------------------
Executive Vice President of Engineering during the Employment Period.
Maslaney's duties shall be those customary for an Executive Vice President of
Engineering of a company similar to the Company and such other duties as are
specified by the Company's President or Board of Directors (the "Board").
Maslaney shall report directly to Thomas R. Parkinson, the Company's President.
In case of a reorganization, merger, consolidation, liquidation, dissolution,
sale of all or substantially all of the Company's assets or similar event, the
Board reserves the right, in its sole discretion, to change or modify Maslaney's
duties hereunder as it deems appropriate in good faith. During the Employment
Period, Maslaney shall devote full time to, and use his best efforts to advance,
the business and welfare of the Company. Maslaney shall not directly or
indirectly render any service of a business, commercial, or professional nature
to any other person, organization or other entity, whether for compensation or
otherwise, directly or indirectly, without the prior written consent of a
majority of the members of the Board.
1.3 Salary and Benefits.
-------------------
(a) Salary and Bonus. The Company shall pay Maslaney a salary at
----------------
the annual rate of $150,000 per year payable at least as frequently as monthly
and subject to such payroll deductions as may be necessary or customary in
respect of the Company's salaried employees in general. The Company shall pay
Maslaney an annual bonus (payable at the end of each year of the Employment
Period") equal to the sum of (a) and (b) below, each calculated as follows:
(a) The Company shall pay Maslaney a bonus of a minimum of $25,000 and a
maximum of $40,000 based on the performance of the Company's Atlanta,
Georgia operations (the "Atlanta bonus"), with the total amount of the
Atlanta bonus to be based upon performance standards to be determined by
the Company's President; and
(b) The Company shall pay Maslaney a bonus of a minimum of $10,000 and a
maximum of $40,000 based upon the performance of the Company's operations
as a whole (the
<PAGE>
"DVS bonus"), with the total amount of the DVS bonus to be based
upon performance standards to be determined by the Company's President
Maslaney's salary and bonus for the periods after the first year of the
Employment Period shall continue at the same rate of salary as for the first
year of the Employment Period, and with a bonus to be paid at the end of each of
the second and third years in amounts determined in the same manner as in the
first year of the Employment Period, unless otherwise mutually agreed to by the
Board and Maslaney.
(b) Incentive, Savings and Retirement Plans. Maslaney shall be
---------------------------------------
entitled to participate at the discretion of the Board in all annual bonus,
incentive, stock option, savings and retirement plans, practices, policies and
programs applicable generally to other senior executives of the Company.
(c) Welfare Benefit Plans. Maslaney shall be eligible for
---------------------
participation in and shall receive all benefits under welfare benefit plans,
practices, policies and programs provided by the Company to the extent
applicable generally to other senior executives of the Company.
(d) Vacations. Maslaney shall be entitled to three weeks paid
---------
vacation per year of service during the Employment Period. To the extent
vacation is not taken in any year, it shall be accrued and may be taken in
subsequent years.
(e) Expenses. Maslaney shall be entitled to receive prompt
--------
reimbursement for all reasonable employment expenses incurred by him in
accordance with the policies, practices and procedures as in effect generally
with respect to other senior executives of the Company.
(f) Fringe Benefits. Maslaney shall be entitled to fringe
---------------
benefits in accordance with the plans, practices, programs and policies as in
effect generally with respect to other senior executives of the Company.
2. Additional Compensation.
-----------------------
2.1 1996 Plan Options.
-----------------
(a) In further consideration for Maslaney's performance of his
obligations under this Agreement, and pursuant to an option agreement to contain
such terms as are customarily provided for by the Company's 1996 Stock Option
Plan (the "Option Plan"), the Company, subject to the approval of the Option
Plan by its shareholders and the approval of the grant by the Company's Board,
shall grant to Maslaney options (the "Options") to purchase 100,000 shares of
the Company's common stock (the "Shares") during the five-year period from the
date of grant, at an exercise price per share equal to the closing price of the
Company's
2.
<PAGE>
common stock on the Nasdaq National Market on the later of the date of
this Agreement or the date on which the Board approves this grant.
(b) The Shares vested and subject to exercise shall be 2.083333%
of such Shares at the end of each month after the grant date during which
Maslaney continues to be employed as the Company's Executive Vice President of
Engineering, so that all of the Shares may be purchased on or after the fourth
anniversary of the grant date if Maslaney has continued to be employed as the
Company's Executive Vice President of Engineering through that date. In the
event that Maslaney's employment with the Company terminates for any reason, all
Options shall either be vested or cancelled as set forth in Section 3.4 hereof.
3. Termination. The term of Maslaney's employment under this Agreement
-----------
may terminate as hereinafter provided, in which case (i) Maslaney shall be
entitled to the amounts set forth in Section 3.4 hereof and (ii) Maslaney shall
remain subject to the provisions of Sections 4, 5 and 6 hereof to the extent
applicable. The Employment Period shall not extend for any period beyond the
third anniversary of the Commencement Date unless agreed to in writing by
Maslaney and the Company.
3.1 Death or Disability. If Maslaney dies or becomes disabled during
-------------------
the Employment Period, Maslaney's employment under this Agreement shall
automatically terminate upon death or after three consecutive months of
disability, as the case may be. "Disability" shall mean any physical or mental
illness that renders Maslaney unable to perform his agreed-upon services under
this Agreement for any three consecutive months. Such disability shall be
determined by a licensed physician not affiliated with the parties to this
Agreement. In the event of Maslaney's death, the amounts due him pursuant to
this Agreement through the date of his death shall be paid to whomever he has
previously designated or, in the event no such designation is made, to his
estate, or to the beneficiaries of his estate.
3.2 Good Cause. Maslaney's employment under this Agreement may be
----------
terminated by the Company for "good cause," as determined in good faith by the
Board. The term "good cause" is defined as any one or more of the following
occurrences:
(a) Maslaney's continuing repeated willful failure or refusal to
perform his duties as required by this Agreement or other material breach of
this Agreement, provided, that termination of Maslaney's employment pursuant to
this subsection (a) shall not constitute valid termination for cause unless
Maslaney shall have first received written notice from the Board stating with
specificity the nature of such failure or refusal and affording Maslaney at
least 15 days to correct the act or omission complained of;
(b) Gross negligence, material violation by Maslaney of any duty
of loyalty to the Company or any other material misconduct on the part of
Maslaney, provided that termination of Maslaney's employment pursuant to this
subsection (b) shall not constitute valid termination for cause unless Maslaney
shall have first received written notice from the Board stating with specificity
the nature of such failure or refusal and affording Maslaney at least 15
3.
<PAGE>
days to fully correct the act or omission complained of and to indemnify the
Company for any damage caused to it by such act or omission;
(c) Maslaney's conviction by, or entry of a plea of guilty or
nolo contender in, a court of competent and final jurisdiction for any crime
involving moral turpitude or punishable by imprisonment in excess of six months
in the jurisdiction involved; or
(d) Maslaney's commission of an act of fraud, whether prior to or
subsequent to the date hereof, upon the Company.
