United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended June 30, 1998
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period
Commission file number 0-28472
DIGITAL VIDEO SYSTEMS, INC.
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 77-0333728
------------------------------ ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
160 Knowles Drive
Los Gatos, CA 95032
-------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(408) 874-8200
--------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
Class Outstanding at July 31, 1998
- ---------------------------------- -------------------------------
(Common Stock, $.0001 Par Value) 23,007,153
'Digital Video Systems, Inc.
Index
Part I. Financial Information Page
- ----------------------------- ----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-
June 30, 1998 4
Condensed consolidated statements of operations-
Three months ended June 30, 1998 and 1997 5
Condensed consolidated statements of cash flows-
Three months ended June 30, 1998 and 1997 6
Notes to condensed consolidated financial statements-
June 30, 1998 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
Part II. Other Information
- --------------------------
Item 1. Legal Proceedings
None --
Item 2. Changes in Securities and Use of the Proceeds 17
Item 3. Defaults upon Senior Securities
None --
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information --
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Item I. Financial Statements
Digital Video Systems, Inc.
Condensed Consolidated Balance Sheets
(in thousands)
<TABLE>
<CAPTION>
June 30,
1998
-----------
(unaudited)
<S> <C>
Assets:
Current assets:
Cash and cash equivalents......................... $1,874
Restricted cash................................... 1,650
Accounts receivable, net.......................... 1,274
Inventories....................................... 5,164
Prepaid expenses and other current assets......... 839
-----------
Total current assets 10,801
Property and equipment, net.......................... 2,015
Intangible assets.................................... 3,437
Other assets......................................... 139
-----------
$16,392
===========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................. 3,220
Accrued liabilities............................... 2,450
Notes payable to related parties.................. 2,000
-----------
Total current liabilities...................... 7,670
Stockholders' equity:
Common stock......................................... 3
Additional paid-in capital........................... 60,010
Accumulated deficit.................................. (50,932)
Accumulated other comprehensive income............... (359)
-----------
Total stockholders' equity 8,722
-----------
$16,392
===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Digital Video Systems, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenue:
Product revenue...................... $2,314 $3,683
Development and services revenue..... 75 --
Component revenue.................... -- 1,705
--------- ---------
Total revenue...................... 2,389 5,388
Cost of product revenue................ 1,853 3,415
Cost of development and
services revenue...................... 8 --
Cost of component revenue.............. -- 1,671
--------- ---------
Gross margin........................... 528 302
Operating expenses:
Research and development............. 1,780 904
Sales and marketing.................. 931 585
General and administrative........... 2,292 1,258
Acquired in-process research
and development..................... 500 --
--------- ---------
Total operating expenses.......... 5,503 2,747
--------- ---------
Loss from operations.............. (4,975) (2,445)
Other income (expense), net............ 58 450
--------- ---------
Net loss............................... ($4,917) ($1,995)
========= =========
Basic and Diluted net loss per share... ($0.34) ($0.17)
========= =========
Shares used in the calculation of Basic
and Diluted net loss per share ....... 14,526 11,893
========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Digital Video Systems, Inc.
Condensed Consolidated Statements Of Cash Flows
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Three Months End
June 30,
------------------------
1998 1997
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................. ($4,917) ($1,995)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization..................... 504 182
Acquired in-process research and development...... 500 --
Loss on disposal of fixed assets.................. 65 --
Changes in operating assets and liabilities:
Increase in restricted cash....................... (1,650) --
Accounts receivable............................... (135) (780)
Inventories....................................... (87) (1,008)
Prepaid expenses and other current assets......... (155) (555)
Accounts payable.................................. 1,070 (976)
Accrued liabilities............................... (1,005) (13)
------------ ----------
Net cash used in operating activities................. (5,810) (5,145)
Investing activities:
Acquisition of property and equipment................. (178) (116)
Purchase of short term investments.................... -- (1,189)
Sale of short-term cash investments................... 1,033
Other investing activities............................ (86) (50)
------------ ----------
Net cash provided by (used in) investing activities... 769 (1,355)
------------ ----------
Financing activities:
Proceeds from short-term loan ........................ 1,000
Proceeds from exercise of stock options............... -- 3
------------ ----------
Net cash provided by financing activities............. 1,000 3
------------ ----------
Net (decrease) in cash and cash equivalents.. (4,041) (6,497)
Cash and cash equivalents at beginning of period...... 5,915 32,221
------------ ----------
Cash and cash equivalents at end of period............ $1,874 $25,724
============ ==========
Supplemental disclosure of non cash transaction:
Issurance of stock to Hyundai for acquisition
of DVD-ROM asset...................................... $3,500 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
Digital Video Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Note 1-Basis of Presentation
Digital Video Systems, Inc. (the "Company") is a digital versatile disk (DVD)
company, utilizing a single technology focus. The Company aims to develop,
manufacture, and market DVD-based products for the computer peripheral,
commercial video and consumer product markets. These products include DVD-ROM,
DVD intelligent loaders, and DVD players. Products under development include
DVD-RAM, CD-R and CD-RW drives and the DVD video engines(VE400). Existing
products include video engines, video CD players for commercial applications,
and MX video servers for education and corporate customers.
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company in accordance with generally accepted accounting
principles for interim financial information and with the instructions to Form
10-QSB and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in conjunction
with the audited financial statements included in the Company's Annual Report
and Form 10-KSB for the fiscal year ended March 31, 1998.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as the
audited financial statements and include all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation of the
interim periods presented. Operating results for the three-month period ended
June 30, 1998 are not necessarily indicative of the results that may be
expected for any other interim period or the full fiscal year ending March 31,
1999.
All significant intercompany balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Significant estimates include impairment write- downs of fixed assets
and intangibles and the level of accounts receivable and inventory reserves.
Actual results could differ from those estimates.
As a result of the Company's significant operating losses and the cost of
acquiring and funding its recent acquisitions, the Company's working capital
has been substantially reduced. The Company has as of June 30, 1998 working
capital of $3.1 million and cash, cash equivalents and short-term investments
of $1.9 million compared with $30.7 million of working capital and $26.9
million of cash and cash equivalents as of June 30, 1997. The Company's
accumulated deficit was $51 million at June 30, 1998. The Company's available
working capital is not sufficient to fund the DVD-ROM operations and the
planned launch of its recently acquired DVD-ROM products, while maintaining
the Company's other activities.
To provide additional working capital, in June 1998 the Company borrowed
$1,000,000 from Dr. Edmund Y. Sun, the Company's Chairman and Chief Technology
Officer. The loan with interest from Dr. Sun was converted into shares of the
Company's common stock in July 1998. Notwithstanding the financing provided
by Dr. Sun, the Company will need to generate additional liquidity to meet its
current obligations and maintain its current level of operations or to fund
any significant future increase in revenues. The Company is actively seeking
additional financing to meet those needs. Management's plan in continuing
their operations include raising additional funds from new and existing
investors and financial institutions, evaluating its operating costs for
potential consolidation and future cost savings and generating revenues from
product sales.
The Company's goal is to bring to market higher-margin products based on the
Company's engineering capabilities, such as the DVD-ROM, DVD player and DVD
intelligent loader product lines, and to provide adequate technical and
marketing support for currently marketed products. In addition, the Company
intends to convert its commercial Video CD product lines to DVD-based product
lines. To meet the Company's objectives, operations will be streamlined and
lower-margin product lines or other operations that are likely to generate
significant negative cash flow for the foreseeable future will be eliminated.
