<PAGE>
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended December 31, 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 [_]
<TABLE>
<CAPTION>
Class Outstanding at January 31, 1998
-------------------------------- ----------------------------------
<S> <C>
(Common Stock, $.0001 Par Value) 20,815,022
</TABLE>
<PAGE>
Digital Video Systems, Inc.
Index
<TABLE>
<CAPTION>
Part I. Financial Information Page
- ----------------------------- ----
<S> <C>
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-
December 31, 1997 and March 31, 1997 3
Condensed consolidated statements of operations-
Three and Nine months ended December 31, 1997 and 1996 4
Condensed consolidated statements of cash flows-
Nine months ended December 31, 1997 and 1996 5
Notes to condensed consolidated financial statements-
December 31, 1997 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 9
Part II. Other Information
- --------------------------
Item 1. Legal Proceedings
None -
Item 2. Changes in Securities and Use of the Proceeds
None -
Item 3. Defaults upon Senior Securities
None -
Item 4. Submission of Matters to a Vote of Security Holders
None -
Item 5. Other Information
None -
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2.
<PAGE>
Item I. Financial Statements
Digital Video Systems, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ -----------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 8,380 $ 32,221
Restricted cash 1,708 -
Short-term investments 2,510 -
Accounts receivable, net 8,073 2,875
Inventories 4,038 1,016
Prepaid expenses and other current assets 1,071 485
-------- --------
Total current assets 25,780 36,597
-------- --------
Property and equipment, net 2,021 1,420
Intangible assets 1,903 -
Other assets 75 56
-------- --------
$ 29,779 $ 38,073
======== ========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 2,387 $ 3,044
Accrued liabilities 2,301 854
-------- --------
Total current liabilities 4,688 3,898
Minority interest in consolidated joint venture 241 --
Stockholders' equity:
Common stock 2 2
Additional paid-in capital 56,482 54,628
Accumulated deficit (31,332) (20,297)
Cumulative foreign currency translation adjustments (226) (72)
Deferred compensation (76) (86)
-------- --------
Total stockholders' equity 24,850 34,175
-------- --------
$ 29,779 $ 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 Nine Months
Ended December 31, Ended December 31,
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Product revenue $ 4,727 $ 2,523 $ 11,384 $ 5,108
Development and services revenue 644 58 645 208
Component revenue -- 3,461 2,444 4,235
------- ------- -------- -------
Total revenue 5,371 6,042 14,473 9,551
Cost of product revenue 4,221 2,199 10,121 5,317
Cost of development and services
revenue 2 19 2 254
Cost of component revenue -- 3,423 2,400 4,221
------- ------- -------- -------
Gross margin 1,148 401 1,950 (241)
Operating expenses:
Research and development 1,702 678 4,194 1,360
Sales and marketing 1,394 413 2,880 1,067
General and administrative 2,805 1,447 5,973 3,073
Purchased in-process research
and development -- 1,819 617 1,819
------- ------- -------- -------
Total operating expenses 5,901 4,357 13,664 7,319
------- ------- -------- -------
Loss from operations (4,753) (3,956) (11,714) (7,560)
Other income (expense), net 178 260 921 246
------- ------- -------- -------
Net loss before extraordinary item (4,575) (3,696) (10,793) (7,314)
------- ------- -------- -------
Extraordinary item-loss on early
extinguishment of bridge notes -- -- -- (1,264)
------- ------- -------- -------
Net loss before provision for income
taxes and minority interest (4,575) (3,696) (10,793) (8,578)
Provision for income taxes -- (22) -- (22)
------- ------- -------- -------
Net loss before minority interest (4,575) (3,718) (10,793) (8,600)
Minority interest (241) -- (241) --
------- ------- -------- -------
Net loss $(4,816) $(3,718) $(11,034) $(8,600)
======= ======= ======== =======
Net loss per share (basic) before
extraordinary item $ (0.39) $ (0.39) $ (0.91) $ (0.80)
Net loss per share (basic) $ (0.39) $ (0.39) $ (0.91) $ (0.95)
======= ======= ======== =======
Shares used in the calculation
of net loss per share (basic) 12,355 9,527 12,182 9,087
======= ======= ======== =======
Net loss per share (diluted) before
extraordinary item $ (0.39) $ (0.39) $ (0.91) $ (0.80)
Net loss per share (diluted) $ (0.39) $ (0.39) $ (0.91) $ (0.95)
======= ======= ======== =======
Shares used in the calculation
of net loss per share (diluted) 12,355 9,527 12,182 9,087
======= ======= ======== =======
</TABLE>
See accompanying notes
4.
<PAGE>
Digital Video Systems, Inc.
Condensed Consolidated Statements Of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months
Ended December 31,
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Operating activities
Net loss $(11,034) $(8,600)
Adjustments to reconcile net loss to net cash
used in operating activities:
Minority interest in consolidated joint venture 241 --
Depreciation and amortization 1,115 159
Deferred financing charges and accretion
related to bridge notes -- 1,491
Purchased in-process research and development 617 1,819
Changes in operating assets and liabilities:
Accounts receivable (5,131) (2,296)
Inventories (1,936) 683
Prepaid expenses and other current assets (483) 262
Accounts payable (658) 2,394
Accrued liabilities 1,066 (330)
-------- -------
Net cash used in operating activities (16,203) (4,418)
Investing activities
Acquisition of property and equipment (863) (837)
Acquisition of Digital Video Division of
Arris Interactive LLC (1,642) --
Acquisition of Synchrome Technology, Inc. (778) --
Purchase of short term investments (2,510) --
Other investing activities (155) 75
-------- -------
Net cash used in investing activities (5,948) (762)
Financing activities
Net proceeds from initial public offering of Units -- 20,714
Net proceeds from secondary public offering -- 23,093
Repayment of bridge notes -- (7,000)
Proceeds from exercise of stock options 18 54
-------- -------
Net cash provided by financing activities 18 36,861
-------- -------
Net (decrease) increase in cash and cash equivalents (22,133) 31,681
Cash and cash equivalents at beginning of period 32,221 4,659
-------- -------
Cash and cash equivalents at end of period $ 10,088 $36,340
======== =======
</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 computer peripheral
products. The Company is currently developing DVD products for home
entertainment and computer markets.
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 nine and three-month periods ended
December 31, 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.
The results of the Company's joint venture in the People's Republic of China
("China") for the quarter ended September 30, 1997 have been incorporated as
part of Company's consolidated financial statements for the quarter ended
December 31, 1997. The Company is not reporting the quarterly financial results
for the Panyu Joint Venture for the period ended December 31, 1997. As the
Company has chosen to adopt a one quarter delay in reporting the Panyu Joint
Venture due to administrative and operational issues.
Revenue is recognized by the Panyu Joint Venture once the product has been sold
through to the final customer with the associated cost of sales being calculated
based upon the number of units sold through. The Panyu Joint Venture assembles
product on behalf of Panyu.
All significant intercompany balances and transactions have been eliminated.
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
6.
<PAGE>
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.
During the quarter ended December 31, 1997, the Company adopted the Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
Under the requirements of SFAS No. 128, entities are required to report "basic"
and "diluted" earnings per share. As the Company has not recorded any net
income for any period to date, the new basic and diluted earnings per share
calculations are not any different from the net loss per share previously
reported. Therefore, the Company is not required to restate prior period
earnings per share.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended December 31, Ended December 31,
----------------- -----------------
1997 1996 1997 1996
----------------- -----------------
<S> <C> <C> <C> <C>
Net loss $ (4,816) $(3,718) $(11,034) $(8,600)
======== ======= ======== =======
Weighted average common shares
outstanding 12,355 9,527 12,182 8,030
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 - - - 1,057
-------- ------- -------- -------
Shares used in computing net loss per
share (1) 12,355 9,527 12,182 9,087
======== ======= ======== =======
Net loss per share $ (0.39) $ (0.39) $ (0.91) $ (0.95)
======== ======= ======== =======
</TABLE>
(1) Does not include shares and options in escrow.
Note 3 - Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
------------ ----------
<S> <C> <C>
Inventories:
Raw materials $1,575 $ 824
Work in process 1,763 157
Finished goods 700 35
------ ------
$4,038 $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 place 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 preliminary valuation, the purchase price has been allocated as
follows:
Current assets $585
Equipment 511
Intangibles 1,935
Liabilities assumed (170)
In-process research and development 617
---
$3,478
======
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. Pursuant to the Asset
Purchase Agreement, 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 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 nine months ended December 31, 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 NINE MONTHS ENDED
DECEMBER 31, DECEMBER 31,
------------ ------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Pro forma net revenue $ 5,371 $ 6,171 $ 15,533 $ 12,380
Pro forma net loss $ (4,566) $ (5,230) $(11,431) $(14,073)
Pro forma net per share $ (0.37) $ (0.52) $ (0.91) $ (1.45)
</TABLE>
For the three and nine months ended December 31, 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) 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 price allocation:
<TABLE>
<S> <C>
Current assets $521
Equipment 52
Goodwill 258
Liabilities assumed (53)
---
$ 778
======
</TABLE>
China Joint Venture
- -------------------
In August 1997 the Company, through its wholly owned subsidiary, D.V.S.
H.K.("D.V.S. H.K."), and Panyu Tian Le Electrical Appliances Manufacturing Co.,
Ltd. ("Panyu") formed a joint venture (the "Panyu Joint Venture") in China to
manufacture and distribute Video CD players and DVD players. As initially
formed, the Panyu Joint Venture was owned 51% by the Company, through D.V.S.
H.K., and 49% by Panyu.
During October 1997, the Company contributed approximately $600 in cash in
accordance with the funding requirements of the Panyu Joint Venture. However, in
December 1997, as Panyu did not make its capital contribution to the Venture as
required by the Joint Venture Agreement, the Company, through D.V.S. H.K., and
Panyu entered into an Ownership Shares Transfer Agreement ("the Transfer
Agreement"). Pursuant to the Transfer Agreement, the Company, through D.V.S.
H.K., agreed to purchase from Panyu the entire 49% interest of Panyu in the
Panyu Joint Venture for a nominal amount, and the Company's interest in the
to nominally hold a 10% interest for the benefit of a new minority partner. In
January 1998, the Company approved the admission of a new minority partner, a
Chinese company owned by Dr. An Yueh Zehan, a Chinese lawyer and businessman.
The Company has also agreed to purchase Video CD materials, parts and finished
goods inventory from Panyu for an amount to be determined.
In connection with the Transfer Agreement, Panyu and the Panyu Joint Venture
entered into a two-year lease agreement (the "Lease") pursuant to which Panyu
will lease to the Panyu Joint Venture certain land, buildings
7.
<PAGE>
and equipment including the land, buildings and equipment that Panyu was
originally required to contribute to the Panyu Joint Venture ("Lease Assets")
for a monthly fee of approximately $78,000. The Lease provides that during its
term, the Panyu Joint Venture may, at its sole option, purchase the Lease Assets
for a price equal to the appraised value of such assets.
The foregoing descriptions of the Transfer Agreement and Lease are qualified in
their entirety by reference to the provisions of such agreements, which are
attached hereto as Item 6. Exhibits and Reports on Form 8-K.
The Company has consolidated 100% of the assets, liabilities and results of
operations for the Joint Venture as of December 31, 1997. Panyu's interest in
the Panyu Joint Venture and the profit therefrom has been reflected as "Minority
interest in consolidated joint venture" on the Company's Consolidated Financial
Statements.
Note 5 - Related party transactions
- -----------------------------------
For the three and nine months ended December 31, 1997, the Company sold
$0 and approximately $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 December 31, 1997. The Company owns less than 20% of
Wyan's equity.
During the quarter ended December 31, 1997, the Company recognized approximately
$644 of the revenue from the Panyu Joint Venture, all of which was derived from
the assembly of products on behalf of Panyu, the former Joint Venture's partner
of the Panyu Joint Venture. The Company's receivable outstanding from Panyu was
approximately $608 as of December 31, 1997.
Note 6 - 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 were cancelled in December 1997 pursuant to the terms of the Escrow
as the result of the delay encountered in completing development of the ViComp
MPEG-1 Chip. 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 escrow securities
deposited into escrow by certain holders of the company's securities in
connection with the company's IPO.
Note 7 - Restricted Cash
- ------------------------
As of December 31, 1997, the Company has approximately $1,708 of cash reserved
for letters of credit on inventory purchases in Asia.
8.
<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, 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 December 31, 1997.
RESULTS OF OPERATIONS FOR THREE AND NINE MONTHS ENDED DECEMBER 31, 1997 COMPARED
TO THE THREE AND NINE MONTHS ENDED DECEMBER 31, 1996
The following table sets forth for the periods indicated certain income and
expense items expressed as a percentage of the Company's total revenues for the
three and nine months ended December 31, 1997 compared to the three and nine
months ended December 31, 1996. See Condensed Consolidated Statements of
Operations.
<TABLE>
<CAPTION>
Percent
of Revenue
------------------------------
Three Months Nine Months
Ended Ended
December 31 December 31
-------------- --------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues 100.0% 100.0% 100.0% 100.0%
Gross margin 21.4 6.6 13.5 (2.5)
Research and development 31.7 11.2 29.0 14.2
Sales and marketing 26.0 6.8 19.9 11.2
General and administration 52.2 23.9 41.3 32.2
Acquired in process R & D -- 30.1 4.3 19.0
Operating (loss) (88.5) (65.5) (80.9) (79.2)
Net (loss) (89.7) (61.5) (76.3) (90.0)
</TABLE>
9.
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31, %
Consolidated Revenue 1997 1996 Change
- -------------------- ------------ ------------ --------
<S> <C> <C> <C>
Three months ended 5,371 6,042 (11.1%)
Nine months ended 14,473 9,551 51.5%
</TABLE>
Total revenue decreased $0.7 million, or 11.1% for the three months ended
December 31, 1997 compared with the three months ended December 31, 1996
as a result of decreasing component revenue. Total
revenue for the nine months ended December 31, 1997 increased $4.9 million or
51.5% from the corresponding period in 1996. These increases were the results of
higher product revenue generated in the nine months ended December 31, 1997.
Product revenue, including Video CD players, digital advertisement insertion
systems, computer peripheral products, and sub-assemblies, increased $2.2
million, or 87.4% to $4.7 million for the three months ended December 31, 1997
compared with the three months ended December 31, 1996. Product revenue for the
nine months ended December 31, 1997 was $11.4 million, an increase of $6.3
million or 122.9% from the preceding year. These increases reflect increased
market penetration of the Company's products, particularly in Asia through the
Company's newly formed Panyu Joint Venture, as well as additional product lines
from acquisitions made by the Company during its current fiscal year.
For the three month ended December 31, 1997, development and service revenue
increased $0.6 million compared to the same period in the prior year as a result
of the formation of the Panyu Joint Venture. The Panyu Joint Venture assembles
product on behalf of Panyu. Prior to the increase in the Company's ownership of
the Panyu Joint Venture, Panyu acted as a distributor for the Company's finished
goods and owned 49% of the Panyu Joint Venture's capital (See Note 4- Business
Combinations). There was no significant revenue generated from development and
service contracts during the three and nine months ended December 31, 1996.
