United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB/A
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Period Ended September 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.)
280 Hope Street
Mountain View, CA 94041
-------------------------------------- ---------
(Address of principal executive offices) (Zip Code)
(650) 625-8200
--------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
-------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that
the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes X No
Class Outstanding at October 31, 1998
- ---------------------------------- -------------------------------
(Common Stock, $.0001 Par Value) 25,156,470
Digital Video Systems, Inc.
Index
Part I. Financial Information Page
- ----------------------------- ----
Item 1. Financial Statements (Unaudited)
Condensed consolidated balance sheets-
September 30, 1998 4
Condensed consolidated statements of operations-
Three months ended September 30, 1998 and 1997 5
Condensed consolidated statements of cash flows-
Six months ended September 30, 1998 and 1997 6
Notes to condensed consolidated financial statements-
September 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
None --
Item 3. Defaults upon Senior Securities
None --
Item 4. Submission of Matters to a Vote of Security Holders
None --
Item 5. Other Information --
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Item I. Financial Statements
Digital Video Systems, Inc.
Condensed Consolidated Balance Sheet
(in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30,
1998
------------
<S> <C>
Assets:
Current assets:
Cash and cash equivalents......................... $8
Restricted cash................................... 751
Accounts receivable, net.......................... 837
Inventories....................................... 5,270
Prepaid expenses and other current assets......... 911
------------
Total current assets 7,777
Property and equipment, net.......................... 2,469
Intangible assets.................................... 133
Other assets......................................... 3,090
------------
$13,469
============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable.................................. $3,115
Accrued liabilities............................... 4,004
------------
Total current liabilities...................... 7,119
Stockholders' equity:
Common stock......................................... 3
Additional paid-in capital........................... 61,326
Accumulated deficit.................................. (55,098)
Accumulated other comprehensive income............... 119
------------
Total stockholders' equity 6,350
------------
$13,469
============
</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 Six Months Ended
September 30, September 30,
------------------- -------------------
1998 1997 1998 1997
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenue:
Product revenue...................... $3,083 $2,974 $5,397 $6,657
Development and services revenue..... 260 1 335 1
Component revenue.................... 133 738 133 2,443
--------- --------- --------- ---------
Total revenue...................... 3,476 3,713 5,865 9,101
Cost of product revenue................ 2,651 2,485 4,504 5,900
Cost of development and
services revenue...................... 12 -- 20 --
Cost of component revenue.............. 143 729 143 2,400
--------- --------- --------- ---------
Gross margin........................... 670 499 1,198 801
Operating expenses:
Research and development............. 1,911 1,588 3,691 2,492
Sales and marketing.................. 738 901 1,669 1,486
General and administrative........... 2,161 1,910 4,453 3,168
Acquired in-process research
and development..................... -- 617 500 617
--------- --------- --------- ---------
Total operating expenses.......... 4,810 5,016 10,313 7,763
--------- --------- --------- ---------
Loss from operations.............. (4,140) (4,517) (9,115) (6,962)
Other income (expense), net............ (24) 293 34 743
--------- --------- --------- ---------
Net loss............................... ($4,164) ($4,224) ($9,081) ($6,219)
========= ========= ========= =========
Basic and Diluted net loss per share... ($0.26) ($0.34) ($0.60) ($0.51)
========= ========= ========= =========
Shares used in the calculation of Basic
and Diluted net loss per share ....... 15,866 12,300 15,196 12,095
========= ========= ========= =========
</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>
Six Months End
September 30,
------------------------
1998 1997
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net loss.............................................. ($9,083) ($6,219)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization..................... 1,038 584
Purchased in-process research and development..... 500 617
Loss on disposal of fixed assets.................. 117 --
Changes in operating assets and liabilities:
Increase in restricted cash....................... (751) --
Accounts receivable............................... 302 (3,835)
Inventories....................................... (193) (476)
Prepaid expenses and other current assets......... (227) (847)
Accounts payable.................................. 965 831
Accrued liabilities............................... (451) 775