As part of this plan the Company will no longer produce consumer Video CD
players in China and will no longer produce the New Media Division's current
product line while completing development of its Catapult ad insertion product
for sale or license to a third party.
There can be no assurance that the Company will obtain additional financing or
product revenue necessary to continue operations. The financial statements do
not include any adjustments to reflect the possible future effects on the
recoverability and classification of assets or the amounts and classification
of liabilities that may result from the outcome of this uncertainty.
Note 2- Net Loss Per Share
In 1997 the Financial Accounting Standards Board issued Statement No. 128,
Earnings Per Share ("FAS 128"). FAS 128 replaced the calculation of primary
and fully diluted net income (loss) per share with basic and diluted net
income (loss) per share. Unlike primary net income (loss) per share, basic
net income (loss) per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted net income (loss) per share is
very similar to the previously reported net loss per share. Net loss per
share amounts for all periods have been presented and, where appropriate,
restated to conform to the FAS 128 requirements.
Basic net loss per share is computed using the weighted average number of
common shares outstanding during the periods. Diluted net loss per share is
computed using the weighted average number of common and potentially dilutive
common shares during the periods, except those that are antidilutive. Basic
and diluted net loss per share is calculated as follows(in thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Net loss............................. ($4,917) ($1,995)
========= =========
Weighted average common shares
outstanding(1)..................... 14,526 11,893
--------- ---------
Shares used in computing Basic and Diluted
net loss per share................. 14,526 11,893
========= =========
Basic and Diluted net loss per share.. ($0.34) ($0.17)
========= =========
</TABLE>
__________________
(1) Does not include 8,311,598 and 8,388,814 shares of escrow common stock for
the three months ended June 30, 1998 and 1997, respectively.
For three months ended June 30, 1998 and 1997, respectively, 3,478,100 and
3,406,309 options and 18,489,955 and 18,480,970 of warrants were excluded from
the calculation of diluted loss per share because their effect would have been
anti-dilutive.
Note 3 - Comprehensive Income
The Company has adopted Statement of Financial Accounting Standards
("SFAS") No. 130, "Reporting Comprehensive Income," as of the first
quarter of fiscal year ended March 31, 1999 ("Fiscal 1999"). SFAS No. 130
establishes new rules for the reporting and display of comprehensive income
and its components, however it has no impact on the Company's net loss or
stockholders' equity.
The components of comprehensive income, net of tax, are as follows(in
thousands):
<TABLE>
<CAPTION>
Three Months Ended
June 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Net loss............................... ($4,917) ($1,995)
Cumulative foreign currency
translation adjustments............ (287) (90)
Deferred Compensation................ (72) (83)
--------- ---------
Comprehensive loss................. ($5,276) ($2,168)
========= =========
</TABLE>
Accumulated other comprehensive loss presented on the accompanying
consolidated condensed balance sheets consists of the cumulative foreign
currency translation adjustments and deferred compensation.
Note 3 - Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
June 30,
1998
-----------
<S> <C>
Inventories:
Raw materials $2,438
Work in process 948
Finished goods 1,778
-----------
$5,164
===========
</TABLE>
Note 4- DVD-ROM Asset Acquisition
In June 1998, the Company completed the acquisition (the "DVD-ROM
Acquisition") of a perpetual, worldwide, royalty-free license to DVD-ROM
technology owned by Hyundai Electronics Industries, Co., Ltd. ("Hyundai") in
exchange for 2,000,000 shares of the Company's common stock. In addition,
the Company, through a newly-formed, wholly-owned subsidiary, DVS-Korea,
completed the acquisition of DVD-ROM manufacturing capabilities, a related
research and development team and management from Hyundai for $1,000,000 in
cash. With this acquisition, the Company gained additional DVD intellectual
property, supply and manufacturing relationships, and additional product
lines. The principal product is the DVD-ROM drive, which the Company
introduced in June 1998 in small quantities with a 2X data transfer rate.
Additional intellectual property acquired from Hyundai included the technology
of CD-R, CD-RW and DVD-RAM drives.
The total purchase price of approximately $4.7 million included cash of $1
million, the issuance of 2,000,000 shares of common stock and related
acquisition costs of $162,000.
Based upon a preliminary valuation, the purchase price has been allocated as
follows(in thousands):
<TABLE>
<S> <C>
Current assets........................ $75
Equipment............................. 1,032
Intangibles........................... 2,400
Goodwill.............................. 655
In-process research and development... 500
-----------
$4,662
===========
</TABLE>
In accordance with generally accepted accounting principles, in-process
research and development of $500,000 has been expensed. Other intangible
assets will be amortized on a straight line basis over their estimated useful
lives of three years.
Note 5 - Other Related Party Transactions
To provide additional working capital, in June 1998 the Company borrowed
$1,000,000 from Dr. Edmund Y. Sun, the Company's Chairman and Chief Technology
Officer. The loan from Dr. Sun plus interest of approximately $7,000 were
subsquently converted into 1,331,479 shares of the Company's common stock in
July 1998 at $0.76 per share(a price equal to 100% of the average closing price
of the Company's common stock over the five trading days preceding the
conversion).
The company has $1,000,000 of notes payable outstanding to Hyundai as of June
30,1998 in relation to the DVD-ROM assets acquired. The Company expects to
pay off the entire balance once pending regulatory issues have been cleared.
The Company has an outstanding receivable balance of $2,900,000 as of June 30,
1998 with its former joint venture partner in the Peoples Republic of China
("China"). The Company, on behalf of the Panyu Joint Venture, has retained a
local CPA firm in China to perform an investigative audit on transactions with
its former joint venture partner and retained a Chinese Counsel to provide
advice on how to recover payment from the outstanding balance and is currently
investigating all available legal remedies. The balance was fully reserved at
June 30, 1998, as there can be no assurance that any amounts will be recovered
from its former joint venture partner.
The Company's receivable outstanding from Wyan, a company located in China,
was approximately $542,000 as of June 30, 1998, which was fully reserved for.
The Company owns less than 20% of Wyan's equity.
Note 6 - Recent Accounting Pronouncements
The Financial Accounting Standards Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", which establishes accounting
and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to
as derivatives) and for hedging activities. SFAS 133 will be effective for
the Company at the beginning of the June 2000 quarter for both annual and
interim reporting periods. The Company is evaluating the potential impact of
this accounting pronouncement on required disclosures and accounting practice.
Note 7 - Restricted Cash
As of June 30, 1998, the Company has approximately $1,650,000 of cash reserved
for letters of credit on inventory purchases in Asia.
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
This document contains forward-looking statements within the meaning of the
"safe-harbor" provisions of the Private Securities Litigation Act of 1995 that
involve risks and uncertainties, including, without limitation, statements
with respect to the Company's strategy, proposed sales of the Company's
products, markets, and the development of the Company's products. The
Company's actual results may differ materially from those described in these
forward-looking statements due to a number of factors, including, but not
limited to, the uncertainty of market acceptance of DVD and Video CD players
and sub-assemblies and other Company products, including DVD-ROM products and
network video, planned growth of the Company's operations, including
potential acquisitions of other businesses or technologies, dependence on a
limited number of suppliers of certain components used in the Company's
operations, risks associated with rapid technological change and obsolescence
and product development, conducting business in foreign countries, such as
China, South Korea and Taiwan, and the competitive market for the Company's
products, and other factors described in Exhibit 99.1 the Company's Annual
Report on Form 10-KSB for the fiscal year ended March 31, 1998, or in other
documents the Company files from time-to-time with the Securities and
Exchange Commission. The following discussion should be read in conjunction
with the Consolidated Financial Statements and Notes thereto included in
the Company's Annual Report on Form 10-KSB for the fiscal year ended March 31,
1998 and the condensed consolidated financial statements and notes thereto
included herein for the three months ended June 30, 1998.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THE
THREE MONTHS ENDED JUNE 30, 1997
The following table sets forth for the periods indicated certain income and
expense items expressed as a percentage of the Company's total revenues for
the three months ended June 30, 1998 compared to the three months ended June
30, 1997. See Condensed Consolidated Statements of Operations.