3.3 Other Termination.
-----------------
(a) By Maslaney. Maslaney may terminate this Agreement at any
time upon six months prior written notice.
(b) By the Company. The Company may terminate this Agreement at
any time during the first year of the Employment Period upon nine months prior
written notice. Thereafter, the Company may terminate this Agreement at any time
upon 180 days prior written notice. If Maslaney receives a notice of termination
under this Section 3.3(b), Maslaney shall facilitate an orderly transition of
his duties within 30 days, after which time he may continue to report to work at
his option.
(c) The foregoing notice requirements shall not apply to any
termination pursuant to Section 3.2 of this Agreement.
3.4 Payments Upon Termination.
-------------------------
(a) Completion of Employment Period. If at the end of the
-------------------------------
Employment Period the parties have not agreed in writing to extend the term of
Maslaney's employment with the Company, Maslaney shall receive his salary and
any guaranteed minimum bonus through the date of such termination. Options
vested at such termination date shall be exercisable in accordance with the
terms of the Option Plan. Options not vested at such termination date shall be
immediately cancelled. In no event shall Maslaney be entitled to receive
additional salary, bonus, options or compensation of any other kind hereunder.
(b) Death or Disability. In the event of Maslaney's termination
-------------------
as set forth in Section 3.1 hereof, he shall receive his salary and the pro rata
portion of any guaranteed minimum bonus through the date of such termination.
Options vested at such termination date shall be exercisable in accordance with
the terms of the Option Plan. Options not vested at such termination date shall
be immediately cancelled. In no event shall Maslaney be entitled to receive
additional salary, bonus, options or compensation of any other kind hereunder.
(c) Good Cause. In the event of Maslaney's termination as set
----------
forth in Section 3.2 hereof, he shall receive his salary through the date of
such termination. Options
4.
<PAGE>
vested at such termination date shall be exercisable in accordance with the
terms of the Option Plan. Options not vested at such termination date shall be
immediately cancelled. In no event shall Maslaney be entitled to receive
additional salary, bonus, options or compensation of any other kind hereunder.
(d) Other Termination. In the event of Maslaney's termination as
-----------------
set forth in Section 3.3 hereof, he shall receive his salary and the pro rata
portion of any guaranteed minimum bonus through the date of such termination
(which termination shall occur six months from the date on which Maslaney gives
notice (the "Termination Date")). In addition, Maslaney shall receive salary,
benefits and the pro rata portion of any guaranteed minimum bonus for an
additional six months following the Termination Date. Options vested at the
Termination Date shall be exercisable in accordance with the terms of the Option
Plan. Options not vested at the Termination Date shall be immediately cancelled;
provided that on the Termination Date, the Administration shall cause the
- --------
vesting to be accelerated on the portion of the Options that would have vested
if he had continued to be employed in the six-month period following the
Termination Date; provided further that the Administration shall hold such
-------- -------
Options in an escrow until the date six months from the Termination Date and
that such Options shall be released to Maslaney on the date six months from the
Termination Date. In no event shall Maslaney be entitled to receive any other
additional salary, bonus, options or compensation of any other kind hereunder.
4. Ownership of Intangibles. Maslaney hereby grants and assigns to the
------------------------
Company all of his right, title and interest in and to any ideas, designs,
techniques, processes, trademarks, inventions and improvements (collectively,
"Inventions") arising during the term of this Agreement, which Inventions relate
to the business of the Company or any of its affiliates, or to actual or
demonstrably anticipated research or development of the Company or any of its
affiliates, or results from work performed by Maslaney for the Company or any of
its affiliates, together with all patents that are pending or have been issued
in the United States and in all foreign countries during the term of this
Agreement with respect to such Inventions (the "Proprietary Rights"). All such
Proprietary Rights shall be the sole and exclusive property of the Company and
shall remain such notwithstanding the subsequent termination of employment under
this Agreement. To the extent that any Proprietary Rights or other ideas,
designs, techniques, processes, trademarks, inventions or improvements used by
the Company during the term of this Agreement rely upon or use patented or
unpatented Inventions that Maslaney has made or conceived prior to the date of
this Agreement that has not otherwise been transferred to the Company pursuant
to the Asset Purchase Agreement dated as of August 1, 1997 by and between the
Company and Arris Interactive L.L.C., Maslaney hereby grants an exclusive,
perpetual, royalty-free, worldwide license to use such Invention.
5. Confidential Information. Maslaney agrees that during the Employment
------------------------
Period, he will be dealing with proprietary, nonpublic and confidential
information, including inventions and processes developed by the Company or any
of its affiliates, relating to the present and prospective business, assets and
good will of the Company or any of its affiliates (all of the foregoing referred
to as "confidential information"). Without limiting the generality of the
5.
<PAGE>
foregoing, it is understood that Maslaney will have access to information
regarding intellectual property of the Company or any of its affiliates,
inventions and ideas under development by them, and information regarding the
actual and prospective business and customers of the Company or any of its
affiliates. Maslaney agrees that he will not disclose to anyone, directly or
indirectly, any of such confidential matters, or use them other than in the
course of performing his obligations under this Agreement. All documents
prepared by Maslaney in connection with the services provided herein, and all
confidential information (however embodied or recorded) that might be given to
him are the exclusive property of the Company and shall be returned to the
Company at its request. After termination of Maslaney's employment with the
Company, he shall not, without the prior written consent of the Company, or as
may otherwise be required by law or legal process, communicate or divulge any
such information, knowledge or data to anyone other than the Company and those
designated by it in writing. Maslaney acknowledges that such actions could cause
irreparable harm to the Company and that the Company may obtain an injunction or
other equitable relief to enforce this provision. Furthermore, upon termination
of this Agreement, Maslaney shall promptly deliver to the Company all books,
memoranda, records and written data in original form of every kind relating to
the business and affairs of the Company that may then be in his personal
possession.
6. Noncompetition.
--------------
6.1 No Competing Activities. Maslaney agrees that, while he is
-----------------------
employed by the Company, he shall not engage or participate in any state of the
United States, directly or indirectly, either as an owner, partner, director,
trustee, officer, employee, consultant, advisor or in any other individual or
representative capacity, in any activity which is the same as, similar to or
competitive in any manner with the business of the Company or its members or
affiliates (herein, a "Competing Activity") or have any investment in a business
which is engaged in a Competing Activity (other than an ownership interest of
less than 5% of any company whose securities are listed on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market). Maslaney
further agrees that in the event of a termination for good cause as set forth in
Section 3.2 hereof upon the expiration of the term of this Agreement, or
Maslaney's election to terminate employment pursuant to Section 3.3 hereof, he
shall not, for a two-year period following such termination of employment,
engage in a Competing Activity or have any investment in a business which is
engaged in a Competing Activity (other than an ownership interest of less than
5% of any company whose securities are listed on the New York Stock Exchange,
the American Stock Exchange or the Nasdaq National Market).