There was no component revenue in the three months ended December 31, 1997
compared to $3.5 million in the three months ended December 31, 1996. Total
component revenue was $2.4 million for the nine months ended December 31, 1997
compared to $4.2 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. It is anticipated that component revenue
continue to decrease in absolute dollars and as a percentage of revenue in the
future.
International revenue represented approximately 76.1% of total revenues in the
third of quarter of fiscal 1998 compared to approximately 98.6% in the same
quarter of fiscal 1997. The Company expects international revenue to continue
to be a significant part of total revenue.
<TABLE>
<CAPTION>
December 31, December 31, %
Gross Margin 1997 1996 Change
- ------------ ------------ ------------ --------
<S> <C> <C> <C>
Three months ended 1,148 401 186.3%
as a percentage of revenue 21.4% 6.6 %
Nine months ended 1,950 (241) 909.1%
as a percentage of revenue 13.5% (2.5)%
</TABLE>
10.
<PAGE>
The increase in the gross margin as a percentage of total revenue for the three
and nine months ended December 31, 1997 compared to the same period last year
was due to the combination of product mix and improved manufacturing
efficiencies from increased sales volume, additional gross margin from the Panyu
Joint Venture and decreased component sales, which have a low margin.
Although the Company's gross margin improved in the three and nine months ended
December 31, 1997 compared with 1996, prices for Video CD players, sub-
assemblies and components continue to decline as a result of intense competition
in the China market and significant reductions in the cost of Video CD
components which has further reduced the market price of Video CD players. The
Company is developing its proprietary ViComp 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 utilize these chips in its
products on a timely basis or at all, or that the cost of these chips will be
significantly lower than other comparable chips available to the Company's
competitors.
<TABLE>
<CAPTION>
December 31, December 31, %
Research and Development 1997 1996 Change
- ------------------------ ------------ ------------ --------
<S> <C> <C> <C>
Three months ended 1,702 678 151.0%
as a percentage of revenue 31.7% 11.2%
Nine months ended 4,194 1,360 208.4%
as a percentage of revenue 29.0% 14.2%
</TABLE>
Research and development expenses consist primarily of personnel and equipment
costs required to conduct the Company's product development efforts. The
increase in these expenses for the three and nine months ended December 31, 1997
was primarily attributable to additional headcount related to the continued
expansion of the Company's worldwide operations, including the Digital Video
division acquired in August 1997. In addition, the Company is increasing its
funding of the development of DVD products. The Company expects that these
expenses will continue to increase in dollar terms as the Company expands its
development efforts.
<TABLE>
<CAPTION>
December 31, December 31, %
Sales and Marketing 1997 1996 Change
- ------------------- ------------ ------------ --------
<S> <C> <C> <C>
Three months ended 1,394 413 237.5%
as a percentage of revenue 26.0% 6.8%
Nine months ended 2,880 1,067 169.9%
as a percentage of revenue 19.9% 11.2%
</TABLE>
Sales and marketing expenses 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. The increase in these expenses
for the three and nine months ended December 31, 1997 was primarily due to
business combinations that occurred during the quarter ended September 30, 1997
and headcount additions. Higher consulting fees and trade show expenses as a
result of Company's commitment to improve worldwide marketing efforts and sales
development have also contributed to the
11.
<PAGE>
increased expenses. As the Company continues its marketing efforts, sales and
marketing expenses in dollar terms are expected to continue to increase.
<TABLE>
<CAPTION>
December 31, December 31, %
General and Administrative 1997 1996 Change
- --------------------------
______________________________________
<S> <C> <C> <C>
Three months ended 2,805 1,447 93.8%
as a percentage of revenue 52.2% 23.9%
Nine months ended 5,973 3,073 94.4%
as a percentage of revenue 41.3% 32.2%
</TABLE>
General and administrative expenses consist of administrative salaries and
benefits, insurance and other business support costs, including legal and audit
expenses. The increase in these expenses for the three and nine months ended
December 31, 1997 resulted from hiring additional administrative personnel, as
well as business acquisitions made during the second quarter of fiscal 1998.
Higher legal, consulting and accounting fees in relation to various business
combinations have also contributed to the increased expenses. The Company
expects that general and administrative costs will increase in dollar terms as
the Company expands its businesses.
Acquired in process Research and Development
- --------------------------------------------
The Company expensed acquired in process research and development, a non-cash
charge, during the nine months of Fiscal 1998 of approximately $0.6 million
resulting from the acquisition of the DV Business and $1.8 million during the
nine months of fiscal 1997 resulting from the acquisition of ViComp Technology,
Inc.
<TABLE>
<CAPTION>
December 31, December 31, %
Other income 1997 1996 Change
- ------------
______________________________________
<S> <C> <C> <C>
Three months ended 178 260 (31.5%)
as a percentage of revenue 3.3% 4.3%
Nine months ended 921 246 274.4%
as a percentage of revenue 6.4% 2.6%
</TABLE>
The decrease in other income for the three month ended December 31, 1997
resulted from lower interest income due to the declining cash balances and
short-term investment. The increase in the nine months ended December 31, 1997
was primarily attributed from interest income generated by funds raised in the
Company's public offerings.
12.
<PAGE>
The Company recorded an extraordinary non-cash charge in the quarter ended June
30, 1996 of approximately $1.3 million related to the repayment of the bridge
notes issued in the bridge financing which were repaid in May 1996 from proceeds
of the Company's initial public offering.
Liquidity And Capital Resources
As of December 31, 1997, the Company had working capital of $21.1 million,
including cash and cash equivalents and short-term investments of $12.6 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 $16.2 million for the nine months
ended December 31, 1997 compared to $4.4 million for the nine months ended
December 31, 1996. Substantially all of the net cash used in operating
activities in the nine months ended December 31, 1997 represented the net loss
of $11.0 million adjusted for non-cash charges for depreciation and amortization
of $1.1 million and net cash used to fund increases in accounts receivable of
$5.1 million and inventories of $1.9 million. Both accounts receivable and
inventory balances have increased due to the expansion of the Company's
operation. Substantially all the net cash used in operating activities in the
nine months ended December 31, 1996 represented the net loss of $8.6 million
adjusted by non-cash charges for depreciation and amortization of $0.2 million
and deferred financing charges and accretion from bridge notes of $1.5 million
and acquired in-process research and development of $1.8 million.
Net cash used in investing activities was $5.9 million for the nine months ended
December 31, 1997 compared to $0.8 million for the nine months ended December
31, 1996. The $5.9 million of cash used for investing activities in the nine
months ended December 31, 1997 includes the purchase of short-term investments
($2.5 million), acquisition of the DV Business ($1.6 million), acquisition of
Synchrome Technology, Inc. ($0.8 million) and acquisition of property and
equipment ($0.9 million). Net cash used for the nine months ended December 31,
1996 was primarily for acquisition of capital equipment.
Net cash provided by financing activities was minimal for the nine months ended
December 31, 1997 compared to $36.9 million for the nine months ended December
31, 1996. Cash provided by financing activities in the nine month ended
December 31, 1996 included net proceeds generated by the Company's initial
public offering of $20.7 million, proceeds from secondary public offering of
$23.1 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
$22.1 million for the nine months ended December 31, 1997 compared to an
increase in cash and cash equivalents of $31.7 million for the nine months ended
December 31, 1996.
Pursuant to the Transfer Agreement, the Company has agreed to purchase Video CD
materials, parts and finished goods inventory from Panyu, the former joint
venture partner of the Panyu Joint Venture, at an amount to be determined. In
addition, in connection with the DV acquisition 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 new revenues of the DV Business during the period from
April 1, 1998 through January 31, 1999 (subject to such revenues exceeding $5
million).
The Company anticipates that the acquisitions made during the year 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
13.
<PAGE>
expected operating losses. 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 is also reviewing
its operating costs to determine where overlapping functions are being
performed. These functions will be reviewed for potential consolidation and
future cost savings to improve the Company's working capital.
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.
14.
<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
<TABLE>
<CAPTION>
<C> <S>
10.1 Ownership Shares Transfer Agreement by and between D.V.S.
H.K., a wholly-owned subsidiary of the Company, and Panyu.
10.2 Lease Agreement by and between D.V.S. H.K., a wholly-owned
subsidiary of the Company, and Panyu.
10.3 Form of Joint Venture Partner Substitution Agreement
10.4 Employment Agreement dated as of January 12, 1998 by and
between the Company and Edward Miller.
10.5 Lease Agreement by and between Digital Video systems, Inc.
and Dell Enterprises.
27.1 Financial Data Schedule
99.1 Certain Considerations
</TABLE>
(b) Reports on Form 8-K:
None
15.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Digital Video Systems, Inc.
-------------------------------
(Registrant)
Date: February 12, 1998 /s/ Edward M. Miller
--------------------------- ------------------------
Edward M. Miller--
Chief Financial Officer
16.
<PAGE>
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit Number
- --------------
<C> <S>
10.1 Ownership Shares Transfer Agreement by and between D.V.S. H.K.,
a wholly-owned subsidiary of the Company and Panyu.
10.2 Lease Agreement by and between D.V.S. H.K., a wholly-owned
subsidiary of the Company, and Panyu.
10.3 Form of Joint Venture Partner Substitution Agreement
10.4 Employment Agreement dated as of January 12, 1998 by and
between the Company and Edward M. Miller.
10.5 Lease agreement by and between Digital Video Systems, Inc.
and Dell Enterprises.
27.1 Financial Data Schedule.
99.1 Other Considerations.
</TABLE>
17.
<PAGE>
EXHIBIT 10.1
Ownership Shares Transfer Agreement
Seller: Panyu Tian Le Electrical Manufacturing Co., Ltd. (Tian
Le)
Legal Address: Nan De Highway, South side, Zhi Village, Dashi town,
Panyu Municipality, Guangdong Province
Legal Representative: Mr Su Xin Rong
Buyer: D.V.S. H.K. Limited (DVS)
Legal Address: Unit 22-23A, Level 18, Landmark North, 39 Lung Sum
Avenue, Sheung Shui, New Territories, Hong Kong
Legal Representative: Dr Edmund Sun
Tian Le and DVS entered a Joint Venture Contract in August, 1997, pursuant to
which the Panyu D.V.S. Electrical Appliances Manufacturing Co., Ltd. was formed
(Joint Venture). For the purpose of Joint Venture's proper operation concerning
the matter of transferring ownership shares, both parties had depth discussion.
Now, have reached the agreement as follows:
1. Tian Le agrees to sell its Panyu D.V.S. Electrical Appliances Manufacturing
Co., Ltd. entire 49% shares (interest) with full consideration of $100 RMB.
One time payment shall be paid by D.V.S. to Tian Le within five days after
signing of this agreement.
2. D.V.S. having 10% of its interest will be held by Tian Le, which is
responsible to hold this interest temporarily for the benefit of D.V.S.'s
new Joint Venture partner until DVS has designated a new Joint Venture
partner to replace Tian Le as a member of the Joint Venture. When the new
Joint Venture partner has been approved by any required governmental
agencies and admitted to the Joint Venture, Tian Le's name will be withdrawn
and removed from the Joint Venture automatically, if DVS notifies Tian Le
that DVS will be the only member of the Joint Venture. Tian Le is
responsible for its full cooperation in the process of replacement and for
its withdrawal, DVS is responsible for all of its costs.
3. From the date of signing this Agreement, beginning December 1st, 1997, Tian
Le is not entitled to receive any payment for its interest in the Joint
Venture, nor responsible for loss of the Joint Venture. Tian Le is no longer
participating the operation and management of Joint Venture.
<PAGE>
4. At the time of Transferring Ownership Shares (interest), Tian Le/DVS shall
send staffs to audit Joint Venture's property, so that confirming its
ownership and belongings, except property listed under the lease agreement
and its supplement are agreed by both parties. If the properties belong to
Tian Le and not listed or purchased by JV, then, Tian Le is entitled to
take away from the premises, DVS will not interfere with.
5. From the date of signing this agreement, effective immediately, DVS shall
designate the General Manager, Deputy General Manager, Financial
Controller, and the head of all departments of the Joint Venture as well as
the Chairman of the Board and members of Board of Directors. Effective
immediately, all Tian Le's members of Directors, management and other Tian
Le employees shall be removed from the premises of the Joint Venture, shall
not participate the operation and management of Joint Venture.
6. Trademarks owned by Tian Le and its licensing (Rights to use) (see separate
trademark licensing contract).
7. Resolving problem concerning Video CD materials, part and finished goods
inventory:
DVS will base on market condition reconfirm the prices of Video CD's
materials, parts and finished goods inventory after Tian Le's approval and
its accounting. Tian Le guarantees that the Video CD Inventory is free and
clear of all liens, claims and encumbrances and is in good physical
condition and is not obsolete. The audit of inventory must be completed
within two weeks after Joint Venture's take over, deduct the entitlement of
DVS, and Joint Venture, and pay off debts owed to Carnival Honour
Development Ltd. (shall base on the audited list to be made and signed by
the representatives of both parties.) Both parties shall sales the net
balances within 2 weeks after the clearance of stock take.
8. Indemnification
From the date of signing this agreement Tian Le guarantees to the Joint
Venture that there has not incurred any contingent liabilities (including
without limitation, for the payment of VAT, other taxes or customs or
duties, or for product liability or warranty repairs or products shipped
prior to the date of this agreement). Tian Le shall indemnify the Joint
Venture against any such contingent liabilities (including any legal fees
or other costs resulting from such liabilities as the accrual of such
liabilities.) In additional to any other remedies that DVS may
<PAGE>
have, DVS may offset the amount of any indemnification under this agreement
or for any other breach of any representation or warranty made by Tian Le
in this agreement against the next rental payments then still outstanding
under the lease agreement.
9. Accounting Records
Tian Le must provide the actual financial records of Joint Venture prior to
the ownership transfer to audit its profit and loss to determine Tian Le's
liability to the Joint Venture.
10. All uncovered areas, shall be resolved through friendly negotiations
between the parties. If negotiations are unsuccessful, the dispute shall be
submitted to the China International Economic and Trade Arbitration
Commission for arbitration according to its provisional rules of
arbitration procedure. The arbitration award shall be final and binding on
both parties. The required costs (including legal fees) shall be borne by
the losing party. During the arbitration proceeding, this agreement shall
continue to be performed except for the portion which is subject to of the
dispute under arbitration.
11. All disputes of this agreement, shall apply the rule of laws of China.
12. This agreement pertaining both Chinese and English versions. There are two
(2) original copies of each version, both parties shall keep Chinese and
English versions.
13. This agreement is executed in both Chinese and English versions shall be
equally binding.
14. This agreement is binding upon signing by the legal representatives of both
parties.