<TABLE>
<CAPTION>
Percent of Revenue
-------------------
Three Months Ended
June 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues 100.0% 100.0%
Gross margin 22.1% 5.6%
Research and development 74.5% 16.8%
Sales and marketing 39.0% 10.9%
General and administration 95.9% 23.3%
Acquired in process R & D 20.9% 0.0%
Operating loss -208.2% -45.4%
Net loss -205.8% -37.0%
</TABLE>
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Consolidated Revenue $2,389 $5,388 -55.7%
</TABLE>
Total revenue decreased $3 million, or 55.7% for the three months ended June
30, 1998 compared with the three months ended June 30, 1997 as a result of
decreasing product and component revenue.
Product revenue decreased $1.4 million, or 37.2% to $2.3 million for the three
months ended June 30, 1998 compared with the three months ended June 30, 1997.
Product revenue for the three months ended June 30, 1998 includes Video CD
players, digital advertisement insertion systems, computer peripheral
products, and sub-assemblies; whereas, product revenue for the three months
ended June 30, 1997 consists almost entirely of sub-assemblies of Video CD
players. With the manufacturing capability acquired in August 1997 in Panyu
China, the Company has transitioned from selling sub-assemblies of Video CD
players to the finished products. However, with the declining price of the
Video CD Player in China due to the increasing number of VCD manufacturing in
China, both the unit price per player and the number of players and
sub-assemblies sold in China by the Company have significantly decreased.
The Video CD player revenue was further negatively impacted due to the
downtime from restructuring of the sales and marketing personnel at the
Company's Panyu China Joint Venture. The decrease in the Video CD player
revenue was partially offset by the revenue from new products-
digital advertisment insertion systems and computer peripheral products.
For the three months ended June 30, 1998 and 1997, development and service
revenue was insignificant.
There was no component revenue in the three months ended June 30, 1998
compared to $1.7 million in the three months ended June 30, 1997. The decrease
resulted from the Company's decision to sell finished goods and sub-assemblies
rather than component parts. Component revenue was primarily derived from the
sale of certain inventory parts in excess of current manufacturing needs of
the Company and was used to generate working capital and strengthen customer
relationship. It is anticipated that component revenue will continue to be
insignificant in absolute dollars and as percentage of total revenue in the
future.
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Gross margin $528 $302 74.8%
as a percentage of revenue 22.1% 5.6%
</TABLE>
The increase in the gross margin as a percentage of total revenue for the
three months ended June 30, 1998 compared to the same period last year was due
to decreased component sales, which have a low margin and increased product
sales from the Commercial Video CD players ("video engines"), which have a
higher margin. This increase was partially offset by a decreased gross margin
from the Consumer Video CD players sold in China.
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Research and Development $1,780 $904 96.9%
as a percentage of revenue 74.5% 16.8%
</TABLE>
Research and development expenses consist primarily of personnel and equipment
prototype costs required to conduct the Company's product development efforts.
Research and development expenses increased $0.9 million, or 96.9%, during the
three months ended June 30, 1998 compared with the same period in Fiscal year
1998. The increase in these expenses was primarily attributable to business
combinations including the acquisitions of the New Media Division and
Synchrome division and the formation of the Panyu joint venture in August 1997,
and purchase of the DVD-ROM manufacturing capabilities and licenses of
related intellectual property in June 1998. Total research and development
expenses from these divisions were $0.8 million for the three months ended
June 30, 1998. The remaining increase was primarily due to higher levels of
spending on product development programs and expenses related to headcount.
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Sales and Marketing $931 $585 59.1%
as a percentage of revenue 39.0% 10.9%
</TABLE>
Sales and marketing expenses consist primarily of personnel and consulting
costs involved in the selling process and in the marketing of the Company's
products, sales commissions, and expenses of trade shows and advertising.
Sales and marketing expenses increased $0.3 million, or 59.1%, during the
three months ended June 30, 1998 compared with the same period in fiscal year
1998. The increase in these expenses was primarily attributable to expenses
related to the operations acquired by the Company in business combinations
in August 1997.
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
General and Administrative $2,292 $1,258 82.2%
as a percentage of revenue 95.9% 23.3%
</TABLE>
General and administrative expenses consist of administrative salaries and
benefits, insurance, facility, legal, accounting, investor relations and other
business support costs. These expenses increased $1 million, or 82.2%, for
the three months ended June 30, 1998. $0.9 million of such increase was
primarily attributable to expenses related to the operations acquired by the
Company in business combinations that occurred in August 1997. The remaining
increase was primarily due to higher legal, accounting and consulting costs
from the Hong Kong subsidiary,
The Company expects that total operating costs will remain flat given the
consideration of the newly added DVD-ROM operation.
Acquired in process Research and Development
The Company recognized acquired in process research and development, a non-
cash charge, during the three months of Fiscal 1999 of approximately $0.5
million resulting from the acquisition of the DVD-ROM operation. There were no
such expenses during the first quarter of fiscal 1998.
<TABLE>
<CAPTION>
Three months ended
June 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Other income $58 $450 -87.1%
as a percentage of revenue 2.4% 8.4%
</TABLE>
The decrease in other income for the three month ended June 30, 1998 resulted
from lower interest income due to the declining cash balances and short-term
investment.
Liquidity And Capital Resources
As a result of the Company's significant operating losses and the cost of
acquiring and funding recent acquisitions, the Company's working capital has
been substantially reduced. The Company has as of June 30, 1998 working
capital of $3.1 million, including cash and cash equivalents and short-term
investments of $1.9 million, compared to working capital at March 31, 1998 of
$8.3 million, including cash and cash equivalents of $6.9 million. The
Company's available working capital is inadequate to fund the DVD-ROM
operation and the planned launch of its recently acquired DVD-ROM products,
while maintaining the Company's other activities.
To provide additional working capital, in June 1998 the Company borrowed $1
million from Dr. Edmund Sun, the Company's Chairman and Chief Technology
Officer. The loan from Dr. Sun was later converted into shares of the
Company's common stock in July 1998 (See Note 5 - Other Related Party
Transactions). Notwithstanding the financing provided by Dr. Sun, the Company
will need to generate additional liquidity to meet its current obligations and
maintain its current level of operations or to fund any significant future
increase in revenues. The Company is actively seeking additional financing to
meet those needs. Management's plan in continuing the Company's operations
include raising additional funds from new and existing investors and financial
institutions, evaluating its operating costs for potential consolidation and
future cost savings and generating revenues from product sales.
The Company's goal is to bring to market higher-margin products based on the
Company's engineering capabilities, such as the DVD-ROM, DVD player and DVD
intelligent loader product lines, and to provide adequate technical and
marketing support for currently marketed products. In addition, the Company
intends to convert its commercial Video CD product lines to DVD-based product
lines. To meet the Company's objectives, operations will be streamlined and
lower-margin product lines or other operations that are likely to generate
significant negative cash flow for the foreseeable future will be eliminated.