6.2 Reasonable Limitations. Maslaney acknowledges that, given the
----------------------
nature of the Company's business, the covenants contained in this Section 6
contain reasonable limitations as to time, geographical area and scope of
activity to be restrained, and do not impose a greater restraint than is
necessary to protect the legitimate business interests of the Company. If,
however, this Section 6 is determined by any court of competent jurisdiction, or
in any arbitration, as the case may be, to be unenforceable by reason of its
extending for too long a period of time or over too large a geographic area or
by reason of its being too extensive in any other respect or for any other
reason it will be interpreted to extend only over the longest period
6.
<PAGE>
of time for which it may be enforceable and/or over the largest geographical
area as to which it may be enforceable and/or to the maximum extent in all other
aspects as to which it may be enforceable, all as determined by such court, or
in such arbitration, as the case may be.
6.3 Acknowledgement. Maslaney understands that the restrictions in
---------------
Section 6.1 hereof may limit his ability to earn a livelihood in a business
similar to the business of the Company, but he nevertheless believes that he has
received and will receive sufficient consideration hereunder and otherwise as an
employee of the Company to justify such restrictions which, in any event, given
his education, abilities and skills, Maslaney does not believe would prevent him
from earning a living.
7. WAIVER OF JURY. WITH RESPECT TO ANY DISPUTE ARISING UNDER OR IN
--------------
CONNECTION WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, EACH PARTY HEREBY
IRREVOCABLY WAIVES ALL RIGHTS IT MAY HAVE TO DEMAND A JURY TRIAL. THIS WAIVER
IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE AND EACH PARTY ACKNOWLEDGES
THAT NONE OF THE OTHER PARTIES NOR ANY PERSON ACTING ON BEHALF OF THE OTHER
PARTIES HAS MADE ANY REPRESENTATION OF FACT TO INDUCE THIS WAIVER OF TRIAL BY
JURY OR IN ANY WAY TO MODIFY OR NULLIFY ITS EFFECT. THE PARTIES EACH FURTHER
ACKNOWLEDGE THAT THEY HAVE BEEN REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE
REPRESENTED) IN THE SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER
BY INDEPENDENT LEGAL COUNSEL, SELECTED OF THEIR OWN FREE WILL, AND THAT THEY
HAVE HAD THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. THE PARTIES EACH
FURTHER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE MEANING AND
RAMIFICATIONS OF THIS WAIVER PROVISION.
8. Miscellaneous.
-------------
8.1 Modification and Waiver of Breach. No waiver or modification of
---------------------------------
this Agreement shall be binding unless it is in writing signed by the parties
hereto. No waiver of a breach hereof shall be deemed to constitute a waiver of
a future breach, whether of a similar or dissimilar nature.
8.2 Assignment. This Agreement shall inure to the benefit of and
----------
shall be binding upon the Company, its successors and assigns. The obligations
and duties of Maslaney hereunder are personal and not assignable, whether
voluntarily or involuntarily or by operation of law or otherwise.
8.3 Notices. All notices and other communications required or
-------
permitted under this Agreement shall be in writing, served personally on, or
mailed by certified or registered United States mail to, the party to be charged
with receipt thereof. Notices and other communications served by mail shall be
deemed given hereunder 72 hours after deposit of such notice or communication in
the United States Post Office as certified or registered mail with postage
prepaid and duly addressed to whom such notice or communication is to be given,
in the case of (a) the Company, 2710 Walsh Avenue, Santa Clara, California
95051, Attention:
7.
<PAGE>
Secretary, or (b) Maslaney, to the address set forth below his name on the
signature page hereof. Any such party may change said party's address for
purposes of this Section 9.3 by giving to the party intended to be bound
thereby, in the manner provided herein, a written notice of such change.
8.
<PAGE>
8.4 Counterparts. This instrument may be executed in one or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same Agreement.
8.5 Governing Law. This Agreement shall be construed in accordance
-------------
with, and governed by, the internal laws of the State of California.
8.6 Legal Fees. If any legal action or other proceeding is brought
----------
for the enforcement of this Agreement, or because of any alleged dispute,
breach, default or misrepresentation in connection with this Agreement, the
successful or prevailing party shall be entitled to recover reasonable
attorneys' fees and other costs it incurred in that action or proceeding, in
addition to any other relief to which it may be entitled.
8.7 Savings Clause. If any provision of this Agreement or the
--------------
application thereof is held invalid, the invalidity shall not affect other
provisions or applications of the Agreement which can be given effect without
the invalid provisions or applications and to this end the provisions of this
Agreement are declared to be severable.
8.8 Complete Agreement. This instrument constitutes and contains the
------------------
entire agreement and understanding concerning Maslaney's employment and the
other subject matters addressed herein between the parties, and supersedes and
replaces all prior negotiations and all agreements proposed or otherwise,
whether written or oral, concerning the subject matters hereof. This is an
integrated document.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on the day
and year first above written.
MICHAEL MASLANEY: THE COMPANY:
DIGITAL VIDEO SYSTEMS, INC.
___________________________ By:__________________________
Michael Maslaney
Address:
___________________________
___________________________
___________________________
9.
<PAGE>
Exhibit 10.10
April 10, 1997
DIG 3-4
VIA FACSIMILE
- -------------
Dr. Edmund Y. Sun
Digital Video Systems, Inc.
2710 Walsh Avenue
Santa Clara, California 95051
Dear Ed:
This will confirm that my last day of service as the President of Digital
Video Systems will be April 14, 1997 but that I will be continuing as a Director
and Chairman of the Executive Committee of DVS. (I am terminating my employment
as President of DVS pursuant to Section 6 of the Consulting and Employment
Agreement dated March 15, 1996 between DVS and myself, and DVS and I are
waiving the 60-day notice requirement of Section 6.)
You and I have agreed, subject to approval by the Board of Directors of
DVS, that the options granted to me pursuant to Section 3 of the Consulting and
Employment Agreement shall vest as follows:
(a) Options to purchase 187,500 shares shall vest and become exercisable on
May 8, 1997 for the term described in the options; provided that I continue to
serve as a director of DVS through at least May 8, 1997.
(b) Options to purchase 162,500 shares shall vest and become exercisable on
a pro rata basis over 48 months for each full month of completed service by me
as a director of DVS after May 8, 1997 (the first vesting date covering options
for approximately 3,385 shares being June 7, 1997), with the options to be
exercisable for the term described in such options.
<PAGE>
Dr. Edmund Sun
April 10, 1997
Page 2
(c) The remaining 400,000 options granted to me under Section 3 have been
cancelled effective as of March 26, 1997.
(d) The options that will be cancelled pursuant to (c) above will be
allocated for cancellation pro rata between my options that are in the D.H.
