<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 13, 1998
SECURITIES ACT FILE NO. 333-32225
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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, CALIFORNIA 95032
(408) 874-8200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
THOMAS R. PARKINSON, PRESIDENT
DIGITAL VIDEO SYSTEMS, INC.
160 KNOWLES DRIVE
LOS GATOS, CALIFORNIA 95032
(408) 874-8200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
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WITH A COPY TO:
SANFORD J. HILLSBERG, ESQ.
TROY & GOULD PROFESSIONAL CORPORATION
1801 CENTURY PARK EAST, SUITE 1600
LOS ANGELES, CALIFORNIA 90067
(310) 553-4441
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: From time to
time after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [_]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act
other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED FEBRUARY 13, 1998
PROSPECTUS
DIGITAL VIDEO SYSTEMS, INC.
328,535 SHARES OF COMMON STOCK
This Prospectus relates to the offer by the securityholders named herein
("Selling Securityholders") for sale from time to time of 328,535 shares of
Common Stock, $.0001 par value (the "Common Stock") of Digital Video Systems,
Inc. (the "Company"). The Company will not receive any proceeds from the sale
of the Common Stock offered hereby.
Pursuant to that certain Agreement and Plan of Merger dated as of October 17,
1996 by and among the Company, Digital Video Acquisition Co., ViComp
Technology, Inc. ("ViComp"), and the shareholders of ViComp listed on Exhibit A
thereto, the Company acquired ViComp (the "ViComp Acquisition") for a
combination of cash and the Company's common stock. The sale of the shares
covered by this Prospectus by the Selling Securityholders has been registered
under the Securities Act of 1933, as amended (the "Securities Act") pursuant to
registration rights granted in connection with the issuance of these shares to
the Selling Securityholders in the ViComp Acquisition.
The Common Stock is quoted on the Nasdaq National Market under the symbol
"DVID." The closing price of the Common Stock reported on the Nasdaq National
Market on February 6, 1998 was $ per share.
The Selling Securityholders have advised the Company that they may sell,
directly or through brokers, all or a portion of the securities offered hereby
in negotiated transactions or in one or more transactions in the market at the
price prevailing at the time of sale. In connection with such sales, the
Selling Securityholders and any participating broker may be deemed to be
"underwriters" of the Common Stock within the meaning of the Securities Act. It
is anticipated that usual and customary brokerage fees will be paid by the
Selling Securityholders in all open market transactions. The Company will pay
all other expenses of this offering. See "Plan of Distribution."
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THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" ON PAGES 6 THROUGH 17 OF THE PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is February , 1998
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act") and in accordance therewith files
reports, proxy or information statements and other information with the
Securities and Exchange Commission (the "Commission"). Such reports, proxy
statements and other information can be inspected and copied at the public
reference facilities maintained by the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, as well as at the following
regional offices: Seven World Trade Center, New York, New York 10048, and
Citicorp Center, 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661.
Copies of such material can be obtained from the Public Reference Section of
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Commission maintains a Web site
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The
address of the Commission's Web site is http://www.sec.gov. The Common Stock
of the Company is quoted on the Nasdaq National Market. Reports, proxy
statements and other information concerning the Company may be inspected at
the offices of the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
Additional information regarding the Company and the securities offered
hereby is contained in the Registration Statement of which this Prospectus is
a part, and the exhibits thereto, filed with the Commission under the
Securities Act. For further information pertaining to the Company and the
securities offered hereby, reference is made to the Registration Statement and
the exhibits thereto, which may be inspected without charge at, and copies
thereof may be obtained at prescribed rates from, the office of the Commission
at Judiciary Plaza, 450 Fifth Street, Washington, D.C. 20549. Statements
contained herein concerning the provisions of any document are not necessarily
complete and in each instance reference is made to the copy of the document
filed as an exhibit or schedule to the Registration Statement. Each such
statement is qualified in its entirety by reference to the copy of the
applicable documents filed with the Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission under the
Exchange Act are incorporated in this Prospectus by reference: (a) the
Company's Annual Report on Form 10-KSB for the fiscal year ended March 31,
1997 (the "1997 10-KSB"); (b) the Company's Form 10-QSBs for the fiscal
quarters ended June 30, 1997 and September 30, 1997; (c) the Company's Current
Reports on Form 8-K filed on July 31, 1997, August 15, 1997 (as amended by a
Form 8-K/A filed on October 10, 1997) and September 26, 1997; (d) all other
reports filed with the Commission pursuant to Section 13 and 15(d) of the
Exchange Act since March 31, 1997; and (e) the description of the Common Stock
set forth in the Company's Registration Statement on Form 8-A (File No. 000-
28472) filed with the Commission pursuant to Section 12(g) of the Exchange Act
on April 26, 1996, including any amendment or report subsequently filed by the
Company for the purpose of updating that description.
All documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior
to the termination of the offering of the securities offered hereby shall be
deemed to be incorporated by reference into this Prospectus and to be a part
of this Prospectus from the date of filing of such documents. Any statement
contained in a document incorporated by reference herein shall be deemed to be
modified or superseded for purposes of this Prospectus to the extent that a
statement contained herein or in any other subsequently filed document which
also is or is deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of
this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, on the written or oral request of any such person, a
copy of any or all of the documents incorporated by reference (other than
exhibits to such documents that are not themselves specifically incorporated
by reference in such documents). Written requests for such copies should be
directed to Thomas R. Parkinson, President, Digital Video Systems, Inc., 160
Knowles Drive, Los Gatos, California 95032. Telephone requests may be directed
to Thomas R. Parkinson at (408) 874-8200.
2
<PAGE>
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995.
In addition to historical information, this Prospectus contains forward-
looking statements. The forward-looking statements contained herein are
subject to certain risks and uncertainties that could cause actual results to
differ materially from those reflected in the forward-looking statements.
Factors that might cause such a difference include, but are not limited, those
discussed below under "Risk Factors" and in the section entitled "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contained in the 1997 10-KSB incorporated herein by reference, as well as
other factors that are described in other documents the Company files from
time to time with the Commission. Readers are cautioned not to place undue
reliance on these forward-looking statements, which reflect management's
analysis only as of the date hereof. The Company undertakes no obligation to
publicly revise these forward-looking statements to reflect events or
circumstances that arise after the date hereof.
3
<PAGE>
THE COMPANY
The Company was founded in 1992 to develop, manufacture, and market 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 currently is developing DVD products for home
entertainment and computer markets.
During the fiscal year ended March 31, 1997 ("fiscal 1997"), the Company
completed its initial public offering (the "IPO") and a follow-on public
offering, which generated aggregate net proceeds of approximately $43.7
million. These proceeds have been used principally to repay $7 million of
bridge notes, to fund the acquisitions of the DV Business and Synchrome (each
described below), to fund the commencement of the Panyu Joint Venture
(described below), and to fund the growth in the Company's operations and
losses generated to date by those operations. It is anticipated that the
remaining proceeds will be used to finance the Company's current operations
and to further expand those operations in the future, including its product
development efforts, and may also be used to acquire additional complementary
businesses or technologies or to enter into strategic alliances. Although the
Company currently is pursuing such transactions, it currently does not have
any agreements or commitments with respect to any proposed material
acquisitions, joint ventures or other strategic alliances, and no assurances
can be given that any such transactions will be consummated in the future.
In October 1996, the Company acquired ViComp, a development stage company
that designs integrated circuits for use in Video CD players and sub-
assemblies. Pursuant to the acquisition, the Company issued 491,253 shares of
its Common Stock for all the outstanding ViComp capital stock and granted
options to certain ViComp shareholders exercisable for 189,557 shares of the
Company's Common Stock. The transaction has been accounted for as a purchase
and, accordingly, the initial purchase price and acquisition costs have been
allocated to identifiable assets and liabilities, including in-process
research and development of $1.8 million that was immediately expensed. The
shares offered hereby were issued by the Company to the Selling
Securityholders in connection with the acquisition by the Company of ViComp on
October 17, 1996.