As part of this plan the Company will no longer produce consumer Video CD
players in China and will no longer produce the New Media Division's current
product line while completing development of its Catapult ad insertion product
for sale or license to a third party.
There can be no assurance that the Company will obtain additional financing or
product revenue necessary to continue operations. The financial statements do
not include any adjustments that may result from the outcome of this
uncertainty.
Net cash used in operating activities was $5.8 million for the three months
ended June 30, 1998 compared to $5.1 million for the three months ended June
30, 1997. Substantially all of the net cash used in operating activities in
the three months ended June 30, 1998 represented the net loss of $4.9 million
adjusted for non-cash charges for depreciation and amortization of $0.5
million and acquired in-process research and development of $0.5 million and
$1.7 million used to secure a letter of credit for purchases of inventory in
Asia. Substantially all the net cash used in operating activities in the
three months ended June 30, 1997 represented the net loss of $2.0 million
adjusted by non-cash charges for depreciation and amortization of $0.2 million
and net cash used to fund increased in accounts receivable of $0.8 million and
inventories of $1.0 million, and decreases in accounts payable of $1.0
million.
Net cash provided by investing activities was $0.8 million for the three
months ended June 30, 1998 compared to $1.4 million used in investing
activities for the three months ended June 30, 1997. The $0.8 million of cash
provided by investing activities in the three months ended June 30, 1998
includes the sale of short-term investments of $1 million which was partially
offset by acquisition of property and equipment of $0.2 million. Net cash
used for the three months ended June 30, 1997 was primarily for purchase of
short-term investments.
For the three months ended June 30, 1998, net cash provided by financing
activities was $1 million from proceeds of notes payable with Dr. Edmund Sun,
the Company's Chairman and Chief Technology Officer(See Note 5-Other Related
Party Transactions). Net cash provided by financing activities was minimal
for the three months ended June 30, 1997.
The Company has $1 million payable to Hyundai in relation to the DVD-ROM
purchase which the Company expects to pay off in August 1998.
The above activities resulted in a decrease in cash and cash equivalents of
$4.0 million for the three months ended June 30, 1998 compared to a decrease
in cash and cash equivalents of $6.5 million for the three months ended June
30, 1997.
The Company has an inventory purchase commitment with Siemens Energy &
Automation, Inc. of approximately $0.4 million as of June 30, 1998.
Part II. Other Information
Except as listed below, all information required by items in Part II is omitted
because the items are inapplicable or the answer is negative.
Item 2. Changes in Securities and Use of the Proceeds
On June 24, 1998, Dr. Edmund Y. Sun, the Company's Chairman and Chief
Technology Officer, entered into an irrevocable subscription agreement
with the Company whereby Dr. Sun agreed to purchase shares of the
Company's common stock ("Common Stock") in exchange for the cancellation
by Dr. Sun of $1,000,000 in aggregate principal amount of loans and
$7,397 of accrued interest thereon, owing from the Company to Dr. Sun.
The number of shares purchased by Dr. Sun was determined by dividing the
total principal and accrued interest of $1,007,397 by the average of the
closing sale price for the Common Stock on the five trading days
following the Company's release of its quarterly earnings press release
on June 30, 1998. Pursuant to the terms of the subscription agreement,
on July 8, 1998 Dr. Sun purchased a total of 1,331,479 shares of Common
Stock at a price per share of and $0.7566. The Company issued shares to
Dr. Sun in reliance on Rule 506 of the Securities Act of 1933, as amended
(the "Securities Act"). The Company's reliance on Rule 506 is based on
the following facts: (i) the offer and sale of the 1,331,479 shares of
Common Stock satisfies the terms and conditions of Rules 501 and 502
under the Securities Act; (ii) there was a single purchaser (the
"Purchaser"); and (iii) the Purchaser is an accredited investor as
defined in Rule 501(a) of the Securities Act.
Item 4. Submission of Matters to a Vote of Security Holders
In June 1998, the Company completed the acquisition of a perpetual,
worldwide, royalty-free license to DVD-ROM technology owned by Hyundai
Electronics Industries Co., Ltd. for 2,000,000 shares of Common Stock.
In addition, the Company, through a newly-formed, wholly-owned
subsidiary, DVS-Korea, completed the acquisition of DVD-ROM manufacturing
capabilities, a related research and development team and management from
Hyundai for $1,000,000 in cash. In connection therewith, the owners of
record collectively of approximately 50.1% (8,553,490 shares) of the
Company's issued and outstanding Common Stock entitled to vote on the
transaction as of April 30, 1998 (17,073,553 shares) signed a written
consent approving and adopting the terms of the transaction, including,
without limitation, the issuance of 2,000,000 shares of Common Stock to
Hyundai. In connection with obtaining such written consent, the Company
provided notice thereof to its shareholders in accordance Delaware
General Corporate Law ("DGCL") Section 228(d), and, on June 3, 1998,
filed an Information Statement on Schedule 14C (the "Information
Statement") with the Securities and Exchange Commission and mailed the
Information Statement to its shareholders. Although approval of the
Company's shareholders was not required under governing Delaware law,
such approval was required under Nasdaq rules applicable to companies
listed on the Nasdaq National Market.
Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed herewith or incorporated by reference:
(10) Material contracts incorporated by reference
10.1 Employment Agreement dated as of May 8, 1998 by and between
the Company and Sung Hee Lee.
10.2 Subscription Agreement dated June 24, 1998 by and between the
Company and Dr. Edmund Sun.
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
(1)Report on Form 8-K filed on July 6, 1998. Item 2 (Acquisition or
Disposition of Assets) and (Financial Statements and Exhibits)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Digital Video Systems, Inc.
----------------------------------
(Registrant)
Date: August 14, 1998 /s/ Edward M. Miller
- --------------------------- ------------------------------------
Edward M. Miller--
Chief Executive Officer and
President and Chief Operating
Officer-- United States Operations
EXHIBIT INDEX
Exhibit Number
10.1 Employment Agreement dated as of May 8, 1998 by
and between the Company and Sung Hee Lee.
10.2 Subscription Agreement dated June 24, 1998 by and
between the Company and Dr. Edmund Sun.
27.1 Financial Data Schedule
EXHIBIT 10.1
EMPLOYMENT AGREEMENT
This Employment Agreement (this "Agreement") is entered into as of
May 8, 1998, by and between Digital Video Systems, Inc., a Delaware
corporation (the "Company"), and Sung Hee Lee ("Lee").
WHEREAS, the Company desires to form a wholly-owned subsidiary of
the Company organized under the laws of Korea ("DVS-Korea") to purchase
certain assets of the DVS-ROM Business of Hyundai (the "Transaction");
WHEREAS, the Company desires to employ Lee to serve as the Managing
Director of DVS-Korea.
NOW, THEREFORE, in consideration of the mutual promises of the
parties hereto, it is mutually agreed by and between the parties hereto
as follows:
1. Employment.
1.1 Employment as Managing Director of DVS-Korea. The
Company agrees to employ Lee, and Lee agrees to be employed by the
Company, as the Managing Director of DVS-Korea, a company organized under
the laws of Korea and a wholly-owned subsidiary of the Company("DVS-
Korea") for the period beginning on the closing date of the Transaction
or such earlier date as the Company and Lee may agree to (the
"Commencement Date") and ending on the third anniversary of the
Commencement Date, unless such employment is terminated earlier pursuant
to Section 3 (the "Employment Period").