Blair performance escrow (the "Escrow") and my options that are not in the
Escrow. Similarly, the options that will vest and become exercisable pursuant
to (a) and (b) above will be allocated pro rata between my options that are in
the Escrow and my options that are not in the Escrow.
It has been a pleasure working with you as the President of DVS, and I
look forward to continuing to work with you to make the Company a great success.
Very truly yours,
/s/ Robert B. Pfannkuch
Robert B. Pfannkuch
Acknowledged and Agreed to
Digital Video Systems, Inc.
By: /s/ Dr. Edmund Y. Sun
---------------------
Dr. Edmund Y. Sun
Chief Executive 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 Six Months
Ended September 30, Ended September 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net loss $(4,224) $(2,080) $(6,219) $(4,882)
======= ======= ======= =======
Weighted average common shares outstanding 12,300 8,952 12,095 7,281
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 - 1,181 - 1,587
------- ------- ------- -------
Shares used in computing net loss per share (1) 12,300 10,133 12,095 8,868
======= ======= ======= =======
Net loss per share $ (0.34) $ (0.21) $ (0.51) $(0.55)
======= ======= ======= =======
</TABLE>
(1) Does not include shares and options in escrow.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS AND STATEMENT OPERATIONS AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> JUL-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 18,571
<SECURITIES> 2,857
<RECEIVABLES> 7,623
<ALLOWANCES> 846
<INVENTORY> 2,530
<CURRENT-ASSETS> 32,171
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<DEPRECIATION> 1,140
<TOTAL-ASSETS> 36,377
<CURRENT-LIABILITIES> 6,527
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 29,762
<TOTAL-LIABILITY-AND-EQUITY> 36,377
<SALES> 3,713
<TOTAL-REVENUES> 3,713
<CGS> 3,214
<TOTAL-COSTS> 3,214
<OTHER-EXPENSES> 5,016
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (4,224)
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</TABLE>
<PAGE>
EXHIBIT 99.1
CERTAIN CONSIDERATIONS
Documents and press releases prepared by the Company, including this report
on Form 10-QSB may from time to time contain forward looking statements. The
Company, its assets, operations, and financial condition and such forward
looking statements made by the Company are subject to various risks and
uncertainties, including without limitation, the following:
HISTORY OF LOSSES AND ACCUMULATED DEFICIT; EXPECTATION OF FUTURE LOSSES. To
date, the Company has incurred significant losses. At September 30, 1997 the
Company had an accumulated deficit of approximately $26,516,000. The Company
incurred operating losses of approximately $3,154,000 and $12,206,000 for the
twelve months ended December 31, 1995 and March 31, 1997, respectively and
$2,263,000 and $4,517,000 for the fiscal quarters ended September 30, 1996 and
September 30, 1997, respectively. Such losses resulted principally from
limited revenues from operations, price competition for the Company's
products, including pricing strategies implemented in order to penetrate
certain markets and significant costs associated with the development of the
Company's technologies. The Company expects 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 VIDEO CD 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 and network video 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
consumer market for Video CD players in the United States and other developed
countries is generally not significant. The Company believes that this has
been due in substantial part to the fact that few motion picture titles are
available in a Video CD format in the United States and other developed
countries and, consequently, few consumers in these markets have an incentive
to purchase a Video CD player. Moreover, the recent introduction of DVD
players in the United States and other developed countries is likely to create
consumer digital video product demand in these markets for DVD players rather
than Video CD players.
Because a large market for consumer entertainment uses of the Video CD
players does not exist in the United States and most other developed countries
and is unlikely to develop in the future, the Company has focused on
commercial applications for Video CD in these markets. These commercial
applications include a family of products ("Video Engines") which provide
solutions for information displays and interactive kiosks. These Video Engines
are similar to consumer Video CD players, but are adapted for commercial
applications. There can be no assurance that significant sales of Video Engine
products will ever materialize. 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 business, financial condition and results of operations.
UNCERTAINTY OF MARKET ACCEPTANCE OF DVD; LACK OF ESTABLISHED MARKET FOR
PRODUCTS. In March 1997, the next-generation CD product, known as DVD, began
selling in the Unites States in its home-video format. A product for computer
applications, known as the DVD-ROM has recently entered the market as well.
The Company believes a number of factors should contribute to the long-term
success of the DVD player. These factors include: the movie industry's
endorsement; the computer industry's demand; a unified product standard; and
the general movement towards digital technology.
While the Company's research and development activities have included
products incorporating MPEG-2 standards, substantially all of the Company's
current products are in the MPEG-1 format. The Company recently has begun the
development of DVD products for the home entertainment, business and computer
markets and expects to commence marketing these products within its current
fiscal year ending March 31, 1998. It is anticipated that these products, if
successfully developed, will be marketed to original equipment manufacturers on
a proprietary basis and will be available in both consumer and commercial
products. 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 products
using the new format or any different format.
Moreover, there can be no assurances that the DVD market will become a
significant one. Further, the competition for DVD consumer players and
computer devices is expected to be intense. Among the factors which may limit
widespread adoption of the current DVD player are the inability of current
models to record, the limited number of software titles currently available,
the relatively high current retail price, and remaining unresolved technical
issues, including certain issues with respect to copyright protection.
Potential customers for the Company's products utilizing the DVD 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.
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. The Company is in the process of
expanding its sales and marketing. 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
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also place substantial demands on the Company's product development, quality
control and sales functions. The failure of the Company's management to
effectively expand or manage these functions consistent with any growth which
may occur could have a materially adverse effect on the Company's business,
financial condition and results of operations.
RISKS ASSOCIATED WITH ACQUISITIONS AND JOINT VENTURES. An element of the
Company's strategy is to pursue acquisitions and joint ventures that would
complement its existing range of products, augment its market coverage or
enhance its technological capabilities or that may otherwise offer growth
opportunities. Such future acquisitions or joint ventures by the Company could
result in potentially dilutive issuances of equity securities, the incurrence
of debt and contingent liabilities, and the amortization of expenses related
to goodwill and other intangible assets, any of which could have a material
adverse effect on the Company's business, financial condition and results of
operations. Acquisitions and joint ventures entail numerous risks, including
difficulties in the assimilation of acquired operations, technologies and
products, diversion of management's attention to other business concerns,
risks of entering markets in which the Company has no, or limited, prior
experience, the potential loss of key employees of acquired organizations or
joint ventures and the need to share managerial control of joint ventures with
one or more joint venture partners. No assurance can be given as to the
ability of the Company to successfully integrate any acquired business,
product, technology or personnel with the operations of the Company, and the
failure of the Company to do so could have a material adverse effect on the
Company's business, financial condition and results of operations.
DEPENDENCE ON LIMITED NUMBERS OF SUPPLIERS. The Company's Video CD 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 the Company to date has been able to obtain an adequate
supply of chips from C-Cube to meet its needs, there can be no assurance that
the Company will be able to meet all of its future chip needs through C-Cube.