In August 1997, the Company completed the acquisition of substantially all
of the assets of the Digital Video Division (the "DV Business") of Arris
Interactive L.L.C. ("Arris") for a combination of $1,500,000 cash, 600,000
shares of the Company's common stock, and up to $5,000,000 of additional cash
consideration to be based on future revenues of the DV Business (the
"Contingent Consideration"). The Contingent Consideration paid to Arris will
equal 15.5% of the net revenues of the DV Business during the period from
August 1, 1997 through March 31, 1998 (subject to such revenues exceeding at
least $3,000,000 during such period) and 15.5% of the net revenues of the DV
Business during the period from August 1, 1998 through January 31, 1999
(subject to such revenues exceeding at least $5,000,000 during such period).
The amount of consideration paid by the Company to acquire the DV Assets was
negotiated by the Company with Arris and was based on the Company's evaluation
of the value of the DV Business assets, including the proprietary technology
and the patents and patent applications acquired in the acquisition. The DV
Business designs, manufactures and distributes MPEG-2 decoding, switching,
streaming and multiplexing solutions that deliver advanced video systems like
digital ad insertion and near video on demand to subscribers.
In August 1997, the Company agreed to establish a joint venture (the "Panyu
Joint Venture") with Panyu Tian Le Electrical Appliance Manufacturing Co.,
Ltd. ("Panyu"), a company organized under the laws of The People's Republic of
China ("China") pursuant to a joint venture agreement dated as of August 5,
1997 (the "Panyu Joint Venture Agreement"). As initially formed, the Panyu
Joint Venture was owned 51% by the Company, through its wholly-owned
subsidiary, D.V.S. H.K. Limited, and 49% by Panyu. The Panyu Joint Venture,
which is based in Guangdong, China and is known as "Panyu D.V.S. Electrical
Appliances Manufacturing Co., Ltd.," is engaged in the business of
manufacturing and selling Video CD players and related products. Under the
terms of the Panyu Joint Venture Agreement, the Panyu Joint Venture may also
engage in the business of manufacturing and selling DVD players, loader and
optical pick-ups for Video CD players, digital broadcasting systems,
networking systems, micro-computers and related products. Sales of the Panyu
Joint Venture's products have been made initially in China but may be expanded
to other countries in the future.
4
<PAGE>
In September 1997, the Company approved an aggregate financial commitment to
the Panyu Joint Venture of $4,080,000, with a contribution of approximately
$2,000,000 in cash and approximately $2,080,000 in parts and components to be
used in the manufacture of Video CD players and other items. However, Panyu
did not make its capital contribution to the Panyu Joint Venture as required
by the Joint Venture Agreement, and in December 1997 D.V.S. H.K. acquired the
entire 49% economic interest of Panyu in the Panyu Joint Venture for nominal
consideration. As of January 31, 1998 the Company had contributed
approximately $600,000 to the Panyu Joint Venture.
In connection with such acquisition, Panyu agreed 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.
In connection with Panyu's sale of its interest in the Panyu Joint Venture,
Panyu and the Panyu Joint Venture entered into a two-year lease (the "Lease"),
pursuant to which Panyu will lease, to the Panyu Joint Venture certain land,
buildings and equipment, including the site, buildings and equipment currently
used by the Panyu Joint Venture that Panyu was originally to contribute to the
Panyu Joint Venture and an additional factory building that may be used by the
Panyu Joint Venture for the manufacture of amplifiers, (the "Leased Assets")
for a monthly rental fee of 650,000 Renminbi (approximately $78,000). In
addition, the Panyu Joint Venture agreed to purchase certain Video CD
components, parts, inventory and finished goods from Panyu.