1.2 Duties as Employee. Lee agrees to serve the Company as
Managing Director of DVS-Korea during the Employment Period. Lee's
duties shall be those customary for a Managing Director of a company
similar to DVS-Korea and such other duties as are specified by the
Company's Board (the "Board"). In case of a reorganization, merger,
consolidation, liquidation, dissolution, sale of all or substantially all
of the Company's or DVS-Korea's assets or similar event, the Board
reserves the right, in its sole discretion, to change or modify Lee's
duties hereunder as it deems appropriate in good faith. During the
Employment Period, Lee shall devote full time to, and use his best
efforts to advance, the business and welfare of DVS-Korea and of the
Company. Lee shall not directly or indirectly render any service of a
business, commercial, or professional nature to any other person,
organization or other entity, whether for compensation or otherwise,
directly or indirectly, without the prior written consent of a majority
of the members of the Board. If requested by the Board, Lee shall resign
from the Board after the Commencement Date.
1.3 Effectiveness of Employment Agreement. If the
Transaction is not consummated, this Agreement shall terminate and shall
be without further force and effect, and none of the parties hereto shall
have any further obligation of any nature or kind whatsoever in
connection with this Agreement.
1.4 Salary and Benefits.
(a) Salary and Bonus. For the first year of the
Employment Period, DVS-Korea shall pay Lee a salary at the annual rate of
$160,000 per year payable at least as frequently as monthly and subject
to such payroll deductions as may be necessary or customary in respect of
DVS-Korea's salaried employees in general. For the first year of the
Employment Period, DVS-Korea shall pay Lee a bonus (the "First Year
Bonus") to be based upon performance standards to be agreed to by the
Board and Lee. Lee's salary and bonus for periods after the first year
of the Employment Period shall be mutually agreed to by Lee and the Board
or, in the absence of any such agreement, shall continue at the same rate
of salary as for the first year of the Employment Period and with a bonus
to be paid at the end of the second and third years of the Employment
Period in an amount equal to the total bonus paid in the first year of
the Employment Period. At the end of the second year of the Employment
Agreement, DVS-Korea shall negotiate with Lee in good faith to extend the
Employment Period for an additional three years from the end of the
original Employment Period. If DVS and Lee agree to extend the original
Employment Period (the "Original Employment Period") Lee's salary and
bonus shall be mutually agreed to by DVS-Korea and Lee at that time.
(b) Incentive, Savings and Retirement Plans. Lee
shall be entitled to participate at the discretion of the Board in all
annual bonus, incentive, stock option, savings and retirement plans,
practices, policies and programs applicable generally to other senior
executives of the Company.
(c) Welfare Benefit Plans. Lee shall be eligible
for participation in and shall receive all benefits under welfare benefit
plans, practices, policies and programs provided by the Company to the
extent applicable generally to other senior executives of the Company.
(d) Vacations. Lee shall be entitled to [three]
weeks paid vacation per year of service during the Employment Period. To
the extent vacation is not taken in any year, it shall be accrued and may
be taken in subsequent years.
(e) Expenses. Lee shall be entitled to receive
prompt reimbursement for all reasonable employment expenses incurred by
him in accordance with the policies, practices and procedures as in
effect generally with respect to other senior executives of the Company.
(f) Fringe Benefits. Lee shall be entitled to
fringe benefits in accordance with the plans, practices, programs and
policies as in effect generally with respect to other senior executives
of the Company.
2. Additional Compensation.
2.1 Options.
(a) In further consideration for Lee's performance
of his obligations under this Agreement, and pursuant to an option
agreement to contain such terms as are customarily provided for by the
Company's 1996 Stock Option Plan, the Company shall grant to Lee options
(the "Options") to purchase 125,000 shares of Company's common stock (the
"Shares"), subject to shareholder approval, during the five-year period
from the date of grant, at an exercise price per share equal to the
closing price of the Company's common stock on the Nasdaq National Market
on the date of this Agreement.
(b) The Shares vested and subject to exercise shall
be 2.083% of such Shares at the end of each month after the grant date
during which Lee continues to be employed as the Managing Director of
DVS-Korea, so that all of the Shares may be purchased on or after the
fourth anniversary of the grant date if Lee has continued to be employed
as the Managing Director of DVS-Korea through that date. In the event
that Lee's employment with the Company terminates for any reason, all
Options shall either be vested or cancelled as set forth in Section 3.4
hereof.
2.2 Incentive Options. The Options shall all be granted as
incentive stock options (up to the maximum permitted by applicable law)
shall be granted as incentive stock options, subject to exercise price
requirements for incentive stock options.
3. Termination. The term of Lee's employment under this Agree-
ment may terminate as hereinafter provided, in which case (i) Lee shall
be entitled to the amounts set forth in Section 3.4 hereof and (ii) Lee
shall remain subject to the provisions of Sections 4, 5 and 6 hereof to
the extent applicable. The Employment Period shall not extend for any
period beyond the third anniversary of the Commencement Date unless
agreed to in writing by Lee and the Company.
3.1 Death or Disability. If Lee dies or becomes disabled
during the Employment Period, Lee's employment under this Agreement
shall automatically terminate upon death or after three consecutive
months of disability, as the case may be. "Disability" shall mean any
physical or mental illness that renders Lee unable to perform his agreed-
upon services under this Agreement for any three consecutive months.
Such disability shall be determined by a licensed physician not
affiliated with the parties to this Agreement. In the event of Lee's
death, the amounts due him pursuant to this Agreement through the date of
his death shall be paid to whomever he has previously designated or, in
the event no such designation is made, to his estate, or to the
beneficiaries of his estate.
3.2 Good Cause. Lee's employment under this Agreement may
be terminated by the Company for "good cause," as determined in good
faith by the Board. The term "good cause" is defined as any one or more
of the following occurrences:
(a) Lee's continuing repeated willful failure or
refusal to perform his duties as required by this Agreement or other
material breach of this Agreement, provided, that termination of Lee's
employment pursuant to this subsection (a) shall not constitute valid
termination for cause unless Lee shall have first received written notice
from the Board stating with specificity the nature of such failure or
refusal and affording Lee at least 15 days to correct the act or omission
complained of;
(b) Gross negligence, material violation by Lee of
any duty of loyalty to DVS-Korea or to the Company or any other material
misconduct on the part of Lee, provided that termination of Lee's
employment pursuant to this subsection (b) shall not constitute valid
termination for cause unless Lee shall have first received written notice
from the Board stating with specificity the nature of such failure or
refusal and affording Lee at least 15 days to fully correct the act or
omission complained of and to indemnify the Company for any damage caused
to it by such act or omission;
(c) Lee's conviction by, or entry of a plea of
guilty or nolo contendere in, a court of competent and final jurisdiction
for any crime involving moral turpitude or punishable by imprisonment in
excess of six months in the jurisdiction involved; or
(d) Lee's commission of an act of fraud, whether
prior to or subsequent to the date hereof, upon DVS-Korea or the Company.
3.3 Other Termination. (a) DVS may terminate this
Agreement during the term of the Employment Period by providing Lee with
six months prior written notice. (The foregoing notice requirement shall
not apply to any termination being made pursuant to Section 3.2 hereof.)
(b) Mr. Lee may terminate this Agreement during the term of
the Employment Period by providing DVS with 12 months prior written
notice; provided, however, that any such notice may not be delivered
until at least 12 months from the Commencement Date.
