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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-KSB
(Mark One)
[X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
For the fiscal year ended March 31, 1999
or
[_] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required).
For the transition period from ________________ to ________________
COMMISSION FILE NUMBER 0-28472
DIGITAL VIDEO SYSTEMS, INC.
(Name of small business issuer in its charter)
DELAWARE 77-0333728
(State of incorporation) (I.R.S. Employer Identification No.)
160 Knowles Drive, Los Gatos, CA 95032
(Address of principal executive offices) (zip code)
Issuer's telephone number: (408) 874-8200
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK
CLASS A WARRANTS
CLASS B WARRANTS
UNITS, EACH
CONSISTING OF ONE
SHARE OF COMMON
STOCK, ONE CLASS A
WARRANT AND ONE
CLASS B WARRANT
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to filing requirements for the past 90
days. YES [X] NO [ ]
Check mark indicates that disclosure of delinquent filers pursuant to Item
405 of Regulation S-B is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [_]
The aggregate market value of the voting stock held by non-affiliates of
registrant as of June 12, 1998 was approximately $13,678,000.
There were 20,993,230 shares of registrant's common stock outstanding as of
June 12, 1998.
The following documents are incorporated by reference into this report:
Portions of registrant's Proxy Statement for its 1998 Annual Meeting of
Shareholders, to be filed with the Securities and Exchange Commission within
120 days after the close of registrant's fiscal year, are incorporated herein
by reference in Part III of this Annual Report.
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<PAGE>
Forward-Looking Statements
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 Video CD and DVD 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 to this 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, 1999.
PART I
Item 1. Description of Business.
Overview
Digital Video Systems, Inc. ("DVS") or ("the Company") was
founded in 1992 to develop, manufacture and market digital video
compression and decompression hardware and software for entertainment,
commercial and educational applications. As an image is converted into
digital signals, compression technologies are employed to minimize the
amount of data to be transmitted through, or stored on, the media.
Decompression techniques perform the reverse operations.
Over the years, the Company has been involved in the marketing and
development of a variety of products and services in the digital video
arena, such as Video CD Players and their decoder chips design,
Networked Video Servers and related components, and Ad-Insertion
technologies. During the fiscal year ended on March 31, 1999, the
Company migrated its product offering into the newer DVD technology,
while phasing out certain older product lines. The Company's current
product offering includes: DVD-ROM drives, DVD Intelligent Loaders
(electro-optic and electro-mechanical subassembly in a DVD player),
Video Engines (kiosk Video CD players), and CD-R, CD-RW products for the
computer peripheral market with the Synchrome brand name. The Company
has developed some models of DVD players for the home entertainment
market, and licensed its DVD player technology to another company. DVS
may offer its own DVD players depending on its evaluation of
feasibility.
During fiscal 1997, which ended on March 31, 1997, the Company
completed its initial public offering (the "IPO") and a follow-on
public offering ("Secondary Offering"). The IPO and Secondary Offering
generated total net proceeds of approximately $43.7 million. As of
fiscal 1999, most of these proceeds have been used to repay $7 million
in bridge notes, make business acquisitions, and fund the development of
product lines and the losses of several product lines.
Consequently, the Company entered into fund raising activities
during the period of May 1998 through October 1998. In May 1998, the
Company entered into a Convertible Note Agreement with its founder, Dr.
Edmund Y. Sun, for $1.0 million in a short-term note to the Company that
was convertible at a future date to common shares. Then in October
1998, the Company entered into an Investment Agreement with Oregon Power
Lending Institution ("OPLI"), for OPLI to invest a minimum of $6.0
million to a potential maximum of $12.25 million in the Company's common
shares. OPLI invested in DVS based on their confidence in Dr. Edmund Y.
Sun's talents and insights. OPLI also made suggestions in the Company
operations considering the benefits of all shareholder - the Company
should streamline its operation and close down its unprofitable business
units, including DVS Panyu, Hong Kong, and Taiwan. As of March 31,
1999, Dr. Sun had provided $1.0 million, and OPLI had provided $6.5
million. The $7.5 million enabled the Company to acquire the DVD-ROM
drive operations of Hyundai Electronics Industries, Co., Ltd., and fund
the Company's turnaround efforts, which include establishment of DVS
Korea Co., Ltd. ("DVS-Korea"), a wholly-owned subsidiary of the
Company, the expansion of the Company's DVD production in Korea, the
loss and costs for corporate streamlining, as well as continued
marketing, R&D, and operational overhead.
In June 1998, the Company completed an Asset Purchase of certain
assets and employees of Hyundai Electronics Industries, Co., LTD's
("Hyundai") DVD-ROM operations. The terms of the Asset Purchase
Agreement were divided into two parts. First, DVS would issue 2.0
million shares of the Company's common stock in exchange for a
perpetual, worldwide, royalty-free license to Hyundai's DVD-ROM
technology. Second, DVS would form a Korean subsidiary (DVS Korea Co.,
Ltd.) that would acquire for $1.0 million in cash, Hyundai's DVD-ROM
production equipment, inventory, production supplies, test equipment,
furniture, and computer systems.
The Company currently does not have any agreements,
understandings, or commitments with respect to any potential material
acquisitions; however, the Company may seek to enter into such
transactions in the future to acquire complementary businesses or
technologies. In April 1999 the Company entered into an agreement with
Chinapro Capital & Investment Co. ("Chinapro"), a subsidiary of state-
owned businesses in China. Based on the Agreement, Chinapro will provide
facilities in China for production of the DVD products based on the
Company's technologies at a lower cost, and up to $35 million in working
capital, which may be used for purchasing materials and financing
accounts receivable. The Company will be in charge of technical support
for this project, as well as world-wide marketing and sales of the
products produced from these facilities, while providing these
facilities with key components produced from DVS Korea at a reasonable
price.
The principle executive offices of the Company are located at 280
Hope Street, Mountain View, California 94041. The Company's telephone
number is (650) 564-9699.
Corporate Streamlining
The Company has made substantial effort in streamlining its
operations, as described below, in order to cut down the losses and
expenses on non-performing operations, focus its resources on more
promising product lines, and expedite its turnaround. The Company
continues to hold the Intellectual Property developed with products in
those divisions. The operations can be re-activated when partners who
find the products a fit in their business and provide funding in
marketing and further technology development
ViComp - MPEG IC Development
In October 1996, the Company acquired ViComp Technology Inc.
("ViComp"), a development stage company that designed MPEG-1 integrated
circuits for use in Video CD players and related components. Pursuant
to the terms of the Purchase Agreement, the Company issued 491,253
shares of its Common Stock for all the outstanding capital stock, and
the Company issued 189,557 shares of Common Stock for all of the ViComp
granted options. The acquisition transaction was accounted for as a
purchase and, accordingly, the initial purchase price and acquisition
costs were allocated to the identifiable assets and liabilities,
including in-process research and development of $1.8 million, which was
immediately expensed.
Effective March 31, 1998, the Company ceased ViComp's operations
including the research and development program, since market conditions
had made further development of an MPEG-1 decoder chip financially
unattractive. The Company continues to retain the intellectual property
developed by ViComp; however, the intellectual property is currently
maintained on the Company's books at zero value. The Company expensed
the majority of the ViComp assets, primarily fixed assets, in fiscal
year 1998, as they had no alternative use.
In January 1999, the Company granted SRS Labs, Inc. a nonexclusive
perpetual license to the core MPEG-1 chip design for $300,000, which the
Company used to offset a payable of the same amount to SRS.
New Media Division - Ad Insertion (DV Systems, Atlanta, GA)
In August 1997, the Company completed the acquisition of the
business and certain assets and liabilities of the Digital Video
division (the "DV Business") of Arris Interactive L.L.C. ("Arris") in
a transaction that was accounted for using the purchase method. The
total purchase price was $3.5 million, which was comprised of cash of
$1.5 million and the issuance of 600,000 shares of Common Stock. There
was also $141,000 of related acquisition costs. Under the Asset
Purchase Agreement, Arris was not entitled to transfer or sell any of
the shares of the Company's Common Stock acquired in the transaction
until certain time periods had elapsed. Additionally, the Arris' DVS
Common Shares were not registered under any state or federal securities
laws.
As part of the DV Business Asset Purchase Agreement, the Company
had agreed to pay Arris additional contingent consideration of up to
$5.0 million in cash if the DV Business achieved certain revenue
milestones. In March 1998, the Company and Arris agreed to remove the
restriction on the sale of the Company's Common Shares held by Arris and
cancel the provision for the payment of contingent consideration to
Arris. In early September 1998, the Company decided to discontinue the
DV Business. The DV Business ceased operations on September 30, 1998
and was closed as of November 26, 1998. The majority of the DV
Business' assets have been either sold or written down. The Company has
expensed or sold the majority of the assets, primarily inventory,
associated with the "enterprise" server line. The "catapult"
research and development project has been written down in value, as it
has no alternative use. The liabilities associated with the business
have been paid down. The decision to cease operations was due to the
combination of declining margins and a market size that was smaller than
originally estimated. DVS continues to retain the intellectual property
and some spare parts inventory to repair systems in operation.
MX Server Division - Video on Demand
In February 1999, the Company chose to cease the operations of the
MX Server Division as the operation was in a market that was very
competitive and had numerous competitors, some with vastly superior
resources. In order to remain competitive within the Video Server
Market, the Company would be required to make substantial ongoing
investments in the business, which was not financially feasible.
Accordingly, the Company has ceased operations and expensed or sold the
majority of the assets, primarily inventory, associated with the MX
Server Division. The Company will retain the intellectual property
developed by the MX Server Division.
DVS Taiwan, Hong Kong and Panyu
In August 1997, the Company through its wholly-owned subsidiary,
DVS Hong Kong Ltd. ("DVS-HK"), established a joint venture in Panyu,
China to manufacture and distribute Video CD players. The joint venture
was initially 51% owned by DVS-HK and the company's legal name is Panyu
Tian Le Electrical Appliance Manufacturing Co., Ltd. ("Panyu JV"). The
remaining 49% of the Panyu JV was owned by a privately held company,
which was controlled by a Mr. Su ("Panyu").
In December 1997, the Company through DVS-HK entered into an
Ownership Shares Transfer Agreement ("Transfer Agreement"), which
allowed DVS-HK to purchase the remaining 49% of the Panyu JV owned by
Panyu for a nominal amount; thereby increasing DVS-HK's ownership in the
Panyu JV to 100%. In January 1998, DVS-HK sold 10% of the Panyu JV for
a nominal amount to Panyu Kembo Electrical Manufacturing Co., Ltd.
("Kembo") which is owned by a partner of the law firm which represented
DVS in China. Kembo holds the interest as a nominee of DVS. Under the
internal laws of China in force at the time of the transactions, foreign
firms could only own a maximum of 90% of a China based company.
In June 1998, due to the increasing losses being recorded by the
Panyu operations, it was decided that the Company would exit the Video
CD player market. From the time that the Panyu JV was formed (August
1997) until early June 1998 the OEM sales price of the Video CD player
in the China market had declined from $140.00 per player to $70.00 per
player. This decline in the sales price had reduced the Panyu JV gross
margin percentage to approximately 1%. During the summer months of
1998, the Company investigated the possibility of relocating the video
engine production from Taiwan to Panyu. In October 1998, due to
increasing problems associated with the lease of the Panyu facility, it
was decided that the Company would exit Panyu and begin the process of
closing its manufacturing and distribution operations in China. DVS
exited the Panyu manufacturing facility during December 1998.
In November 1999, the Company decided to streamline its offices in
Taiwan, Hong Kong, and China. Currently the Company only retains one
employee at Taiwan and Hong Kong, and fewer than 10 workers stationed in
Shenzen to manage the scaled-down Video CD business activities at these
locations. Nevertheless, the Company has become more active in sending
marketing and field engineering staff to DVD player OEM's in China, for
them to purchase and incorporate the Company's DVD loaders in their
products.
Industry Background
Digital Video and Digital Versatile Disc (DVD)
Since the 1950's, with the exception of photography, video images
have been stored almost exclusively using analog formats such as
videotape. The transmission method for video images was via a
transmitting tower and receiving antenna or coaxial cable (cable TV),
again an analog medium.
In the 1980's with the advent of the Personal Computer, digital
video became available as a new storage and transmission medium for
video. Digital video can be stored on what is generally viewed as a
computer disc. The computer disc in this instance can be a Compact Disc
(CD), hard disc or a floppy disc, provide the storage capacity is 100
megabytes or greater. Digital video can be transmitted via satellite,
telephone lines (internet), and cable TV with a fiber-optic backbone. In
many cases, digital video information is compressed, which allows for
increased storage capability and transmission efficiencies, as well as
the ability to reproduce and transmit video images without perceptible
image degradation. Digital video also permits superior editing and
special effects capabilities because of its compatibility with computer
systems and the continuing evolution of both hardware and software in
the multimedia arena.
Early in the development of digital video, it was realized that a
single standard needed to be established as multiple groups were
pursuing different methods for storage and compression. Because a
standard for video storage and compression was required for digital
video to be shared among various systems and products, a group of
industry leaders in the consumer electronics, personal computers and
communications industries joined together to define a compression
standard. Utilizing the International Standards Organization ("ISO"),
the industry leaders defined a standard for compression of audio and
video to CD-ROM called MPEG -1 (Motion Picture Experts Group). MPEG-1
was adopted by the ISO in 1991. In 1994, the ISO adopted a second
compression standard for the broadcasting of audio and video that was
labeled as MPEG-2. MPEG-2 permits improved picture clarity due to
increased resolution versus MPEG-1. MPEG-1 produces approximately 275
lines of resolution on a television set; whereas, MPEG-2 produces over
500 lines. However, the drawback of MPEG-2 is that with the greater
resolution comes the requirement of greater storage capacity,
approximately four times the storage capacity versus MPEG-1 for the same
picture/video. Dr. Edmund Y. Sun, a founder of DVS, has been
instrumental in the development of the MPEG technologies. He was
recently granted the Life-time Achievement Award at the 1999 DVD Summit
Conference held in Ireland for his contribution to the development of
the MPEG technologies.
The most common form for storing digital video information today
is either a Compact Disc ("CD") or a Digital Versatile Disc ("DVD"),
also known as Digital Video Disc. Video CD's are the same size as
either an audio CD or computer CD disc, approximately 120 millimeters in
diameter and 1.2 millimeters in thickness. The average CD disc will
store approximately 650 megabytes of information which when converted to
a combination of video and audio storage is equivalent to approximately
74 minutes of playing time.
The DVD disc is the same size as the CD disc; however, the grooves
on the back of the disk are substantially more dense. Due to the
increased number of grooves the storage capacity of the DVD disc is
approximately 7 times greater at 4.7 gigabytes (4.7 billion bytes) of
information. Due to the greater storage capability, the DVD video
standard uses MPEG-2 as its compression standard. The combination of
the greater storage capacity and use of MPEG-2 allows the average DVD
disc to hold approximately 133 minutes (2 hours and 13 minutes) of video
on a single DVD disc. DVD discs are now available with a second layer
which adds another 4.7 giga bytes of capacity on the same side of one
disc.