In August 1997, the Company acquired substantially all of the assets of
Synchrome Technology, Inc. ("Synchrome") for approximately $753,000 in cash
and assumed certain liabilities of Synchrome. The Company designs,
manufactures and markets computer peripheral products through their operation
acquired from Synchrome.
The Company's telephone number is (408) 874-8200. The principal executive
offices of the Company are located at 160 Knowles Drive, Los Gatos, California
95032.
5
<PAGE>
RISK FACTORS
The securities offered hereby are highly speculative in nature and involve a
high degree of risk. Prospective investors should carefully consider, along
with the other information contained in this Prospectus, the following
considerations and risks in evaluating an investment in the Company.
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.
6
<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
7
<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
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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 obtaining
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
16
<PAGE>
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.
17
<PAGE>
USE OF PROCEEDS
The Company will not receive any of the proceeds from the sale by the
Selling Securityholders of any of the shares of Common Stock offered hereby.
The Company will pay all of the costs of this offering, excluding any
brokerage fees paid by the Selling Securityholders.
SELLING SECURITYHOLDERS
The following table lists the Selling Securityholders, the number of shares
of Common Stock beneficially owned by each such Selling Securityholder as of
the date of this Prospectus, the number of shares offered by them pursuant to
this Prospectus, and the number of shares of Common Stock beneficially owned
by each Selling Securityholder after the completion of this offering. The
shares listed under the caption "Number of Shares of Common Stock Being
Offered" refers to the shares of Common Stock owned by such Selling
Securityholder that are included in this Prospectus. All shares of Common
Stock listed under the caption "Number of Shares of Common Stock Being
Offered" may be sold pursuant to this Prospectus. The Company believes that
the Selling Securityholders own no securities of the Company other than as
listed in the table.
<TABLE>
<CAPTION>
SHARES OF NUMBER OF AFTER OFFERING(1)(2)
COMMON STOCK SHARES OF --------------------------
BENEFICIALLY OWNED COMMON STOCK SHARES OF
AS OF THE DATE OF BEING COMMON STOCK
PROSPECTUS(1) OFFERED BENEFICIALLY OWNED PERCENT
------------------ ------------ ------------------ -------
<S> <C> <C> <C> <C>
James W. Kirkpatrick,
Jr.(3)................. 9,384 9,384 0 *
Kirkpatrick Family
Trust.................. 83,284 83,284 0 0
Fen-Yu Su............... 1,172 1,172 0 0
Dr. Michael R.
Mruzik(4).............. 2,440 2,440 0 0
Frances Hung(5)......... 11,965 11,965 0 0
Dr. Edmund Y. Sun....... 7,681,658(6) 140,760 7,540,898 37.5
Lish Chen(5)............ 46,920 46,920 0 0
Mihailo Stojancic(5).... 20,645 20,645 0 0
Tai Sato(5)............. 11,965 11,965 0 0
</TABLE>
- --------
* less than 1%.
(1) Pursuant to the rules promulgated under the Exchange Act, a person is
deemed to be the beneficial owner of a security if that person has the
right to acquire ownership of such security within 60 days.
(2) The table assumes that the Selling Securityholders will dispose of all
shares of Common Stock owned by them or issuable to them that are being
registered for sale by this Prospectus.
(3) Mr. Kirkpatrick was the Chief Technical Officer of ViComp until August
1997, when his employment with the Company terminated. Does not include
83,284 shares owned by the Kirkpatrick Family Trust of which Mr.
Kirkpatrick is a trustee. All of the shares offered by Mr. Kirkpatrick
have been placed in escrow pursuant to an escrow agreement, with American
Stock Transfer & Trust Company as escrow agent. All or a portion of such
shares are subject to forfeiture in the event the Company incurs certain
losses in connection with the ViComp Acquisition. The escrowed shares may
not be assigned, transferred or otherwise disposed of prior to the earlier
of (i) June 30, 1998 or (ii) the date that the Company's annual report on
Form 10-K for the year ending March 31, 1998 is filed with the Commission.