Sellers: Panyu, Tian Le Electrical Buyer: D.V.S. H.K. Limited
Appliance Manufacturing Co., Ltd.
[SEAL] [SEAL OF D.V.S. H.K. LIMITED]
By: /s/ Su Xin Rong By: /s/ Dr. Edmund Sun
--------------------------------------- --------------------------------
Mr. Su Xin Rong Dr. Edmund Sun
December 27, 1997
<PAGE>
EXHIBIT 10.2
Lease Agreement
Lessor: Panyu Tian Le Electrical Appliance Manufacturing
Co., Ltd. (Tian Le)
Legal Address: Nan De Highway, South side, Zhi Village, Dashi
Village, Dashi town, Panyu Municipality, Guangdong
Province
Legal Representative: Mr Su Xin Rong
Lessee: Panyu D.V.S. Electrical Appliances Manufacturing
Co., Ltd. (DVS)
Legal Address: Nan De Highway, South side, Zhi Village, Dashi
Village, Dashi town, Panyu Municipality, Guangdong
Province
Legal Representative: Dr Edmund Sun
In accordance with "the Economic Contracts of the People's Republic of China,"
and other related regulations, for the purpose of securing the rights and
obligations of Lessor and Lessee, through consultations, it is mutually agreed
to execute this agreement.
1. Name and quantity of lease property
(1) The site (referred to Appendix I of Joint Venture Agreement's)
(2) All of the buildings and other situations located on the site including
the Video CD and amplifier factory buildings, two dormitory buildings
and a power transformer station.
(3) Machinery, equipment, facilities (referred to Joint Venture Agreement
and attachment list to be confirmed afterwards)
2. Lease term
This lease if for two years, commencing December 1st, 1997 to November 30th,
1999.
3. Base rent and lease payment's time schedule.
(1) The monthly rent is RMB650,000, payable before 10th of each month. The
Lessee can not use excuse to delay the payment.
<PAGE>
(2) Within 10 days when signing this agreement, Lessee shall pay RMB
1,950,000 to Lessor as security deposit which will be returned to
Lessee after completion of the lease without interest.
(3) During the term of said lease Lessor is responsible for all rent,
property, occupancy and other taxes that are assessed based on the
Joint Venture's leased property. Local government's fees, water and
electricity bills shall be paid by Lessee.
4. The maintenance and repairs during term of lease
Lessee is responsible to pay for repairs & maintenance of machineries and
equipments. Lessor is responsible to pay for the normal repairs &
maintenance of the leased property, the site, all of the buildings, and
other structures located on the site, including without limitation the
Video CD and amplifier factory buildings, two dormitory building and a
power transformer station except that Lessee must reasonably use said
property and will be responsible for damages due to its failure to not
reasonable use said property.
5. Other agreed matters
(1) Lessee's all activities being conducted by using the leased property
must comply with the rules and regulations of the government, Lessee
must not engage in any illegal business on the premises.
(2) Lessee shall not sell the leased property, shall not use the leased
property, for mortgage and for other party's guaranty.
(3) Without Lessor's approval, Lessee may not sublet or letting any third
party to use more than 50% of the leased property. However, Lessor
without good reason shall not withhold the sublease, written consent
shall be given to Lessee.
(4) Lessee may not disassemble and reconstruct the leased property without
Lessor's approval.
(5) During the lease, Lessor must insure the leased property from the
insurance company, the insurance premium must be paid by Lessor.
According to the actual conditions, except normal wearing and tearing.
Lessee shall be responsible for damages are caused by the improper use
of the leased property.
<PAGE>
(6) Lessee and Joint Venture
By providing the appropriate documentation describing the transaction
is provided to Tian Le. The lease may be assigned by Lessee to any
company acquiring or merging with the Joint Venture, or any
corporation owning or controlling DVS or owned or controlled by DVS.
(7) During the lease term, with advance notice and under reasonable
situation, Lessor accompanied by Lessee may enter the premises to
inspect the conditions of the properties and for related business
purposes.
(8) During the lease, both parties are not responsible for any Acts of
God, natural disaster where damages caused by themselves force majeure
and uncontrollable Government's condemnation proceeding, thus the
lease can not be carried on.
6. Obligation for breach of lease by Lessor and Lessee
(1) In the event Lessor contravenes Article 2 of this agreement, unable to
lease the properties to Lessee for use within 30 days, Lessor needs to
pay 3% of month rent per day to Lessee as penalty. Lessee will reserve
the rights to terminate the lease agreement and Lessor shall refund
all rental deposits and rentals already received together with
interest rate currently charged by the bank for the intervening
period, from the date the captioned money paid to the Lessor and the
date money refunded to Lessee at last.
(2) In the event Lessor involuntarily loses the ownership of or right to
lease the leased property, Lessor shall pay Lessee a termination fee
of three months rent under the lease if Lessee has at least one year's
notice before it loses possession of the leased property or six months
rent under the lease of the Joint Venture has less than one-year's
notice before it loses possession of the leased property.
(3) Lessor agrees to pledge all its leased machineries, equipments to
Lessee as collateral granting Lessee the right to forfeit the above-
stated properties on the premises as soon as Lessor breaches the terms
and conditions of this lease agreement after the judgment from the
court. Any money in excess of the amount owed to the Lessee and
damages will be returned to Lessor. Both parties agree to register
this collateral (mortgage) at the Industrial & Commercial Bureau after
signing this agreement. Lessor represents no current liens or pledges
of subject machineries and equipments to any 3rd party.
<PAGE>
(4) Lessee shall pay rent late charges in the amount of 3% of this month
rent per day upon written notice via registered mail to Lessee to the
attention of Mr. Edmund Sun but without immediate rectification from
Lessee. If Lessee does not pay rental after 20 days overdue, or
intentionally pay monthly rental 20 days after the due date for three
consecutive months, Lessor is entitled to forfeit three month security
deposit and may terminate the lease.
7. The leasehold shall be for a two-year term and may be renewed by Lessee for
successive additional one-year term at the option of Lessee and upon six
month's written notice prior to expiration of the current term. Lessor
shall not refuse Lessee's option for renewal. However, Lessor may cancel
the lease at any time after the initial two-year term by giving Lessee one
year's notice and paying it a calculated based on the rent for final month
of the lease for three-month rent. The rent for renewal periods shall be
650,000 RMB per month.
8. Indemnification
Lessor guarantees that it has the authority to lease "the leased property"
to Lessee without obtaining the approval of any governmental agency or
other third party and that it has no reason to believe that possession and
use of the leased property by the Lessee will be disturbed, interrupted or
interfered with during the initial two-year term also guarantees that
Lessor, except those assets already mortgaged or under liens and details to
be furnished to Lessee prior to signing this agreement, shall not use "the
leased property" to secure mortgages or to create any liens, encumbrances
against "the leased property" without notice to Lessee and written approval
should be obtained from Lessee in amount of liens and/or charges exceeding
RMB650,000 whilst Lessee shall not refuse without reasonable reasons such
as affecting the status of the Lessee Agreement. In case if Lessor defaults
in any mortgage, liens or encumbrances and Lessee paid on his behalf, such
amount should be deducted in the rental payment payable by Lessee to
Lessor. In addition to any other remedies that Lessee may have, Lessee may
offset the amount of any indemnification under this agreement or for any
other breach of any representation or warranty made by Lessor in this
agreement against the next payments then still outstanding under the lease.
9. Noncompetition
The Noncompetition Agreement set forth in Appendix 3 to the Joint Venture
Agreement shall continue in effect during the entire term of the lease and
for a period of ten (10) years from the purchase of the leased property by
Lessee and shall apply to all of the current and proposed business of the
Joint Venture as described in Article 8 of the Joint Venture Agreement as
well as the amplifier business being transferred to the Joint Venture.
10. After signing this agreement, this agreement will be automatically invalid
if not
<PAGE>
approved by any required government agency or in the event Lessor
involuntarily loses the ownership of or right to lease the leased property.
Lessor shall return its security deposit and prepaid rental to Lessee
with interest and based on the bank's loan interest rate calculating from
the date received security deposit until the date return the security
deposit and prepaid rental to Lessee. In the event that Lessee does not
obtain and transfer the necessary manufacturing license and product safety
license from the Minister of Electronic Industry so as to avoid any
interruption in the continuation of the Lessee's operations during the
lease term, Lessee may immediately terminate the lease without further
obligation to Lessor. Lessee will be responsible for the normal fees
including travelling expenses related for the transfer of above licenses to
Lessee. And after the expire of the Lease Agreement, Lessee will assist to
transfer the above license back to Lessor and Lessor will be responsible
for all the related cost.
11. Within ten (10) days after the lease expires, Lessee shall pay cleaning
fees and return the property to Lessor keeping the normal conditions, hold
over will be paid as rent under the lease calculated based on the last
rent, if the leased property can not be repaired or incurred damages to
Lessor's leased property, Lessee shall be responsible to pay the actual
cost.
12. During the leasehold, Lessee may exercise the option either to purchase
part of, or the entire leased property, the purchase price shall be based
on the acceptable appraisal report agreed upon by both parties, then the
separate purchase contract shall be signed.
13. This agreement is executed in both Chinese and English versions shall be
equally binding. Both parties agree to sign Chinese version first, the
English version shall be signed thereafter, during the leasehold, if
disputes arising between both parties, the Chinese and English versions to
be referred.
14. All uncovered areas, shall be resolved through friendly negotiations
between the parties. If negotiations are unsuccessful, the dispute shall be
submitted to the China International Economic and Trade Arbitration
Commission for arbitration, according to its provisional rules of
arbitration procedure. The arbitration award shall be final and binding on
both parties. The required costs shall be borne by the losing party. During
the arbitration proceeding, this agreement shall continue to be performed
except for the portion which is subject to the dispute under arbitration.
15. This agreement shall apply the rule of laws of China.
<PAGE>
16. This agreement is binding upon signing both Chinese and English versions,
when the security deposit and rent are received by Lessor. This agreement
pertaining both Chinese and English version, there are four (4) original
copies of each version, licensor and licensee keep one set, the rest shall
be submitted to the proper government authority for records.
Lessor: Panyu Tian Le Electrical Lessee: Panyu D.V.S. Electrical
Appliance Manufacturing Appliance Manufacturing
Co., Ltd.
[SEAL] [SEAL]
By: /s/ Su Xin Rong By: /s/ Dr. Edmund Sun
-------------------------------- --------------------------------
Legal Representative: Mr. Su Xin Rong Legal Representative: Dr. Edmund Sun
December 27, 1997
<PAGE>
EXHIBIT 10.3
JOINT VENTURE PARTNER SUBSTITUTION AGREEMENT
Majority Partner: D.V.S. H.K. Limited ("DVS")
Legal Address: Unit 22-23A, Level 18, Landmark North, 39 Lung Sum
Avenue, Sheung Shui, New Territories, Hong Kong
Legal Representative: Dr. Edmund Sun
New Minority Partner: Pacific Electrical Manufacturing Co., Ltd. ("Pacific")
Legal Address: Beijing Minzu Hotel, 51 Fuxingmennel Street, Suites
2205-2206, Beijing, China 100031
Legal Representative: Dr. An Yueh Zehan
WHEREAS, DVS and Panyu Tian Le Electrical Manufacturing Co. ("Tian Le")
entered into a Joint Venture Contract in August 1997, pursuant to which the
Panyu D.V.S. Electrical Appliances Manufacturing Co., Ltd. was formed (the
"Joint Venture"); and
WHEREAS, the Joint Venture was initially owned 51% by DVS and 49% by Tian
Le, and in December 1997, DVS purchased from Tian Le its entire 49% interest in
the Joint Venture, with the agreement that Tian Le would hold a 10% interest in
the Joint Venture for the benefit of DVS's new Joint Venture Partner until DVS
had identified a new Joint Venture partner; and
WHEREAS, DVS and Pacific have agreed that Pacific will acquire the 10%
interest in the Joint Venture currently held by Tian Le, subject to the terms
and conditions set forth below;
NOW, THEREFORE, the parties hereto agree as follows:
1. DVS and Pacific agree that Pacific shall acquire the 10% interest in the
Joint Venture previously held by Tian Le for full consideration of 100 RMB.
(Dr. An agrees to form a company in Panyu, Guangdong province, China to
effectuate such acquisition in accordance with the requirements of Chinese
law.)
2. Pacific's 10% interest in the Joint Venture shall be subject to repurchase
by DVS at any time, at DVS's sole discretion, for an aggregate amount equal
to 100 RMB.
3. Pacific agrees that from the date of this agreement until such time as DVS
has recovered all of its contributed capital from the Joint Venture (in
addition to any profits from operations), DVS shall receive all profits
from the operation of and capital distribution from the Joint Venture
including (a) profits that would otherwise be payable to Pacific as a
return on his 10% interest in the Joint Venture and (b) any return of
Pacific's capital contributed to the Joint Venture (which shall be the
capital contributed by Tian Le).
4. Pacific shall assist DVS in obtaining any required governmental approvals
necessary to complete the substitution of Pacific for Tian Le as DVS's new
Joint Venture partner.
5. DVS shall be entitled to designate all of the directors, the General
Manager and all other personnel for the Joint Venture and to otherwise
direct the management of the Joint Venture.
<PAGE>
6. Dr. An is the sole owner of Pacific, which is serving as a Joint Venture
partner, Dr. An shall be appointed the General Counsel for the Joint
Venture during the period that he is a Joint Venture partner. Dr. An shall
not receive any special compensation for his service as General Counsel,
but he shall be entitled to be compensated for his legal services provided
to the Joint Venture at his usual and customary rate or as otherwise agreed
to by Dr. An and the Joint Venture.
7. DVS agrees to pay the costs of completing the substitution of Pacific for
Tian Le.
8. DVS agrees to hold Pacific harmless and free of any obligations, contingent
liabilities, or other costs resulting from any obligations or liabilities
which have accrued, or may accrue from the Joint Venture and its operations
in connection with Pacific's acquisition of the 10% interest in the Joint
Venture formerly held by Tian Le, including without limitation for the
payment of taxes, legal fees or other costs resulting from such
acquisition. Notwithstanding the foregoing, Pacific agrees that Pacific
shall be fully responsible for any obligations, contingent liabilities or
other costs resulting from Pacific's failure to timely make all filings and
obtain all consents required to be filed or obtained by Pacific in
connection with its acquisition of the 10% interest in the Joint Venture.
9. Following the substitution of Dr. An's company "Pacific" for Tian Le as a
10% holder in the Joint Venture, the Joint Venture shall maintain its
current form of organization as a limited liability company and equity
joint venture in accordance with the Law of the People's Republic of China
on Sino-Foreign Equity Joint Ventures and other relevant laws and
regulations of China and the province of Guangdong.
10. All issues not expressly covered by this agreement shall be resolved by
good faith negotiations between the parties. If negotiations are
unsuccessful, any dispute shall be submitted to the China International
Economic and Trade Arbitration Commission for arbitration according to its
provisional rules of arbitration procedure. The arbitration award shall be
final and binding on both parties. The costs of such arbitration
(including reasonable legal fees) shall be borne by the DVS party. During
the arbitration proceeding, this agreement shall continue to be performed
except for the portion which is subject to the dispute under arbitration.