Should the Company's ability to obtain the requisite number of C-Cube chips be
limited for any lengthy period of time or 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. In addition, increases in the supply of chips through
C-Cube or other manufacturers of chips may allow the Company's existing
competitors to produce more competing products or encourage new competitors to
produce Video CD products and may allow the Company's competitors to produce
products at lower costs that those incurred by the Company. It is the
Company's intention to utilize the MPEG-1 chip currently under development by
ViComp (the "ViComp MPEG-1 Chip") to replace the C-Cube chips used in certain
of the Company's products, but there can be no assurance that development of
this chip will be successfully completed on a timely basis or at all. The
Company's inability to obtain a sufficient quantity of chips from one or more
sources at a competitive cost would have a material adverse effect on the
Company's business, financial condition and results of operations.
From time to time several of the Company's customers for its Video CD sub-
assembly products have experienced difficulties in obtaining certain Video CD
components from vendors. To the extent a significant customer of the Company
cannot obtain sufficient quantities of components from vendors, such shortages
could have a material adverse effect on the Company's business, financial
condition and results of operations.
RISKS OF VICOMP ACQUISITION. In October 1996, the Company acquired all of
the outstanding capital stock of ViComp ("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-1 signals. However, there can be no assurance that ViComp will be
able to successfully complete development of the ViComp MPEG-1 Chip on a
timely basis, if at all. ViComp previously has experienced delays in
completing development of this chip and may encounter further such delays due
to factors such as unexpected design problems or loss of key personnel
involved in development of this chip. Further, if the costs to commercially
produce the ViComp MPEG-1 Chip are higher than currently anticipated or if
third parties develop MPEG-1 decoder chips that can be commercially produced
at costs lower than the ViComp MPEG-1
2
<PAGE>
Chip, such chip could be of limited or no value to the Company. ViComp has
also conducted preliminary analysis in connection with potential new products,
however, there can be no assurance that any additional products will be
successfully developed by ViComp or that such products will be commercially
viable. In order to produce any chips developed by ViComp, the Company will
need to obtain sufficient foundry capacity and there can be no assurance that
prior shortages of foundry capacity in the integrated circuit industry will
not recur in the future. In addition, an increase in production by C-Cube or
other chip makers could increase the Company's cost and difficulty of
obtaining foundry capacity. These events could also have an adverse impact on
the commercial viability of the Company's ViComp MPEG-1 Chip.
ViComp was founded in August 1995 by Dr. Edmund Y. Sun ("Dr. 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 Medical Division. Mr. Kirkpatrick served as ViComp's
Chief Executive Officer prior to the ViComp Acquisition and thereafter served as
ViComp's Chief Technical Officer until August 1997, when his employment with the
Company terminated. Mr. Kirkpatrick and each of the other ViComp engineers
employed by the Company subsequent to the ViComp Acquisition have ended their
full-time employment with the Company, and the Company believes that the loss of
Mr. Kirkpatrick and the other ViComp engineers was at least in part responsible
for delays in ViComp's product development activities. Recently, ViComp has
retained a new Chief Technical Officer, and in October 1997 ViComp secured the
services of Mr. Kirkpatrick and two other former ViComp engineers as part-time
consultants in connection with the development and testing of the ViComp MPEG-1
Chip. The Company is actively seeking full-time replacements for the former
ViComp engineers and believes that it can replace them with new engineers or a
combination of engineers currently employed by the Company and new engineers.
However, there can be no assurance that the Company will be able to retain the
services of such engineers and the Company's failure to attract qualified
replacements for the departed ViComp engineers could have a material adverse
effect on the development of the ViComp MPEG-1 Chip and any other ViComp Chip
products. The Company's inability to complete development of the ViComp MPEG-1
chip on a timely and commercially viable basis could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS OF INTERNATIONAL OPERATIONS. Sales outside the United States have
accounted for approximately 85% of the Company's cumulative revenues from
inception through June 30, 1997 (with sales to Hong Kong, China and Taiwan
accounting for approximately 67%, 22% and 2%, respectively, of the Company's
revenues of $14,121,000 in fiscal 1997), and the Company believes that foreign
sales will continue to account for a significant portion of its future revenues.
The Company's four largest customers in fiscal 1997 were Guangzhou Free Trade
Zone (China) International Electronics Exhibition and Trade Centre, Sinorex,
Ltd., Lucky Way Trading Co., and Shenzhen Jialei Electronics Co., Ltd., which
accounted for 25%, 20%, 16% and 12%, respectively, of the Company's revenues for
that fiscal year. Moreover, the Company has been manufacturing Video CD players
and Video Engine products at its Taiwan facility and has been utilizing
subcontractors in China to produce Video CD sub-assemblies. The Company is in
the process of shifting assembly of Video CD products to the Panyu Joint Venture
3
<PAGE>
in China to reduce manufacturing costs. In addition, the Company may establish
manufacturing operations in other countries to meet local demand for its
products in those markets when, if ever, such demand develops.
The Company will be subject to all of the risks inherent in international
operations in connection with its foreign operations, including work
stoppages, transportation delays and interruptions, political instability in,
or conflict between, countries in which the Company is doing business, such as
Hong Kong, China and Taiwan, 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
material adverse effect on the Company's business, financial condition and
results of operations. 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. In order to
manufacture or market its products in foreign countries such as China, the
Company may be required or deem it advisable to conduct these operations
through joint ventures with local partners (as in the case of the Panyu Joint
Venture),which could expose the Company to various risks, including
potentially reduced profitability of these operations for the Company and the
need to share management control with such local partners. 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 limited quantities of certain items incorporated into its
products in currencies other than the U.S. dollar, the Company does not
currently hedge its exposure to foreign currency fluctuations. As a result,
currency fluctuations could have a material adverse effect on the Company's
business and results of operations. With respect to international sales that
are denominated in U.S. dollars, an increase in the value of the U.S. dollar
relative to foreign currencies could increase the effective price of, and
reduce demand for, the Company's products relative to competitive products
priced in the local currency.
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 material adverse
effect on the Company's business, financial condition and results of
operations. Similarly, protectionist trade legislation in either the United
States or foreign countries, such as China and Taiwan, could affect the
Company's ability to import and export products and have a material adverse
effect on the Company's ability to manufacture or to sell its products in
foreign markets. In addition, recent efforts by China to limit certain ongoing
practices, such as the pirating of Video CD titles, may increase the cost of
such titles and result in a substantial decrease in demand in that country for
the Company's Video CD products, including the Video CD player.
RISKS ASSOCIATED WITH CONDUCTING BUSINESS IN CHINA. General economic
conditions in China could have a significant impact on the business prospects
of the Company. The economy of China differs from the economies of most
countries belonging to the Organization for Economic Co-operation and
Development in such respects as structure, government involvement, level of
development, growth rate, capital reinvestment, allocation of resources, self-
sufficiency, rate of inflation and balance of payments position, among others.