In the month of March 1999, the major recording studios and audio
electronic manufacturers agreed to a single standard for the production
of DVD audio. The issue among the recording studios and audio
electronics manufacturers that delayed the establishment of a standard,
was how to assure the limitation of replication of the DVD audio discs.
A standard was established and it was forecasted at the time that the
first DVD audio equipment could be available before Christmas holiday
shopping period.
Consumer Electronic Manufacturers (both audio and video
equipment), Computer Hardware Manufacturers, Software Developers, Motion
Picture Studios, and the Major Recording Studios have agreed to the DVD
standard and have been actively supporting DVD as the new standard for
video, soon audio and eventually data. The Company believes that DVD
has the potential over the next two years to make major in-roads in the
replacement of the VCR, computer CD-ROM drive, laser disc, Video CD, and
audio CD. DVD-ROM drives offer substantial benefits over CD-ROM drives
due to their increased storage capacity, improved data transfer rates
and enhanced interactive qualities which lead to improved multimedia and
game applications. DVD Video offers several advantages over the VCR and
Video CD which include increased picture resolution including up to nine
camera angles, a more durable storage medium (VHS videotape versus DVD
disc), enhanced audio quality and improved user capabilities such as
random access, multiple language tracks, parental controls and
subtitles. The DVD audio presently available with DVD movies offers
several benefits over VCR audio tracks as DVD movies include Dolby
Digital sound offering six separate audio channels and a full range of
sound. The DVD Audio standard for audio recordings offers multiple
channels, much higher digital sampling rates, and generally higher
fidelity versus the Audio CD's commonly in use today.
Products and Markets
The Company's current product offering consists of DVD-ROM drives,
DVD Intelligent Loader drives, and CD based Video Engine products for
the Consumer Products, Commercial Video and Computer Peripherals
markets.
DVD-ROM drives
The majority of the Company's product revenue for this fiscal year
was generated by the DVD-ROM drive business. The DVD-ROM drive is used
in Personal Computers ("PC's") as a storage medium. The principal
benefits of a DVD-ROM drive versus a CD-ROM drive is the DVD drive's
storage capacity and ability to provide enhanced multimedia capabilities
for computer games and videos. The drawbacks to the DVD-ROM drive
versus the CD-ROM drive are its cost and speed for data transfer. In
today's PC drive market, the CD-ROM drives that are available operate at
either 32X or 40X speeds; whereas, the fastest DVD-ROM drives available
at the end of March 1999 operate at an equivalent 32X CD-ROM speed. The
Company believes that the cost issue will over time resolve itself as
the production volumes for DVD-ROM drives continue to increase. Also,
the Company plans to introduce DVD ROM drives with a 40X CD read speed
in Fiscal Year 2000.
A DVD-ROM drive looks and operates in a similar manner to that of
a CD-ROM drive. DVS' first DVD-ROM drive was produced in mid-July 1998,
and the first sales occurred in late July 1998. The Company's first
DVD-ROM drive was a 2X speed. (There has been established a test
criterion that determines the speed at which a DVD drive downloads data.
The faster the rate that data is downloaded, the higher the "X" number
or drive speed rating on the DVD-ROM drive. There is a second test,
which determines a DVD-ROM drives speed when using a CD disc.) In late
September and early October 1998, DVS supplied its key customers with
prototypes of its 5.2X speed DVD-ROM drive. Production and initial
sales of the 5.2X both occurred in the month of October. In late
January and early February 1999, DVS introduced its 6.2X speed DVD-ROM
drive. The 6.2X DVD-ROM drive was first produced and sold in the latter
half of February 1999. The Company's DVD-ROM drives are compatible with
DVD-Video, DVD-ROM, DVD-R, and virtually all CD formats including CD-
ROM, CD-Audio, CD-R, CD-RW, Video CD, CD-I/FMV, multi-session Photo CD,
and Photo CD. The major advantage that DVD possesses versus CD is its
storage capacity. DVD discs can contain up to 4.7 gigabytes (4.7
billion bytes of digital data) of data on a single disc, a seven fold
increase over that of CD discs. Also, the transfer rate of a typical DVD
ROM drive is faster than the transfer rate used for reading data from a
CD-ROM. For example, a 40X CD transfer rate is 6.0 mega bytes per
second; a 6.2X DVD ROM transfer rate is 8.382 mega bytes per second.
DVS' DVD-ROM drives are manufactured under the Company's
supervision through its wholly owned subsidiary, DVS Korea Co., Ltd., at
a subcontractor located in Korea. Sales of the DVD-ROM drives were sold
worldwide both to PC-OEM's (Personal Computer-Original Equipment
Manufacturers) and distributors. Currently the Company has not
established direct sales contract with first-tier PC-OEM's.
The popularity of DVD-ROM drives has risen significantly in the
past year due to: the release of Windows 98 which contained DVD-ROM
drivers, the increase in the speed of DVD-ROM drives from 2.0X to 6.0X,
the release of the Pentium III chip with improved multimedia
capabilities, and Hollywood' continuing support for the DVD format. The
market for DVD-ROM drives is continuing to increase both through the
availability of new PC's with DVD-ROM drives and the after-market for
users wishing to upgrade their current PC with a DVD-ROM drive. As the
speed of the DVD-ROM drive continues to increase and new computer
software and games are produced on DVD discs, the Company believes that
the demand for DVD-ROM drives will continue to increase. The principle
user/buyer of DVD-ROM drives will continue to be the PC-OEMs.
As the PC-OEMs will continue to be the principle user/buyer of
DVD-ROM drives, gaining a Supply Agreement with a first tier PC-OEM' is
the desire of all PC component manufacturers; unfortunately, qualifying
with a first tier PC-OEM's requires time, expected results and quality
controls. Most of the first tier PC-OEM's require that all of their
potential suppliers meet a list of requirements prior to being
considered as a potential supplier. In addition, the Company faces
competition from very large, well established firms which are presently
supplying the first tier OEM's. These competitors include Matsushita,
Hitachi, Sony, Toshiba, and Pioneer. The first tier PC-OEMs will
request an audit of the supplier's manufacturing and design operations
to assure that the appropriate quality controls are in place, and that
the Company has the financial strength and mass production capacity to
meet the first tier OEM's needs. The Company continues to pursue the
first tier PC-OEMs; however, no assurances can be given that the Company
will be able to succeed in its efforts.
The Company continues to pursue all potential customers both at
the OEM level and the distributor level. The Company remains optimistic
as to the rate of growth and eventual size of the DVD-ROM drive market
and hopes to expand its presence in the DVD drive market.
DVD Intelligent Loader
The Company's DVD Intelligent Loader is a derivative of the DVD-
ROM Drive, which was designed entirely by the Company under the
technical & marketing directives of Dr. Edmund Sun. The Company has
completed two different interface designs for the DVD Intelligent
Loader: an ATAPI version and a serial-parallel interface version. The
Company's ATAPI interface DVD Intelligent Loader is referred to as the
ATAPI Loader. The Company's serial-parallel interface version has been
named the "Jumbo" Loader. The prototypes of the ATAPI Loader were
available to potential customers in October 1998, whereas the Jumbo
Loader prototypes were available in December 1998. With active marketing
and field engineering since March 1999, the sales of the Company's DVD
Intelligent Loaders have dramatically increased in fiscal 2000. The
Company to date has received $15 million orders for the DVD Intelligent
Loaders through September 1999.
The DVD Intelligent Loader is a DVD-ROM drive for a DVD Player. It
has a longer tray to accommodate a DVD Player. As the name "DVD
Intelligent Loader" implies, there is intelligence associated with this
specific component. The purpose of the microprocessor incorporated in
the DVD Intelligent Loader is to provide control of the DVD loader using
high level commands so that system integration and hence product
development is made easier for the DVD player manufacturer. The ATAPI
DVD loader uses commands which are nearly identical to the ATAPI
commands used in a personal computer to access and read the data from a
DVD disc in a computer DVD-ROM drive. The serial-parallel interface
version, the Jumbo loader, is designed to provide a lower cost
alternative to the ATAPI version, which enables a DVD player
manufacturer to save costs on components.
Every DVD Player requires a DVD loader in order to operate. With
the approval in March 1999 of a standard for DVD Audio, the market size
for the DVD Intelligent Loader may expand to accommodate the needs of
the new DVD Audio equipment.
The Company has developed a reference design for a DVD Player
using the "Jumbo" Loader. The Company believes that over time the
"Jumbo" based DVD Players will surpass the ATAPI based DVD Players due
to the combination of the generally greater functionality and lower cost
to manufacture.
Video Engines (Kiosk Video CD Players)
Since the early development of the Video CD player, the Company
has produced a commercial version of the Video CD Player for use in
several in the informational kiosk markets. The commercial version of
the Video CD Player was named the "Video Engine" and has been used in
the hospitality, education and entertainment markets. This product line
is marketed to retail stores, hotels, hospitals, banks, restaurants,
museums, and educational institutions to deliver advertisements, movies
and technical data, as well as training and educational material. The
Company sells the Video Engine product line to Kiosk integrators, who
integrate the product as part of a complete solution, including software
titles.
The Company's current product offering in the Video Engine line
consists of the Video Engine 100, the Video Engine 150, and the Video
Engine 200. The Video Engine 150 is manufactured in the U.S. and is
similar in operation to the consumer Video CD Player except for three
significant modifications: 1) the Video Engine 150 is half the size of
the Video CD Player, 2) the Video Engine 150 has a continuous loop
playback mode and 3) the Video Engine 150 has an RS232 port that allows
the player to interface with a computer. The Video Engine 150 was
introduced in the 3rd Quarter of fiscal year 1999 will replace the Video
Engine 100.
The Video Engine 200, which the Company introduced in July 1998,
is a CD-I Player intended to serve markets requiring an interactive
capability such as the secondary and elementary education markets. This
is an interactive video CD player that has applications in several
markets, including education, medical and corporate presentations. LG
Electronics in South Korea manufactures the Video Engine 200 players for
the Company.
Computer Peripheral Products
The acquisition of Synchrome in August 1997 added a computer
peripheral product line and retail distribution channel within the
United States. In additional, the acquisition gave the Company the
opportunity to establish a sales channel for future products, such as
DVD-ROM drives.
The Company purchases CD-R (write-once compact disc) and CD-RW
(rewritable compact disk) optical drives from a variety of manufacturers
and assembles them into an external or internal drive. The drive is
then bundled with industry-standard software and packaged for sale to
retailers.
When connected to a PC, the CD-R or CD-RW drives allow the user to
copy data, audio, images, or video to a CD disc that can be read by a
CD-ROM drive, and audio CD player, a video CD player, or DVD-ROM drive
depending upon the type of data recorded. The competitive pricing in
the CD-R and CD-RW drive markets has been steadily growing over the past
six to nine months, which has reduced the margins in this business
segment. Accordingly, the Company believes that the market for these
products (CD-R and CD-RW drives) is limited.
Research and Development
Since its inception, the Company has devoted a substantial portion
of its resources to research and product development, focusing on
digital video compression as well as decompression hardware and software
systems. Since the acquisition of the New Media Division, the Company
has also spent much effort in developing products for the division.
During the fiscal year ended March 31, 1999, the Company incurred
research and development expenses of $6.2 million.
The Company currently anticipates that during the next twelve
months its research and development efforts will focus on enhancing its
DVD technologies, including enhancing quality, reducing costs, and
developing the next generation of DVD products in an effort to remain at
the forefront of technology development. The Company also anticipates
that some of its research and development personnel will be utilized to
support the sales and marketing efforts of the Company in connection
with customizing product applications for specific customers.
There can be no assurance, however, that research and development
efforts with respect to such products will progress as anticipated, that
the Company will be able to reduce costs sufficiently to be able to
compete with others marketing similar products or that new markets for
these products will develop on a timely basis, if at all.
Competition
The Company's products compete or will compete with those marketed by
other manufacturers of DVD-ROM products and CD-based products. Most of
the Company's competitors and potential competitors, are the well-known
electronic manufacturers substantially larger in size and far greater in
financial, marketing, and other resources than the Company.
Certain of the Company's potential competitors may have technological
capabilities or other resources that would allow them to develop
alternative products that could compete with the Company's products.
Potential competitors may begin operations or expand their existing
operations into the Company's proposed markets before the Company is
able to successfully market its products. There can be no assurance that
future technological advances by competitors will not result in improved
products or services that could adversely affect the Company's business.
Competition in the electronics industry also extends to attracting and
retaining qualified technical and marketing personnel, and there can be
no assurance that the Company will be successful in attracting and
retaining such qualified personnel.
As a reseller of CD-R and CD-RW products, the Company competes with
Smart & Friendly, Hi-Val, Hewlett Packard and others. There can be no
assurance that the Company will be able to compete favorably against
products offered by its competitors in the future.
Manufacturing
The DVD-ROM drives and DVD Intelligent Loader are manufactured in
South Korea at a subcontract manufacturer's facility under the
supervision of DVS Korea staff members. Pursuant to the agreement with
Chinapro, in the near future the Company may subcontract its
manufacturing of DVD products in factories in China, with working
capital provided by Chinapro.
The Company no longer performs manufacturing at the Company's
Panyu, China and Suwanee, Georgia locations. The Company continues to
assemble Computer Peripheral products; however, this work is limited in
scope and volume. The Video Engine 200 is manufactured for the Company
on a subcontract basis with LG Electronics in South Korea.
Marketing and Distribution
The Company's representatives attend trade and industry shows to
increase the awareness and interest in the Company's product offering
and focus on DVD technology. The Company employs eleven full-time
marketing and sales personnel based in U. S., South Korea, and Hong
Kong, who may also travel to other parts of the world, to sell its
products to OEM and distributors. The Company continues to maintain a
network of dealers in the United States, who resell the Video Engine
product line.
Suppliers
The DVD pick-ups for the Company's DVD products may be purchased from
suppliers such as Matsushita, Sanyo, and Sankyo. The DVD chip sets are
available from sources such as Matsushita, TI, and Toshiba, LSI Logic.
There are a variety of suppliers for Video CD, CD-ROM, CD-R and CD-RW
drives as well as the other parts and raw materials that are used to
make the Company's products.
Item 2. Description of Property
The Company currently has the following facilities, all of which
are leased from third parties.