(4) All of such shares have been placed in escrow pursuant to an escrow
agreement, with American Stock Transfer & Trust Company as escrow agent.
All or a portion of such shares are subject to forfeiture in the event the
Company incurs certain losses in connection with the ViComp Acquisition.
The escrowed shares may not be assigned, transferred or otherwise disposed
of prior to the earlier of (i) June 30, 1998 or (ii) the date that the
Company's annual report on Form 10-K for the year ending March 31, 1998 is
filed with the Commission.
(5) Ten percent of the shares offered by such Selling Securityholder have been
placed in escrow pursuant to an escrow agreement, with American Stock
Transfer & Trust Company as escrow agent. All or a portion of such shares
are subject to forfeiture in the event the Company incurs certain losses
in connection with the ViComp Acquisition. The escrowed shares may not be
assigned, transferred or otherwise disposed of prior to the earlier of (i)
June 30, 1998 or (ii) the date that the Company's annual report on Form
10-K for the year ending March 31, 1998 is filed with the Commission.
(6) Includes 140,760 shares of Common Stock acquired by Dr. Sun in the ViComp
Acquisition, all of which have been deposited in escrow and are subject to
cancellation in certain circumstances. Also includes 280,334 shares owned
by Dr. Sun's sons and 21,564 shares owned by Dr. Sun's sister.
18
<PAGE>
PLAN OF DISTRIBUTION
The Selling Securityholders may sell, directly or through brokers, the
shares of Common Stock in negotiated transactions or in one or more
transactions in the market at the price prevailing at the time of sale. In
connection with such sales, the Selling Securityholders and any participating
broker may be deemed to be "underwriters" of the shares within the meaning of
the Securities Act, although the offering of these securities will not be
underwritten by a broker-dealer firm. Sales in the market may be made to
broker-dealers making a market in the Common Stock or other broker-dealers,
and such broker-dealers, upon their resale of such securities, may be deemed
to be "selling securityholders" in this offering. The Company will not receive
any of the proceeds from the sale of the shares of Common Stock by the Selling
Securityholders. Pursuant to the terms under which the shares of Common Stock
were issued to the Selling Securityholders, the Company has agreed to
indemnify the Selling Securityholders against such liabilities as they may
incur as a result of any untrue statement of a material fact in the
Registration Statement of which this Prospectus forms a part, or any omission
herein or therein to state a material fact necessary in order to make the
statements made, in the light of the circumstances under which they were made,
not misleading. Such indemnification includes liabilities that the Selling
Securityholders may incur under the Securities Act.
Each Selling Securityholder and any other persons participating in a
distribution of securities will be subject to applicable provisions of the
Exchange Act and the rules and regulations thereunder, including, without
limitation, Regulation M, which may restrict certain activities of, and limit
the timing of purchases and sales of securities by, Selling Securityholders
and other persons participating in a distribution of securities. Furthermore,
under Regulation M, persons engaged in a distribution of securities are
prohibited from simultaneously engaging in market making and certain other
activities with respect to such securities for a specified period of time
prior to the commencement of such distribution, subject to specified
exceptions or exemptions. All of the foregoing may affect the marketability of
the securities offered hereby.
The Company will bear all costs and expenses of the registration under the
Securities Act and certain state securities laws of the Common Stock, other
than fees of counsel (if any) for the Selling Securityholders and any
discounts or commissions payable with respect to sales of such securities.
From time to time this Prospectus may be supplemented or amended as required
by the Securities Act. During any time when a supplement or amendment is so
required, the Selling Securityholders are required to cease sales until the
Prospectus has been supplemented or amended.
Pursuant to the terms of the registration rights agreement signed in
connection with the ViComp Acquisition, the Company is required to keep this
Registration Statement effective for a period of 180 days following the date
on which this Registration Statement is declared effective.