------------ ----------
Net cash provided in operating activities............. (7,783) (8,570)
Investing activities:
Acquisition of property and equipment................. (865) (464)
Acquisition of Digital Video Division of
Arris Interactive LLC............................... -- (1,642)
Sale of short-term cash investments................... 1,033 --
Purchase of short term investments.................... -- (2,857)
Other investing activities............................ 392 (129)
------------ ----------
Net cash provided in investing activities............. 560 (5,092)
------------ ----------
Financing activities:
Proceeds from short-term loan ........................ 1,000 --
Repayment of short-term loan ......................... (1,000) --
Issuance of common stock.............................. 1,316 --
Proceeds from exercise of stock options............... -- 12
------------ ----------
Net cash provided by financing activities............. 1,316 12
------------ ----------
Net (decrease) in cash and cash equivalents.. (5,907) (13,650)
Cash and cash equivalents at beginning of period...... 5,915 32,221
------------ ----------
Cash and cash equivalents at end of period............ $8 $18,571
============ ==========
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, that uses this technology platform as the basis for its
product introductions. The Company is currently developing,
manufacturing, and marketing DVD-based products for the computer and
consumer product markets. These products include DVD-ROM drives, DVD
intelligent loaders, DVD players, DVD-RAM drives, and DVD video
engines. The Company commenced sales of its 2X DVD-ROM drives in the
current quarter. Previously developed products from which the Company
currently derives revenue include its "Enterprise" ad-insertion
product, its video CD player, video engine 100, 200, and 300 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 six-month and three-month period ended September 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 had as of September
30, 1998 working capital of $0.66 million and cash, cash equivalents and
short-term investments of $0.76 million compared with $25.6 million of
working capital and $21.6 million of cash and cash equivalents as of
September 30, 1997. The Company's accumulated deficit was $55 million
at September 30, 1998.
In August 1998 Hsu Yao Wen invested $300,000 into the Company, which
was used for capital equipment purchases by the Company's DVS-Korea
subsidiary. Mr. Hsu received 778,255 shares of Common stock for this
investment.
In October and November of 1998, Oregon Power Lending Insitution
("OPLI") purchased $2.0 million (the "First Tranche") of the Company's
Preferred Stock, pursuant to a binding letter agreement (the "Letter
Agreement"). The Letter Agreement calls for an additional mandatory
investment by OPLI of $1 million and optional investments of up to $7
million, for an aggregate investment of up to $10 million. All
issuances of the Preferred Stock to OPLI following the First Tranche
are subject to prior approval of a majority of the Company's
Shareholders. The Preferred Stock is convertible into the Company's
common stock at a conversion price of $0.47 per share. Thus, the $2.0
million worth of Preferred Stock sold in the First Tranche is
convertible into 4,255,319 shares of the Company's common stock. In
connection with its purchase of the First Tranche, OPLI also received
an option (the "Option") to purchase up to 2 million shares of the
Company's common stock at an exercise price of $0.75 per share. The
option has a term of 24 months. When OPLI makes its additional required
investment in the Company, it will receive an option to purchase an
additional 1 million shares of the Company's common stock, also at an
exercise price of $0.75 per share and with a term of 24 months.
The Company will need to generate additional liquidity to fund any
significant future increase in revenues. The Company is actively
seeking additional financing to meet those needs. Management's plan to
meet these requirements is to raise additional funds from new and
existing investors, further reduce its operating costs, and generate
higher revenues from product sales. There can be no assurance that the
Company will obtain additional financing or product revenue necessary
to expand operations.
The Company's goal is to bring to market higher-margin products based
on the Company's DVD intellectual property portfolio, such as the DVD-
ROM, DVD player, DVD video engine, 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 ("video engine") product lines to DVD-
based product lines. To meet the Company's objectives, management plans
to streamline operations and eliminate lower-margin product lines or
other operations that are not essential to the Company's primary
products and markets. As part of this plan the Company will no longer
produce consumer Video CD players in China and, effective in early
October, the Company began the closure of its Panyu, China facility.
Effective September 30, DVS has closed both its office in Tokyo, Japan
and its New Media division in Atlanta, GA. The Company will use its
best efforts to license or sell the New Media division intellectual
property, including the Catapult ad insertion product.