Facility Location
US Headquarters Mountain View, CA
Asia Operations Headquarters Seoul, Korea
China Office and Warehouse Shenzhen, China
Taiwan Office Taipei, Taiwan
Item 3. Legal Proceedings
In the first half of calendar 1998, the Company discovered that
its original partner in the Panyu JV, Mr. Su, had taken approximately
$3.0 million in funds out of the Panyu JV during the period of September
1997 through December 1997. The Company immediately began the process of
building a case against Mr. Su over the missing $3.0 million. In
September 1998, the Company filed legal actions against Mr. Su for
fraud. So far the actions have not been successful to recover the
missing $3.0 million. In June 22, the Company's Board decided to
terminate the engagement of the current attorney representing DVS in
China for this case. The Company has started other legal steps to pursue
recovery of losses in Panyu. The steps may include, but not limited to,
insurance claims and engagement of a different law firm for this matter.
In April 1999 Ambient Capital Group, Inc. and Edwin Moss
("Ambient/Moss") filed a suit in Los Angeles County, seeking to recover
a "commission" from the Company arising out of the investment by OPLI
in the Company. Ambient/Moss purport to have been the Company's
exclusive financial advisers and private placement agents and are due a
commission regardless of whether they "found" the investor.
Ambient/Moss seek: (1) cash in excess of $623,000; (2) options to
purchase the Company's common stock at $0.75 per share; and (3)
preferred stock convertible into 1, 102,184 shares of the Company's
common stock at a conversion price of $0.47 per share. The Company
believes that there are meritorious defenses to this claim and intends
to vigorously defend its position that no commission is due to
Ambient/Moss in this matter. The Company has filed a cross-complaint in
the action.
In April 1999 assignees of the Company's former corporate counsel
Troy & Gould ("T&G") also filed an action for legal fees in the amount
of about $300,000. The Company has cross-claimed against T&G for
indemnity in the Ambient/Moss action as well as for professional
negligence. The Company intends to vigorously defend against this action
as well as pursue its cross-complaint for professional negligence and
indemnity.
Litigation by its very nature is uncertain. The Company believes
that it has meritorious defenses to these claims but there are no
guarantees that it will prevail.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal
year covered by this report to a vote of the security holders.
Part II
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock trades on the Nasdaq National Market
under the symbol DVID. The following table sets forth the high and low
sale prices for each quarter within the last two years.
High Low
--------- ---------
Fiscal 1999:
First quarter ended June 31, 1998................ $1.94 $0.88
Second quarter ended September 30, 1998.......... 1.06 0.31
Third quarter ended December 31, 1998............ 2.44 0.50
Fourth quarter ended March 31, 1999.............. 2.75 0.81
Fiscal 1998:
First quarter ended June 31, 1997................ $5.50 $2.88
Second quarter ended September 30, 1997.......... 5.50 3.00
Third quarter ended December 31, 1997............ 4.88 1.50
Fourth quarter ended March 31, 1998.............. 2.75 1.50
As of March 31, 1999, there were 164 holders of record of the
Company's Common Stock.
To date, the Company has not declared or paid cash dividends on
its Common Stock, and the current policy of the Board of Directors is to
retain earnings, if any, to fund the growth of the Company.
Consequently, no cash dividends are expected to be paid on the Common
Stock in the near future.
Item 6. 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 products, 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 and South Korea
and the competitive market for the Company's products, and other factors
described in Exhibit 99.1 to this 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, 1999.
Results of operations for fiscal year ended March 31, 1999 (fiscal
1999) compared to year ended March 31, 1998 (fiscal 1998) are presented
below.
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 years ended March 31, 1999 and 1998. See
Consolidated Financial Statements and Notes for additional information.
<TABLE>
<CAPTION>
Percent Of Revenue
---------------------
Year Ended March 31,
---------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenues................................... 100.0% 100.0%
Gross margin............................... 4.3% -16.4%
Research and development................... 36.2% 45.8%
Sales and marketing........................ 18.0% 32.7%
General and administrative................. 68.5% 53.6%
Purchased in-process research and
development............................... 2.9% 3.5%
Operating (loss)........................... -121.2% -152.0%
Net (loss)................................. -128.2% -145.8%
</TABLE>
<TABLE>
<CAPTION>
Consolidated revenue March 31, March 31, %
(in thousands) 1999 1998 Change
- ----------------------------------- ---------- ---------- -----------
<S> <C> <C> <C>
Product revenue....................... $16,463 $14,524 13.4%
Development and services revenue...... 427 671 -36.4%
Component revenue..................... 221 2,443 -91.0%
---------- ----------
Total revenue...................... $17,111 $17,638 -3.0%
========== ========== ===========
</TABLE>
Total revenue decreased $0.5 million, or 3.0% for fiscal 1999
compared with fiscal 1998 as a result of decreasing component revenue.
Product revenue consists of revenue from sale of DVD-ROM drives,
DVD intelligent loaders, Video engines and computer peripheral products.
Product revenue increased $1.9 million, or 13.4%, for fiscal 1999
compared with fiscal 1998. The increase was due to the introduction of
5x and 6x DVD-ROM drives, which accounted for 60.5% of product revenue.
For the year ended March 31, 1999, development and service revenue
decreased $0.2 million or 36.4%,
Component revenue in fiscal 1999 declined significantly when
compared to fiscal 1998, decreasing $2.2 million, or 91.0%. The change
was the result of a management decision to discontinue component sales,
since gross margins on these products was negligible.
International revenue represented approximately 58.1% and 71.9% of
total revenue for the years ended March 31, 1999 and 1998, respectively.
The Company expects international revenue to continue to be a
significant part of total revenue.
<TABLE>
<CAPTION>
March 31, March 31, %
1999 1998 Change
(in thousands) ---------- ---------- -----------
<S> <C> <C> <C>
Gross margin................... $744 ($2,890) 125.7%
as a percentage of revenue... 4.3% -16.4%
</TABLE>
Gross margin increased $3.6 million, from negative $2.9 million in
fiscal 1998 to positive $0.7 million in fiscal 1999. Gross margin
percentage increased to positive 4.4 % in fiscal 1999 from negative
16.4% in fiscal 1998.
Gross margin for product revenue increased $4.6 million, to a
gross margin of $1.0 million in fiscal 1999 from a negative gross margin
of $3.6 million in fiscal 1998. Product gross margin as a percentage of
product revenues increased to 6.4% in fiscal 1999 from negative 24.6% in
fiscal 1998.
The gross margin would be higher if there were no write-downs of
inventory totaling $1.5 million. Generally accepted accounting
principles require management to periodically revalue inventory to the
lower of cost or market. As such, inventory in Mountain View, primarily
consisting of video servers acquired for the network video product line
that has been discontinued, was written down by $325,000. In addition,
the Company has established reserves of $1,165,000 for inventory
remaining in Shenzhen, consisting primarily of Panasonic video CD
loaders, and for obsolete DVD-ROM of $173,652 for inventory in South
Korea. The selling price for both products has fallen below the cost of
these items. These reserves were expensed to cost of goods sold.
Development, service, and component revenue were an insignificant
portion of total revenue. The gross margin for these categories are not
material.
<TABLE>
<CAPTION>
March 31, March 31, %
1999 1998 Change
(in thousands) ---------- ---------- -----------
<S> <C> <C> <C>
Research and development....... $6,193 $8,082 -23.4%
as a percentage of revenue... 36.2% 45.8%
</TABLE>
Research and development expenses consist primarily of personnel
and equipment prototype costs required for the Company's development
efforts.
Research and development expenses decreased $1.9 million, or
23.4%, during fiscal 1999 compared with the same period in fiscal 1998.
Research and development expenses as a percentage of net revenues in
fiscal 1999 decreased to 36.2% from 45.8% in fiscal 1998. The decrease
in these expenses and as a percentage of net revenues is attributable to
a significant decrease in headcount that resulted from clsoing
operations in Atlanta and streamlining the research and development
efforts on non-performing product lines during fiscal 1999. The Company
expects that research and development expenses in dollar terms will
continue to increase as the Company expands its efforts to develop DVD
products.
<TABLE>
<CAPTION>
March 31, March 31, %
1999 1998 Change
(in thousands) ---------- ---------- -----------
<S> <C> <C> <C>
Sales and marketing............ $3,072 $5,771 -46.8%
as a percentage of revenue... 18.0% 32.7%
</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 associated with
trade shows and advertising.
Sales and marketing expenses decreased $2.7 million, or 46.8%,
during fiscal 1999 compared with the same period in fiscal 1998. Sales
and marketing expenses as a percentage of net revenues decreased to 18%
in fiscal 1998 from 32.7% in fiscal 1998. The decrease in these
expenses in aggregate dollar spending and as a percentage of net
revenues for fiscal 1999 was primarily due to closing operations in
Atlanta, and an increase in revenues as compared to fiscal 1998. In
addition, streamlining sales and marketing operations for non-performing
products, which occurred in the second half of fiscal 1999, should lower
the Company's expenses. In addition, consulting fees and trade show
expenses decreased as a result of Company's commitment to focus sales on
a few product lines. The Company expects that sales and marketing
expenses in dollar terms will continue to increase as the Company
continues to expand its sales and marketing efforts worldwide.
<TABLE>
<CAPTION>
March 31, March 31, %
1999 1998 Change
(in thousands) ---------- ---------- -----------
<S> <C> <C> <C>
General and administrative..... $11,726 $9,447 24.1%
as a percentage of revenue... 68.5% 53.6%
</TABLE>
General and administrative expenses consist primarily of
administrative salaries and benefits, insurance, facility, legal,
accounting, investor relations and other business support costs.
General and administrative expenses increased $2.3 million, or
2.4%, during fiscal 1999 compared with fiscal 1998. General and
administrative expenses as a percentage of net revenues in fiscal 1999
increased to 68.5% from 53.6% in fiscal 1998. The increase in these
expenses for the year ended March 31, 1999 was the result of the
streamlining efforts by management to reduce personnel and cease non-
performing business operations. The Company expects that general and
administrative costs in the future will increase in proportion to
revenue to the extent that the Company continues to expand its
businesses.
<TABLE>
<CAPTION>
March 31, March 31, %
1999 1998 Change
(in thousands) ---------- ---------- -----------
<S> <C> <C> <C>
Purchased in-process research and $500 $617 -19.0%
development..........................
as a percentage of revenue.......... 2.9% 3.5%
</TABLE>
Purchased in-process research and development expenses were $0.5
million and $0.6 million in fiscal 1999 and 1998, respectively.
Purchased in-process research and development expenses were incurred as
a result of the acquisition of the DVD-ROM business in June 1998 and the
ad insertion business of Arris in August 1997.
<TABLE>
<CAPTION>
March 31, March 31, %
1999 1998 Change
(in thousands) ---------- ---------- -----------
<S> <C> <C> <C>
Other income and expense, net.. $54 $1,089 -95.0%
as a percentage of revenue... 0.3% 6.2%
</TABLE>
The decrease in other income during fiscal 1999 compared to
fiscal 1998, due to lack of interest earned from the short-term
investment of funds raised in the Company's public offerings.
Discontinued operations. In fiscal 1999, the Company closed its
New Media division, which operated from offices in Atlanta, Georgia.
Income taxes. The Company incurred net losses and consequently
paid no federal or state income taxes in fiscal 1998 or 1997. For
federal and state tax purposes, the Company has net operating loss
carryforwards as of March 31, 1999 of approximately $35 million and $6
million, respectively, which will expire in various years beginning with
1999 if not utilized.
Due to the "change in ownership" provisions of the Internal
Revenue Code, the availability of the Company's net operating loss and
credit carryforwards may be subject to an annual limitation in future
periods. Such a limitation could substantially limit the eventual tax
utilization of these carryforwards.
The Company has established a valuation allowance against its
deferred tax assets of $13.8 million due to uncertainty surrounding the
realization of such assets. Management evaluates on a quarterly basis
the recoverability of the deferred tax assets and the level of the
valuation allowance. If it is determined that it is more likely than not
that the deferred tax assets are realizable, then the valuation
allowance will be appropriately reduced.
Liquidity and Capital Resources
The Company's accumulated deficit was $67.9 million at March 31,
1999. The Company ended fiscal 1999 with working capital of ($1.7)
million and cash, cash equivalents and short-term investments of $1.3
million compared with $8.3 million of working capital and $6.9 million
of cash and cash equivalents at the end of fiscal 1998.
To provide additional working capital, in June 1998 the Company
borrowed $1,000,000 from Dr. Edmund Y. Sun, the Company's then Chairman
and CEO, today Dr. Sun is the Company's Co-Chairman and Chief Technology
Officer. The Sun loan was converted to 1,331,479 shares of the Company's
common stock in July 1998.
On October 15, 1998, Digital Video Systems, Inc. ("DVS") entered
into an Investment Agreement with Oregon Power Lending Institution, an
Oregon corporation ("OPLI"). Pursuant to this Investment Agreement, DVS
gave OPLI the right to invest up to $12.25 million in DVS in exchange
for certain securities that would be convertible into a maximum of
24,276,595 shares of DVS common stock. See Item 12 for more details in
connection with OPLI investment. Furthermore, in the first quarter of
FY1999, the Company entered into an agreement with Chinapro, which will
fund subcontract manufacturing and grant the company trade credit up to
$35 million.
There can be no assurance that the Company will obtain 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 totaled $13.3 million in
fiscal 1999 compared to $21.2 million in fiscal 1998. Substantially all
of the net cash used in operating activities in fiscal 1999 represented
the net loss of $21.9 million adjusted for non-cash charges to
operations of $1.9 million for depreciation and amortization, $2.7
million for shares issued and options granted, $0.1 million for the
write off of operating and intangible assets, $0.5 million for purchased
in-process research and development and $0.3 million for loss on
disposal of assets. Substantially all of the net cash used in operating
activities in fiscal 1998 represented the net loss of $25.7 million
adjusted for non-cash charges to operations of $1.9 million for
depreciation and amortization, $0.6 million for purchased in-process
research and development.
Net cash used in investing activities totaled $4.2 million in
fiscal 1999 compared to $5.2 million in fiscal 1998. Substantially all
of the net cash used for investing activities in fiscal 1999 was for the
acquisition of the DVD-ROM business from Hyundai. For fiscal 1999, most
of the net cash used in investing activities was for the acquisition of
the DVD-ROM business of $3.1 million and Synchrome of $1.0 million,
acquisition of property and equipment and licenses of $1.3 million and
the purchase of short-term investments of $1.0 million. The Company had
capital expenditures of $ 2.4 million, related to the manufacturing of
DVD-ROM drives by its South Korean subsidiary.
Net cash provided by financing activities in fiscal 1999,
totaled $12.9 million, compared to negligible amounts in fiscal 1998.
In fiscal 1999, the Company issued 4,283,899 shares of common stock for
a total of $4.3 million. Bank borrowings by the Company's South Korean
subsidiary totaled $2.1 million. The Company completed a private
placement during the fiscal 1999 with Oregon Power Lending Institution
(OPLI) selling $6.5 million of Series C convertible preferred.
The above activities resulted in decreases in cash and cash
equivalents of $4.6 million in fiscal 1999 compared to an aggregate
increase of $26.3 million in fiscal 1998.