LEGAL MATTERS
The validity of the securities offered hereby has been passed upon by Troy &
Gould Professional Corporation, Los Angeles, California. Joseph F. Troy, a
member of Troy & Gould Professional Corporation, is a director of the Company
and holds options to purchase 136,608 shares of Common Stock at $3.50 per
share. In addition, members of Troy & Gould own 700 of the Company's Class B
Warrants.
19
<PAGE>
EXPERTS
The consolidated financial statements of Digital Video Systems, Inc.
appearing in Digital Video Systems, Inc.'s Annual Report (Form 10-KSB) for the
year ended March 31, 1997, and the financial statements of Arris Interactive
LLC--Digital Video Division for the year ended December 31, 1995 included in
the Current Report Form 8-K/A of Digital Video Systems, Inc. dated October 10,
1997, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon included therein and incorporated herein by
reference. Such consolidated financial statements have been incorporated
herein by reference in reliance upon such reports given upon the authority of
such firm as experts in accounting and auditing.
The audited financial statements of Arris Interactive LLC--Digital Video
Division (the "DV Business") for the year ended December 31, 1996, appearing
in the Company's Current Report (Form 8-K/A) dated October 10, 1997, have been
audited by Deloitte & Touche LLP, independent auditors, as set forth in their
report thereon included therein and incorporated herein by reference. Such
financial statements have been incorporated herein by reference in reliance
upon such report given upon the authority of such firm as experts in
accounting and auditing.
20
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFERING HEREBY, AND, IF GIVEN OR MADE,
SUCH INFORMATION AND REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE SELLING SECURITYHOLDERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES TO ANY PERSON IN ANY STATE OR OTHER JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THE FACTS
HEREIN SET FORTH SINCE THE DATE HEREOF.
-----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information .................................................... 2
Incorporation of Certain Documents by Reference........................... 2
The Company............................................................... 4
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 18
Selling Securityholders................................................... 18
Plan of Distribution...................................................... 19
Legal Matters............................................................. 19
Experts................................................................... 20
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
328,535 SHARES OF
COMMON STOCK
DIGITAL VIDEO SYSTEMS, INC.
-----------------
PROSPECTUS
-----------------
FEBRUARY , 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The Company estimates that expenses in connection with the distribution
described in this Registration Statement will be as follows. All expenses
incurred with respect to the distribution will be paid by the Company, and
such amounts, with the exception of the Securities and Exchange Commission
registration fees, are estimates.
<TABLE>
<S> <C>
SEC registration fee................................................ $ 465
Accounting fees and expenses........................................ 10,000
Legal fees and expenses............................................. 25,000
Printing expenses................................................... 1,500
Miscellaneous....................................................... 500
-------
Total............................................................. $37,465
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"). The Registrant's Bylaws also
provide that the Registrant will indemnify its directors and officers and may
indemnify its employees and other agents to the fullest extent not prohibited
by Delaware law.
The Registrant's Certificate of Incorporation provides for the elimination
of liability for monetary damages for breach of the directors' fiduciary duty
of care to the Registrant and its shareholders. These provisions do not
eliminate the directors' duty of care and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to the Registrant, for acts or omissions not in good faith or
involving intentional misconduct, for knowing violations of law, for any
transaction from which the director derived an improper personal benefit, and
for payment of dividends or approval of stock repurchases or redemptions that
are unlawful under Delaware law. The provision does not affect a director's
responsibilities under any other laws, such as the federal securities laws or
state or federal environmental laws.