For over 40 years, the economy of China has been primarily a planned economy
characterized by state ownership
4
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and control of productive assets and the management of such assets through a
series of economic and social development plans. Although the majority of
China's productive assets are still owned by the various ministries, agencies
and commissions of the national and local government of China, the adoption of
economic reform policies since 1978 has resulted in a gradual reduction in the
role of state economic plans in the allocation of resources, pricing and
management of such assets, an increased emphasis on the utilization of market
forces, and rapid growth in the Chinese economy. However, such growth has been
uneven among various regions of the country and among various sectors of the
economy. At times, the economic reform measures adopted by the Chinese
government may be inconsistent or ineffectual, and therefore the Company may
not be able to enjoy the potential benefits of such reforms.
The Company may also be adversely affected by changes in the political and
social conditions in China, and by changes in governmental policies with
respect to such matters as laws and regulations, methods to address inflation
(including austerity measures that could adversely affect consumer demand for
products such as Video CD players), currency conversion and rates and methods
of taxation. While China is expected to continue its economic reform policies,
many of the reforms are new or experimental and may be refined or changed. It
is also possible that a change in China's governmental leadership could lead
to changes in economic policy.
The Company expects that a substantial portion of the revenues generated in
China will be earned in Renminbi (the Chinese currency) through the sale of
products in China. Renminbi earnings must be converted to pay dividends or
make other payments to the Company in U.S. dollars or other freely convertible
currencies. As of December 1, 1996, the Renminbi became fully convertible for
current account items, including profit distributions, interest payments and
receipts and expenditures from trade. No approvals are needed to acquire
foreign exchange for a current account transaction. Strict foreign exchange
controls continue for capital account transactions (including repayment of
loan principal and return of direct capital investments and transactions in
investments in negotiable securities). In the past, there have been shortages
of U.S. dollars or other foreign currency available for conversion of
Renminbi, and it is possible such shortages could recur, or that restrictions
on conversion could be reimposed, in the future at times when the Company is
seeking to convert Renminbi. Prior to 1994, the Renminbi experienced a
significant net devaluation against most major currencies, and during certain
periods, significant volatility in the market-based exchange rate. Since the
beginning of 1994, the Renminbi to U.S. dollar exchange rate has largely
stabilized. However, there can be no assurance that such exchange rate will
remain stable or that the Company will continue to be able to remit foreign
currency abroad.
China's current legal system is relatively new, and the government is still
in the process of developing a comprehensive system of laws. While
considerable progress has been made in the promulgation of laws and
regulations dealing with economic matters such as corporate organization and
governance, foreign investment, commerce, taxation and trade, foreign
investors may be adversely affected by new laws, changes to existing laws (or
interpretations thereof) and preemption of provincial or local regulations by
national laws or regulations. Moreover, experience with respect to the
implementation, interpretation and enforcement of such laws and regulations is
limited. Administrative and judicial interpretation and implementation and the
enforcement of commercial claims and resolution of commercial disputes may be
subject (as has recently been asserted by a number of American corporations
doing business in China) to the exercise of considerable discretion by both
administrative and judicial organs and may be influenced by external forces
unrelated to the legal merits of a particular matter or dispute. Even where
adequate laws exist and contractual terms are clearly stated, there can be no
assurance that the Company will obtain swift and equitable enforcement of its
rights under Chinese law.
RISKS ASSOCIATED WITH THE PANYU JOINT VENTURE. Prior to entering into the
Panyu Joint Venture in August 1997, the Company had no experience doing business
in China (other than marketing products there). The Company believes that in
order for the Panyu Joint Venture's manufacturing facility to produce the level
and quality of output required to compete effectively in the Video CD market,
the Panyu Joint Venture will need to upgrade certain parts of the manufacturing
facility's production capacity and process, provide additional training to the
work force, and institute more rigorous quality control measures. The Company is
currently in the process of evaluating the manufacturing facility and developing
a plan to help the Panyu Joint Venture achieve quality and
5
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output objectives. However, there can be no assurance that the Panyu Joint
Venture will be able to achieve its objectives or to reduce its costs and
increase its quality sufficiently to compete effectively in the Video CD
market. In addition, the actions necessary to increase the Panyu Joint
Venture's manufacturing capacity and to improve quality control at the Panyu
Joint Venture's manufacturing facility may require substantial expenditures
that may need to be funded by the Company in excess of its current financial
commitment to the Panyu Joint Venture.
If the Panyu Joint Venture does not achieve its cash flow objectives within
a reasonable period of time, the Company may be compelled to choose between
contributing additional resources to the Panyu Joint Venture or risking the
loss of its entire investment. Transfer of an interest in a Chinese equity
joint venture, such as the Panyu Joint Venture, requires government approval
and unanimous agreement among the parties. In addition, the parties in an
equity joint venture may not reduce the amount of their registered capital
until the expiration of the term of the joint venture or its dissolution in
accordance with Chinese law. The term of the Panyu Joint Venture is 25 years.
In order for the Company to consolidate the Panyu Joint Venture's results
for financial reporting purposes and to continue its operations as a joint
venture, certain pending administrative and regulatory matters relating to the
start-up of the joint venture must be completed. Such matters include obtaining
all required governmental approvals and licenses, the transfer of certain
assets by Panyu, the Company's joint venture partner, into the joint venture
and the appropriate payment and recording of various transactions on behalf of
the Panyu Joint Venture. Although the Company expects that such matters will
be resolved by the end of the current fiscal year, there can be no assurance
that such matters will be resolved on a timely basis, or at all.
The Panyu Joint Venture is subject to all of the requirements of Chinese tax
laws, and may also seek the benefits of such laws, where appropriate. Under
Chinese law joint ventures may seek a "tax holiday" which exempts qualifying
joint ventures from paying corporate income taxes for an initial two-year
period and entitles them to a 50% reduction in such taxes in the succeeding
three-year period. The Panyu Joint Venture intends to seek a tax holiday, and
if granted such a "tax holiday," this would increase the joint venture's
potential net income. However, there can be no assurance that the Panyu Joint
Venture will qualify for a tax holiday, and failure to obtain a tax holiday
could make it more difficult to compete against other joint ventures in China
producing similar products that have obtained a tax holiday or obtain one in
the future.
The Panyu Joint Venture's sales in China are subject to certain Chinese Value
Added Tax ("VAT") laws. Under Chinese law, the total amount of VAT tax that a
seller of finished goods must collect from its customers may be offset by the
VAT amounts which it has paid in connection with the purchase of raw materials
and components included in such final products. Such offsetting amounts must be
evidenced by invoices which are issued by the sellers of components and other
raw materials. The Panyu Joint Venture currently purchases all of its raw
materials and components through Panyu, and the Panyu Joint Venture is seeking
to obtain approprite VAT documentation Panyu on purchases made to date. If for
any reason, Panyu should fail to properly invoice sales to the Panyu Joint
Venture, this could result in the Panyu Joint Venture being unable to offset VAT
tax paid to Panyu against VAT tax owed for final goods sold to end users. Panyu
has agreed to indemnify the Panyu Joint Venture for any VAT liability that may
result from Panyu failing to provide adequate documentation, but there can be
assurance that the Panyu Joint Venture will be successful in obtaining such
indemnification should it become necessary to seek it from Panyu.