Charge to income in the event of release of escrow securities
In the event the Company attains any of the earning or stock price
thresholds required for the release of all or a portion of the
securities placed in escrow in connection with the IPO, the release of
such securities will result, for financial reporting purposes, in
compensation expense to the Company. Accordingly, the Company will, in
the event of the release of the securities escrowed in connection with
the IPO, recognize, during the period that the conditions for such
release are met, a substantial non-cash charge to earnings for financial
reporting purposes for the period or periods during which such
securities are, or become probable of, being released from escrow. The
amount of this charge will be equal to the fair market value of such
securities on the date of release from escrow.
Seasonality
The Company's DVD-ROM drive business may be subject to the
seasonality for similar computer peripherals such as CD-ROM and CD-R.
The seasonality of the DVD Intelligent Loader's business may be similar
to closely related consumer electronic items such as the DVD player and
Video CD player, since the loaders are a component of DVD players. The
Video Engine businesses generally are not subject to seasonality.
Year 2000 Compliance
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. Product lines that
may be affected by the Year 2000 issue are the MX Server and Server
Systems for Cable Ad Insertion, both of which have been discontinued.
The MX server, which uses Intel processors, and the ad insertion
servers, which were obtained form Silicon Graphics, have been installed
with Kirkwood College, Iowa and San Leandro City Hall customers. The
Company believes that the impact from the Year 2000 will not be
significant to its product lines as a whole.
Corporate Systems. The Company has begun 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 Company estimates that replacement of internal
hardware and software systems could approach $100,000. 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. 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. 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. The Company believes
that its exposure on Year 2000 issues is not material to its business as
a whole.
Item 6A. Outlook for Fiscal Year 2000
In Fiscal Year 1999 the Company continued to operate at a loss and its
working capital was substantially reduced. As a result, the Company has
formulated a new plan which has as its primary goals 1) generating an
operating profit in FY 2000, with the turnaround complete in the second
quarter and 2) positioning the Company as a going concern which can
generate positive cash flow in FY 2001 and allow the Company to operate
as a significant and successful factor in the industry. In order to
achieve these objectives, the Company is undertaking four major
operating tasks in FY 2000. These include:
1. Reducing all operating expenses to the lowest level possible by
closing all non-profitable and/or non-essential facilities, and
reducing headcount wherever possible. The Company believes these
tasks have been completed by June 1999. By that time the Company
headcount worldwide will have decreased to approximately 85,
lowering projected operating expenses in the first quarter of FY
2000. Total operating expenses in Q1 of Fiscal 1999 were $5.5
million, declining to $4.8 million in the second quarter of Fiscal
1999. By contrast, the total operating expenses for the first and
second quarters of Fiscal 2000 will be $1.70 million and $1.60
million respectively, a decrease of 69 and 67 per cent from the
same periods of the prior year. Because research and development
spending is critical to the Company's ongoing technology position
in the industry, the Company will not reduce research and
development spending in the DVD-ROM and DVD loader business.
Research and development spending has only been reduced in areas
where the Company is no longer planning on producing products in
the future, such as the video-on-demand market segment.
2. Entering the DVD loader business. By the end of September 1999 the
Company intends to produce and ship a substantial volume of DVD
loaders, representing over $15 million in quarterly revenue. The
tasks leading up to this result included completing the design of
the loader to be compatible with customers' DVD player designs,
and achieving the design-ins at several major DVD player producers
in Asia. The DVD loader business will generate profit margins in
the range of 10% to 20% gross margin, and the Company plans to
sell a volume of DVD loaders that contributes substantially to the
Company's gross profit by the third quarter of FY 2000.
3. Transitioning the Company to lower cost manufacturing in China. In
Fiscal Year 2000 the Company will be in full production of DVD
loaders and DVD-ROM drives in China, through the agreement the
Company signed with Chinapro Investment and Capital Company. This
agreement creates several major advantages to the Company,
including the following. First, the Company does not have to raise
new capital for working capital because Chinapro will fund product
manufacturing and grant the company trade credit up to $35
million. Second, the Company's manufacturing costs will be lowered
for the DVD loader and DVD-ROM products. Third, through the use of
manufacturing in China, the Company will gain further access to
the growing market in China for DVD loaders in particular. The
Company believes that by the end of 2001 China may be one of the
largest producing countries of DVD players, possibly exceeding
even the production of such players in Japan.
4. Entering the tier one OEM business in the DVD-ROM industry. In
order to be profitable and generate positive cash flow, the
Company must greatly increase sales volume in the DVD-ROM
business. This will only be possible by signing agreements with
and supplying the first tier of personal computer OEM companies.
At such time as an OEM agreement is reached and products are
shipped, the Company will be in a greatly increased revenue
position, and the gross margin will improve because better
agreements with suppliers can be negotiated based on large
purchase volumes. The Company has been engaged in talks for
several months with major OEM's and believes that the chances of
being successful in this area are good in FY 2000.
The Company believes it has adequate cash resources to sustain its
operations through the first quarter of Fiscal 2000. In the second
quarter of Fiscal 2000 the Company will need an additional cash infusion
of approximately $3.75 million, and in the third quarter the Company
will require an additional $3.0 million to fund its operations. OPLI has
indicated it will provide the capital required given that the Company is
performing to plan.
The principal objective of the Company is to implement the above items
in Fiscal year 2000, which will lead to a profitable operation if the
items are successfully implemented, and if market conditions continue in
a favorable direction. Although the Company believes that the outlook is
favorable, there can be no assurance that market conditions will
continue in a direction favorable to the Company.
Item 7. Financial Statements
I would insert this at the beginning of item 7
This Form 10-KSB does not include the report of Ernst & Young LLP relating
to the audited financial statements of the Company for the fiscal year
ended March 31, 1998 (the "1998 Audit Report"). Ernst & Young has
refused to reissue its report relating to such financial statements due to
the existence of a fee dispute with the Company. The 1998 Audit Report
can be found in the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1998. The 1998 Audit Report had a "going concern"
qualification. In the 1998 Audit Report, Ernst & Young stated that (i) it
had prepared the accompanying financial statements assuming the Company
would continue as a going concern, (ii) the Company had incurred recurring
operating losses, (iii) such condition raised substantial doubt about the
Company's ability to continue as a going concern and (iv) the financial
statements did not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or on the
amounts and classification of liabilities that might result from the
outcome of this uncertainty. There can be no assurances that Ernst &
Young would reissue the 1998 Audit Report or reissue it without additional
qualifications even if the fee dispute were resolved. Management does not
believe that there have been any significant events which would cause
Ernst & Young LLP to have modified that 1998 audit in any material
respect.
The following financial statements of the Company are included in
this report:
---Consolidated Balance Sheets --- March 31, 1999
---Consolidated Statements of Operations-Years ended March 31,
1999 and 1998
---Consolidated Statements of Stockholders' Equity-Years ended
March31, 1999 and 1998
---Consolidated Statements of Cash Flows-Years ended March 31,
1999 and 1998
---Notes to Consolidated Financial Statements
C. G. UHLENBERG & CO. LLP
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of Digital Video Systems, Inc.
We have audited the accompanying consolidated balance sheet of Digital
Video Systems, Inc. and subsidiaries as of March 31, 1999, and the related
consolidated statement of operations, stockholders' equity, and cash flows
for year ended March 31, 1999. The consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits. We did not audit the financial statements of DVS Korea Co., Ltd.,
a wholly-owned subsidiary, which statements reflect total assets of $9.0
million as of March 31, 1999, and total revenues of $8.2 million, for the
period from May 30, 1998 (inception) to March 31, 1999. Those statements
were audited by other auditors whose report has been furnished to us, and
our opinion, insofar as it relates to the amounts included for Digital
Video Systems, Inc., is based solely on the report of the other auditors.
We did not audit the financial statements of Digital Video Systems at
March 31, 1998. Those statements were audited by other auditors, whose
report date July 9, 1998, expressed an unqualified opinion.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting amounts and disclosures in
the consolidated financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Digital Video Systems, Inc.
and subsidiaries as of March 31, 1999, and the results of their operations
and their cash flows for the year ended March 31, 1999 in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has incurred recurring operating losses.
These conditions raise substantial doubt about its ability to continue as
a going concern. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
C. G. Uhlenberg & Co. LLP
Redwood City, California
June 29, 1999
Young Wha Corporation (Korea)
Report of Independent Auditors
The Board of Directors and Shareholder
DVS Korea Co., Ltd.
We have audited the accompanying balance sheet of DVS Korea Co., Ltd.
("the Company") at March 31, 1999 and the related statements of operations
and accumulated deficit, and cash flows for the period from May 30, 1998
(inception) to March 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for
our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DVS Korea Co., Ltd. at
March 31, 1999 and the results of its operations and cash flows for the
period from May 30, 1998 (inception) to March 31, 1999, in conformity with
accounting principles generally accepted in the United States of America.
The accompanying financial statements have been translated into United
States dollars solely for the convenience of the reader. We have reviewed
the translation and, in our opinion, the accompanying financial statements
have been translated into United States dollars on the basis described in
Note 2.
[Young Wha Corporation Letter Head]
The Board of Directors and Shareholder
DVS Korea Co., Ltd.
Page 2
Without qualifying our opinion, we draw attention to Note 14 to the
financial statements. The operations of the Company, and those of similar
companies in the Republic of Korea have been significantly affected, and
will continue to be affected for the foreseeable future, by the country's
unstable economy caused in part by the currency volatility in the Asia-
Pacific region. While the Korean economy has recently shown signs of
improvement, there are still significant uncertainties that may affect
future operations, the recoverability of the Company' s assets and the
ability of the Company to maintain or pay its debts as they mature. The
financial statements do not include any adjustments that might result from
those uncertainties.
/s/ Young Wha
April 24, 1999
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
March 31, 1999
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $664
Restricted cash ................................... 612
Accounts receivable, less allowance for doubtful
accounts of $4,275 ............................... 761
Inventories........................................ 7,785
Prepaid expenses and other current assets.......... 1,977
----------
Total current assets............................. 11,799
Property and equipment, net of depreciation.......... 1,847
Intangibles.......................................... 2,374
Other assets......................................... 73
----------
$16,093
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $5,440
Notes payable...................................... 2,120
Accrued liabilities................................ 4,409
----------
Total current liabilities........................ 11,969
Stockholders' equity:
Preferred stock, $0.0001 par value:
5,000,000 shares authorized; no shares issued
or outstanding at March 31, 1998.................. --
Common stock, $0.0001 par value:
80,000,000 shares authorized; 25,254,063
shares issued and outstanding at March 31, 1999... 3
Additional paid-in capital......................... 70,467
Accumulated deficit................................ (67,946)
Cumulative translation adjustments................ 1,600
----------
Total stockholders' equity....................... 4,124
----------
$16,093
==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenue:
Product revenue.............................. $16,463 $14,524
Development and services revenue............. 427 671
Component revenue............................ 221 2,443
---------- ----------
Total revenue.............................. 17,111 17,638
---------- ----------
Cost of product revenue........................ 15,414 18,103
Cost of development and services revenue....... 20 25
Cost of component revenue...................... 933 2,400
---------- ----------
Gross margin............................... 744 (2,890)
Operating expenses:
Research and development..................... 6,193 8,082
Sales and marketing.......................... 3,072 5,771
General and administrative................... 11,726 9,447
Purchased in-process research and
development................................. 500 617
---------- ----------
Total operating expenses................... 21,491 23,917
---------- ----------
Operating loss............................. (20,747) (26,807)
Interest expense............................... (104) --
Other income................................... 54 1,089
---------- ----------
Loss before extraordinary item................. (20,797) (25,718)
Extraordinary item- cost of closed
operations.................................... (1,134) --
---------- ----------
Net loss....................................... ($21,931) ($25,718)
========== ==========
Basic and diluted net loss per share before
extraordinary item............................ ($1.20) ($2.09)
========== ==========
Basic and diluted net loss per share........... ($1.27) ($2.09)
========== ==========
Shares used in the calculation
of basic and dluted net loss per share....... 17,279 12,276
========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Year Ended
March 31,
-------------------
1998 1998
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.............................. ($21,931) ($25,718)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation........................ 771 1,200
Amortization........................ 1,205 696
Shares and warrants issued to a
consultant......................... 196 11
Options granted..................... 2,455 --
Purchased in-process research and
development........................ 500 617
Write-off of operating and
intangible assets ................. 101 2,524
Loss on disposal of fixed assets.... 309 121
Changes in operating assets and
liabilities:
Accounts receivable............... 378 1,803
Inventories....................... (2,783) (3,538)
Prepaid expenses and other
current assets................... 1,174 (331)
Accounts payable.................. 3,289 (864)
Accrued liabilities............... 987 2,313
--------- ---------
Net cash used in operating
activities..................... (13,349) (21,166)
--------- ---------
INVESTING ACTIVITIES
Acquisition of property and equipment. (2,673) (954)
Proceeds from disposal of
property and equipment............... 842 --
Business combinations, net of cash
acquired............................. -- (2,670)
Purchase of short-term cash
investments.......................... (217) (3,366)
Maturities of short-term investments.. 1,250 2,333
Purchases of intangibles............... (3,355) (320)
Other investing activities............ (83) (199)
--------- ---------
Net cash used in investing
activities..................... (4,236) (5,176)
--------- ---------
FINANCING ACTIVITIES
Proceeds from the sale of common
stock................................ 4,307 --
Proceeds from the sale of
convertible preferred shares......... 6,475 --
Proceeds from exercise of stock
options.............................. 24 36
Proceeds from short-term bank
borrowings............................ 2,140 --
--------- ---------
Net cash provided by financing
activities..................... 12,946 36
--------- ---------
Net decrease in cash and cash
equivalents.......................... (4,639) (26,306)
Cash and cash equivalents at beginning
of year.............................. 5,915 32,221
--------- ---------
Cash and cash equivalents at end of
year.................................. $1,276 $5,915
========= =========
Supplemental disclosure of cash flow
information:
Interest paid....................... $104 $ --
Common stock issued in acquisitions. $3,500 $1,836
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
<TABLE>
<CAPTION>
Accumulated
Convertible Addi- Other
Preferred Stock Common Stock tional Accumu- Comprehensive Deferred
----------------- ------------------- Paid-in lated Income Compen-
Shares Amount Shares Amount Capital Deficit (Expense) sation Total
--------- ------- ----------- ------- --------- ---------- ------------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1997..... -- $ -- 20,259,579 $2 $54,628 ($20,297) ($72) ($86) $34,175
Comprehensine income:
Net loss..................... -- -- -- -- -- (25,718) -- -- (25,718)
Translation adjustment....... -- -- -- -- -- -- (177) -- (177)
---------
(25,895)
---------
Exercise of common stock
options..................... -- -- 247,130 -- 36 -- -- -- 36
Shares and warrants issued
to a consultant............. -- -- 4,215 -- 11 -- -- -- 11
Cancellation of ViComp
escrowed shares............ -- -- (140,760) -- -- -- -- -- --
Issuance of common stock
to Arris to acquire
new Media .................. -- -- 600,000 -- 1,835 -- -- -- 1,835
Amortization of deferred
compensation................ -- -- -- -- -- -- -- 13 13
--------- ------- ----------- ------- --------- ---------- ------------- --------- ---------
BALANCE AT MARCH 31, 1998..... -- -- 20,970,164 2 56,510 (46,015) (249) (73) 10,175
Comprehensine income:
Net loss..................... -- -- -- -- -- (21,931) -- -- (21,931)
Translation adjustment....... -- -- -- -- -- -- 1,849 -- 1,849
---------
(20,082)
---------
Exercise of common stock
options(1).................. -- -- 174,165 -- 23 -- -- -- 23
Issuance of common stock
to Hyundai for DVD-ROM
technology.................. -- -- 2,000,000 -- 3,500 -- -- -- 3,500
Conversion of promissory
notes to common stock....... -- -- 2,109,734 -- 1,307 -- -- -- 1,307
Issuance of common stock
options..................... -- -- -- -- 2,651 -- -- -- 2,651
Issuance of preferred stock
to OPLI..................... 6,477 -- -- -- 6,477 -- -- -- 6,477
Amortization of deferred
compensation................ -- -- -- -- -- -- -- 73 73
--------- ------- ----------- ------- --------- ---------- ------------- --------- ---------
BALANCE AT MARCH 31, 1999..... 6,477 $ -- 25,254,063 $2 $70,468 ($67,946) $1,600 $ -- $4,124
========= ======= =========== ======= ========= ========== ============= ========= =========
</TABLE>
See Notes to Consolidated Financial Statements
<PAGE>
DIGITAL VIDEO SYSTEMS, INC.