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 anti-dilutive. Basic and diluted net loss per share is
calculated as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Ended
September 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Net loss............................. ($4,164) ($4,224)
========= =========
Weighted average common shares
outstanding(1)..................... 15,866 12,300
--------- ---------
Shares used in computing Basic and Diluted
net loss per share................. 15,866 12,300
========= =========
Basic and Diluted net loss per share.. ($0.26) ($0.34)
========= =========
</TABLE>
__________________
(1) Does not include 8,311,598 and 8,396,153 shares of escrow common
stock for the three months ended September 30, 1998 and 1997,
respectively.
For three months ended September 30, 1998 and 1997, respectively,
4,532,805 and 4,003,695 options and 18,450 and 18,450 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
September 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Net loss............................... ($4,164) ($4,224)
Cumulative foreign currency
translation adjustments............ 184 (90)
Deferred Compensation................ (65) (83)
--------- ---------
Comprehensive loss................. ($4,045) ($4,397)
========= =========
</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>
September 30
1998
------------
<S> <C>
Inventories:
Raw materials $4,083
Work in process 21
Finished goods 1,166
------------
$5,270
============
</TABLE>
Note 4 - Other Related Party Transactions
The Company has an outstanding receivable balance of $2.9 million as of
September 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, originally
reserved on March 31, 1998 remained fully reserved at September 30,
1998, as there can be no assurance that any amounts will be recovered
from its former joint venture partner.
At September 30, 1998, the Company had an outstanding account
receivable in the amount of approximately $0.54 million from Anhui
Wanyan Electronic Systems Co., Ltd. ("Wyan"), a related party located
in China, which was fully reserved. The Company owns less than 20% of
Wyan's equity.
Note 5 - 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 6 - Restricted Cash
As of September 30, 1998, the Company has approximately $750,900 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-ROM, DVD Intelligent Loaders, DVD Players,
Video CD players and other Company products, planned growth of the
Company's operations, 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
and South Korea, and the competitive market for the Company's products,
and other factors described in Exhibit 99.1 to the Form 10-KSB, 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 herein 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 September 30, 1998.
RESULTS OF OPERATIONS FOR THREE MONTHS ENDED SEPTEMBER 30, 1998
COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 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 September 30, 1998 compared to the
three months ended September 30, 1997. See Consolidated Statements of
Operations.
<TABLE>
<CAPTION>
Percent of Revenue
-------------------
Three Months Ended
September 30,
-------------------
1998 1997
--------- ---------
<S> <C> <C>
Revenues 100.0% 100.0%
Gross margin 19.3% 13.4%
Research and development 55.0% 42.8%
Sales and marketing 21.2% 24.3%
General and administration 62.2% 51.4%
Acquired in process R & D 0.0% 16.6%
Operating loss -119.1% -121.7%
Net loss -119.8% -113.8%
</TABLE>
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Consolidated Revenue $3,476 $3,713 -6.4%
</TABLE>
Total revenue decreased $0.24 million for the three months ended
September 30, 1998 compared with the three months ended September 30,
1997 as a result of decreasing component revenue.
Product revenue increased slightly to $3.08 million for the three
months ended September 30, 1998 compared with the three months ended
September 30, 1997. Product revenue for the three months ended
September 30, 1998 includes DVD-ROM drives, video engine 100, 200 and
300, and computer peripheral products. The Company recognized revenue
from the sale of digital ad insertion products and consumer video CD
players from existing inventories. The latter two product lines have
been discontinued by the Company. For the three months ended September
30, 1997, sales consisted almost entirely of video CD players and
related component kits.
For the three months ended September 30, 1998 development and services
revenue was $0.26 million compared to no significant development and
service revenue for the three month ended September 30, 1997.
There was $0.13 million component revenue in the three months ended
September 30, 1998 compared to $0.74 million in the three months ended
September 30, 1997. Component revenue was derived primarily from the
liquidation of video CD inventory in Panyu. 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
September 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Gross margin $670 $499 34.3%
as a percentage of revenue 19.3% 13.4%
</TABLE>
The increase in the gross margin as a percentage of total revenue for
the three months ended September 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 DVD-ROM drives and Commercial Video CD
players ("video engines"), which have a higher margin. This increase
was partially offset by the negative gross margin from the liquidation
of Consumer Video CD and ad insertion inventories.