The Registrant has entered into agreements with its directors and executive
officers that require the Registrant to indemnify such persons against
expenses, judgments, fines, settlements and other amounts actually and
reasonably incurred (including expenses of a derivative action) in connection
with any proceeding, whether actual or threatened, to which any such person
may be made a party by reason of the fact that such person is or was a
director or officer of the Registrant or any of its affiliated enterprises,
provided such person acted in good faith and in a manner such person
reasonably believed to be in or not opposed to the best interests of the
Registrant and, with respect to any criminal proceeding, had no reasonable
cause to believe his or her conduct was unlawful. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
II-1
<PAGE>
ITEM 16. EXHIBITS
The following exhibits, which are furnished with this Registration Statement
or incorporated by reference, are filed as part of this Registration
Statement:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
4.1 Form of Common Stock certificate.(1)
5.1 Opinion of Troy & Gould Professional Corporation.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
Consent of Troy & Gould Professional Corporation (contained in Exhibit
23.3 5.1).
24.1 Power of Attorney (contained in Part II).
</TABLE>
- --------
(1) Incorporated by reference from Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-2228), as filed
with the Commission on May 8, 1996.
ITEM 17. UNDERTAKINGS
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred or paid by a
director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made of
the securities registered hereby, a post-effective amendment to this
Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of this Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
provided, however, that (i) and (ii) do not apply if the information
required to be included in a post-effective amendment is contained in
periodic reports filed by the registrant pursuant to Section 13 or
Section 15(d) of the Exchange Act that are incorporated by reference in
the Registration Statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the registrant certifies
that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized in the City of Los Gatos, State of California, on
February 9, 1998.
DIGITAL VIDEO SYSTEMS, INC.
By: /s/ Edmund Y. Sun
------------------------------
Dr. Edmund Y. Sun
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
The officers and directors of Digital Video Systems, Inc., whose signatures
appear below, hereby constitute and appoint Dr. Edmund Y. Sun and Thomas R.
Parkinson, and each of them, their true and lawful attorneys-in-fact and
agents, each with power to act alone, to sign, execute and cause to be filed
on behalf of the undersigned any amendment or amendments, including post-
effective amendments, to this Registration Statement of Digital Video Systems,
Inc. on Form S-3. Each of the undersigned does hereby ratify and confirm all
that said attorneys-in-fact and agents shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following person in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Edmund Y. Sun Chairman of the Board and February 9, 1998
____________________________________ Chief Executive Officer
Dr. Edmund Y. Sun (Principal Executive
Officer)
/s/ Thomas R. Parkinson President, Chief Operating February 9, 1998
____________________________________ Officer and Director
Thomas R. Parkinson
/s/ Philip B. Smith Director February 9, 1998
____________________________________
Philip B. Smith
/s/ Joseph F. Troy Director February 9, 1998
____________________________________
Joseph F. Troy
/s/ Sanford Sigoloff Director February 9, 1998
____________________________________
Sanford Sigoloff
/s/ Sung Hee Lee Director February 9, 1998
____________________________________
Sung Hee Lee
/s/ Edward M. Miller Chief Financial Officer February 9, 1998
____________________________________ (principal financial and
Edward M. Miller, Jr. accounting officer)
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<S> <C>
4.1 Form of Common Stock Certificate(1).
5.1 Opinion of Troy & Gould Professional Corporation.
23.1 Consent of Ernst & Young LLP.
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Troy & Gould Professional Corporation (contained in Exhibit 5.1).
24.1 Power of Attorney (contained in Part II).
</TABLE>
- --------
(1) Incorporated by reference from Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-2228), as filed
with the Commission on May 8, 1996.
<PAGE>
EXHIBIT 5.1
February 9, 1998
Digital Video Systems, Inc.
160 Knowles Drive
Los Gatos, California 95032
Re: Registration Statement on Form S-3
----------------------------------
Ladies and Gentlemen:
We have acted as special counsel to Digital Video Systems, Inc., a Delaware
corporation (the "Company"), in connection with the registration of 328,535
shares of Common Stock of the Company (the "Selling Securityholder Shares").
This opinion is being furnished in accordance with the requirements of Item
601(b)(5) of Regulation SB under the Securities Act of 1933, as amended (the
"1933 Act").