Notes to Consolidated Financial Statements
Note 1 - The Company and its Significant Accounting Policies
The Company
Digital Video Systems, Inc. (the "Company") develops and
markets DVD-ROM drives, DVD intelligent loaders, and video CD based
video engines.
Basis of Presentation
The accompanying condensed consolidated financial statements of
Digital Video Systems, Inc. ("DVS" or the "Company") include the
accounts of the Company and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated
in consolidation. In the opinion of management, the condensed
consolidated financial statements reflect all normal and recurring
adjustments which are necessary for a fair presentation of the Company's
financial position, results of operations and cash flows as of the dates
and for the periods presented.
Use of Estimates
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.
Cash and Equivalents and Short-term Investments
Cash and cash equivalents include money market accounts and
highly liquid debt instruments with a remaining maturity of three months
or less at the date of purchase. Short-term investments consist of money
market instruments, investments in municipal bonds and mutual funds with
carrying values which approximate their market values.
In accordance with Statement of Financial Accounting Standard
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities", the Company has classified its debt securities as
available-for-sale. Available-for-sale securities are carried at fair
value, with unrealized gains and losses reported as a separate component
of stockholders' equity when material. Unrealized gains and losses and
realized gains and losses for each period presented have not been
material. The cost of securities sold is based on the specific
identification method.
Revenue Recognition
Revenue from product and component sales are recognized upon the
later of shipment, acceptance of the product by the customer, or when
payment from the customer is assured. The Company offers limited stock
rotation and price protection under certain programs. The Company
estimates and maintains a reserve for product returns and price
protection.
Development revenue is recognized based upon the completion of
specified milestones in accordance with the agreement terms, typically
as costs are incurred. Costs related to development revenues are
included in cost of development and service revenues in accompanying
statements of operations. Service revenues are recognized as cash is
received for services performed.
Advertising Expense
Advertising expenditures are charged to operations as incurred
and total $330,000 and $313,000 in fiscal 1999 and 1998, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out
method) or market. The Company has recorded a write-down of inventory
and a charge to cost of product revenue of $0.2 million to reflect net
realizable value as of March 31, 1999. Additionally, management
determined that inventory of certain products was in excess of the
Company's current requirements based on past levels of sales and sales
forecasted in fiscal 2000. Management has developed a program to reduce
inventories to levels that are consistent with forecasted sales and has
expensed to cost of product revenue, $1.3 million, related to excess and
obsolete inventory.
Property and Equipment
Property and equipment are stated at cost net of accumulated
depreciation and amortization or at their impaired value. Depreciation
and amortization are computed using the straight-line method over the
assets estimated useful lives of two to five years.
The Company has adopted FASB Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long Lived Assets to be
Disposed of". In the fiscal year ending March 31, 1990, the Company
wrote-down the assets of its New Media division and ViComp subsidiary.
In accordance with APB 30, "Reporting the Results of Operations -
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions", the Company reduced the value of assets of New Media
division and ViComp subsidiary in the amount of $0.2 million.
Intangibles
Intangible assets consist of acquired technology and purchased
goodwill and are stated at cost net of accumulated amortization or at
their impaired value. Amortization is computed using the straight-line
method over the assets estimated useful lives of 5 months to 7 years.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiaries is
the local currency. Translation adjustments, which result from the
process of translating foreign currency financial statements into U.S.
dollars, are included as a separate component of stockholders' equity.
Transactional gains and losses, which have not been material to date,
are included in interest and other income in the accompanying statement
of operations.
Certain Concentrations
Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash equivalents,
short-term investments, and receivables from customers. The Company
primarily invests its cash equivalents and short-term investments in
time deposits with high-credit quality institutions and corporate bonds
and notes. The Company is exposed to credit risk in the event of
default by these institutions and corporate entities to the extent of
the amount recorded in the balance sheet. With respect to receivables
from customers, the Company primarily sells its products worldwide to
original equipment manufacturers and product distribution companies in
Asia. The Company generally does not require collateral, and maintains
reserves for potential credit losses.
Foreign Operations
A significant portion of the Company's operations are based
outside of the United States, principally in China and South Korea. As
a result, the Company must comply with a wide variety of foreign laws
and regulations. In particular, the Company may be materially adversely
affected by changes in the political, social and economic conditions in
these countries, and by changes in government policies with respect to
such matters as laws and regulations, methods to address inflation,
currency conversion and restrictions and rates and methods of taxation.
Revenue
A significant portion of the Company's revenue and net income is
derived from international sales, particularly from customers based in
Asia. Fluctuation of the U.S. dollar against foreign currencies,
charges in local regulatory or economic condition could adversely
effect operating results.
During the year ended March 31, 1999, there were no customer
accounted for more than 10% of total revenue. During the year ended
March 31, 1998, one customer accounted for 31% of total revenue.
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.
Note 2 - Balance Sheet Components
Inventories, property and equipment, and accrued liabilities
consisted of the following at March 31, 1999 (in thousands):
Inventories:
Raw materials................................... $1,981
Work in progress................................ 1,366
Finished goods.................................. 3,151
----------
$6,498
==========
Property and equipment:
Machinery and computer equipment................ $2,357
Furniture and fixtures.......................... 807
----------
3,164
Accumulated depreciation........................ (1,317)
----------
$1,847
==========
Accrued liabilities:
Warranty and related expenses................... $20
Payroll and related expenses.................... 129
Accrued taxes................................... 5
Other accrued expenses.......................... 4,255
----------
$4,409
==========
Intangible assets:
Goodwill........................................ $655
Intangible assets of acquired business.......... 2,406
Purchased licenses.............................. 285
----------
3,346
Accumulated amortization........................ (972)
----------
$2,374
==========
Note 3 - Business Combinations
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 new, 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 addition to the
license of DVD-ROM technology the acquisition provides the Company DVD-
ROM manufacturing capabilities, a related research and development team
and management from Hyundai. 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 July 1998 in small
quantities with a 2X data transfer rate.
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):
Current assets.................................. $75
Equipment....................................... 1,032
Intasngibles-developed technology............... 2,400
Goodwill........................................ 655
In-process research and development............. 500
----------
$4,662
==========
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 4 - Cash equivalents, Short-term investments and Fair Value of
Financial Instruments
As of March 31, 1999, the estimated fair value of the cash
equivalents and short-term investments consisted of cash and money
market funds in the amount of $1,276 (in thousands).
The estimated fair value of marketable securities by contractual
maturity as of March 31, 1999 are as follows:
(in thousands)
Cash equivalents and short-term investments:
Due in one year or less.................... $1,264
Due after one year......................... 12
----------
Total cash equivalents and short-term
investments............................. $1,276
==========
Note 5 - Commitments
Lease Commitments
The Company leases its facilities and certain office equipment
under noncancelable leases that require the Company to pay operating
costs, including property taxes, insurance and maintenance. Future
minimum lease payments under these operating leases at March 31, 1999
are as follows (in thousands):
2000............................................ $143
2001............................................ 148
2002............................................ 152
2003............................................ 157
----------
$600
==========
Rent expense charged to operations was approximately $823,203
and $975,000 for the fiscal years ended March 31, 1999 and 1998,
respectively.
Note 6 - Income Taxes
For financial reporting purposes, the net loss includes the following
components:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------
1999 1998
(in thousands) ---------- ----------
<S> <C> <C>
United States.................. ($15,734) ($17,290)
Foreign........................ (6,197) (8,428)
---------- ----------
Total.......................... ($21,931) ($25,718)
========== ==========
</TABLE>
The differences between the benefit for income taxes and the amount computed
at the U.S. statutory income tax rate are as follows:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------
1999 1998
(in thousands) ---------- ----------
<S> <C> <C>
Tax at U.S. statutory rate..... ($7,460) ($8,826)
Losses for which no tax
benefit was recognized........ 7,448 8,809
Other, net..................... 12 17
---------- ----------
Benefit for income taxes....... $ -- $ --
========== ==========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets at March 31, 1999 are as follows (in
thousands):
<TABLE>
<CAPTION>
<S> <C>
Deferred tax assets:
Net operating loss carryforwards......... $12,955
Inventory valuation accounts............. 107
Reserves and other accrued expenses not
yet deductible for taxes................ 574
Other.................................... 183
----------
Total deferred tax assets................ 13,819
Valuation allowance for deferred tax
assets.................................. (13,819)
----------
Net deferred tax assets.................. $ --
==========
</TABLE>
For federal and state tax purposes, the Company has net
operating loss carryforwards as of March 31, 1999 of approximately $35
million and $6 million, respectively, which will expire in various years
beginning with 1999 if not utilized.
Due to the "change in ownership" provisions of the Internal
Revenue Code, the availability of the Company's net operating loss and
credit carryforwards may be subject to an annual limitation in future
periods. Such a change could substantially limit the eventual tax
utilization of
these carryforwards.
Note 7 - Net Loss Per Share
In February 1997, the Financial Accounting Standards Board
issued FAS 128, which was required to be adopted on December 31, 1997.
As a result, the Company has changed the method used and restated prior
periods.
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------
1999 1998
---------- ----------
(in thousands except per share amounts)
<S> <C> <C>
Net loss before extraordinary item.......... ($20,797) ($25,718)
Net loss.................................... ($21,931) ($25,718)
Weighted average common shares
outstanding during the period(1)........... 17,279 12,276
Shares used in computing basic and
diluted net loss per share................ 17,279 12,276
Basic and diluted net loss per share
before extraordinary item................. ($1.20) ($2.09)
Basic and diluted net loss per share........ ($1.27) ($2.09)
</TABLE>
(1) Does not include 7,870,448 and 8,311,598 shares of escrow common and
stock for fiscal 1999 and 1998, respectively.
Pro forma basic and diluted net loss per share for 1999 have
been computed as described in Note 1 and also gives effect (using the
if-converted method) to the conversion of convertible preferred shares
that automatically converted upon completion of the Company's initial
public offering from the date of issuance.
For fiscal 1999 and 1998, respectively, 18,450,000 and
18,489,955 of Class A and Class B warrants were excluded from the
calculation of diluted loss per share because their effect is anti-
dilutive. For fiscal 1999 and 1998, respectively, 1,452,179 and
3,358,283 options were excluded from the calculation of diluted loss per
share because their effect was anti-dilutive.
Note 8 - Stockholder's Equity
Common Stock Offering
In May 1996, the Company completed an initial public offering,
("IPO"), of 4,830,000 units, each unit consisting of one share of Common
Stock, one Class A Warrant and one Class B Warrant, priced at $5.00 per
Unit. In November 1996, the Company closed a follow-on offering of
26,450 units. Each Unit consisted of 100 units that are identical to the
units issued in the Company's initial public offering of units as
described above. In connection with the IPO, all of the then
outstanding shares of convertible preferred stock of 5,232,948 were
converted to common stock on a one-for-one basis. The proceeds, net of
commissions and certain expenses, to the Company from the offerings were
approximately $43.7 million.
Each Class A Warrant entitles the holder to purchase at an
exercise price of $6.50, subject to adjustment, one share of Common
Stock and one Class B Warrant. Each Class B Warrant entitles the holder
to purchase, at an exercise price of $8.75, subject to adjustment, one
share of Common Stock. The Class A Warrant and the Class B Warrants
included in the Units are exercisable at any time after issuance until
May 9, 2001. The Class A Warrants are subject to immediate redemption
and the Class B Warrants are subject to redemption commencing in May
1997, by the Company at $0.05 per Warrant, upon 30 days' written notice,
if the average closing bid price of the Company's Common Stock has
equaled or exceeded $9.10 per share with respect to the Class A Warrants
and $12.25 per share with respect to the Class B Warrants (subject to
adjustment in each case) for 30 consecutive trading days ending within
15 days of the date the Warrants are called for redemption.
Escrowed Securities
In April 1996, the holders of the Company's common and preferred
stock, and holders of options to purchase common stock pursuant to the
Company's 1993 stock option plan, placed, on a pro rata basis, 7,812,948
of their shares and options to purchase 1,852,697 shares of common
stock, respectively, into escrow, and a holder of an option to purchase
200,000 shares of Common Stock outside the Company's 1993 stock option
plan placed all of such options into escrow. Additionally, 234,355
options reserved for future grant under the Company's 1993
Stock Option Plan were subject to escrow upon grant. The common stock
and options will be released to the stockholders on a pro rata basis, in
the event specified levels of pretax income of the Company for the years
ended March 31, 1999 to 2001 are achieved, or the market price of
the Company's common stock attains specified targets during a 36-month
period commencing from the effective date of the registration statement
relating to the Company's IPO. The pretax income levels are subject to
proportionate adjustment upon the issuance of certain securities
subsequent to the Company's IPO.
Any shares or options remaining in escrow on July 15, 2001 will
be forfeited, which shares and options will then be contributed to the
Company's capital.
In the event that the foregoing earnings or market price levels
are attained and the escrow securities released, the release of escrow
securities to officers, directors, employees and consultants of the
Company will result in compensation expense for financial reporting
purposes. The expense will equal the fair market value of the escrow
securities on the date of release and could result in a material charge
to operations.