11. All disputes arising in connection with this agreement shall apply the rule
of laws of China.
12. This agreement has been memorialized in both Chinese and English, and each
such version, when duly executed, shall be a valid and binding legal
document. There are two (2) original copies of each version, and each
party shall keep a copy of both the Chinese and the English version.
13. This agreement is binding upon signing by the legal representatives of both
parties.
MAJORITY JOINT VENTURE PARTNER: MINORITY JOINT VENTURE PARTNER
D.V.S. H.K. Limited Pacific Electrical
Manufacturing Co., Ltd.
By: By:
--------------------------- ----------------------------
Name: Name:
Title: Title:
<PAGE>
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
--------------------
THIS EMPLOYMENT AGREEMENT ("Employment Agreement"), dated as of this 23rd
day of January, 1998 (the "Effective Date"), is entered into by and between
Digital Video Systems, Inc. ("Company"), and Edward Miller ("Executive"). In
consideration of the mutual covenants and agreements hereinafter set forth, the
parties agree as follows:
<PAGE>
1. EMPLOYMENT.
----------
1.1 Position. During the Employment Term (as hereinafter defined) and
--------
subject to the terms and conditions set forth herein, the Company agrees to
employ Executive as its Chief Financial Officer, reporting directly to Tom
Parkinson, President and Chief Operating Officer of the Company.
1.2 Duties. Executive will be employed as Chief Financial Officer.
------
Executive shall diligently, and to the best of his ability, perform all such
duties incident to his position and use his best efforts to promote the
interests of the Company.
1.3 Time to be Devoted to Employment. During the Employment Term,
--------------------------------
Executive shall devote his full time and energy to the business of the Company
and shall not be engaged in any competitive business activity without the
express written consent of the Company. Executive hereby represents that he is
not a party to any agreement which would be an impediment to entering into this
Employment Agreement and that he is permitted to enter into this Employment
Agreement and perform the obligations hereunder.
2. COMPENSATION AND BENEFITS.
-------------------------
2.1 Annual Salary. In consideration of and as compensation for the
-------------
services agreed to be performed by Executive hereunder, the Company agrees to
pay Executive a starting annual base salary of One Hundred Thirty-Five Thousand
Dollars ($135,000), payable in accordance with the Company's regular payroll
schedule ("Base Salary"), less applicable withholdings and deductions. The Base
Salary will be subject to change at the sole discretion of the Board of
Directors of the Company (the "Board").
2.2 Bonus. The Company shall pay Executive an annual bonus, payable at
-----
the end of each fiscal year of the Employment Period, of a minimum of twenty
percent (20%) of his then current Base Salary and a maximum of fifty percent
(50%) of his then current Base Salary 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 and Chief Operating Officer.
2.3 Stock Options. Subject to Board approval, Executive shall be granted
-------------
an option pursuant to the 1996 Stock Option Plan to purchase 135,000 shares of
Common Stock of Digital Video Systems, Inc. (the "Option"). The Option shall be
an incentive stock option to the extent permissible by law, and the exercise
price per share will be equal to the fair market value of a share of the
Company's Common Stock on the option grant date. The Option shall vest and
become exercisable in a series of forty-eight (48) equal successive monthly
installments upon Executive's completion of each month of service with the
Company over the forty-eight (48) month period measured from Executive's first
date of employment. The Option shall be evidenced by the Company's form Stock
Option Agreement, a copy of which is attached hereto as Exhibit A, and shall be
subject to all the terms of the Stock Option Agreement and the Company's 1996
Stock Option Plan under which the Option is granted and which is attached hereto
as Exhibit B.
2.4 Participation in Benefit Plans. During the Employment Term, Executive
------------------------------
shall be entitled to participate in any pension, group insurance, medical
hospitalization, annual physical, disability or other similar benefit plan, to
the extent permitted by law, that may from time to time be adopted by the Board,
that is generally available to the other executive officers of the Company. The
Company reserves the right to amend, modify or terminate any employee benefits
at any time for any reason.
2.5 Reimbursement of Expenses. The Company shall reimburse Executive for
-------------------------
all reasonable business expenses incurred by Executive on behalf of the Company
during the Employment Term, provided that: (i) such reasonable expenses are
ordinary and necessary business expenses incurred on behalf of the Company, and
(ii) Executive provides the Company with itemized accounts, receipts and other
documentation for such reasonable expenses as are reasonably required by the
Company.
2.6 Paid Time Off. During the Employment Term, Executive will be entitled
-------------
to three (3) weeks of paid time off per annum.
3. EMPLOYMENT TERM.
---------------
3.1 Employment Term. The "Employment Term" means the period commencing on
---------------
the week of January 12, 1998 and terminating on the earlier of April 15, 1999 or
as set forth in Section 4.1.
3.2 Notice of Renewal. At least thirty (30) days prior to April 15, 1999
-----------------
and thirty (30) days prior to each one year anniversary thereafter, if
applicable, the Company shall give Executive written notice of whether the
<PAGE>
Company will be seeking a one-year extension of Executive's services under this
Employment Agreement or subsequent one-year period, if applicable. Unless such
notice indicates that there will be no extension, the terms of this Employment
Agreement shall be automatically renewed for successive one-year periods.
However, Executive's employment with Employer will continue unless terminated by
Executive or the Company as set forth in Section 4.1.
4. TERMINATION OF EMPLOYMENT.
-------------------------
4.1 Method of Termination. Executive's employment pursuant to this
---------------------
Employment Agreement and the Employment Term provided for herein shall terminate
upon the first of the following to occur:
(i) Executive's death;
(ii) Date that written notice is deemed given or made by the
Company to Executive that as a result of any physical or mental injury or
disability, he is unable to perform the essential functions of his job, with or
without reasonable accommodation. Such notice may be issued when the Board has
reasonably determined that Executive has become unable to perform substantially
his services and duties hereunder with or without reasonable accommodation
because of any physical or mental injury or disability, and that it is
reasonably likely that he will not be able to resume substantially performing
his services and duties on substantially the terms and conditions as set forth
in this Employment Agreement;
(iii) Date that written notice is deemed given or made by the
Company to Executive of termination for "cause." For purposes of this Employment
Agreement, "cause" shall mean any one of the following:
(A) Gross negligence or the repeated failure of Executive to
perform his duties and responsibilities to the reasonable satisfaction of the
Board or any breach by Executive of his fiduciary duties to the Company or any
material term of this Employment Agreement. For purposes of this Employment
Agreement, any act or acts or omission or omissions by Executive that have a
material adverse effect on the Company's operations, prospects, reputation or
business shall be deemed to be a breach of his duties and responsibilities to
the Company; or
(B) The conviction of Executive for a felony.
(iv) Executive's resignation, voluntary departure, or departure
pursuant to Sections 4.1(i) or 4.1(ii) of this Employment Agreement as an
employee of the Company; or
(v) Date that written notice is deemed given or made by the
Company to Executive of Executive's termination without "cause."
Nothing herein alters Executive and the Company's separate right to terminate
the employment relationship at any time, for any reason, with or without cause.
4.2 Effect of Termination for Cause, Executive's Resignation or Other
-----------------------------------------------------------------
Events. Upon (i) the termination of Executive for cause; (ii) Executive's
- ------
resignation or voluntary departure; or (iii) Executive's departure pursuant to
Section 4.1(i) (death) or 4.1(ii) (disability) of this Employment Agreement,
Executive will not be entitled to any additional compensation or other rights or
benefits from the Company; and, as a result, the Company shall be obligated to
pay Executive only that portion of his Base Salary that Executive has earned
prior to the effective date of the termination of Executive's employment with
the Company.
4.3 Effect of Termination without Cause. In the event the Company
-----------------------------------
terminates Executive's employment with the Company without cause, Executive
shall receive his salary earned through the date of such termination and a lump
sum severance payment equal to twenty percent (20%) of his then existing Base
Salary.
4.4 Resignation as an Officer and Director. In the event Executive's
--------------------------------------
employment with the Company terminates for any reason, Executive agrees to
immediately resign as an officer and/or director of the Company.
5. CONFIDENTIAL INFORMATION AND COVENANT NOT TO COMPETE.
----------------------------------------------------
5.1 Executive understands that the Company and its affiliates possess
Proprietary Information (as defined below) which is important to its business
and that this Employment Agreement creates a relationship of confidence and
trust between Executive and the Company and its affiliates with regard to
Proprietary Information.
<PAGE>
Nothing in this Section 5 shall be deemed modified or terminated in the event of
the termination or expiration of this Employment Agreement.
5.2 For purposes of this Employment Agreement, "Proprietary Information" is
information that was or will be developed, created, or discovered by or on
behalf of the Company and its affiliates and predecessors, or is developed,
created or discovered by Executive while performing services under this
Employment Agreement, or which became or will become known by, or was or is
conveyed to the Company and its affiliates which has commercial value in the
Company's and its affiliates' business. "Proprietary Information" includes, but
is not limited to, trade secrets, ideas, techniques, business, product, or
franchise development plans, customer information, franchisee information and
any other information concerning the Company's and its affiliates' actual or
anticipated business, development, personnel information, or which is received
in confidence by or for the Company and its affiliates from any other person.
5.3 At all times, both during the term of this Employment Agreement and
after its termination, Executive will keep in confidence and trust, and will not
use or disclose, any Proprietary Information without the prior written consent
of the Board.
5.4 Executive understands that the Company and its affiliates possess or
will possess "Company Documents" which are important to its business. For
purposes of this Employment Agreement, "Company Documents" are documents or
other media that contain or embody Proprietary Information or any other
information concerning the business, operations or plans of the Company and its
affiliates, whether such documents have been prepared by Executive or by others.
"Company Documents" include, but are not limited to, blueprints, drawings,
photographs, charts, graphs, notebooks, customer lists, computer disks,
personnel files, tapes or printouts and other printed, typewritten or
handwritten documents. All Company Documents are and shall remain the sole
property of the Company. Executive agrees not to remove any Company Documents
from the business premises of the Company or deliver any Company Documents to
any person or entity outside the Company, except as required to do in connection
with performance of the services under this Employment Agreement. Executive
further agrees that, immediately upon the Company's request and in any event
upon completion of Executive's services, Executive shall deliver to the Company
all Company Documents, apparatus, equipment and other physical property or any
reproduction of such property.
5.5 During the term of this Employment Agreement and for one year
thereafter, Executive will not encourage or solicit any employee of the Company
or any affiliate to leave the Company or any affiliate for any reason.
5.6 Non-Competition.
---------------
A. During the Employment Term, Executive shall not directly or
indirectly:
(i) own, manage, operate, join, control or participate in the
ownership, management, operation or control of, or be employed by or connected
in any manner with, any enterprise which is engaged in any business competitive
with that which the Company is at the time conducting or proposing to conduct;
provided, however, that such restriction shall not apply to any passive
- --------
investment representing an interest of less than two percent (2%) of an
outstanding class of publicly traded securities of any corporation or other
enterprise which is not, at the time of such investment, engaged in a business
geographically competitive with the Company's business; or
(ii) encourage or solicit any Company employee to leave the
Company's employ for any reason or interfere in any material manner with
employment relationships at the time existing between the Company and its
current employees, except as may be required in any bona fide termination
decision regarding any Company employee.
5.7 Executive acknowledges that the specialized nature of his knowledge of
the Company's Proprietary Information, trade secrets and other intellectual
property are such that a breach of his covenant not to compete or
confidentiality obligations contained in this Section 5 of this Employment
Agreement would necessarily and inevitably result in a disclosure,
misappropriation and misuse of such Proprietary Information, trade secrets and
other intellectual property. Accordingly, Executive acknowledges and agrees that
such a breach would inflict unique and irreparable harm upon the Company and
that the Company shall be entitled, in addition to its other rights and
available remedies, to enforce, by injunction or decree of specific performance,
Executive's obligations set forth herein.
6. RESTRICTIVE COVENANT.
--------------------
During the Employment Term:
<PAGE>
6.1 Executive shall devote substantially all of his time and energy to the
performance of Executive's duties described herein, except during periods of
illness or paid time off.
6.2 Executive shall not directly or indirectly provide services to or
through any person, firm or other entity except the Company, unless otherwise
authorized by the Company in writing.
6.3 Executive shall not render any services of any kind or character for
Executive's own account or for any other person, firm or entity without first
obtaining the Company's written consent.
6.4 Notwithstanding the foregoing, Executive shall have the right to
perform such incidental services as are necessary in connection with (i) his
private passive investments, but only if Executive is not obligated or required
to (and shall not in fact) devote any managerial efforts which interfere with
the services required to be performed by him hereunder, (ii) his charitable or
community activities or (iii) participation in trade or professional
organizations, but only if such incidental services do not significantly
interfere with the performance of Executive's services hereunder.
7. MISCELLANEOUS.
-------------
7.1 Notices. All notices, demands and requests required by this
-------
Employment Agreement shall be in writing and shall be deemed to have been given
or made for all purposes (i) upon personal delivery, (ii) one day after being
sent, when sent by professional overnight courier service, (iii) five days after
posting when sent by registered or certified mail, or (iv) on the date of
transmission when sent by telegraph, telegram, telex, or other form of "hard
copy" transmission, to either party hereto at the address set forth below or at
such other address as either party may designate by notice pursuant to this
Section 7.
If to the Company, to:
Digital Video Systems, Inc.
160 Knowles Dr.
Los Gatos, CA 95032
If to Executive, to:
___________________________________
___________________________________
___________________________________
7.2 Assignment. This Employment Agreement shall be binding on, and shall
----------
inure to the benefit of, the parties hereto and their respective heirs, legal
representatives, successors and assigns; provided, however, that Executive may
not assign, transfer or delegate his rights or obligations hereunder and any
attempt to do so shall be void.
7.3 Deductions. All amounts paid to Executive hereunder are subject to
----------
all withholdings and deductions required by law, as authorized under this
Employment Agreement, and as authorized from time to time.
7.4 Entire Agreement. This Employment Agreement contains the entire
----------------
agreement of the parties with respect to the subject matter hereof, and all
prior agreements, written or oral, are merged herein and are of no further force
or effect.
7.5 Amendment. This Employment Agreement may be modified or amended only
---------
by a written agreement signed by a member of the Compensation Committee Board of
Directors of the Company and Executive.
7.6 Waivers. No waiver of any term or provision of this Employment
-------
Agreement will be valid unless such waiver is in writing signed by the party
against whom enforcement of the waiver is sought. The waiver of any term or
provision of this Employment Agreement shall not apply to any subsequent breach
of this Employment Agreement.
7.7 Counterparts. This Employment Agreement may be executed in several
------------
counterparts, each of which shall be deemed an original, but together they shall
constitute one and the same instrument.