Devaluation of the Renminbi against the U.S. dollar would increase the
amount of Renminbi the Panyu Joint Venture would need to service U.S. dollar
or other currency obligations, such as payment for imported components. No
assurance can be given that the Panyu Joint Venture will in the future be able
to convert sufficient amounts of Renminbi to foreign currency in China's
foreign exchange markets to meet its foreign currency obligations, or that the
Panyu Joint Venture will freely be able to remit foreign currency abroad.
6
<PAGE>
RAPID TECHNOLOGICAL CHANGE AND OBSOLESCENCE; RISKS ASSOCIATED WITH PRODUCT
DEVELOPMENT, INTRODUCTIONS AND ANNOUNCEMENTS. The markets for the Company's
products are characterized by evolving industry standards, rapid technological
advances resulting in short product life cycles, price reductions, significant
price/performance improvements and frequent new product introductions. The
Company's future success will depend at least in part upon its ability to
enhance its existing products and to develop and introduce new products and
features that meet changing customer requirements and emerging industry
standards on a timely basis. There can be no assurance that one or more of the
Company's products will not be rendered noncompetitive or obsolete by
technological advances or changing customer preferences. In addition, from
time to time, the Company or others may announce products, features or
technologies that have the potential to shorten the life cycle of or replace
the Company's then existing products, including the Company's products that
only use the MPEG-1 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 material adverse effect on the Company's business,
financial condition 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.
7
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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, Thomas R. Parkinson,
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 will depend to a significant extent on the performance and
continued service of certain other key employees recently employed by the
Company, including Bob Werbicki, the Company's Vice President of Computer
Products, Gary Franza, the Company's Executive Vice President of Business
Development and Chief Operating Officer of the DV Business, and Michael
Maslaney, the Company's Executive Vice President of Engineering. The Company
is seeking other personnel to complete its management team in connection with
the Company's proposed expansion of its operations. Competition for highly-
skilled business, product development, technical and other personnel is
intense, and there can be no assurance that the Company will be successful in
recruiting new personnel or in retaining any of its existing personnel. The
Company may experience increased costs in order to retain and attract skilled
employees. 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 business, financial condition and results of operations.
COMPETITION IN THE VIDEO CD PRODUCT AND DVD PRODUCT MARKETS. The Company's
Video CD products compete with products marketed by other manufacturers of
Video CD players, subassemblies and 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 DVD 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. Competition in the Video CD market generally occurs
on the basis of price and features. There can be no assurance that the Company
can offer its customers products that are as competitively priced or as
feature rich as its larger competitors. Moreover, manufacturers of Video CD
player sub-assemblies and components have substantially reduced the selling
prices of these items and further reductions in those prices can be expected,
which will require the Company to reduce its production costs in order to
remain competitive in the Video CD player, sub-assembly and component markets.
Although the Company has been reducing its costs of production for these
products, there can be no assurance that it will be able to remain competitive
or that its operations will not be materially adversely affected should
competitors substantially reduce their prices in the future. 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.
COMPETITION IN DIGITAL AD INSERTION MARKET. The Company, through its DV
Business, competes against other suppliers of digital advertisement insertion
systems, which provide cable television operators with the ability to
selectively insert local and regional advertising into cable channel video
streams. The digital ad insertion market is highly competitive and is
currently dominated by two suppliers, SeaChange International Inc. and
SkyConnect, Inc.
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The Company believes that in order to compete effectively in the digital ad
insertion market, it must reduce the cost of digital ad insertion server
systems so as to be able to offer systems that are affordable for smaller
cable operators. The Company believes that it can reduce the cost of its
current server systems by developing and building key components and using
certain of the Company's current products rather than purchasing such
components from third-party vendors. However, there can be no assurance that
the Company will be able to sufficiently reduce the cost of its current server
systems to reach the lower tier of the ad insertion market or that the Company
will be able to successfully increase its market share even if it does so.
Certain of the Company's current and potential competitors in the digital ad
insertion market have greater financial, selling and marketing, technical and
other resources than the Company. Increased competition could prevent the DV
Business from attaining market share, which would adversely affect the
Company's business, financial condition and results of operations. Although
the Company believes it has certain technological and other advantages over
its current competitors, realizing and maintaining such advantages will
require continued investment by the Company in research and product
development, marketing and customer service and support. There can be no
assurance that the Company will have sufficient resources to continue to make
such investments or that the Company will be able to make the technological
advances necessary to compete successfully with its existing competitors or
with new competitors.
DEPENDENCE ON NONAFFILIATED AND FOREIGN MANUFACTURERS. To date, the Company
has primarily relied 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 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 material adverse effect on the Company's business, financial
condition and results of operations. 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. Although
the Company has experienced certain quality control problems in connection
with the Panyu Joint Venture's initial production of Video CD players, the
Company believes that manufacturing Video CD players and other products
through the Panyu Joint Venture ultimately will enable the Company to exercise
greater control over the quality of such products and the manufacturing
capacity required to make such products.
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 and network video products (and DVD products when it
develops them). 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.
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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
patent, trademark, copyright and trade secret laws and employee and third-
party nondisclosure agreements to protect its proprietary rights. The Company
possesses certain patent rights which may limit competition against it in
certain areas of the digital ad insertion market, and has applied for patent
protection in the United States and certain other countries covering certain
of the technologies that relate to its digital ad insertion systems and
network video systems. There are few barriers to entry into the market for
many of the Company's products, and there can be no assurance that any patents
applied for by the Company will be granted for any of these technologies or
that the scope of any patent claims allowed will be sufficiently broad to
protect against the use of similar technologies by the Company's competitors.
There can be no assurance, therefore, that any of the Company's competitors,
many of whom have far greater resources than the Company, will not
independently develop technologies that are substantially equivalent or
superior to the Company's technology. Further, the Company distributes certain
of 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 business,
financial condition and results of operations.
There can also be no assurance that third parties will not assert
infringement claims against the Company in the future with respect to current
or future products. If infringement is alleged, the Company could be required
to discontinue the use of certain software codes or processes, to cease the
manufacture, use and sale of infringing products, to incur significant
litigation costs and expenses and to develop non-infringing technology or to
obtain licenses to the alleged infringing technology. There can be no
assurance that the Company would be able to develop alternative technologies
or to obtain such licenses or, if a license were obtainable, that the terms
would be commercially acceptable to the Company.
The Company may be involved from time to time in litigation to determine the
enforceability, scope and validity of any proprietary rights of the Company or
of third parties asserting infringement claims against the Company. Any such
litigation could result in substantial costs to the Company and diversion of
efforts by the Company's management and technical personnel.