As of March 31, 1999, 7,870,448 shares of the Company's common stock,
412,615 outstanding options to purchase common stock and 443,532 options
available for future grant were subject to escrow.
To date, no shares or options have been released from escrow.
Stock Option Plans
The Company's stock option plans provide for the granting of
incentive stock options and nonstatutory stock options to employees,
directors and consultants at prices ranging from 85% to 110% (depending
on the type of grant) of the fair value of the common stock on the grant
date as determined by the Board of Directors. Most options vest ratably
over a four-year period commencing as of the date of grant. The Company
has authorized 3,762,532 shares of common stock for issuance under the
1993 Stock Option Plan (the "1993 Plan"), 1,500,000 shares of common
stock for issuance under the 1996 Stock Option Plan (the "1996 Plan"),
and 4,000,000 shares of common stock for issuance under the 1998 Stock
Option Plan (the "1998 Plan"). The options granted under the 1993
Plan, 1996 Plan and 1998 Plan are exercisable over a maximum term of ten
years from the date of grant, and are subject to various restrictions as
to resale and right of repurchase by the Company. The 1998 Plan is
subject to shareholder approval, which the Company will seek at its next
annual meeting.
Option activity under the 1993 Plan, 1996 Plan and 1998 Plan was
as follows:
<TABLE>
<CAPTION>
Outstanding Options
----------------------
Weighted
Available Number Average
for of Shares Exercise
Grant Price
----------- ----------- ----------
<S> <C> <C> <C>
Balance at March 31, 1997....... 383,022 3,478,046 $3.01
Options authorized............ 500,000 -- --
Options granted............... (1,773,043) 1,773,043 3.33
Options exercised............. -- (247,130) 0.14
Options canceled.............. 1,845,676 (1,845,676) 4.49
----------- -----------
Balance at March 31, 1998....... 955,655 3,158,283 2.55
Options authorized............ 4,000,000 -- --
Options granted............... (3,428,500) 3,428,500 1.07
Options exercised............. -- (151,249) 0.14
Options canceled.............. 2,701,377 (2,701,377) 4.49
----------- -----------
Balance at March 31, 1999....... 4,228,532 3,734,157 1.35
=========== =========== ==========
</TABLE>
<TABLE>
<CAPTION>
Options Oustanding Options Exercisable
----------------------------------- ----------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
at Remaining Average at Average
Range of March 31, Contractual Exercise March 31, Exercise
Exercise Prices 1999 Life (Years) Price 1999 Price
- ----------------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
0.139 - 0.688 760,311 8.18 $0.47 337,356 $0.25
1.125 - 1.438 2,497,000 9.31 1.21 518,820 1.22
2.125 - 7.250 411,679 8.16 4.48 283,537 4.56
----------- -----------
3,668,990 1,139,713
=========== ===========
</TABLE>
Employee Stock Purchase Plan
In September 1997, the shareholders approved 500,000 shares for
distribution under the Company's employee stock purchase plan which
employees may purchase shares, subject to certain limitations, at no
less than 85% of the lower of the fair market value of the shares at the
beginning or end of a three-month purchase period. The first enrollment
period for the stock purchase plan began on April 1, 1998. As of March
31, 1999, 22,907 shares have been distributed to employees under this
plan.
Other Options and Warrants
On February 1, 1996, the Board of Directors authorized a grant of
200,000 common stock options to a consultant. The options, which are
not included in the 1993 Plan, 1996 Plan or 1998 Plan, have an exercise
price of $5.00 per share and were fully vested at March 31, 1999. None
of these options have been exercised to date.
In connection with the IPO and follow-on offering, the Company
granted an option to purchase 650,000 Units (each Unit is identical to
the ones issued in the IPO) to an underwriter. 420,000 Units are
exercisable at a price of $6.50 per Unit during a three year period
commencing in May 1998. 230,000 Units are exercisable at a price of $16
per Unit over a period of two years commencing November 21, 1999.
In connection with the sale of preferred stock to OPLI, the
Company granted 24-month options to purchase 3,000,000 shares of Common
stock at an exercise price of $0.75. None of these options have been
exercised to date.
The Board of Directors has authorized a contingent grant of
1,750,000 to Mali Kuo, subject to attainment of certain financing
targets for the Company. These options have an aggregate exercise price
of $0.91 and expire within a certain time. None of these options have
been exercised to date. 250,000 shares have been earned and issued
through March 31, 1999.
As of March 31, 1999, there were warrants, issued to a consultant,
outstanding to purchase 30,970 shares of common stock at $8.375 per
share through 2002.
Accounting for Stock Based Compensation
The Company accounts for stock option plans in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued
to Employee," (APB No. 25). In accordance with APB No. 25, the Company
has generally not recognized compensation expense in connection with
such plans.
The Company has adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, (SFAS 123),
"Accounting for Stock-Based Compensation". Had compensation cost for
the 1998, 1996 and 1993 Plans been determined based on the fair value at
the grant date for the options granted in fiscal 1999 consistent with
the provisions of SFAS 123, the Company's net loss for fiscal 1999 and
1998 would have been increased to the pro forma amounts indicated below
(amount in thousands, except per share):
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Net loss before extraordinary item--
pro forma......................... ($22,523) ($27,367)
Net loss -- pro forma............... ($23,656) ($27,367)
Basic and Diluted net loss per share
before extraordinary item
-- pro forma...................... ($1.30) ($2.23)
Basic and Diluted net loss per share
-- pro forma...................... ($1.37) ($2.23)
</TABLE>
The weighted average estimated fair values of employee stock
options for fiscal year 1999 and 1998 were $1.26 and $1.78 per share,
respectively.
The fair value for these options was estimated at the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for 1999 and 1998:
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------
1999 1998
---------- ----------
<S> <C> <C>
Risk-free interest rate.......... 5.90% 5.50%
Dividend yield................... 0.0% 0.0%
Volatility....................... 1.8% 0.9%
Average life..................... 1.27 1.19
</TABLE>
The Black-Scholes option valuation model was developed for use
in estimating the fair value of traded options that have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility. Because the Company's employee stock
options have characteristics significantly different from those of
traded options, and because changes in these subjective input
assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not provide a reliable
single measure of the fair value of its employee stock options.
The pro forma effects of applying SFAS No. 123 are not likely to
be representative of the effects on pro forma disclosures in future
years. Because SFAS No. 123 is applicable only to options granted
subsequent to March 31, 1995, its pro forma effect will not be fully
reflected until approximately fiscal 2000.
Note 9 - Employee Benefit Plan
During fiscal 1998, the Company implemented a 401(k) tax-
deferred savings plan under which all US employees may contribute up to
16% of their compensation, subject to certain Internal Revenue Service
limitations. The Company has not contributed to the plan to date.
Note 10 - Segment Information
The Company operates in one business segment, which includes developing,
producing and marketing digital video systems and sub-assemblies,
digital ad insertion products and computer peripheral products. As a
result of SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", issued by the Financial Accounting Standards
Board, the Company has summarized its business operation by geographic
areas in which it operates. The Company maintains its headquarter in
the United States and its foreign operation in Asia are located in
Korea, Taiwan, Hong Kong and China.
<TABLE>
<CAPTION>
(in thousands)
United
States Asia Total
--------- --------- ---------
<S> <C> <C> <C>
Year Ended March 31, 1999:
Revenue from unaffiliated customers......... $7,164 $7,078 $14,242
Revenue from related parties and affiliates. 9 2,860 2,869
--------- --------- ---------
Total revenue............................... $7,173 $9,938 $17,111
========= ========= =========
Loss from operations........................ ($14,929) ($5,819) ($20,748)
========= ========= =========
Identifiable assets......................... $5,802 $10,291 $16,093
========= ========= =========
Year Ended March 31, 1998:
Revenue from unaffiliated customers......... $4,928 $12,039 $16,967
Revenue from related parties and affiliates. 29 642 671
--------- --------- ---------
Total revenue............................... $4,957 $12,681 $17,638
========= ========= =========
Loss from operations........................ ($18,483) ($8,324) ($26,807)
========= ========= =========
Identifiable assets......................... $10,020 $5,708 $15,728
========= ========= =========
</TABLE>
Export sales, representing sales from the United States to
customers in foreign countries, were $182,000 and $196,000, for the
years ended March 31, 1999 and 1998, respectively.
Note 11 - Comprehensive Income
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income", (SFAS 130"). The Company adopted SFAS 130 on
April1, 1998. Under SFAS 130, the Company is required to display
comprehensive income and its components as part of the Company's full
set of financial statements. The measurement and presentation of net
income(loss) did not change. Comprehensive income(loss) is comprised of
net income(loss) and other comprehensive income(expense). Other
comprehensive income(expense) includes certain changes in equity that
are excluded from net income(loss), such as, translation adjustments,
unrealized holding gains and losses on available-for-sale marketable
securities and certain derivative instruments. The Consolidated
Statements of Shareholders' Equity reflect comprehensive income(loss)
for years ended March 31, 1999, and 1998.
Note 12 - Pending Litigation
The Company is involved in a pending lawsuit. Ambient Capital
Group has filed suit against the Company seeking to recover a
"commission" arising out of a private placement investment secured by
the Company. The Company has filed a cross-complaint against Ambient
Capital. It is the opinion of management that this case will result in
a favorable outcome. Management feels that there will be no material
effect on the financial statement.
The Company is also in litigation with its former corporate
council regarding unpaid fees. The Company has filed a cross-complaint
against the firm.
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Management of the Company
Set forth below is certain information with respect to the
directors and executive officers of the Company as of the filing date of
this report.
Name
Age
Position
Director Since
Mali Kuo
46
Chief Executive Officer and
Co- Chairman
1999
Edmund Y. Sun
50
Co-Chairman and Chief
Technology Officer
1992
Sung Hee Lee
44
President, Asian Operations
- --
Robert Werbicki
47
Executive Vice President
- --
Philip B. Smith
64
Director
1995
Douglas Watson
46
Director
1998
Michael Chen
46
Director
1998
Young Sam Cho
46
Director
1998
Ande Abbott
56
Director
1999
Edmund Y. Sun has served as the Company's Chairman of the Board
since its inception in October 1992 and is the founder of the Company.
Dr. Sun served as Chief Executive Officer from October 1992 to June 1998
and served as President from October 1992 to May 1996. Dr. Sun founded
C-Cube Microsystems Inc. ("C-Cube"), a public company involved in the
development of full-color still and motion picture compression
technology, and was its Chief Executive Officer from March 1989 to
September 1991, and Chairman of the Board from August 1988 until April
1993. Dr. Sun was also a founder, Vice President, and Chief Technical
Officer of Weiteck Corporation, a public company involved in high-speed
three-dimensional shaded applications. Dr. Sun is a director of CSS
Laboratories, Inc., a privately-held company involved in computer
hardware. Dr. Sun has a Ph.D. in Applied Physics, and an M.S. in
Electrical Engineering from the California Institute of Technology, and
a B.S. in Electrophysics from the National Chiao-Tung University in
Taiwan.
Mali Kuo was appointed as the Company's Chief Executive Officer
and Co-Chairman of the Board in February 1999 and has served in such
capacities since that time. From 1997 to 1998, she served as Chief
Financial Officer and then later as Chief Executive Officer of Well
Communications, Inc., a supplier of carrier telecommunications via
satellite between the United States and Asia. From 1996 to 1997, she
served as Executive Vice President of Unistar Technology Co., the
manufacturer's rep in the U. S. for a major PCB manufacturer in Taiwan.
From 1993 to the present, Ms. Kuo has arranged a number of large-scale
financing projects which include negotiations of contracts in excess of
$10 million for Astoria Metal Corporation, financing for acquisitions by
Pacific Rim Metals, Inc. and financing of multi-unit housing projects
throughout Northern California. Ms. Kuo received her three-year college
education from Shih Chien College in Taipei, Taiwan.
Sung Hee Lee was appointed President of Asian Operations of the
Company and Managing Director of DVS Korea Co., Ltd. in June 1998. Mr.
Lee had been a director of the Company from March 1994 to June 1998.
Prior to joining DVS, Mr. Lee was the Director and founder of the
Multimedia Business Division of Hyundai Electronics Industries Co., Inc.
since 1993. From 1991 to 1993, Mr. Lee served as a Senior Marketing
Manager of Hyundai's Information Systems Business Sector and from 1989
to 1991, he was a Senior Manager of Hyundai's Computer Export
Department. Mr. Lee is a member of the Board of Directors of Wanyan
Electronics Co. Ltd. in China. He received his M.S. in Industrial
Engineering from the Korea Advanced Institute of Science & Technology.
Robert B. Baker was appointed the Company's Chief Financial
Officer in June, 1999. Since joining the Company in May, 1997 Mr.
Baker, as Corporate Controller, has handled special assignments in Asia
as well as assisting in the downsizing of U.S. operations. Prior to
joining the Company Mr. Baker was the Chief Financial Officer of Shape,
Inc., a manufacturer of home video entertainment and computer related
products. From 1987 - 1994 Mr. Baker was President and CEO of
Technology Service Group, Inc. a developer and manufacturer of payphones
for the Bell operating companies and large independent telcos.
Robert Werbicki has served as the Company's Executive Vice
President of Computer Products since August 1997. In 1995 he founded and
was the President of Synchrome Technology Inc., a development and
marketing company that integrates CD-ROM drives into finished peripheral
add-on personal computer products, and develops and markets multimedia
audio software. In 1993, Mr. Werbicki served as General Manager and
consultant to Mountain Network Solutions and Nakamichi Peripherals
Corporation. From 1990 to 1993 he served in various executive positions
at Rexon Inc., including President of Rexon/Tacmar Inc.; President of
Sytron, the Rexon, software development and marketing subsidiary; and
General Manager of the Wangtek DAT Division. From 1985 to 1990 Mr.
Werbicki held Engineering positions at Mountain Network Solutions Inc.
From 1980 to 1984 he held design-engineering positions at Ampex
Corporation and DRS/Precision Echo. Mr. Werbicki received his B.S.E.E.
degree from the University of the Pacific and the Bachelor of Commerce
degree from the University of Toronto.
Philip B. Smith has served as a director of the Company since
November 1995. Mr. Smith has been a Vice Chairman of the Board of
Spencer Trask Securities Incorporated since 1991. He was formerly a
Managing Director of Prudential Securities in their merchant banking
division from 1985 to 1991. Mr. Smith is a founding General Partner of
Lawrence Venture Associates, a venture capital limited partnership
headquartered in New York City and was the General Partner from 1984 to
1985. From 1981 to 1984, he served as Executive Vice President and
Group Executive of the international banking and worldwide corporations
group at Irving Trust Company. Prior to joining Irving Trust Company,
he was at Citibank for 15 years, where he founded Citicorp Venture
Capital and was its President and Chief Executive Officer. Since 1988,
Mr. Smith has also been the managing general partner of Private Equity
Partnership, L.P. Mr. Smith is a director of Movie Gallery, Inc.,
DenAmerica Corp. and KLS Enviro Resources, Inc., all publicly-held
companies. Mr. Smith is an adjunct professor at Columbia University
Graduate School of Business. He holds a B.S.E. from Princeton
University and an M.B.A. from Harvard University.