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Research and Development $1,911 $1,588 20.3%
as a percentage of revenue 55.0% 42.8%
</TABLE>
Research and development expenses consist primarily of personnel and
equipment prototype costs required to complete the Company's product
development efforts. Research and development expenses increased $0.3
million, or 20%, during the three months ended September 30, 1998
compared with the same period in Fiscal year 1998. The increase in
these expenses was primarily attributable to the growth in the
Company's emerging DVD-ROM business. A portion of the increase was due
to product development programs and expenses related to the New Media
division, which has since been discontinued. The Company expects that
research and development expenses will remain steady for the short-term
as the Company devotes most of these resources to DVD products,
replacing research and development expenses associated with the New
Media division.
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Sales and Marketing $738 $901 -18.1%
as a percentage of revenue 21.2% 24.3%
</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 decreased $0.16
million, or 18%, during the three months ended September 30, 1998
compared with the same period in fiscal year 1998. As the Company
continues its marketing efforts, sales and marketing expenses in dollar
terms are expected to increase.
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
General and Administrative $2,161 $1,910 13.1%
as a percentage of revenue 62.2% 51.4%
</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
$0.2 million, or 13.1%, for the three months ended September 30, 1998.
The Company expects that general and administrative costs will increase
in dollar terms to the extent the Company expands its DVD business.
<TABLE>
<CAPTION>
Three months ended
September 30,
------------------- %
1998 1997 Change
--------- --------- ---------
<S> <C> <C> <C>
Other income ($24) $293 -108.2%
as a percentage of revenue -0.7% 7.9%
</TABLE>
The decrease in other income for the three month ended September 30, 1998
resulted from lower interest income due to 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. As of September 30, 1998, the
Company had working capital of $0.66 million and cash, cash equivalents
and short-term investments of $0.76 million, compared to working
capital of $8.3 million and cash, cash equivalents, and short-term
investments of $6.9 million at March 31, 1998. In October and November,
Oregon Power Lending Institution ("OPLI") purchased $2.0 million (the
"First Tranche") of the Company's Prefered Stock, pursuant to a binding
letter agreement (the "Letter Agreement"). The Letter Agreement calls
for an additional investment of up to $10 million. All
issuances of the Preferred Stock to OPLI following the First Tranche
are subject to prior approval of a majority of the Company's
Shareholders. The Preferred Stock is convertible into the Company's
common stock at a conversion price of $0.47 per share. The proceeds
from OPLI's investments in the Company will be used as working capital
to support the sale of DVD-ROM drives and for general corporate
purposes. This amount may be insufficient if demand for DVD-ROM drives
exceeds management's expectations.
The Company is actively seeking additional financing to meet its
liquidity needs. Management's plan in continuing the Company's
operations include raising additional funds from new and existing
investors and financial institutions, and continuing to reduce its
operating costs by closing non-performing businesses and divisions.
The Company's goal is to bring to market higher-margin products based
on the Company's engineering capabilities, including DVD-ROM drives,
DVD intelligent loaders, and DVD players. In addition, the Company
intends to convert its Video engine product lines to DVD-based product
lines. To meet the Company's objectives and to conserve resources, the
Company has closed its New Media division, the manufacturing operations
in Panyu and the Company's office in Japan are in the process of being
closed, and operations at other locations are being streamlined. For
the three months ended September 30, as well as for the three months
ending December 31, 1998, the one-time costs associated with
streamlining the Company's operations will have a negative impact on
the Company's income statement.
Net cash used in operating activities was $7.8 million for the six
months ended September 30, 1998 compared to $8.6 million for the six
months ended September 30, 1997. Substantially all of the net cash
used in operating activities in the six months ended September 30, 1998
represented the net loss of $9.1 million adjusted for non-cash charges
for depreciation and amortization of $1.04 million and acquired in-
process research and development of $0.75 million and net cash used to
fund an increase in restricted cash of $0.5 million and a decrease in
accounts payable of $0.97 million. Substantially all the net cash used
in operating activities for the six months ended September 30, 1997
represented the net loss of $6.2 million adjusted by non-cash charges
for depreciation and amortization of $0.58 million, purchased in-
process research and development of $0.62 million and net cash used to
fund increased in accounts receivable of $3.8 million and inventories
of $0.48 million, and decreases in accounts payable of $0.83 million.