7.8 Severability. The provisions of this Employment Agreement shall be
------------
deemed severable, and if any part of any provision is held illegal, void or
invalid under applicable law, such provision may be changed to the
<PAGE>
extent reasonably necessary to make the provision, as so changed, legal, valid
and binding. If any provision of this Employment Agreement is held illegal, void
or invalid in its entirety, the remaining provisions of this Employment
Agreement shall not in any way be affected or impaired but shall remain binding
in accordance with their terms.
7.9 Governing Law. THIS EMPLOYMENT AGREEMENT AND THE RIGHTS AND
-------------
OBLIGATIONS OF THE COMPANY AND EXECUTIVE HEREUNDER SHALL BE DETERMINED UNDER,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA
AS APPLIED TO AGREEMENTS AMONG CALIFORNIA RESIDENTS ENTERED INTO AND TO BE
PERFORMED ENTIRELY WITHIN CALIFORNIA.
7.10 Arbitration. The Executive understands and agrees that, as a condition
-----------
of his employment with the Company, any and all disputes that the Executive may
have with the Company, or any of its employees, officers, directors, agents or
assigns, which arise out of the Executive's employment or investment or
compensation shall be resolved through final and binding arbitration, as
specified in this Employment Agreement. This shall include, without limitation,
any controversy, claim or dispute of any kind, including disputes relating to
any employment by the Company or the termination thereof, claims for breach of
contract or breach of the covenant of good faith and fair dealing, infliction of
emotional distress, defamation and any claims of discrimination, harassment or
other claims under Title VII of the Civil Rights Act of 1964, the Age
Discrimination in Employment Act, the Americans With Disabilities Act, the
Employee Retirement Income Securities Act, or any other federal, state or local
law or regulation now in existence or hereinafter enacted and as amended from
time to time concerning in any way the subject of the Executive's employment
with the Company or its termination. The only claims not covered by this
---
Employment Agreement are claims for benefits under the unemployment insurance or
workers' compensation laws, and any claims pursuant to paragraph 5 of this
Employment Agreement which will be resolved pursuant to those laws. Any disputes
and/or claims covered by this Employment Agreement shall be submitted to final
and binding arbitration to be conducted in Santa Clara County, California, in
accordance with the rules and regulations of the American Arbitration
Association. The Executive and the Company will split the cost of the
arbitration filing and hearing fees and the cost of the arbitrator. Each side
will bear its own attorneys' fees, and the arbitrator will not have authority to
award attorneys' fees unless a statutory section at issue in the dispute
------
authorizes the award of attorneys' fees to the prevailing party, in which case
the arbitrator has authority to make such award as permitted by the statute in
question. The arbitration shall be instead of any civil litigation; this means
that the Executive is waiving any right to a jury trial, and that the
---------------------------------
arbitrator's decision shall be final and binding to the fullest extent permitted
by law and enforceable by any court having jurisdiction thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Employment
Agreement as of the date first above written.
DIGITAL VIDEO SYSTEMS, INC.
By:
----------------------------------------
Name: Tom Parkinson
Title: President and Chief Operating Officer
----------------------------------------
Edward Miller
<PAGE>
EXHIBIT 10.5
MULTI-TENANT
NET LEASE AGREEMENT
1. Parties. This Lease is made this 29TH day of AUGUST, 1997, by and
-------
between DELL ENTERPRISES, a California Limited partnership, as "Landlord", and
----------------
DIGITAL VIDEO SYSTEMS, INC., a California Corporation, as "Tenant".
- --------------------------
2. Premises. Landlord hereby Leases to Tenant and Tenant hereby Leases
--------
from Landlord upon the terms and conditions herein set forth the real property,
with improvements (including any improvements as defined in Paragraph 6),
described as follows: APPROXIMATELY 23,516 SQUARE FEET OF SPACE AT 160 KNOWLES
--------------------------------------------------------
DRIVE, LOS GATOS, CALIFORNIA, BEING PART OF A LARGER BUILDING OF 48,384 SQUARE
- ------------------------------------------------------------------------------
FEET, AND PART OF A TOTAL BUILDING SQUARE FOOTAGE OF 156,044 SQUARE FEET FOR THE
- --------------------------------------------------------------------------------
PARCEL. Such real property, with improvements, shall hereinafter be referred to
- ------
as the "Premises".
3. Term. The term of this Lease shall commence on the 1ST, day of
----
OCTOBER, 1997, and shall expire on the 30TH, day of SEPTEMBER, 2000, unless
sooner terminated pursuant to the provisions of this Lease.
-1-
<PAGE>
4. Rent. Tenant shall pay to Landlord as rent for the Premises, without
----
deduction or offset, prior notice or demand, in advance, on the first day of
each calendar month of the term hereof, the following:
SEE ADDENDUM
- ------------
5. Security Deposit. Upon execution of this Lease, Tenant shall deliver
----------------
to Landlord in cash a sum equal to THIRTY NINE THOUSAND NINE HUNDRED SEVENTY
-----------------------------------------
SEVEN AND 20/100 Dollars ($39,977.20), as security for Tenant's faithful
- ---------------- ------------
performance of Tenant's obligations under the Lease (the "Deposit"). If Tenant
fails to pay rent or other charges due under the Lease, or otherwise defaults
with respect to any provision of the Lease, Landlord may use, apply or retain
all or any portion of the Deposit for the payment of any rent or other charge in
default or for the payment of any other sum to which Landlord may become
obligated by reason of Tenant's default, or to compensate Landlord for any
expenditures, loss or damage which Landlord may suffer thereby, including but
not limited to costs incurred by Landlord to repair damage to the Premises, or
to clean the same upon expiration or sooner termination of the Lease. If
Landlord so uses or applies all or any portion of the Deposit, Tenant shall
within five (5) days after written demand therefor deposit cash with Landlord in
an amount sufficient to restore the Deposit to the full amount hereinabove
stated and Tenant's failure to do so shall be a breach of the Lease. Landlord
shall not be required to keep the Deposit separate from its general accounts. If
Tenant performs all of Tenant's obligations under the Lease, the Deposit or so
much thereof so has not theretofor been applied by Landlord, shall be returned,
without payment of interest or other increments for its use, to Tenant (or, at
Landlord's option, to the last assignee, if any, of Tenant's interest under the
Lease) within thirty (30) days after the later of the expiration of the term of
the Lease, or the date on which Tenant shall vacate the Premises.
6. Interior Improvements. PER ATTACHED EXHIBIT "AA" AND ADDENDUM.
--------------------- --------------------------------------
7. Use of Premises. Tenant shall use the Premises only in conformance
---------------
with applicable governmental laws, regulations, rules and ordinances for the
purpose of GENERAL OFFICE, RESEARCH & DEVELOPMENT, MARKETING, SALES, LIGHT
---------------------------------------------------------------
ASSEMBLY, STORAGE, AND OTHER RELATED LEGAL USES, and for no other purpose
- -----------------------------------------------
without Landlord's prior written consent.
Tenant shall indemnify, defend, and hold Landlord harmless against any loss,
expense, damage, attorney's fees or liability arising out of failure of Tenant
to comply with the preceding sentence. Tenant shall not commit or suffer to be
committed, any waste upon the Premises, or any nuisance, or other acts or things
which may disturb the quiet enjoyment of any other tenant in or around the
Premises, or allow any sale by auction upon the Premises or allow the Premises
to be used for any unlawful purposes, or place any loads upon the floor, walls
or ceiling of the Premises which endangers the structure, or place any harmful
liquids in the drainage system of the Premises. No waste materials or refuse
shall be dumped upon or permitted to remain upon any part of the Common Area (as
hereinafter defined) except in trash containers placed inside exterior
enclosures designated for that purpose by Landlord or inside of the Premises. No
material, supplies, equipment, finished products or semi-finished products, raw
materials or articles of any nature shall be stored upon or permitted to remain
on any portion of the Common Area.
-2-
<PAGE>
8. Taxes and Assessments.
----- --- ----------
(a) Tenant's Property. Tenant shall pay before delinquency any and
-------- --------
all taxes, assessments, license fees and public charges levied, assessed or
imposed upon or against Tenant's fixtures, equipment, furnishings, furniture,
appliances and personal property installed or located on or within the Premises.
Tenant shall cause said fixtures, equipment, furnishings, furniture, appliances
and personal property to be assessed and billed separately from the real
property of Landlord. If any of Tenant's said personal property shall be
assessed with Landlord's real property, Tenant shall pay Landlord the taxes
attributable to Tenant within ten (10) days after receipt of written statement
from Landlord setting forth the Taxes applicable to Tenant's property.
(b) Monthly Payments. All property taxes (as hereinafter defined)
------- --------
levied or assessed against the parcel of land outlined on Exhibit "D" attached
------- -
hereto and incorporated herein by this reference (the "Parcel"), and the
buildings and improvements thereon, which become due or accrued during the term
of this Lease, shall be a Common Area Charge. Landlord shall estimate the amount
of property taxes which will be levied against the Parcel for each year of the
Lease term, and Tenant shall pay each month one-twelfth (1/12th) of its share
thereof in accordance with Paragraph 13 hereof. Landlord's estimate of the
amount of property taxes for each year after the first (1st) year of the Lease
term shall be based on the amount of property taxes levied against the Parcel
for the immediately preceding year. At the end of each year of the Lease term,
Landlord shall determine the amount of Tenant's share of the property taxes
actually levied against the Parcel during such year, and shall reimburse Tenant
for any amounts paid by Tenant in excess of the amount actually owed by Tenant
to Landlord, or in the event the amounts paid by Tenant during said year are
less than the amount actually owed, Tenant shall pay to Landlord, upon written
demand therefor, the difference between the amount actually owed and the amount
paid.
Tenant's liability hereunder shall be prorated to reflect the commencement
and termination dates of this Lease. In the event the Building and any
improvements installed or construed therein by Tenant or Landlord are valued by
the assessor disproportionately higher than other buildings located on the
Parcel, Tenant's share of the property taxes shall be readjusted upwards
accordingly and Tenant agrees to pay such readjusted share. Such determination
shall be made by Landlord from the respective valuation assigned in the
assessor's work sheet or such other information as may reasonably be available.
Landlord's reasonable determination thereof, in good faith, shall be conclusive.
For the purposes of this Lease, the term "property taxes" means and
includes all taxes, assessments, taxes based on vehicles utilizing parking
areas, taxes based on rental income (other than federal and state income taxes),
Environmental Protection Agency charges, and any other governmental charges,
general and special, ordinary and extraordinary, of any kind and nature
whatsoever, applicable to the Parcel, including, but not limited to, assessments
for public improvements or benefits which heretofore or shall during the term of
this Lease, or any extension thereof, be assessed, levied, imposed upon or
become due and payable and a lien upon the Parcel, or any part thereof, but
excluding franchise, estate, inheritance, succession, capital levy, transfer or
excess profits tax imposed upon Landlord.
9. Insurance.
---------
(a) Tenant agrees to indemnify and defend Landlord against and hold
Landlord
-3-
<PAGE>
harmless from any and all claims, causes of action, judgments, obligations or
liabilities and all reasonable expenses incurred in investigating or resisting
the same (including reasonable attorney's fees), on account of, or arising out
of, the condition, use or occupancy of the Premises (excluding such loss or
liability caused by Landlord's active negligence or wilful misconduct). This
Lease is made on the express condition that Landlord shall not be liable for, or
suffer loss by reason of, injury to person or property, from whatever cause
(except Landlord's active negligence or wilful misconduct), in any way connected
with the condition, use or occupancy of the Premises, specifically including
without limitation any liability for injury to the person or property of Tenant,
its agents, offices, employees, licensees and invitees.
(b) Tenant shall, at Tenant's expense, obtain and keep in force during the
term of this Lease a policy of comprehensive public liability insurance insuring
Landlord and Tenant (and such other persons, firms, or corporations as are
designated by Landlord) against any liability arising out of the condition, use,
or occupancy of the Premises and all areas appurtenant thereto, including
parking areas. Such insurance shall be in an amount of not less than $1,000,000
combined single limit for bodily injury, death or property damage as a result of
any one occurrence. The insurance shall be with companies approved by Landlord,
which approval Landlord agrees not to unreasonably withhold. Tenant shall
deliver to Landlord, prior to possession, a certificate on insurance evidencing
the existence of the policy required hereunder and such certificate shall
certify that the policy (i) names Landlord as an additional insured, and (ii)
insures performance of the indemnity set forth in Paragraph 9(a) above.
(c) Tenant shall, at Tenant's sole expense, obtain and keep in force
during the term of this Lease, a policy or policies of fire insurance including
a standard "all risk" endorsement together with a sprinkler leakage endorsement
(if the Premises shall be sprinklered), insuring the merchandise, fixtures,
equipment and leasehold improvements of Tenant within the Premises for the full
replacement value thereof.
The proceeds from any of such policies shall be used for the repair or
replacement of such items so insured and Landlord shall have no interest in
such insurance.
(d) Tenant shall obtain and carry during the term of this Lease a policy
or policies of worker's compensation insurance and any other employee benefit
insurance respecting the Premises necessary to comply with California law.
(e) The insurance required to be obtained by Tenant pursuant to this
Paragraph 9 shall be primary insurance and shall provide that the insurer shall
be liable for the full amount of the loss up to and including the total amount
of liability set forth in the declarations without the right of contribution
from any other insurance coverage of Landlord. All insurance required by this
Paragraph shall be in a form satisfactory to Landlord, shall be carried with
companies acceptable to Landlord, and shall specifically provide that such
policies shall not be subject to cancellation or change except after at least
thirty (30) days prior written notice to Landlord. The policy or policies, or
duly executed certificates for them, together with satisfactory evidence of
payment of the premium thereon, shall be deposited with Landlord (i) prior to
the Commencement Date and (ii) upon renewal of such policies, which shall be
effected not less than thirty (30) days prior to the expiration date of the term
of such coverage.
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<PAGE>
(f) Landlord shall retain the right at any time to review the coverage,
form and amount of the insurance required by the Lease. If in the reasonable
opinion of Landlord, the insurance provisions in the Lease do not provide
adequate protection for Landlord and for members of the public using the
Premises, Landlord may require Tenant to obtain insurance sufficient in
coverage, form and amount to provide adequate protection.
(g) In the event Tenant shall fail from time to time to pay any premiums
required to be paid by Tenant for insurance pursuant to the Paragraph 9,
Landlord shall be entitled to pay the same on behalf of Tenant and Tenant shall
immediately reimburse to Landlord said amounts plus interest thereon at ten
percent (10%) per annum, as additional rent, upon written demand therefor.
(h) Landlord shall obtain and keep in force during the term of this Lease a
policy or policies of insurance covering loss or damage to the Premises, in the
amount of the full replacement value thereof, providing protection against those
perils included within the classification of "all risk" insurance and flood
insurance if available, plus a policy of rental income insurance in the amount
of 100% of 12 months rent (including sums paid as additional rent). The cost of
such insurance for the Parcel, including all buildings and improvements from
time to time located thereon, shall be a Common Area Charge and Tenant shall pay
to Landlord its share of said cost as provided in Paragraph 13 below. If such
insurance cost is increased due to Tenant's use of the Premises, Tenant agrees
to pay to Landlord the full cost of such increase. Tenant shall have no interest
in nor any right to the proceeds of any insurance procured by Landlord covering
the premises.