In connection with this opinion, we have examined and are familiar with
originals or copies, certified or otherwise identified to our satisfaction, of
such documents as we have deemed necessary or appropriate as a basis for the
opinions set forth herein, including (i) Amendment No. 1 to the Registration
Statement of the Company on Form S-3 relating to the Selling Securityholder
Shares (File No. 333-32225), filed with the Securities and Exchange Commission
(the "Commission") on the date hereof (the "Registration Statement") and the
prospectus made a part thereof (the "Prospectus"); (ii) the Amended and
Restated Certificate of Incorporation and Bylaws of the Company, as amended to
date; (iii) the form of Common Stock Certificate; and (iv) such other
documents as we have deemed necessary or appropriate as a basis for the
opinions set forth below.
In our examination, we have assumed the genuineness of all signatures, the
legal capacity of all natural persons, the authenticity of all documents
submitted to us as originals, the conformity to original documents of all
documents submitted to us as certified or photostatic copies and the
authenticity of the originals of such latter documents. In making our
examination of documents executed by parties other than the Company, we have
assumed that such parties had the power, corporate or other, to enter into and
perform all obligations thereunder and have also assumed the due authorization
by all requisite action, corporate or other, and execution and delivery by
such parties of such documents and the validity and binding effect thereof. As
to any facts material to the opinions expressed herein which were not
independently established or verified, we have relied upon oral or written
statements and representations of officers and other representatives of the
Company and others.
Based on the foregoing examination, we are of the opinion that (i) the
Selling Securityholder Shares have been duly and validly authorized and are
duly and validly issued, fully paid and nonassessable and (ii) the Selling
Securityholder Shares, when sold by the Selling Securityholders in the manner
contemplated in the Prospectus made part of the Registration Statement will be
legally and validly issued, fully paid and nonassessable.
We are admitted to practice only in the State of California, and this
opinion is limited in all respects to the federal laws of the United States of
America, the laws of the State of California and the General Corporation Law
of the State of Delaware, and no opinion is expressed with respect to the laws
of any other jurisdiction or any effect which such laws may have on the
opinions expressed herein.
We consent to the use of our name under the caption "Legal Matters" in the
Registration Statement, and to the filing of this opinion as an exhibit to the
Registration Statement. By giving you this opinion and consent, we do not
admit that we are experts with respect to any part of the Registration
Statement within the meaning of the term "expert" as used in Section 11 of the
1933 Act, or the rules and regulations promulgated thereunder, nor do we admit
that we are in the category of persons whose consent is required under Section
7 of the 1933 Act.
Very truly yours,
TROY & GOULD
Professional Corporation
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-3 No. 333-32225) and related prospectus of
Digital Video Systems, Inc. for the registration of 328,535 shares of its
common stock and to the incorporation by reference therein of our report dated
May 1, 1997, with respect to the consolidated financial statements of Digital
Video Systems, Inc. included in its Annual Report (Form 10-KSB) for the year
ended March 31, 1997, filed with the Securities and Exchange Commission.
We also consent to the incorporation by reference in the Registration
Statement, as amended, and related prospectus of our report dated August 21,
1997 with respect to the financial statements of Arris Interactive LLC--
Digital Video Division for the year ended December 31, 1995 included in the
Current Report on Form 8-K/A of Digital Video Systems, Inc. dated October 10,
1997, filed with the Securities and Exchange Commission.
Ernst & Young LLP
San Jose, California
February 9, 1998
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Amendment No. 1 to
Registration Statement No. 333-32225 of Digital Video Systems, Inc. on Form S-
3 of our report dated August 8, 1997 on the financial statements of Arris
Interactive LLC--Digital Video Division for the year ended December 31, 1996,
appearing in the Current Report on Form 8-K/A of Digital Video Systems, Inc.
dated October 10, 1997, filed with the Securities and Exchange Commission.
We also consent to the reference to us under the heading "Experts" in such
Registration Statement.
Deloitte & Touche LLP
Atlanta, Georgia
February 9, 1998