3.4 Payments Upon Termination.
(a) Completion of Employment Period. If at the end
of the Original Employment Period the parties have not agreed in writing
to extend the term of Lee's employment with the Company, Lee shall
receive his salary and any guaranteed minimum bonus through the date of
such termination. In addition, Lee shall receive a cash severance payment
equal to 12-months salary at the salary rate received by Lee in the 12
months preceding such termination. Options vested at such termination
date shall be exercisable in accordance with the terms of the Company's
1996 Stock Option Plan (the "Option Plan"). Options not vested at such
termination date shall be immediately cancelled. In no event shall Lee
be entitled to receive additional salary, bonus, options or compensation
of any other kind hereunder.
(b) Death or Disability. In the event of Lee's
termination as set forth in Section 3.1 hereof, he shall receive his
salary through the date of such termination. Options vested at such
termination date shall be exercisable in accordance with the terms of the
Option Plan. In addition, if such termination occurs: (i) during the
first year of the Original Employment Period, Lee shall receive a cash
severance payment equal to 24 months salary at the salary rate received
by Lee in first year of the Original Employment Period; (ii) during the
second year of the Original Employment Period, Lee shall receive a cash
severance payment equal the sum of (A) 12 months salary at the salary
rate received by Lee in the second year of the Employment Period plus (B)
all of the salary he would have received if he had continued his
employment through the second year of the Original Employment Period; and
(iii) during the third year of the Original Employment Period, Lee shall
receive a cash severance payment equal to 12 months salary at the salary
rate received by Lee during the third year of the Original Employment.
Options not vested at such termination date shall be immediately cancel-
led. In no event shall Lee be entitled to receive additional salary,
bonus, options or compensation of any other kind hereunder.
(c) Good Cause. In the event of Lee's termination
as set forth in Section 3.2 hereof, he shall receive his salary through
the date of such termination. Options vested at such termination date
shall be exercisable in accordance with the terms of the Option Plan.
Options not vested at such termination date shall be immediately cancel-
led. In no event shall Lee be entitled to receive additional salary,
bonus, options or compensation of any other kind hereunder.
(d) Other Termination. In the event of Lee's
termination as set forth in Section 3.3 hereof, he shall receive his
salary through the date of such termination. Options vested at such
termination date shall be exercisable in accordance with the terms of the
Option Plan. In addition, if such termination occurs: (i) during the
first year of the Original Employment Period, Lee shall receive a cash
severance payment equal to 24 months salary at the salary rate received
by Lee in first year of the Original Employment Period; (ii) during the
second year of the Original Employment Period, Lee shall receive a cash
severance payment equal the sum of (A) 12 months salary at the salary
rate received by Lee in the second year of the Employment Period plus (B)
all of the salary he would have received if he had continued his
employment through the second year of the Original Employment Period; and
(iii) during the third year of the Original Employment Period, Lee shall
receive a cash severance payment equal to 12 months salary at the salary
rate received by Lee during the third year of the Original Employment.
Options not vested at such termination date shall be immediately cancel-
led. In no event shall Lee be entitled to receive any other additional
salary, bonus, options or compensation of any other kind hereunder.
4. Ownership of Intangibles. Lee hereby grants and assigns to
the Company all of his right, title and interest in and to any ideas,
designs, techniques, processes, trademarks, inventions and improvements
(collectively, "Inventions") arising during the term of this Agreement,
which Inventions relate to the business of the Company or any of its
affiliates, or to actual or demonstrably anticipated research or
development of the Company or any of its affiliates, or results from work
performed by Lee for the Company or any of its affiliates, together with
all patents that are pending or have been issued in the United States,
Korea and in all other countries during the term of this Agreement with
respect to such Inventions (the "Proprietary Rights"). All such
Proprietary Rights shall be the sole and exclusive property of the
Company and shall remain such notwithstanding the subsequent termination
of employment under this Agreement. To the extent that any Proprietary
Rights or other ideas, designs, techniques, processes, trademarks,
inventions or improvements used by the Company during the term of this
Agreement rely upon or use patented or unpatented Inventions that Lee has
made or conceived prior to the date of this Agreement, Lee hereby grants
an exclusive, perpetual, royalty-free, worldwide license to use such
Invention.
5. Confidential Information. Lee agrees that during the
Employment Period, he will be dealing with proprietary, nonpublic and
confidential information, including inventions and processes developed by
the Company or any of its affiliates, relating to the present and
prospective business, assets and good will of the Company or any of its
affiliates (all of the foregoing referred to as "confidential informa-
tion"). Without limiting the generality of the foregoing, it is
understood that Lee will have access to information regarding intellec-
tual property of the Company or any of its affiliates, inventions and
ideas under development by them, and information regarding the actual and
prospective business and customers of the Company or any of its affili-
ates. Lee agrees that he will not disclose to anyone, directly or
indirectly, any of such confidential matters, or use them other than in
the course of performing his obligations under this Agreement. All docu-
ments prepared by Lee in connection with the services provided herein,
and all confidential information (however embodied or recorded) that
might be given to him are the exclusive property of the Company and shall
be returned to the Company at its request. After termination of Lee's
employment with the Company, he shall not, without the prior written
consent of the Company, or as may otherwise be required by law or legal
process, communicate or divulge any such information, knowledge or data
to anyone other than the Company and those designated by it in writing.
Lee acknowledges that such actions could cause irreparable harm to the
Company and that the Company may obtain an injunction or other equitable
relief to enforce this provision. Furthermore, upon termination of this
Agreement, Lee shall promptly deliver to the Company all books,
memoranda, records and written data in original form of every kind
relating to the business and affairs of the Company that may then be in
his personal possession.
6. Noncompetition.
6.1 No Competing Activities. Lee agrees that, while he is
employed by the Company, he shall not engage or participate in any state
of the United States or in Korea, directly or indirectly, either as an
owner, partner, director, trustee, officer, employee, consultant, advisor
or in any other individual or representative capacity, in any activity
which is the same as, similar to or competitive in any manner with the
business of the Company or its members or affiliates (herein, a
"Competing Activity") or have any investment in a business which is
engaged in a Competing Activity (other than an ownership interest of less
than 5% of any company whose securities are listed on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market).
Lee further agrees that in the event of a termination for good cause as
set forth in Section 3.2 hereof or Lee's election to terminate employment
pursuant to Section 3.3 hereof, he shall not, for a two-year period
following such termination of employment, engage in a Competing Activity
or have any investment in a business which is engaged in a Competing
Activity (other than an ownership interest of less than 5% of any company
whose securities are listed on the New York Stock Exchange, the American
Stock Exchange or the Nasdaq National Market).
6.2 Reasonable Limitations. Lee acknowledges that, given
the nature of the Company's business, the covenants contained in this
Section 6 contain reasonable limitations as to time, geographical area
and scope of activity to be restrained, and do not impose a greater
restraint than is necessary to protect the legitimate business interests
of the Company. If, however, this Section 6 is determined by any court
of competent jurisdiction, or in any arbitration, as the case may be, to
be unenforceable by reason of its extending for too long a period of time
or over too large a geographic area or by reason of its being too
extensive in any other respect or for any other reason it will be
interpreted to extend only over the longest period of time for which it
may be enforceable and/or over the largest geographical area as to which
it may be enforceable and/or to the maximum extent in all other aspects
as to which it may be enforceable, all as determined by such court, or in
such arbitration, as the case may be.