(i) Each party shall cause each insurance policy obtained by them pursuant
to their obligations under the Lease to provide that the insurance company
issuing said policy waives all right of recovery by way of subrogation against
the other party in connection with any damage covered by any such policy
provided that, such a clause does not prejudice said party's right to recover
under said policy.
10. Utilities. Tenant shall pay for all water, gas, light, heat, power,
---------
electricity, telephone, trash pick-up, sewer charges, and all other services
supplied to or consumed on the Premises. In the event that any of the utility
services are not separately metered to the Premises, Tenant shall pay, as
additional rent, a reasonable proportion to be determined by Landlord of all
charges jointly metered with other premises. In addition, the cost of any
utility services supplied to the Common Area of the Building or the Common Area
of the Parcel shall be a Common Area Charge and Tenant shall pay its share of
such cost to Landlord as provided in Paragraph 13 below.
In the event Tenant shall fail from time to time to pay any charges
required to be paid by Tenant for utilities pursuant to this Paragraph 10,
Landlord shall be entitled to pay the same on behalf of Tenant and Tenant shall
immediately reimburse to Landlord said amounts plus interest at ten percent
(10)% per annum, as additional rent, upon written demand therefor.
11. Repairs and Maintenance.
-----------------------
(a) Subject to the provisions of Paragraph 11 (b), Landlord shall at
its sole expense keep and maintain the roof, roof membrane, structural elements
and exterior walls of the building in good order and repair. In addition
Landlord shall keep and maintain the heating and air conditioning systems of
the Building. The cost of the repairs and maintenance of the heating and air
conditioning systems shall be a Building Common Area Charge and Tenant shall
reimburse Landlord for its prorata share of such costs pursuant to Paragraph 13
below.
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<PAGE>
below. Replacement of any heating and air conditioning systems, classified as
capital expenditures by generally accepted accounting principles (IRS Codes),
the cost thereof shall be amortized over the life of the equipment. Tenant shall
pay its prorate share over the remaining term of the Lease.
(b) Except as expressly provided in Paragraph 11 (a), Tenant shall, at
its sole cost, keep and maintain in good order, condition and repair the entire
Premises and every part thereof, including without limitation, the windows,
window frames, plate glass, glazing, truck doors, and all door hardware, the
interior walls and partitions, and the electrical, plumbing and lighting
systems.
(c) Should Tenant fail to make repairs required of Tenant hereunder
forthwith upon notice from Landlord, Landlord, in addition to all other remedies
available hereunder or by law, and without waiving any alternative remedies, may
make the same, and in the event, Tenant shall reimburse Landlord as additional
rent for the cost of such maintenance or repairs within ten (10) days of written
demand by Landlord.
(d) Tenant hereby expressly waives the provisions of subsection 1 of
Section 1932 and sections 1941 and 1942 of the Civil Code of California and all
rights to make repairs at the expense of Landlord as provided in section 1942 of
said Civil Code.
12. Common Area. Subject to the terms and conditions of this Lease and
------ ----
such rules and regulations as Landlord may from time to time prescribe, Tenant
and Tenant's employees, invitees and customers shall, in common with other
tenants of other buildings located on the Parcel, and their respective
employees, invitees and customers, and other entitled to the use thereof, have
the nonexclusive right, until termination of this Lease, to use the access
roads, parking areas, grounds and facilities provided and designated by Landlord
for the general use and convenience of all tenants of buildings located on the
Parcel. Said areas and facilities are referred to herein as the "Common Area",
and are initially defined as that area outlined on Exhibit "E", attached hereto
------- ---
and incorporated herein by this reference. The term "Common Area" shall include
the Common Area of the Building, which shall mean those areas within the
Building that are common shafts and elevators, common mechanical and electrical
rooms, common restroom facilities, common corridors, and the like. Landlord
reserves the right from time to time to make changes in the shape, size,
location, amount and extent of the Common Area. Landlord further reserves the
right to promulgate such reasonable rules and regulations relating to the use of
the Common Area, and any part or parts thereof, as Landlord may deem appropriate
for the best interests of the tenants of the buildings located on the Parcel.
The rules and regulations shall be binding upon Tenant upon delivery of a copy
of them to Tenant, and Tenants shall abide by them and cooperate in their
observance. Such rules and regulations may be amended by Landlord from time to
time, with or without advance notice, and all amendments shall be effective upon
delivery of a copy to Tenant.
Tenant shall not at any time park or permit the parking of Tenant's trucks
or other vehicles, or the trucks or other vehicles of others, adjacent to
loading areas so as to interfere in any way with the use of such areas, nor
shall Tenant at any time park or permit the parking of Tenant's vehicles or
trucks, or the vehicles or trucks of Tenant's suppliers or others, in any
portion of the Common Area not designated by Landlord for such use by Tenant.
Tenant shall not park or permit to be parked any inoperative vehicles or
equipment on any portion of the Common Area.
Landlord shall operate, manage and maintain the Common Area. The manner in which
the
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<PAGE>
Common Area shall be maintained and the expenditures for such maintenance shall
be at the sole discretion of Landlord. The cost of such maintenance, operation
and management, including Landscaping, and repair of paving and sidewalks, shall
be a Common Area Charge and Tenant shall reimburse to Landlord its share of such
costs as provided in Paragraph 13 below.
13. Common Area Charges. Tenant shall pay to Landlord, as additional
-------------------
rent, upon demand but not more often than once each calendar month, (i) an
amount equal to 15.07% of the Common Area Charges for the Parcel, and (ii) an
------
amount equal to 48.6% of Common Area Charges for the Building, as defined in
-----
this Lease.
14. Alterations.
-----------
(a) Tenant shall not make, or suffer to be made, any alternations,
improvements or additions in, on, about or to the Premises or any part thereof
greater than the cost of ONE THOUSAND Dollars ($1,000.00), without the prior
--- -------- -----------
written consent of Landlord, which consent shall not be unreasonable withheld,
and without a valid building permit issued by the appropriate governmental
authority.
(b) As a condition to giving its consent to any proposed
alterations, improvements or additions, Landlord may require that Tenant agree
to remove any such alterations, improvements or additions at the termination of
this Lease, and to restore the Premises to their prior condition. Unless
Landlord requires in writing that Tenant remove any such alterations,
improvements or additions, any alterations, additions or improvements to the
Premises shall become the property of Landlord upon installation and shall
remain upon and be surrendered with the Premises at the termination of this
Lease. Without limiting the generality of the foregoing, all heating, lighting,
electrical (including all wiring, conduits, outlets, drops, buss ducts, main and
subpanels), air conditioning, partitioning, drapery, and carpet installations
made by Tenant, regardless of how affixed to the Premises, together with all
other additions, alterations and improvements that have become an integral part
of the Premises, shall be and become the property of the Landlord upon
installation, and shall not be deemed trade fixtures, and shall remain upon and
be surrendered with the Premises at the termination of this Lease.
(c) Thirty (30) days prior to making any alterations, improvements or
additions in, on, about or to the Premises or any part thereof, which shall cost
in excess of TWO THOUSAND Dollars ($2,000.00), Tenant shall deliver to Landlord
--- -------- -----------
written notice in order to permit Landlord sufficient time to erect appropriate
notice of nonresponsibility for the same.
(d) If during the term thereof, any alteration, addition or change of
any sort applicable to all or any portion of the Premises is required by law,
regulation, ordinance or order of any public agency, Tenant, at its sole cost
and expense, shall promptly make the same. Subject to the foregoing, if during
the term hereof, any alteration, addition or change to the Common Area is
required by law, regulation, ordinance, or order of any public agency, the cost
of such alteration, addition, or change shall be a Common Area Charge and Tenant
shall pay its share of said costs to Landlord as provided in paragraph 13 above,
however, any cost exceeding Twenty Five Thousand Dollars ($25,000.00) shall be
amortized over the useful life of the improvement, and Tenant shall pay its
prorata share thereof. Landlord represents that to the best of his knowledge,
Landlord is in compliance with all applicable codes and regulations.
15. No Warranties. Tenant acknowledges that neither the Landlord nor
-- ----------
Landlord's
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<PAGE>
agents has made any representation or warranty as to the suitability of the
Premises for the conduct of Tenant's business. Any agreements, warranties or
representations not expressly contained herein shall in no way bind either
Landlord or Tenant, and Landlord and Tenant expressly waive all claims for
damages by reason of any statement, representation, warranty, promise or
agreement, if any, not contained in this Lease.
16. Parking. Tenant shall have the non-exclusive use of SEVENTY THREE (73)
------- ------------------
parking spaces in the Common Area as designated on Exhibit "A" attached hereto
------- ---
and incorporated herein by this reference.
17. Default.
-------
(a) A breach of this Lease shall exist if any of the following events
(hereinafter referred to as an "Event of Default") shall occur:
i. Tenant's failure to pay any installment of rent or other
payment required to be made by Tenant hereunder; within three (3) days written
notice is given to Tenant;
ii. Tenant's failure to perform any other term, convenant or
condition contained in this Lease and such failure shall have continued for
thirty (30) days after written notice of such failure is given to Tenant,
provided, however, that if the nature of Tenant's default is such that more than
thirty (30) days are reasonably required for its cure, then Tenant shall not be
deemed to be in default if Tenant commences such cure and diligently prosecutes
such cure to completion.
iii. Tenant's abandonment of the Premises;
iv. Tenant's assignment of its assets for the benefit of its
creditors;
v. The sequestration of, attachment of, or execution on, any
substantial part of the property of Tenant or on any property essential to the
conduct of Tenant's business on the Premises, and Tenant shall have failed to
obtain a return or release of such property within thirty (30) days thereafter,
or prior to sale pursuant to such sequestration, attachment or levy, whichever
is earlier; or
vi. An entry of any decree or order by a court having jurisdiction
(A) adjudging Tenant to be bankrupt or insolvent, (B) approving as properly
filed a case or arrangement under the bankruptcy laws or any other applicable
debtors' relief law or statute of the United States or any State thereof, (C)
appointing a receiver, trustee or assignee of Tenant in bankruptcy or insolvency
or for its property, or (D) directing the winding up or liquidation of Tenant;
and such decree or order shall have continued for a period of thirty (30) days;
or Tenant shall have voluntarily submitted to or filed a case or petition
seeking any such decree or order.
(b) Upon any Event of Default, Landlord shall have the following
remedies, in addition to all other rights and remedies provided by law, to which
Landlord may resort cumulatively, or in the alternative:
i. Landlord may reenter the Premises and, without terminating
this Lease, at any time relet the Premises or any part or parts of them, for the
account and in the name of Tenant or otherwise. Landlord may, at Landlord's
election, eject Tenant or any of Tenant's subtenants, assignees or other person
or persons claiming any right under or
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<PAGE>
through this Lease, and remove for storage Tenant's fixtures, equipment,
furnishings, furniture, appliances and personal property installed or located
on or within the Premises. Tenant shall nevertheless pay the Landlord on the due
date specified in this Lease all sums required of Tenant under this Lease, plus
Landlord's reasonable expenses, less the proceeds of any sublease or reletting.
The reasonable expense allowed Landlord shall include, without limitation, those
incurred to: retake possession of the Premises, (including attorneys' fees),
remove Tenant's property to storage, store Tenant's property, place the Premises
in good condition and alter them for reletting, secure new tenants (including
real estate broker's commissions), and fulfill all of Tenants covenants and
conditions to the end of the term. No act by or on behalf of Landlord under this
provision shall constitute a termination of this Lease unless Landlord expressly
terminates this Lease by delivering written notice thereof to tenant.
ii. Landlord shall be entitled to keep this Lease in full force and
effect (whether or not Tenant shall have abandoned the Premises) and to enforce
all of its rights and remedies under this Lease, including the right to recover
rent and other sums as they become due, plus interest at the rate of ten percent
(10%) per annum from the due date of each installment of rent or other sum until
paid.
iii. Landlord may terminate this Lease by giving Tenant written notice
of termination. On the giving of the notice, all of Tenant's rights in the
Premises and the Parcel shall terminate. Upon the giving of the notice of
termination, Tenant shall surrender and vacate the Premises in the condition
required by Paragraph 38, and Landlord may re-enter and take possession of the
Premises and all the remaining improvements of property and eject Tenant and any
one or more of Tenant's subtenants, assignees, or other person or persons
claiming any right under or through Tenant. This Lease may also be terminated by
a judgment specifically providing for termination. Any termination under this
paragraph shall not release Tenant from the payment of any sum then due Landlord
or from any claims for damages or rent previously accrued or then accruing
against Tenant. In no event shall any one or more of the following actions by
Landlord constitute a termination of this Lease:
(A) maintenance and preservation of the Premises;
(B) efforts to relet the Premises;
(C) appointment of a receiver in order to protect Landlord's
interest hereunder;
(D) consent to any subletting of the Premises or assignment of
this Lease by Tenant, whether pursuant to provisions hereof concerning
subletting and assignment or otherwise; or
(E) any other action by Landlord or Landlord's agents intended
to mitigate the adverse effects from any breach of this Lease of Tenant;
iv. In the event this Lease is terminated pursuant to Paragraph 17
(b) (iii) above, Landlord shall be entitled to damages in the following sums:
(A) the worth at the time of award of the unpaid rent which has
been earned at the time of termination; plus
(B) the worth at the time of award of the amount by which the
unpaid rent which would have earned after termination until the time of award
exceeds the
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<PAGE>
amount of such rental loss that Tenant proves could have been reasonably
avoided; plus
(C) the worth at the time of award of the amount by which
the unpaid rent for the balance of the term after the time of award exceeds the
amount of such rental loss that Tenant proves could be reasonably avoided; and
(D) any other amount necessary to compensate Landlord for
all detriment proximately caused by Tenant's failure to perform Tenant's
obligations under this Lease, or which in the ordinary course of things would be
likely to result therefrom including, without limitation, the following: (i)
expenses for cleaning, repairing or restoring the Premises; (ii) expenses for
altering, remodeling or otherwise improving the Premises for the purpose of
reletting, including installation of Leasehold improvements (whether such
installation be funded by a reduction of rent, direct payment or allowance to
Tenant, or otherwise); (iii) real estate broker's fees, advertising costs and
other expenses of reletting the Premises; (iv) cost of carrying the Premises
such as taxes and insurance premiums thereon, utilities and security
precautions; (v) expenses in retaking possession of the Premises; (vi)
attorney's fees and court costs; (vii) any unamortized real estate brokerage
commission paid in connection with this Lease.