Net cash provided by investing activities was negligible for the six
months ended September 30, 1998 compared to $5.1 million used in
investing activities for the six months ended September 30, 1997.
Substantially all of the cash provided by investing activities for the
six months ended September 30, 1998 consisted of the sale of short-term
investments of $1 million which was offset by the acquisition of
property and equipment of $0.87 million. Net cash used for the six
months ended September 30, 1997 was primarily for purchase of short-
term investments and the acquisition of the New Media division from
Arris Interactive.
Net cash provided by financing activities for the six months ended
September 30, 1998 was $1,300,000 from the proceeds of short term loans.
Net cash provided by financing activities was minimal for the six
months ended September 30, 1997.
The above activities resulted in a decrease in cash and cash
equivalents of $5.9 million for the six months ended September 30, 1998
compared to a decrease in cash and cash equivalents of $13.65 million
for the six months ended September 30, 1997.
Year 2000
The Company is taking appropriate steps to ensure that its computer
systems will properly recognize date sensitive information when the
year changes to 2000 or "00". Systems that do not properly recognize
such information could generate erroneous data or cause a system to
fail. The Company is in the process of evaluating its computer systems
to identify those that could be affected by this issue.
Product Liability. While the Company believes that most of its
currently developed and actively marketed products are Year 2000
compliant for significantly all functionality, these products could
contain errors or defects related to the Year 2000. Versions of the
Company's products which are not the most currently released or which
are not currently being developed may not be Year 2000 compliant. The
Company sells some of its older product lines, which are not being
actively developed and updated, as such these products are not
necessarily Year 2000 compliant.
Corporate Systems. The Company will start an assessment of its
computer systems and software and will modify or replace portions of
its software so that its operating systems will function properly with
respect to dates in the Year 2000 and thereafter. The Company will
evaluate system interfaces with third-party systems, such as those of
key suppliers, distributors and financial institutions, for Year 2000
functionality. The Year 2000 project cost is not expected to be material.
The Company believes that, with modifications to existing
software and conversions to new software, the Year 2000 issue will not
pose significant operational problems for its computer systems. Most
of the Company's servers use the Windows NT operating system. Microsoft
Corporation has stated that Windows NT is Year 2000 compliant or
compliant with minor issues. The Company plans to upgrade or replace
its operating systems to this platform. However, if such modifications
and conversions are not made, or are not completed in a timely manner,
the Year 2000 issue could have a material adverse impact on the operations
of the Company. Additionally, the systems of other companies with which
the Company does business may not address any Year 2000 problems on a
timely basis, which could have an adverse affect on the Company's systems
or business transactions. The area of highest risk to the Company related
to the Year 2000 issue is noncompliance by key suppliers. However, based
upon publicly available information, the Company believes that key
suppliers, such as Matsushita, are Year 2000 compliant.
As testing of Year 2000 functionality of the Company's systems
must occur in a simulated environment, the Company will not be able to
test full system Year 2000 interfaces and capabilities prior to Year 2000.
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
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: January 15, 1999 /s/ Edward M. Miller
- --------------------------- ------------------------------------
Edward M. Miller--
President and Chief Executive Officer
EXHIBIT INDEX
Exhibit Number
27.1 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 837
<ALLOWANCES> 0
<INVENTORY> 5,270
<CURRENT-ASSETS> 7,777
<PP&E> 3,969
<DEPRECIATION> (1,500)
<TOTAL-ASSETS> 13,469
<CURRENT-LIABILITIES> 7,119
<BONDS> 0
0
0
<COMMON> 3
<OTHER-SE> 6,347
<TOTAL-LIABILITY-AND-EQUITY> 13,469
<SALES> 3,476
<TOTAL-REVENUES> 3,476
<CGS> 2,806
<TOTAL-COSTS> 2,806
<OTHER-EXPENSES> 4,810
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,164)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,164)
<EPS-PRIMARY> ($0.26)
<EPS-DILUTED> ($0.26)
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