Young Sam Cho has served as a director since October 1998. Mr.
Cho has been the Director of the Corporate Planning Department of
Hyundai since June 1994. From March 1990 until May 1994, Mr. Cho served
as General Manager of Hyundai Electronics Europe Gmbh (Hyundai's
European Sales Subsidiary). Mr. Cho received a BA degree in Business
Administration from Seoul National University.
Ande Abbott has been a respected member of organized labor for 32
years. For the past 21 years, he has worked in Washington D.C. where he
is currently Assistant to the International President and Director of
Legislation for the International Brotherhood of Boilermakers. He also
serves as the Director of the Shipbuilding and Marine Division, making
him responsible to the International President for 40 civilian and
federal shipyards throughout the United States and Canada. His duties
require him to lobby the U.S. congress to advocate or oppose proposed
legislation in the interests of the union's 90,000 members. He has also
served on the Executive Board of the Maritime Trades Department of the
American Federation of Labor - Congress of Industrial Organizations
since 1991. In addition to his union activities, Mr. Abbott also serves
on the Department of Labor Trade Advisory Committee and is serving his
second year on the Advisory Committee of the Export-Import Bank.
Douglas T. Watson has served as a Director and a member of the
Executive Committee since November 1998. Mr. Watson is currently
President and CEO of Astoria Metal Corporation, a ship repair and
dismantling firm which he founded in 1992, currently operating in San
Francisco. In May 1999 AMC succeeded in obtaining the rights to use the
Long Beach shipyard, for which he has played a key role. From 1986 to
1992, Mr. Watson was President and CEO of West State, Inc., a ship
repair firm that he founded and operated out of Portland, Oregon. During
the period from its founding to its sale in 1994 by Mr. Watson, West
State generated total revenues of $360 million, had a credit line of $40
million, and employed thousands of marine workers. During the period
from 1986 to 1994, Mr. Watson organized and operated many smaller
companies dealing with finance, real estate, engineering and marine
specialty work. From 1973 through 1985, Mr. Watson worked in the marine
repair and construction industry holding increasingly responsible
positions. At the time that he founded West State, Inc. in 1986, Mr.
Watson was the Operations Manager for Dillingham Ship Repair. In
addition to his marine business experience, Mr. Watson has an extensive
background in commercial and industrial real estate. His portfolio
included over 30 companies at one time which were instrumental in the
founding of his own companies.
Michael S. Chen has served as a Director and a member of the
Executive Committee since November 1998. Prior to that, he had been the
President of EMEE, Inc. since 1992, where Mr. Chen has developed and
patented a microprocessor-based device for use on automobiles and other
applications, raised 7-figure funding, and managed marketing efforts to
major international tier-1 suppliers for automotive OEM's. Between 1987
and 1991 he worked at Cadence Design Systems, Inc., a world leader of
ICCAD systems. From 1981 to 1986, Mr. Chen worked at Xerox Palo Alto
Research Center. Prior to that, he had been in charge of QRA for several
mass-produced consumer opto-electronic systems at Texas Instruments
(Taiwan) Limited. He received management training in the Academy of
National Defense Management in Taiwan and worked as an officer in
managerial functions during his 2-year military service in the China
Airforce. Mr. Chen holds a B.S. degree in Physics from National Taiwan
University, a M.S.E.E. degree and Ph.D. candidacy from Stanford
University.
Directors serve until the next annual meeting or until their
successors are elected or appointed. Officers are elected by and serve
at the discretion of the Board of Directors. Michael Chen was
previously married to Ms. Kuo.
Pursuant to the underwriting agreement entered into by the Company
in connection with the initial public offering of the Company's
securities in May 1996 (the "IPO"), the Company agreed for a period of
five years commencing on May 9, 1996, if requested by the underwriter,
D.H. Blair Investment Banking Corp. (the "Underwriter"), to nominate a
designee of the Underwriter who is reasonably acceptable to the Company
to the Company's Board of Directors. To date, the Underwriter has not
designated a director.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act") requires the Company's directors and certain of its
officers, and persons who own more than 10% of a registered class of the
Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission (the
"Commission"). Officers, directors and greater than 10"% stockholders
are required by the Commission's regulations to furnish the Company with
copies of all Section 16(a) forms they file. Based solely upon a review
of the copies of the forms furnished to the Company and the
representations made by the reporting persons to the Company, the
Company believes that during the fiscal year ended March 31, 1999, its
directors, officers and 10% stockholders complied with all filing
requirements under Section 16(a) of the Exchange Act, with the following
exceptions: Dr. Sun filed a late Form 3 to report the receipt of
400,000 stock options; Mr. Smith filed a late Form 4 to report the
acquisition of shares of 16,766 Common Stock upon the exercise of stock
options; Ms Kuo filed a late Form 3 to report the receipt of
400,000/1,750,000 stock options. Mr. Watson, Chen, Fitchey, and Cho
filed a late Form 3 to report the receipt of 100,000 stock options.
Item 10. Executive Compensation
Executive Compensation
The following table sets forth the compensation for the fiscal
year ended March 31, 1999, 1998 and 1997 paid by the Company to its
Chief Executive Officer and the other executive officer of the Company
who earned in excess of $100,000 (collectively, the "Named Executive
Officers") based on salary and bonus for the fiscal year ended March 31,
1999:
Annual Compensation
Long-Term
Compensation
Awards
Name and Principal
Position
Fiscal
Year
Ended
March 31,
Salary
Other
Annual
Compen-
sation
Securities
Underlying
Options
Mali Kuo (2)
Co-Chairman & Chief
Executive Officer
1999
- -
400,000
Edmund Sun (3)
Co-Chairman & Chief
Technology Officer
1999
1998
1997
46,045
165,157
159,751
400,000
Edward M. Miller (4)
former Chief Executive
Officer & former Chief
Financial Officer
1999
1998
131,944
41,409
215,000
135,000
Sung Hee Lee (5)
President, Asian
Operations
1999
160,000
250,000
Bob Baker (6)
Chief Financial Officer
1999
100,000
50,000
Robert Werbicki (7)
Executive Vice President,
Computer Products
1999
1998
207,137
144,806
75,000
100,000
John Smuda (8)
former Chief Financial
Officer
1999
1998
124,349
49,654
37,500
15,625
Thomas R. Parkinson (9)
1998
393,166
900,000
Former President & CEO
Gary Franza (10)
former Executive Vice
President,
New Media division
1999
1998
93,932
138,439
89,861
35,135
125,000
(1) The compensation described in this table does not include medical
insurance, retirement benefits and other benefits received by the
foregoing executive officers which are available generally to all
employees of the Company and certain perquisites and other personal
benefits received by the foregoing executive officers of the Company,
the value of which did not exceed the lesser of $50,000 or 10% of the
executive officer's cash compensation in the table.
(2) Ms. Kuo was appointed Chief Executive Officer and Co-Chairman
effective February 18, 1999.
(3) Dr. Sun also served as President of the Company during the twelve
months ended March 31, 1996 and through May 1996 and as Chief Executive
Officer during the fiscal year ended March 31, 1996 and through June
1998.
(4) Mr. Miller served as Chief Financial Officer from January 1998
through June 1998. Mr. Miller was appointed Chief Executive Officer
effective June 23, 1998 and resigned effective February 23, 1999.
(5) Mr. Lee was appointed President, Asian Operations effective June 23,
1998.
(6) Mr. Baker was appointed Chief Financial Officer effective June 1,
1999
(7) Mr. Werbicki served as the Executive Vice President of Computer
Products since August 1997.
(8) Mr. Smuda served as Vice President, Business Development from
November 1997 to June 1998. Mr. Smuda was appointed Chief Financial
Officer effective June 23, 1998 and resigned effective March 15, 1999.
(9) Mr. Parkinson resigned as President and Chief Operating Officer of
the Company on June 23, 1998, effective July 3, 1998.
(10) Represents payments made to Mr. Franza as a consultant prior to his
employment by the Company as Executive Vice President of the New Media
division in August 1997. Mr. Franza's employment with the Company was
terminated as of November 1, 1998.
DIRECTOR COMPENSATION
Non-employee directors receive $15,000 per year as compensation
for serving on the Board of Directors, are entitled to participate in
the Company's stock option plans, and from time to time to receive
grants of options thereunder to purchase shares of the Company's Common
Stock.
In June 1998 all non-employee directors were granted 100,000
options pursuant to the Company's 1998 Stock Option Plan (the "1998
Stock Option Plan").
EMPLOYMENT AND CONSULTING AGREEMENTS
The Company entered into an employment agreement (the "Sun
Employment Agreement") with Dr. Sun, the Company's founder, Chairman of
the Board and Chief Executive Officer, in March 1996. The term of the
Sun Employment Agreement commenced in May 1996 and will expire on March
31, 2001; provided, however, that the Sun Employment Agreement can be
terminated by either party after March 31, 1999, if all of the Escrow
Securities (as defined herein) have been released. The Sun Employment
Agreement provides that in consideration for Dr. Sun's services, he is
to be paid a salary of $160,000 during the first year of the agreement.
In addition, he will receive increases in salary and bonuses as deemed
appropriate by the Board of Directors. In June 1998, Dr. Sun resigned
as Chief Executive Officer and was appointed Chief Technology Officer.
Dr. Sun's compensation package remains the same, although his pay has
been voluntarily deferred for a number of months.
On February 18, 1999, the Company entered into an employment
agreement with Mali Kuo. In connection with such agreement and subject
to approval by the Board of Directors, Ms. Kuo is to receive options to
purchase 400,000 shares of Common Stock. Although such options may vest
at a rate of 25% per quarter, she may not exercise such options until on
or after February 18, 2001, if her options are fully vested. If her
service as Chief Executive Officer terminates before such options are
fully vested, she may not exercise any vested options until on and after
the second anniversary of the last vesting date on which Ms. Kuo served
as the Company's Chief Executive Officer. The exercise date may be
accelerated under certain circumstances based on the stock performance
on the market. Pursuant to the agreement, Ms. Kuo shall receives an
annual salary of $150,000, although it has been voluntarily deferred.
The Company entered into an employment agreement in May 8, 1998
with Sung Hee Lee, pursuant to which Mr. Lee became President of the
Company's Asian Operations. Upon entering into such agreement, Mr. Lee
received five-year options to purchase 250,000 shares of Common Stock at
$1.125 under the Company's 1998 Stock Option Plan. Such options vest at
a monthly rate of 2.083% over a four year period, subject to
acceleration of this vesting schedule or forfeiture of these options
under certain circumstances. Mr. Lee receives an annual salary of
$160,000 and will be eligible for an annual performance bonus ranging
from $____. Mr. Lee's employment as President, Asian Operations is
renewable at the end of the 36-month term by mutual agreement of the
parties.
The Company entered into a fifteen-month employment agreement in
December 1997 with Edward Miller, pursuant to which Mr. Miller became
the Chief Financial Officer of the Company in January 1998. Upon
entering into such agreement, Mr. Miller received five-year options to
purchase 135,000 shares of Common Stock at $1.44 per share under the
Company's 1996 Stock Option Plan. Such options vest at a monthly rate
of 2.083% over a four year period commencing on March 1, 1998, subject
to acceleration of this vesting schedule or forfeiture of these options
under certain circumstances. Mr. Miller receives an annual salary of
$135,000 and will be eligible for an annual performance bonus ranging
from $27,000 to $67,500. Mr. Miller's employment as Chief Financial
Officer was renewable at the end of the fifteen-month term by mutual
agreement of the parties. In June 1998, Mr. Miller was appointed Chief
Executive Officer of the Company and President of its U.S. Operations.
Mr. Miller was granted an additional 215,000 shares of Common Stock
under the Company's 1998 Stock Option Plan as a result of such
appointment. On April 23, 1999 Mr. Miller entered into a consulting
agreement with the Company, which becomes effective on May 1, 1999.
Pursuant to the consulting agreement, Mr. Miller shall work part time as
the Company's consultant and receive the same amount of salary as
before, while all of his unvested stock options shall be vested at an
accelerated rate to be completely exercisable in less than one year.
In August 1997, the Company entered into a three year employment
agreement with Robert Werbicki, pursuant to which Mr. Werbicki became
the Vice President of Computer Products of the Company. Upon entering
into such agreement, Mr. Werbicki received five-year options to purchase
100,000 shares of Common Stock at $4.69 per share under the Company's
1996 Stock Option Plan. Such options vest at a monthly rate of 2.083%
over a four-year period commencing on September 1, 1997, subject to
acceleration of this vesting schedule or forfeiture of these options
under certain circumstances. Mr. Werbicki forfeited these shares for new
options in a repricing program offered to all employees. Mr. Werbicki
was granted a total of 75,000 shares at $2.156 per share. Mr. Werbicki
receives annual salary of $150,000. Mr. Werbicki is also eligible for a
quarterly performance bonus equal to a certain percentage of the gross
margin from all hardware sales under the Computer Products Division,
(the "Gross Margin"). The first year's bonus is calculated based on 5%
of the Gross Margin, but no less than $75,000 per annum. The second
year's bonus is 5% of the Gross Margin with no minimum bonus and the
third year is between 2% to 5% of the Gross Margin which will be
negotiated and mutually agreed on by Mr. Werbicki and the President of
the Company. Mr. Werbicki's employment as Executive Vice President of
the Company is renewable at the end of the initial three-year term by
mutual agreement of the parties.
The Company entered into a two-year employment agreement dated as
of March 28, 1997 with Thomas R. Parkinson, pursuant to which Mr.
Parkinson became the President and Chief Operating Officer of the
Company commencing on April 15, 1997. During the fiscal year ended
March 31, 1998, Mr. Parkinson received options to purchase 500,000
shares of Common Stock under the Company's 1996 Stock Option Plan and
options to purchase 400,000 shares of Common Stock under the Company's
1993 Amended and Restated Stock Option Plan.
Mr. Parkinson received an annual salary of $280,000 and was
eligible for an annual performance bonus ranging from $120,000 to
$200,000. Mr. Parkinson's salary and bonus would be mutually agreed to
by Mr. Parkinson and the Board of Directors after the first year. Mr.
Parkinson terminated his employment as the Company's President on July
3, 1998. In connection with his termination as President, Mr. Parkinson
and the Company agreed that his options to purchase 197,917 shares of
Common Stock would vest on July 3, 1998. The remaining 702,083 options
(including 266,667 Escrow Options) were cancelled on July 3, 1998. As of
March 31, 1999, all vested shares have expired unexercised.