(E) The "worth at the time of award" of the amounts referred
to in subparagraph (A) and (B) of this paragraph is computed by allowing
interest at the rate of ten percent (10%) per annum. The "worth at the time of
award" of the amount referred to in subparagraph (C) of this paragraph is
computed by discounting such amount at the discount rate of the Federal Reserve
Board of San Francisco at the time of award plus one percent (1%). The term
"rent" as used in this paragraph shall include all sums required to be paid by
Tenant to Landlord pursuant to the terms of this Lease.
18. Destruction. In the event the Premises are damaged or destroyed from
-----------
any peril that is covered by Landlord's insurance policy of the Premises (an
"insured" peril) and the cost to repair such damage or destruction exceeds fifty
percent, (50%) of the then replacement cost of the Premises, then Landlord may,
at its option:
(a) Rebuild or restore the Premises to their condition prior to the
damage or destruction; or
(b) Terminate this Lease.
If Landlord does not give Tenant notice in writing within thirty (30) days
from the destruction of the Premises of its election to either rebuild and
restore them, or to terminate this Lease, Landlord shall be deemed to have
elected to rebuild or restore them, in which event Landlord agrees, at its
expense, promptly to rebuild or restore the Premises to their condition prior to
the damage or destruction. In the event the Premises are damaged or destroyed
from any insured peril to the extent of fifty (50%) percent or less of the then
replacement cost of the Premises, Landlord shall, at Landlords expense, promptly
rebuild or restore the Premises to their condition existing prior to the damage
or destruction, and Tenant shall pay to Landlord upon commencement of
reconstruction an amount not to exceed FIVE THOUSAND Dollars ($5,000.00), of
---- -------- -----------
any deductible from the insurance policy. If Landlord does not complete the
rebuilding or restoring within ninety (90) days following the date of
destruction (such period of time to be extended for delays caused by the fault
or neglect of Tenant or because of acts of God, acts of public agencies, Labor
disputes, strikes, fires, freight embargos, rainy or stormy weather, inability
to obtain
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<PAGE>
materials, supplies or fuels, acts of contractors, or subcontractors, or delay
of the contractors or subcontractors due to such causes or other contingencies
beyond the control of Landlord), then Tenant shall have the right to terminate
this Lease by giving fifteen (15) days prior written notice to Landlord.
Landlord's obligation to rebuild or restore shall not include restoration of
Tenant's trade fixtures, equipment, merchandise, or any improvements,
alterations or additions made by Tenant to the Premises.
In the event that any portion of the Premises is destroyed or damaged by
uninsured peril, Landlord or Tenant may, upon written notice to the other, given
within thirty (30) days after the occurrence of such damage or destruction,
elect to terminate this Lease; provided, however, that either party may, within
thirty (30) days after receipt of such notice, elect to make any required
repairs and/or restoration at such party's sole cost and expense, in which event
this Lease shall remain in full force and effect, and the party having made such
election to restore and repair shall thereafter diligently proceed with such
repairs and/or restoration.
Unless this Lease is terminated pursuant to the foregoing provisions, this
Lease shall remain in full force and effect. Tenant hereby expressly waives the
provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4 of
the California Civil Code.
19. Condemnation.
------------
(a) For the purposes of this Paragraph 19, the term (i) "Taking"
means a taking the Premises or damage to the Premises related to the exercise of
the power of eminent domain and includes a voluntary conveyance, in lieu of
court proceedings, to any agency, public utility, person or corporate entity
empowered to condemn property; (ii) "Total Taking" means the taking of the
entire Premises or so much of the Premises as to prevent or substantially impair
the use thereof by Tenant for uses herein specified; provided, however, that in
no event shall the taking of Less than twenty percent (20%) of the Premises be
considered a Total Taking; (iii) "Partial Taking" means the taking of only a
portion of the Premises which does not constitute a Total Taking; (iv) "Date of
Taking" means the date upon which the title of the Premises or a portion
thereof, passes to and vests in the condemnor, or the effective date of any
order for possession if issued prior to the date title vests in the condemnor;
(v) "Award" means the amount of any award made, consideration paid, or damages
ordered as a result of a Taking.
(b) The parties agree that in the event of a Taking all rights
between them in and to an Award shall be set forth herein and Tenant shall have
no right to any Award except as set forth herein.
(c) In the event of a Total Taking during the term hereof (i) the
rights of Tenant under the Lease and the Leasehold estate of Tenant in and to
the Premises shall cease and terminate as of the date of Taking; (ii) Landlord
shall refund to Tenant any prepaid rent; (iii) Tenant shall pay the Landlord any
rent or charges due Landlord under the Lease, each prorated as of the date of
Taking; (iv) Tenant shall receive from the Landlord those portions of the Award
specifically identified as payment for trade fixtures of Tenant and for moving
expenses of Tenant; and (v) the remainder of the Award shall be paid to and be
the property of Landlord.
(d) In the event of a Partial Taking during the term hereof (i) the
rights of Tenant under the Lease, and the leasehold estate of Tenant in and to
the portion of the
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<PAGE>
Premises taken shall cease and terminate as of the Date of Taking; (ii) from
and after the Date of Taking, the monthly installment of rent shall be an amount
equal to the product obtained by multiplying the monthly installment of rent
immediately prior to the Taking by the quotient obtained by dividing the square
footage of the Premises after the Taking by the square footage of the Premises
prior to the Taking; (iii) Tenant shall receive from the Award the portions of
the Award specifically identified as payment for trade fixtures of Tenant; and
(iv) the remainder of the Award shall be paid to and be the property of
Landlord.
20. Mechanics' Liens. Tenant shall (a) pay for all labor and services
----------------
performed for, and materials used by or furnished to, Tenant, or any contractor
employed by Tenant, with respect to the Premises, and (b) indemnify, defend and
hold Landlord and the Premises harmless and free from any liens, claims,
demands, encumbrances, or judgments created or suffered by reason of any Labor
or services performed for, or materials used by or furnished to, Tenant or any
contractor or employees of Tenant with respect to the Premises, and (c) give
notice to Landlord in writing five (5) days prior to employing any laborer or
contractor to perform services related to, or receiving materials for use upon
the Premises, and (d) permit Landlord to post a notice of nonresponsibility in
accordance with the statutory requirements of California Civil Code Section 3094
or any amendment thereof. In the event Tenant is required to post an improvement
bond with a public agency in connection with the above, Tenant agrees to include
Landlord as an additional obligee.
21. Inspection of the Premises. Tenant shall permit Landlord and its
--------------------------
agents to enter the Premises at any reasonable time for the purpose of
inspecting the same, performing Landlord's maintenance and repair
responsibilities, posting a notice of non-responsibility for alterations,
additions or repairs, and at any time within ninety (90) days prior to
expiration of this Lease, to place upon the Premises, ordinary "For Lease" or
"For Sale" signs.
22. Compliance With Laws. Tenant shall, at its own cost, comply with all
--------------------
of the requirements of all municipal, county, state and federal authority now in
force, or which may hereafter be in force, pertaining to the use and occupancy
of the Premises, and shall faithfully observe all municipal, county, state and
federal statutes or ordinances now in force or which may hereafter be in force.
The judgment of any court of competant jurisdiction or the admission of Tenant
in any action of proceeding against Tenant, whether Landlord be a party thereto
or not, that Tenant has violated any such ordinance or statute in the use and
occupancy of the Premises shall be conclusive of the fact that such violation by
Tenant has occurred.
23. Hazardous Materials. Landlord makes the following representations to
-------------------
Tenant, each of which is made to the best of Landlord's knowledge as of the date
of the Lease and as of the Commencement Date and is subject to and qualified by
all information and disclosures made to Tenant by Landlord or obtained by Tenant
from other sources prior to the date of the Lease.
(a) The soil and ground water in, under, on or about the Parcel does
not contain Hazardous Materials (as defined below) in the amounts which violate
any Hazardous Materials Laws to the extent that any federal, state or local
governmental entity could require Landlord or Tenant to take any remedial action
with respect to such Hazardous Materials.
(b) No Litigation has been brought or threatened, nor any settlement
reached
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<PAGE>
with the federal, estate or local government entity or private party,
concerning the actual or alleged presence of Hazardous Materials in, under, on
or about the Parcel or any disposal, release, or threatened release of Hazardous
Materials in or about the Parcel.
(c) During the time that Landlord has owned the Project, Landlord has
received no notice of (i) any violation, or alleged violation, of any Hazardous
Material Law that has not been corrected to the satisfaction of the appropriate
authority, (ii) any pending claims relating to the presence of Hazardous
Material on the Parcel, or (iii) any pending investigation by any government
agency concerning the Parcel relating to Hazardous Materials.
To the extent caused by Tenant or Tenant's employees, agents or contractors,
Tenant agrees to indemnify Landlord, defend with counsel acceptable to Landlord,
and hold Landlord harmless from and against any claims (including real and
personal property damage), actions, administrative proceedings (including
informal proceedings), judgments, damages, punitive damages, penalties, fines,
costs, liabilities (including sums paid in settlement of claims), interests or
losses, attorneys' fees, including any fees and expenses incurred in enforcing
this indemnity from or in connection with the presence, suspected presence,
release or suspected release of any Hazardous Materials whether into the air,
soil, surface water or ground water at the Parcel, or any other violation of any
Hazardous Materials Laws.
To the extent caused by Landlord or Landlord's employees, agents or contractors,
Landlord agrees to indemnify Tenant, defend with counsel acceptable to Tenant,
and hold Tenant harmless from and against any claims (including real and
personal property damage), actions, administrative proceedings (including
informal proceedings), judgments, damages, punitive damages, penalties, fines,
costs, liabilities (including sums paid in settlement of claims), interests or
losses, attorneys' fees, including any fees and expenses incurred in enforcing
this indemnity from or in connection with the presence, suspected presence,
release or suspected release of any Hazardous Materials whether into the air,
soil, surface water or ground water at the Parcel, or any other violation of any
Hazardous Materials Laws.
24. Subordination.
-------------
(a) At the option of Landlord, the rights of Tenant under this Lease
shall be subject and subordinate to any mortgage or deed to trust which is or
may hereafter be placed upon the Premises, or any part thereof, by Landlord.
(b) Tenant shall, upon Landlord's request, promptly execute any
reasonable instrument (including an amendment to this Lease) or instruments of
subordination necessary to subordinate this Lease to any mortgage or deed of
trust now or hereafter placed upon the Premises, or any part thereof, by
Landlord in accordance with Paragraph 24 (a) above. Tenant agrees to recognize
any mortgagee or beneficiary of the deed of trust subsequently encumbering the
Premises and any party acquiring title to the Premises by judicial foreclosure
or a tustee's sale, as a successor to Landlord hereunder. If Tenant is required
to sign a subordination agreement, the Lender will provide Tenant with a
non-disturbance agreement at the time upon execution of the subordination
agreement.
24. Holding Over. This Lease shall terminate without further notice at the
------- ----
expiration of the Lease term. Any holding over by Tenant after expiration shall
not constitute a renewal or extension or give Tenant any rights in or to the
Premises except as expressly provided in this Lease. Any holding over after the
expiration with the express
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<PAGE>
written consent of Landlord shall be construed to be a tenancy from month to
month, at the monthly rent for the last month of the Lease term, and shall
otherwise be on the terms and conditions herein specified insofar as applicable,
unless otherwise mutually agreed upon.
26. Notices. Any notice required or desired to be given under this Lease
-------
shall be in writing with copies directed as indicated below and shall be
personally served or given by mail. Any notice given by mail shall be deemed to
have been given when forty-eight (48) hours have elapsed from the time such
notice was deposited in the United States mails, certified and postage prepaid,
addressed to the party to be served with a copy as indicated herein at the last
address given by that party to the other party under the provisions of this
part. At the date of execution of this Lease, the address of Landlord is:
DELL ENTERPRISES
----------------
1500 DELL AVENUE
----------------
CAMPBELL, CALIFORNIA 95008
--------------------------
and the address of Tenant is:
DIGITAL VIDEO SYSTEMS, INC.
--------------------------
160 KNOWLES DRIVE,
------------------
LOS GATOS, CALIFORNIA 95030
----------------------------
27. Late Charges. If any rent is not received by Landlord within ten (10)
------------
days after rent is due, Tenant shall pay to Landlord a late charge of EIGHTEEN
--------
HUNDRED EIGHTY ONE AND 28/100 Dollars ($1821.28) as liquidated damages, in lieu
- ------- ------ --- --- ------ ----------
of actual damages and attorney fees and costs. The parties agree that this late
charge represents a reasonable estimate of the expenses that Landlord will incur
because of any late payment in Rent (other than interest and attorney fees and
costs). Tenant shall pay the late charge as Additional Rent with the next
installment of Rent.
28. Attorney's Fees. In the event either party shall bring any action or
---------------
legal proceeding for damages for an alleged breach of any provision of this
Lease, to recover rent, to terminate the tenancy of the Premises, or to
enforce, protect or establish any term or covenant of this Lease or right or
remedy of either party, the prevailing party shall be entitled to recover as a
part of such action or proceeding, reasonable attorneys' fees and court costs,
including attorneys' fees and costs for appeal, as may be fixed by the court or
jury.
-14-
<PAGE>
30. Entire Agreement. This Lease shall constitute the sole and entire
------ ---------
agreement of the parties hereto with respect to the leasing of the Premises. No
modification of this Lease shall be effective for any purpose unless signed in
writing by both parties hereto.
31. Successors. The covenants and agreements contained in this Lease
----------
shall be binding on the parties hereto and on their respective heirs, successors
and assigns (to the extent the Lease is assignable).
32. Mortgagee Protection. In the event of any default on the part of
--------- ----------
Landlord, Tenant will allow beneficiary or mortgagee a reasonable opportunity to
cure the default, including time to obtain possession of the Premises by power
of sale or judicial foreclosure, if such should prove necessary to effect a
cure.
33. Landlord Loan or Sale. Tenant agrees promptly following request by
-------- ---- -- ----
Landlord (a) to execute and deliver to Landlord any documents, including
estoppel certificates, presented to Tenant by Landlord (i) certifying whether or
not this Lease has been modified and is in full force and effect, and stating
the date to which the rent and other charges are paid in advance, if at all,
(ii) stating whether or not there are, to Tenant's knowledge, any uncured
defaults on the part of Landlord hereunder, and (iii) evidencing the status of
the Lease as may be required either by a Lender making a loan to Landlord to be
secured by a deed of trust or mortgage covering the Premises or a purchaser of
the Premises from Landlord; and (b) to deliver to Landlord the current financial
statements of Tenant, including a balance sheet and profit and loss statement,
for the then current fiscal year and the two (2) immediately prior fiscal years,
all prepared in accordance with generally accepted accounting principles
consistently applied. Tenant's failure to deliver an estoppel certificate
promptly following such request shall be an Event of Default under this Lease.
34. Surrender of Lease not Merger. The voluntary or other surrender of
--------- -- ----- --- ------
this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger
and shall, at the option of Landlord, terminate all or any existing subleases,
or operate as an assignment to Landlord of all or any such subleases.