6.3 Acknowledgement. Lee understands that the restrictions
in Section 6.1 hereof may limit his ability to earn a livelihood in a
business similar to the business of the Company, but he nevertheless
believes that he has received and will receive sufficient consideration
hereunder and otherwise as an employee of the Company to justify such
restrictions which, in any event, given his education, abilities and
skills, Lee does not believe would prevent him from earning a living.
7. WAIVER OF JURY. WITH RESPECT TO ANY DISPUTE ARISING UNDER OR
IN CONNECTION WITH THIS AGREEMENT OR ANY RELATED AGREEMENT, EACH PARTY
HEREBY IRREVOCABLY WAIVES ALL RIGHTS IT MAY HAVE TO DEMAND A JURY TRIAL.
THIS WAIVER IS KNOWINGLY, INTENTIONALLY, AND VOLUNTARILY MADE AND EACH
PARTY ACKNOWLEDGES THAT NONE OF THE OTHER PARTIES NOR ANY PERSON ACTING
ON BEHALF OF THE OTHER PARTIES HAS MADE ANY REPRESENTATION OF FACT TO
INDUCE THIS WAIVER OF TRIAL BY JURY OR IN ANY WAY TO MODIFY OR NULLIFY
ITS EFFECT. THE PARTIES EACH FURTHER ACKNOWLEDGE THAT THEY HAVE BEEN
REPRESENTED (OR HAVE HAD THE OPPORTUNITY TO BE REPRESENTED) IN THE
SIGNING OF THIS AGREEMENT AND IN THE MAKING OF THIS WAIVER BY INDEPENDENT
LEGAL COUNSEL, SELECTED OF THEIR OWN FREE WILL, AND THAT THEY HAVE HAD
THE OPPORTUNITY TO DISCUSS THIS WAIVER WITH COUNSEL. THE PARTIES EACH
FURTHER ACKNOWLEDGE THAT THEY HAVE READ AND UNDERSTAND THE MEANING AND
RAMIFICATIONS OF THIS WAIVER PROVISION.
8. Miscellaneous.
8.1 Modification and Waiver of Breach. No waiver or
modification of this Agreement shall be binding unless it is in writing
signed by the parties hereto. No waiver of a breach hereof shall be
deemed to constitute a waiver of a future breach, whether of a similar or
dissimilar nature. DVS agrees that it shall, if required, modify this
Agreement to ensure compliance with Korean law, and if Lee requests, to
provide for employment of Lee by another DVS affiliate, including,
without limitation, DVS's Hong Kong subsidiary.
8.2 Assignment. This Agreement shall inure to the benefit
of and shall be binding upon the Company, its successors and assigns. The
obligations and duties of Lee hereunder are personal and not assignable,
whether voluntarily or involuntarily or by operation of law or otherwise.
8.3 Notices. All notices and other communications required
or permitted under this Agreement shall be in writing, served personally
on, or mailed by certified or registered United States mail to, the party
to be charged with receipt thereof. Notices and other communications
served by mail shall be deemed given hereunder 72 hours after deposit of
such notice or communication in the United States Post Office as
certified or registered mail with postage prepaid and duly addressed to
whom such notice or communication is to be given, in the case of (a) the
Company, 160 Knowles Drive, Los Gatos, California 95032, Attention:
Secretary, or (b) Lee, to the address set forth below his name on the
signature page hereof. Any such party may change said party's address
for purposes of this Section 9.3 by giving to the party intended to be
bound thereby, in the manner provided herein, a written notice of such
change.
8.4 Counterparts. This instrument may be executed in one
or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same Agreement.
8.5 Governing Law. This Agreement shall be construed in
accordance with, and governed by, the internal laws of the State of
California.
8.6 Legal Fees. If any legal action or other proceeding is
brought for the enforcement of this Agreement, or because of any alleged
dispute, breach, default or misrepresentation in connection with this
Agreement, the successful or prevailing party shall be entitled to
recover reasonable attorneys' fees and other costs it incurred in that
action or proceeding, in addition to any other relief to which it may be
entitled.
8.7 Savings Clause. If any provision of this Agreement or
the application thereof is held invalid, the invalidity shall not affect
other provisions or applications of the Agreement which can be given
effect without the invalid provisions or applications and to this end the
provisions of this Agreement are declared to be severable.
8.8 Complete Agreement. This instrument constitutes and
contains the entire agreement and understanding concerning Lee's
employment and the other subject matters addressed herein between the
parties, and supersedes and replaces all prior negotiations and all
agreements proposed or otherwise, whether written or oral, concerning the
subject matters hereof. This is an integrated document.
IN WITNESS WHEREOF, the undersigned have executed this Agreement on
the day and year first above written.
LEE: THE COMPANY:
DIGITAL VIDEO SYSTEMS, INC.
/S/ Sun Hee Lee By: /S/ Thomas Parkinson
- -------------------------- --------------------------
Sung Hee Lee Thomas Parkinson
Address:
Hyundai Apt #310-1101
KwangJang-Dong, KwangJin-Ku
Seoul, Korea
EXHIBIT 10.2
AGREEMENT
Digital Video Systems, Inc.
160 Knowles Drive
Los Angeles, California 95032
Gentlemen:
I am executing and delivering this agreement (this "Agreement") in
connection with my loan of funds to and purchase from Digital Video
Systems, Inc., a Delaware corporation (the "Company"), of shares of the
Company's common stock, par value $.0001 (the "Common Stock").
1. Loan. Concurrently with my execution of this Agreement, I shall
lend the Company $500,000, which shall bear interest at 10% per annum and
shall be repaid as set forth in paragraph 2 below (the "New Loan"). The
New Loan shall be in addition to the $500,000 loan previously made by me
and evidenced by a promissory note, dated May 28, 1998 (the "Prior
Loan").
2. Unconditional and Irrevocable Subscription. I hereby
unconditionally and irrevocably agree that on the date (the "Purchase
Date") occurring five trading days after the earlier to occur of (i) the
filing of the Company's Annual Report on Form 10-KSB for the Company's
fiscal year ended March 31, 1998 ("Fiscal 1998") or (ii) the issuance by
the Company of a press release disclosing the Company's operating and
financial results for Fiscal 1998, I shall purchase shares of Common
Stock (the "Shares") for a total purchase price of $1,000,000 plus the
accrued interest through the Purchase Date on the New Loan and the Prior
Loan. The purchase price per share (the "Purchase Price") and the number
of shares being purchased shall be determined as set forth in paragraph 2
below. Payment for the Shares shall be made by the cancellation of the
New Loan and the Prior Loan, effective as of the Purchase Date, and all
principal and interest owing on the New Loan and the Prior Loan shall be
deemed paid by the issuance of the Shares to me.
3. Purchase Price. The Purchase Price shall equal the average
closing sales price, or the closing bid if no sales were reported, for a
share of Common Stock, as quoted on The Nasdaq National Market System for
the five trading days immediately preceding, and including the Purchase
Date; provided, that the Purchase Price shall not be greater than $1.20
per share of Common Stock, or less than $.50 per share of Common Stock.
The number of Shares to be purchased shall be equal to $1,000,000 plus
the accrued interest through the Purchase Date on the New Loan and the
Prior Loan, divided by the Purchase Price.
4. Registration Rights. The Company shall, within 30 days of the
sale and purchase of the Shares under this Agreement, file a registration
statement with the Securities and Exchange Commission (the "SEC")
covering such Common Stock under the Securities Act of 1933, as amended
(the "Securities Act"). The Company shall use its reasonable best
efforts to cause such registration statement to become effective under
the Securities Act.