CONTROL BY INSIDERS. The Company's directors and officers, together with
Hyundai (a principal shareholder of the Company), beneficially own shares of
the Company's capital stock representing 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. 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 follow-on 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 IPO. In the event
that certain shares of Common Stock and certain options to purchase Common
Stock which were deposited into an escrow in connection with the IPO ("Escrow
Securities") owned by securityholders of the Company who are officers,
directors, consultants or employees of the Company, or 140,760 of the Escrow
Acquisition Shares owned by Dr. Edmund Y. Sun that have been escrowed in
connection with the Company's follow-on offering are released from escrow,
compensation expense will be recorded for financial reporting purposes.
Therefore, in the event the Company attains any of the earnings or stock price
thresholds required for the release of the Escrow Securities and the foregoing
Escrow Acquisition Shares owned by Dr. Sun, the release will be treated, for
financial reporting purposes, as expense of the Company. In the event that the
140,760 of the Escrow Acquisition Shares owned by Dr. Sun that have been
escrowed in connection with the ViComp Acquisition are released from escrow,
the Company will record additional purchase price for the ViComp Acquisition
at the time of such release, which will either be (i) expensed at that time or
(ii) capitalized and amortized over future periods. Accordingly, the Company
will, in the event of the release of the Escrow Securities or Dr. Sun's Escrow
Acquisition Shares escrowed in connection with the Company's follow-on
offering, recognize, during the period that the conditions for such release
are met, a substantial non-cash charge to earnings that would increase the
Company's loss or reduce or eliminate earnings, if any, at such time. In the
event of the release of Dr. Sun's
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Escrow Acquisition Shares escrowed in connection with the ViComp Acquisition,
the Company will either recognize such charge during the period that the
conditions for such release are met or recognize such charge over future
periods. The amount of those charges will be equal to the aggregate market
price of such Escrow Securities or Escrow Acquisition Shares at the time of
release from escrow. Although the amount of expense recognized by the Company
will not affect the Company's total shareholders' equity or cash flow, it may
have a depressive effect on the market price of the Company's securities.
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.
POSSIBLE ADVERSE EFFECTS OF AUTHORIZATION OF PREFERRED STOCK; POTENTIAL
ANTI-TAKEOVER PROVISIONS. The Company's Amended and Restated Certificate of
Incorporation authorizes the issuance of a maximum of 5,000,000 shares of
Preferred Stock on terms which may be fixed by the Company's Board of
Directors without further shareholder action. The terms of any series of
preferred stock, which may include priority claims to assets and dividends and
special voting rights, could adversely affect the rights of holders of the
Common Stock and thereby reduce the value of the Common Stock. The issuance of
preferred stock could make the possible takeover of the Company or the removal
of management of the Company more difficult, discourage hostile bids for
control of the Company in which shareholders may receive premiums for their
shares of Common Stock or otherwise dilute the rights of holders of Common
Stock. In addition, the agreement governing the Escrow Securities contains
certain procedures that may make a possible takeover of the Company more
difficult.
POSSIBLE VOLATILITY OF PRICE OF SECURITIES. The Company believes factors
such as quarterly fluctuations in financial results and announcements of new
technology in the entertainment industry may cause the market price of the
Company's securities to fluctuate, perhaps substantially. These fluctuations,
as well as general economic conditions, such as recessions or high interest
rates, may adversely affect the market price of the securities.
NO DIVIDENDS. The Company has not paid any dividends on its Common Stock
since its inception. The Company has no current plans to pay dividends on its
Common Stock and intends to retain earnings, if any, for working capital
purposes.
LIMITATION ON OFFICERS' AND DIRECTORS' LIABILITIES UNDER DELAWARE
LAW. Pursuant to the Company's Amended and Restated Certificate of
Incorporation, and as authorized under applicable Delaware law, directors of
the Company are not liable for monetary damages for breach of fiduciary duty,
except (i) in connection with a breach of the duty of loyalty; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law; (iii) for dividend payments or stock repurchases
illegal under Delaware law; or (iv) for any transaction in which a director
has derived an improper personal benefit.
POSSIBLE ADVERSE EFFECT ON LIQUIDITY OF THE COMPANY'S SECURITIES DUE TO
INVESTIGATION BY THE SECURITIES AND EXCHANGE COMMISSION OF D.H. BLAIR AND
BLAIR & CO. AND RECENT SETTLEMENT BY BLAIR & CO. WITH NASD. The Commission is
conducting an investigation concerning various business activities of
D.H. Blair Investment Banking Corp. ("D.H. Blair"), the underwriter of the
Company's IPO and follow-on public offering, and D.H. Blair & Co., Inc.
("Blair & Co."), the parent of D.H. Blair, . The Company has been advised by
D.H. Blair that the investigation has been ongoing since at least 1989 and
that it is cooperating with the investigation. D.H. Blair cannot predict
whether this investigation will ever result in any type of formal enforcement
action against D.H. Blair or Blair & Co.
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In July 1997, Blair & Co., its Chief Executive Officer and its head trader
consented, without admitting or denying any violations, to a settlement with
the NASDR District Business Conduct Committee for District No. 10 to resolve
allegations of NASD rule and securities law violations in connection with
mark-up and pricing practices and adequacy of disclosures to customers
regarding market-making activities of Blair & Co. in connection with certain
securities issues during the period from June 1993 through May 1995 where
Blair & Co. was the primary selling group member. NASDR alleged the firm
failed to accurately calculate the contemporaneous cost of securities in
instances where the firm dominated and controlled after-market trading,
thereby causing the firm to charge its customers excessive mark-ups. NASDR
also alleged the firm did not make adequate disclosure to customers about its
market-making activities in two issues. As part of the settlement, Blair & Co.
has consented to a censure and has agreed to pay a $2.0 million fine, make
$2.4 million in restitution to retail customers, employ an independent
consultant for two years to review and make recommendations to strengthen the
firms's compliance procedures, and has undertaken for 12 months not to sell to
its retail customers (excluding banks and other institutional investors) more
than 60% of the total securities sold in any securities offering in which it
participates as an underwriter or selling group member. The Chief Executive
Officer of Blair & Co. has agreed to settle failure to supervise charges by
consenting to a censure, the imposition of a $225,000 fine and a 60-day
suspension from associating with any NASD member firm and to take a
requalification examination. The firm's head trader has agreed to settle
charges against him by consenting to a censure, the imposition of a $300,000
fine and a 90-day suspension from associating with any member firm and has
undertaken to take certain requalification examinations. The settlement with
NASDR does not involve or relate to D.H. Blair, its chief executive officer or
any of its other officers or directors.
The Company is unable to predict whether Blair & Co.'s settlement with the
NASDR or any unfavorable resolution of the Commission's investigation will
have any effect on such firm's ability to make a market in the Company's
securities and, if so, whether the liquidity or price of the Company's
securities would be adversely affected.
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