35. Waiver. The waiver of Landlord or Tenant of any breach of any term,
------
covenant or condition or any subsequent breach of the same or any other term,
covenant or condition
-15-
<PAGE>
herein contained shall not be deemed to be a waiver of such term, covenant or
condition or any subsequent breach of the same or any other term, covenant or
condition herein contained.
36. General.
-------
(a) The paragraph headings used in this Lease are for purposes of
convenience only, and shall not be construed to limit or amplify the meaning of
any part of this Lease.
(b) The term "Landlord" as used in this Lease, so far as the covenants
or obligations on the part of the Landlord are concerned, shall be limited to
mean and include only the owner at the time in question of the fee title of the
Premises, and in the event of any transfer or transfers of the title of such
fee, the Landlord herein named (and in case of any subsequent transfer or
conveyances, the then grantor) shall after the date of such transfer or
conveyance be automatically freed and relieved of all liability with respect to
performance of any covenants or obligations on the part of Landlord contained in
this Lease thereafter to be performed; provided, that any funds in the hands of
Landlord or the then grantor at the time of such transfer in which Tenant has an
interest, shall be turned over to the grantee. The covenants and obligations
contained in this Lease on the part of Landlord shall, subject to the foregoing,
be binding upon each Landlord, and its heirs, personal representatives,
successors and assigns, only during its respective period of ownership.
(c) Any executed copy of this Agreement shall be deemed an original
for all purposes.
(d) Time is of the essence for the performance of each term, covenant
and condition of this Lease.
(e) In case any one or more of the provisions contained herein, except
for the payment of rent, shall for any reason be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision of this Lease, but this Lease shall be
construed as if such invalid, illegal or unenforceable provision had not been
contained herein. This Lease shall be construed and enforced in accordance with
the laws of the State of California.
(f) If Tenant is more than one person or entity, each such person or
entity shall be jointly and severally liable for the obligations of Tenant
hereunder.
(g) Tenant agrees to execute any amendments required by a Lender to
enable Landlord to obtain permanent financing so long as Tenant's rights
hereunder are not substantially affected or its obligations not substantially
increased.
37. Signs. Tenant shall not place or permit to be placed any sign or
-----
decoration on the exterior of the Building, or elsewhere on the Parcel, without
the prior written consent of Landlord. Tenant, upon written notice by Landlord,
shall immediately remove any sign or decoration that Tenant has placed or
permitted to be placed on the Parcel or the exterior of the Building without the
prior written consent of Landlord, and if Tenant fails to so remove such sign
or decoration within five (5) days after Landlord's written notice, Landlord may
enter upon the Premises and remove said sign or decoration and Tenant agrees to
pay Landlord, as additional rent upon demand, the cost of such removal. Upon
-16-
<PAGE>
termination of this Lease, Tenant shall remove any sign which it has placed on
the Parcel or the Building, and shall repair any damage caused by the
installation or removal of such sign. Tenant shall be permitted to use the
existing street monument and the building sign, to place its company signs upon.
38. Interest on Past Due Obligations. Any amount due to Landlord hereunder
-------- -- ---- --- -----------
not paid when due shall bear interest at the rate of ten percent (10%) per annum
from the due date. Payment of such interest shall not excuse or cure any default
by Tenant under this Lease.
39. Surrender of the Premises. On the last day of the term hereof, or on
--------- -- --- --------
sooner termination of this Lease, Tenant shall surrender the Premises to
Landlord in the condition existing as of the Commencement Date of this Lease,
reasonable wear and tear expected, with all originally painted interior walls
washed, or repainted if marked or damaged, and all other interior walls cleaned
and repaired, all carpets shampooed and cleaned, and all floors cleaned and
waxed, all to the reasonable satisfaction of Landlord. Tenant shall remove all
of Tenant's personal property and trade fixtures from the Premises, and all
property not so removed shall be deemed abandoned by Tenant. If the Premises are
not so surrendered at the termination of this Lease, Tenant shall idemnify
Landlord against loss or liability resulting from delay by Tenant in so
surrendering the Premises including, without limitation, any claims made by any
succeeding tenant or losses to Landlord due to lost opportunities to lease to
succeeding tenants.
40. Authority. The undersigned parties hereby warrant that they have
---------
proper authority and are empowered to execute this Lease on behalf of the
Landlord and Tenant, respectively.
IN WITNESS WHEREOF, the parties have executed this Agreement on the dates
set forth below.
LANDLORD: TENANT:
DELL ENTERPRISES DIGITAL VIDEO SYSTEMS, INC.
A California Limited Partnership A California Corporation
By [SIGNATURE ILLEGIBLE] By [SIGNATURE ILLEGIBLE]
--------------------------------- -----------------------------
Title GENERAL PARTNER Title PRESIDENT
------------------------------ --------------------------
Date 9/8/97 Date 9/8/97
------------------------------- ---------------------------
-17-
<PAGE>
FIRST ADDENDUM TO LEASE DATED AUGUST 29, 1997, BY AND BETWEEN DELL ENTERPRISES
(LANDLORD) AND DIGITAL VIDEO SYSTEMS, INC. (TENANT) FOR PREMISES AT 160 KNOWLES
DRIVE, LOS GATOS, CALIFORNIA.
The following Items are additional terms and conditions to be incorporated in
the above referenced lease document.
1. RENT.
Rent for months 01-12 shall be $37,625.60 NNN per month.
Rent for months 13-24 shall be $38,801.40 NNN per month.
Rent for months 25-36 shall be $39,977.20 NNN per month.
Any partial month of occupancy, will be pro-rated by adjusting the rent for
the second month of occupancy.
The above stated rent is a net rental, including, maintenance of exterior
walls, roof and parking lot foundation, but excluding real property taxes,
insurance, repair, maintenance and utilities, of the "Common Area" and
Premises. Tenant shall pay to Landlord as additional rent its pro-rata
share of taxes, insurance, utilities, and repair and maintenance of the
"Common Area" and Premises.
2. COMMENCEMENT.
Commencement shall be on or after October 1, 1997, or as soon thereafter
that the Premises are available for occupancy. If occupancy is delayed
beyond January 1, 1998, Tenant shall have the right to terminate this
Lease.
3. FIRST MONTH RENT.
Tenant shall pay to Landlord first month's rent in the amount of $37,625.60
with the execution of this Lease.
2. TENANT IMPROVEMENTS.
Landlord shall paint the interior of the premises as needed, shampoo the
existing carpet and clean/polish all vinyl tile areas.
3. CONDITION OF PREMISES.
Prior to Lease commencement, Landlord at Landlord's sole cost and expense
shall deliver the Premises to Tenant in good condition and repair,
including but not limited to, roof, electrical, plumbing, mechanical
systems and parking lot. If during the initial sixty (60) days of Tenant's
occupancy a problem relative to the condition of the above mentioned items
is discovered Tenant shall provide Landlord with written notification of
said problem and Landlord, at Landlord's sole cost, shall repair said
problem.
4. EARLY ACCESS.
Provided Tenant does not interfere with Landlord's tenant improvement work,
Landlord grants Tenant the right to access the Premises for one (1) week
preceding the commencement date in order to prepare the Premises for
Tenant's occupancy. During this early access period Tenant shall not be
obligated to pay base rent or triple net expenses.
5. OPTION TO RENEW.
Tenant shall have the right to renew this Lease for one (1) three (3) year
period. Rent for said period shall be at fair market rental for comparable
space in the
<PAGE>
Page Two
First Addendum to Lease dated August 29, 1997, by and between Dell
Enterprises and Digital Video Systems, Inc.
immediate vicinity of the Premises.
Tenant shall notify Landlord in writing, of its intent to renew this Lease,
not less than one hundred and eighty (180) days before the expiration of
this Lease. Landlord shall respond within five (5) days, and provide Tenant
with a market rent for the renewal period of the option. If Tenant elects
to not exercise the option to renew Tenant shall provide Landlord with
written notice within five (5) days of Landlord's notice stating its intent
to not exercise the option.
6. RIGHT OF FIRST REFUSAL.
Tenant shall have the right of first refusal on any available space at
either 140 or 150 Knowles Drive, subject only to first right of refusal
previously given to other Tenants. If the above Premises become available
for lease, Landlord shall notify Tenant and offer a term and market rent
for such space. Tenant shall respond in writing within five (5) business
days to accept or reject said offer.
7. CONDITION OF PREMISES.
Landlord makes the following representations to Tenant, each of which are
made to the best of Landlord's knowledge as of the date of the Lease that
the Premises are in compliance with applicable federal, state and local
statutes, ordinances and regulations, including, jurisdictional
requirements of the Americans with Disabilities Act, and no notices of any
violations have been filed or are pending.
8. SUBLEASING/ASSIGNMENT.
Tenant shall have the right to sublease/assign all or any portion of its
premises during the term of the Lease to a qualified Tenant or Tenants,
subject to Landlord's approval which shall not be unreasonably withheld or
delayed. No response within five (5) days shall be deemed as Landlord's
approval. Any profits generated from said subleasing or assignment shall be
allotted 50%/50% Tenant and Landlord after Tenant recovers all costs
associated with subleasing. Notwithstanding the foregoing, Tenant may, with
Landlord's consent (i) sell or transfer, including by consolidation, merger
or reorganization, a majority of the voting stack of Tenant, in a single
transaction or a series of related transactions, (ii) assign its interest
in the Lease or sublet the Premises, or a portion thereof to a subsidiary,
affiliate division or corporation controlled by or under common control of
Tenant, or to a purchaser of substantially all of Tenant assets, provided
however, that the new entity must have a net worth comparable or greater to
Tenant, at the time of Lease execution.
LANDLORD: TENANT:
DELL ENTERPRISES DIGITAL VIDEO SYSTEMS, INC.
By [SIGNATURE ILLEGIBLE] By [SIGNATURE ILLEGIBLE]
-------------------------- ----------------------------
Title General Partner Title President
----------------------- -------------------------
Date 9/8/97 Date 9/5/97
------------------------ --------------------------
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 10,088
<SECURITIES> 2,510
<RECEIVABLES> 8,848
<ALLOWANCES> 775
<INVENTORY> 4,038
<CURRENT-ASSETS> 25,780
<PP&E> 3,478
<DEPRECIATION> 1,457
<TOTAL-ASSETS> 29,779
<CURRENT-LIABILITIES> 4,688
<BONDS> 0
0
0
<COMMON> 2
<OTHER-SE> 24,848
<TOTAL-LIABILITY-AND-EQUITY> 29,779
<SALES> 5,371
<TOTAL-REVENUES> 5,371
<CGS> 4,223
<TOTAL-COSTS> 4,223
<OTHER-EXPENSES> 5,901
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (4,816)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,816)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,816)
<EPS-PRIMARY> (0.39)
<EPS-DILUTED> (0.39)
</TABLE>
<PAGE>
EXHIBIT 99.1
Other 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, was
launched in its home-video format by several large consumer electronics
manufacturers in the United States. 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, including the movie industry's endorsement; the computer industry's
demand; a unified product standard; and the general movement towards digital
technology. However, there can be no assurance that the DVD market will become
a significant one in the near term or at all.
1
<PAGE>
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 manufacturing these products within the
current calendar year. 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.
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 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
2
<PAGE>
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 further losses 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 Chip, such chip
could be of limited or no value to the Company. While ViComp has also
conducted preliminary analysis in connection with potential new products in
addition to the ViComp MPEG-1 Chip, 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, 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. 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
3
<PAGE>
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.
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 were cancelled in December 1997 pursuant to the terms
of the escrow as the result of the delay encountered in completing development
of the ViComp MPEG-1 Chip. 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. The Company
will incur a substantial non-cash charge to earnings at such time, if ever,
that the conditions for the release of any or all of Dr. Sun's Escrow
Acquisition Shares from escrow are satisfied, which would increase the
Company's loss or reduce or eliminate the Company's net income, if any, for
financial reporting purposes for the period or periods during which such
securities are, or become possible of being, released from escrow.
RISKS OF INTERNATIONAL OPERATIONS. Sales outside the United States have
accounted for approximately 85% of the Company's revenues from inception
through September 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 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
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 recent
currency and financial turmoil in a number of Asian countries has adversely
impacted consumer demand for various products in certain of those countries. A
prolonged or deepening crisis in these countries could have a material adverse
effect on demand for the Company's products in these countries.
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, 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.
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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.
EFFECT OF TRADE DISPUTES. The United States has had disputes with China
relating to trade and human rights issues and has considered trade sanctions
against China and Japan. If trade sanctions were imposed, China or Japan could
enact trade sanctions in response. Because a number of the Company's current
and prospective customers and suppliers of items incorporated into its
products are located in China, Taiwan or Japan, trade sanctions, if imposed,
could have a 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 current 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 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 that could adversely affect the Company's
current or prospective business operations in China.
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. Certain ministerial approvals are
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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 (particularly in light of the recent currency crisis
experienced by a number of other Asian countries) 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.
EXPROPRIATION The Chinese government has, in the past, renounced various
debt obligations incurred by predecessor governments, which obligations remain
in default, and expropriated assets without compensation. There can be no
assurance that Chinese government will not in the future expropriate or
nationalize assets which may relate to any current or prospective business
operations of the Company.
RELIANCE ON STATISTICS Statistics relating to economic, demographic, and
general business data are not widely disseminated within or outside of China.
Further, certain Chinese statistics may not be compiled in accordance with, or
may not be subject to, Western standards of accuracy. The resultant imperfect
information naturally hinders the performance of the Company's business
planning or investment analysis and introduces risks in conducting business in
China.
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, among other things, 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 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,
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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 at the Panyu
Joint Venture's facility, certain pending administrative and regulatory
matters have been required to be completed. Such matters included the
appropriate payment and recording of various transactions on behalf of the
Panyu Joint Venture. Although the Company expects that such matters will be
successfully 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.
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.
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
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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.
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 Edward M. Miller, Jr., the Company's Chief Financial
Officer, 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. In September 1997, a large U.S. consumer
electronics retailer announced plans to back an alternative competing format
called "Divx," short for "digital video express." Divx disks are expected to
cost less than DVD disks, but are designed to be viewable only a limited
number of times. Unlike rented video cassette tapes, Divx disks need not be
returned to the retailer. It is possible that these two competing, but
similar, technologies may create confusion in the minds of consumers that will
result in consumers being hesitant to invest in DVD players until a dominant
technology emerges. 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
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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.
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.
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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.
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. 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
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and the foregoing Escrow Acquisition Shares owned by Dr. Sun, the release will
be treated, for financial reporting purposes, as expense of the Company.
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. 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
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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.
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.
In January 1998, Blair & Co. sold substantially all of its retail operations
to Barrington Capital. The Company is unable to predict whether Blair & Co.'s
settlement with the NASDR, the sale of Blair & Co.'s retail operations or any
unfavorable resolution of the Commission's investigation will have any
materially adverse effect on the liquidity or price of the Company's
securities.
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