5. Purchaser's Representations, Warranties and Covenants. I hereby
represent, warrant to and agree with the Company as follows:
(a) I understand that the shares of Common Stock sold to me
hereby have not been registered under the Securities Act, or any state
securities laws in reliance on exemptions from such registration for
transactions not involving any public offerings. Consequently, such
shares of Common Stock may not be sold, transferred or otherwise disposed
of unless subsequently registered under the Securities Act and applicable
state securities laws, or an exemption from such registration is
available, and the certificate or certificates representing such shares
of Common Stock shall bear a restrictive legend in substantially the
following form (and a stop-transfer may be placed against transfer of
such shares of Common Stock):
THE SHARES OF COMMON STOCK REPRESENTED BY THIS CERTIFICATE
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, OR ANY STATE SECURITIES ACT. SUCH SHARES OF
COMMON STOCK MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS (i) A REGIS-
TRATION STATEMENT UNDER SAID ACT SHALL HAVE BECOME
EFFECTIVE WITH RESPECT THERETO OR (ii) IN THE OPINION OF
COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER,
AN EXEMPTION UNDER SAID ACT AND FROM ANY APPLICABLE STATE
SECURITIES LAWS IS AVAILABLE.
(b) I am purchasing shares of Common Stock hereunder solely for
my own account, for investment, and not with a view to or for the resale,
assignment, distribution, subdivision or fractionalization thereof.
(c) I agree not to sell any shares of the Company's Common
Stock, including without limitation, the Shares, prior to January 1,
1999.
(d) I have (i) reviewed and understand the Company's Business
Plan dated June , 1998 provided to me by the Company (the
"Business Plan"); (ii) had the opportunity to review the Company's
quarterly reports on Form 10-QSB for the fiscal quarters ended June 30,
1997, September 30, 1997 and December 30, 1997, filed with the SEC, and
the Company's preliminary operating results for the fiscal quarter and
year ended March 31, 1998; and (iii) had an opportunity to ask questions
of and receive answers from representatives of the Company concerning the
financial condition and prospects of the Company, and to obtain any
additional information necessary to verify the accuracy of the
information in the Business Plan.
(e) I understand that the Business Plan and any other documents
delivered to me by the Company in connection with my purchase of Common
Stock hereunder (collectively, the "Disclosure Materials") have not been
approved or disapproved by the SEC or any state securities commission nor
has any such commission passed upon the accuracy or adequacy of the
Disclosure Materials or the fairness of my purchase of Common Stock
hereunder. Any representation to the contrary is unlawful.
(f) I understand that the Company intends to use the proceeds
from my purchase of Common Stock hereunder for general corporate purposes
and, at its option, for other purposes described in the Business Plan.
(g) I am relying upon my own counsel, accountant and/or business
adviser concerning legal, tax, business and related aspects of my
purchase of Common Stock hereunder and my investment in the Company and I
am not relying upon Troy & Gould Professional Corporation who serves as
counsel to the Company.
(h) I have the authority to enter into this Agreement and to
consummate the transactions contemplated herewith without obtaining the
consent of any third party, and entering into this Agreement and
consummating such transactions will not conflict with any agreement with,
or obligation to, any third party.
(i) I will not enter into any lease, purchase agreement, license
or other agreement of any type that commits the Company to expend in
excess of $5,000 or that may otherwise create a liability for the Company
of in excess of $5,000 without the prior written approval of the
Company's chief executive officer.
6. Company's Representations, Warranties and Covenants. The Company
hereby represents and warrants to and agrees with me as follows:
(a) The Company is a corporation duly organized, existing and in
good standing under the laws of the State of Delaware and has the
corporate power to conduct the business which it proposes to conduct.
(b) All corporate action required to authorize the execution,
delivery and performance of this Agreement has been duly taken or will
have been duly taken prior to the consummation of the purchase and sale
provided for in this Agreement.
(c) The shares of Common Stock to be sold and purchased
hereunder have been, or, prior to the consummation of such sale and
purchase, will have been, duly and validly authorized and, when issued
and paid for in accordance with the terms of this Agreement, will be duly
and validly issued, fully paid and nonassessable.
(d) For so long as I am a director of the Company, the Company
will provide to me by telefax to a number for me that is on file with the
Company copies of all proposed purchase orders, invoices and other
agreements that would commit the Company to expend in excess of $5,000 or
that may otherwise create a liability for the Company of in excess of
$5,000 at least 48 hours prior to entering into any such commitment. In
the event I disapprove of such commitment by delivering written notice of
such disapproval to the Company's chief executive officer within 48 hours
of my receiving by telefax the documentation described above, the Company
shall not enter into such commitment unless it is approved by the
Company's Board of Directors at a duly held meeting.
7. Survival. The representations, warranties and covenants in
Sections 5 and 6 above shall survive the delivery of this Agreement and
the Purchase Price to the Company and the delivery to me of the shares of
Common Stock purchased.
8. Revocation. I acknowledge that the Company in executing its
current Business Plan is placing substantial reliance on my agreement to
purchase the Shares, and I agree that I cannot cancel, terminate or
revoke this Agreement or any of my agreements hereunder.
9. Miscellaneous.
(a) All notices or other communications given or made hereunder
shall be in writing and shall be delivered by hand, against written
receipt, or mailed by registered or certified mail, return receipt
requested, postage prepaid, to me at my address set forth below and to
the Company at its address set forth above. Notices shall be deemed
given on the date of receipt or, if mailed, three business days after
mailing, except notices of change of address, which shall be deemed given
when received.
(b) Notwithstanding the place where this Agreement may be
executed by me or the Company, we agree that all the terms and provisions
hereof shall be construed in accordance with and governed by the internal
laws of the State of California without regard to principles of conflict
of laws.
(c) This Agreement constitutes the entire agreement between us
with respect to the subject matter hereof and may be amended only by a
writing executed by each of us.
(d) The waiver by either of us of a breach of any provision of
this Agreement shall not operate, or be construed, as a waiver of any
subsequent breach of any provision of this Agreement.
(e) We agree to execute and deliver all further documents,
agreements and instruments and to take such further action as may be
necessary or appropriate to carry out the purposes and intent of this
Agreement.
(f) This Agreement may be executed in one or more counterparts,
each of which shall be deemed an original, and all of which together
shall constitute one and the same instrument.
I have signed this Agreement as of the date indicated below.
/S/ Dr. Edmund Y. Sun
-----------------------
Dr. Edmund Y. Sun
Address:
One Atherton Oaks Lane
Atherton, California, 94027
ACKNOWLEDGED AND AGREED:
DIGITAL VIDEO SYSTEMS, INC.
By:
Name: Edward M. Miller
Title: Chief Executive Officer
Date: June 24, 1998
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THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED BALANCE SHEETS, CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS
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<MULTIPLIER> 1,000
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,874
<SECURITIES> 0
<RECEIVABLES> 2,594
<ALLOWANCES> 1,320
<INVENTORY> 5,164
<CURRENT-ASSETS> 10,801
<PP&E> 2,872
<DEPRECIATION> 857
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<CURRENT-LIABILITIES> 7,670
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0
0
<COMMON> 3
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<TOTAL-LIABILITY-AND-EQUITY> 16,392
<SALES> 2,389
<TOTAL-REVENUES> 2,389
<CGS> 1,861
<TOTAL-COSTS> 1,861
<OTHER-EXPENSES> 5,503
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,917)
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<NET-INCOME> (4,917)
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