In August 1997, the Company entered into a two-year employment
agreement with Gary Franza, pursuant to which Mr. Franza became the
Executive Vice President of Business Development for the Company and
Chief Operating Officer of the Company's Atlanta, Georgia operations.
Upon entering into such agreement, Mr. Franza received ten-year options
to purchase 125,000 shares of Common Stock at $4.69 per share under the
Company's 1996 Plan. Such options vest at a monthly rate of 2.083% over
a four-year period commencing on September 1, 1997, subject to
acceleration of this vesting schedule or forfeiture of these options
under certain circumstances. Mr. Franza received an annual salary of
$180,000 and would be eligible for an annual performance bonus ranging
from $40,000 to $80,000. Mr. Franza's employment with the Company
terminated on December 1, 1998.
STOCK OPTION PLANS
In October 1993, the Board of Directors approved the Company's 1993
Stock Option Plan, which plan was subsequently approved by the Company's
stockholders in March 1994. In April 1996, the Board of Directors and
the stockholders of the Company approved the 1993 Amended and Restated
Stock Option Plan, which effected certain amendments to the 1993 Stock
Option Plan. The 1993 Stock Option Plan provides for the grant of
options to officers, directors, other key employees and consultants of
the Company to purchase up to an aggregate of 3,762,532 shares of Common
Stock. The 1993 Stock Option Plan is administered by the Board of
Directors or a committee of the Board and is currently administered by
the Board of Directors, which has complete discretion to select the
optionees and to establish the terms and conditions of each option,
subject to the provisions of the 1993 Stock Option Plan. Notwithstanding
the foregoing, grants of options to named executive officers may be made
only by a committee of directors who qualify as "outside directors"
within the meaning of Section 162(m) of the Internal Revenue Code of
1986, as amended (the "Code"). Options granted under the 1993 Stock
Option Plan may be "incentive stock options" as defined in Section 422
of the Code, or nonqualified options, and will be designated as such.
The exercise price of incentive stock options may not be less than
100% of the fair market value of the Company's Common Stock as of the
date of grant(110% of the fair market value if the grant is to an
employee who owns more than 10% of the total combined voting power of
all classes of capital stock of the Company). The Code currently limits
to $100,000 the aggregate value of Common Stock that may be acquired in
any one year pursuant to incentive stock options under the 1993 Stock
Option Plan or any other option plan adopted by the Company.
Nonqualified options may be granted under the 1993 Stock Option Plan at
an exercise price less than the fair market value of the Common Stock on
the date of grant. Nonqualified options also may be granted without
regard to any restriction on the amount of Common Stock that may be
acquired pursuant to such options in any one year.
In general, upon termination of employment of an optionee, all
options granted to such person which were not exercisable on the date of
such termination would immediately terminate, and any options that are
exercisable would terminate 90 days (six months in the case of
termination by reason of death or disability) following termination of
employment.
Options may not be exercised more than ten years after the grant
(five years after the grant if the grant is an incentive stock option to
an employee who owns more than 10% of the total combined voting power of
all classes of capital stock of the Company). Options granted under the
1993 Stock Option Plan are not transferable and may be exercised only by
the respective grantees during their lifetime or by their heirs,
executors or administrators in the event of death. Under the 1993 Stock
Option Plan, shares subject to cancelled or terminated options are
reserved for subsequently granted options. The number of options
outstanding and the exercise price thereof are subject to adjustment in
the case of certain transactions such as mergers, recapitalizations,
stock splits or stock dividends. The 1993 Stock Option Plan is
effective for ten years, unless sooner terminated or suspended.
During the fiscal year ended March 31, 1999, options to purchase
no shares of Common Stock were granted under the 1993 Stock Option
Plan."
In September 1996, the Company's Board of Directors approved the
Company's 1996 Stock Option Plan, which was subsequently approved by the
Company's stockholders in September 1997. The purpose of the 1996 Stock
Option Plan is to enable the Company to attract and retain top-quality
employees, officers, directors and consultants and to provide such
employees, officers, directors and consultants with an incentive to
enhance stockholder return. The 1996 Stock Option Plan became effective
on the first day immediately following the date on which the 1996 Stock
Option Plan was approved by the stockholders.
The 1996 Stock Option Plan provides for the grant of options to
officers, directors, other key employees and consultants of the Company
to purchase up to an aggregate of 1,500,000 shares of Common Stock. The
1996 Stock Option Plan is administered by the Board of Directors or a
committee of the Board, and is currently administered by the Board of
Directors, which has complete discretion to select the optionees and to
establish the terms and conditions of each option, subject to the
provisions of the 1996 Stock Option Plan. Notwithstanding the
foregoing, grants of options to executive officers may be made only by a
committee of directors who qualify as "outside directors" within the
meaning of Section 162(m) of the Code. Options granted under the 1996
Stock Option Plan may be "incentive stock options" as defined in Section
422 of the Code, or nonqualified options, and will be designated as
such.
The exercise price of incentive stock options may not be less than
100% of the fair market value of the Company's Common Stock as of the
date of grant(110% of the fair market value if the grant is to an
employee who owns more than 10% of the total combined voting power of
all classes of capital stock of the Company). The Code currently limits
to $100,000 the aggregate value of Common Stock that may be acquired in
any one year pursuant to incentive stock options under the 1996 Stock
Option Plan or any other option plan adopted by the Company.
Nonqualified options may be granted under the 1996 Stock Option Plan at
an exercise price less than the fair market value of the Common Stock on
the date of grant. Nonqualified options also may be granted without
regard to any restriction on the amount of Common Stock that may be
acquired pursuant to such options in any one year.
In general, upon termination of employment of an optionee, all
options granted to such person which were not exercisable on the date of
such termination would immediately terminate, and any options that are
exercisable would terminate 90 days (six months in the case of
termination by reason of death or disability) following termination of
employment.
Options may not be exercised more than ten years after the grant
(five years after the grant if the grant is an incentive stock option to
an employee who owns more than 10% of the total combined voting power of
all classes of capital stock of the Company). Options granted under the
1996 Stock Option Plan are not transferable and may be exercised only by
the respective grantees during their lifetime or by their heirs,
executors or administrators in the event of death. Under the 1996 Stock
Option Plan, shares subject to cancelled or terminated options are
reserved for subsequently granted options. The number of options
outstanding and the exercise price thereof are subject to adjustment in
the case of certain transactions such as mergers, recapitalizations,
stock splits or stock dividends. The 1996 Stock Option Plan is
effective for ten years, unless sooner terminated or suspended. The
1996 Stock Option Plan provides that options covering no more than
500,000 shares of Common Stock may be granted to any one employee in any
twelve month period.
During the fiscal year ended March 31, 1999, options to purchase
2000 shares of Common Stock were granted under the 1996 Stock Option
Plan.
In May 1998, the Board of Directors adopted the Company's 1998
Stock Option Plan (the "1998 Plan"). The 1998 Plan will be submitted to
the Company's shareholders for approval at the Company's next annual
meeting of shareholders. The 1998 Stock Option Plan provides for the
grant of options to officers, directors, other employees and consultants
of the Company to purchase up to an aggregate of 4,000,000 shares of
Common Stock. The 1998 Stock Option Plan is administered by the Board
of Directors or a committee of the Board, and is currently administered
by the Compensation Committee of the Board of Directors, which has
complete discretion to select the optionees and to establish the terms
and conditions of each option, subject to the provisions of the 1998
Stock Option Plan. Options granted under the 1998 Stock Option Plan may
be "incentive stock options" as defined in Section 422 of the Code, or
nonqualified options, and will be designated as such.
The exercise price of incentive stock options may not be less than
the fair market value of the Company's Common Stock as of the date of
grant (110% of the fair market value if the grant is to an employee who
owns more than 10% of the total combined voting power of all classes of
capital stock of the Company). The Code currently limits to $100,000
the aggregate value of Common Stock that may become exercisable for the
first time in any one year pursuant to incentive stock options under the
1998 Stock Option Plan or any other option plan adopted by the Company.
Nonqualified options may be granted under the 1998 Stock Option Plan at
an exercise price less than the fair market value of the Common Stock on
the date of grant. Nonqualified options also may be granted without
regard to any restriction on the amount of Common Stock that may become
exercisable pursuant to such options in any one year.
In general, upon termination of employment of an optionee, all
options granted to such person which were not exercisable on the date of
such termination would immediately terminate, and any options that are
exercisable would terminate 90 days (six months in the case of
termination by reason of death or disability) following termination of
employment.
Options may not be exercised more than ten years after the grant
(five years after the grant if the grant is an incentive stock option to
an employee who owns more than 10% of the total combined voting power of
all classes of capital stock of the Company). Options granted under the
1998 Stock Option Plan are not transferable and may be exercised only by
the respective grantees during their lifetime or by their heirs,
executors or administrators in the event of death. Under the 1998 Stock
Option Plan, shares subject to cancelled or terminated options are
available for subsequently granted options. The number of options
outstanding and the exercise price thereof are subject to adjustment in
the case of certain transactions such as recapitalizations, stock splits
or stock dividends. The 1998 Stock Option Plan is effective for ten
years, unless sooner terminated or suspended. The 1998 Stock Option
Plan provides that options covering no more than 750,000 shares of
Common Stock may be granted to any one employee in any twelve month
period.
During the fiscal year ended March 31, 1999, options to purchase
2,731,500 shares of Common Stock were granted under the 1998 Stock
Option Plan.
Item 10. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of May 31, 1999,
by (i) each person who is known by the Company to own beneficially more
than 5% of the Company's outstanding Common Stock; (ii) each of the
Company's directors; (iii) each of the Named Executive Officers; and
(iv) all officers and directors of the Company as a group.
Name and Address (1)
Amount and Nature of
Beneficial Ownership
(2)
Percent
Ownership
Edmund Sun
9,121,492 (3)
23.2%
Mali Kuo
477,222 (4)
- --
Sung Hee Lee
67,706 (5)
- --
Robert Werbicki
34,374 (6)
- --
Philip B. Smith
195,585 (7)
0.5
Douglas Watson
16,666 (8)
- --
Michael Chen
16,666 (9)
- --
Young Sam Cho
19,290 (10)
- --
Cary Fitchey
18,749 (11)
- --
Tom Parkinson
- --
- --
Gary Franza
35,155(14)
- --
Hyundai Electronics Industries
Company, Ltd.
5,896,999 (12)
15
Oregon Power Lending Institution
13,825,534 (13)
35.2
All executive officers and directors
as a group (9 persons)
24.8
(1) Except as otherwise indicated, the address of each principal
stockholder is c/o the Company at 280 Hope Street, Mountain View,
California .
(2) Includes the Escrow Securities of such individual or entity. See "-
- - Escrow Securities." Nature of beneficial ownership of securities
is direct and arises from sole voting power and sole investment
power, subject to community property laws where applicable. Shares
underlying options to purchase Common Stock exercisable within 60
days are deemed to be outstanding for purposes of calculating the
number of shares owned by the holders of such options.
(3) Includes 140,760 shares of Common Stock acquired by Dr. Sun in the
ViComp Acquisition, all of which have been deposited in escrow and
are subject to cancellation in certain circumstances. Also includes
320,334 shares owned by Dr. Sun's sons and 31,564 shares owned by
Dr. Sun's sister and her family. Also includes options to purchase
108,330 shares of Common Stock. Excludes options to purchase
291,670 shares of Common Stock which are not exercisable within 60
days.
(4) Includes options to purchase 182,222 shares of Common Stock.
Excludes options to purchase 1,967,778 shares of Common Stock which
are not exercisable within 60 days
(5) Although Mr. Lee served as Hyundai's representative on the Company's
Board of Directors, he did not have any right to vote or dispose of
the shares owned by Hyundai. Mr. Lee resigned as director of the
Company and became President, Asia Operations in June 1998. Includes
options to purchase 67,706 shares of Common Stock. Excludes options
to purchase 182,294 shares of Common Stock which are not exercisable
within 60 days.
(6) Includes options to purchase 34,374 shares of Common Stock.
Excludes options to purchase 40,627 shares of Common Stock which are
not exercisable within 60 days.
(7) Includes options to purchase 155,150 shares of Common Stock.
Excludes options to purchase 81,458 shares of Common Stock which are
not exercisable within 60 days.
(8) Includes options to purchase 16,666 shares of Common Stock.
Excludes options to purchase 83,334 shares of Common Stock which are
not exercisable within 60 days.
(9) Includes options to purchase 16,666 shares of Common Stock.
Excludes options to purchase 83,334 shares of Common Stock which are
not exercisable within 60 days.
(10) Although Mr. Cho serves as Hyundai's representative on the Company's
Board of Directors, he does not have any right to vote or dispose of
any shares owned by Hyundai. Includes options to purchase 19,290
shares of Common Stock. Excludes options to purchase 82,710 shares
of Common Stock which are not exercisable within 60 days.
(11) Includes options to purchase 18,749 shares of Common Stock.
Excludes options to purchase 81,251 shares of Common Stock which are
not exercisable within 60 days.
(12) Mong Hun Chung is the Chairman and largest individual shareholder of
Hyundai and may be considered a beneficial owner of such shares.
(13) Includes options to purchase 3,000,000 shares of Common Stock. These
shares are fully vested.
(14) Includes options to purchase 35,155 shares of Common Stock.
ESCROW SECURITIES
In connection with the IPO and through March 31, 1997, the holders
of the Company's Common Stock and options to purchase Common Stock
placed 8,086,321 shares (the "Escrow Shares") and options to purchase
1,985,656 shares (the "Escrow Options") and the Company has placed
through March 31, 1997 options issuable under the 1993 Stock Option Plan
to purchase 28,023 shares of Common Stock (together with the Escrow
Options and the Escrow Shares, the "Escrow Securities") into escrow
pursuant to an escrow agreement (the "Escrow Agreement") with American
Stock Transfer & Trust Company, as escrow agent. The Escrow Securities
are not assignable or transferable; however, the Escrow Shares may be
voted. Holders of any options in escrow may exercise their options prior
to their release from escrow; however, the shares issuable upon any such
exercise will continue to be held in escrow as Escrow Shares pursuant to
the Escrow Agreement.
All or a portion of the Escrow Securities may be released from
escrow based on the Company's Minimum Pretax Income targets (as defined
and set forth below) or the trading price of the Company's Common Stock.
The Minimum Pretax Income amounts (i) shall be calculated exclusively of
any extraordinary earnings, including, but not limited to, any charge to
income resulting from the release of the Escrow Securities; and (ii)
shall be increased from the amounts established at the time of the IPO
proportionately, with certain limitations, in the event additional
shares of Common Stock or securities convertible into, exchangeable for
or exercisable into Common Stock are issued after the IPO. The Minimum
Pretax Income targets are described below.
Of the Escrow Securities, one-half (representing 5,050,000 shares
of issued or issuable shares of Common Stock) will be released from
escrow, on a pro rata basis, if, and only if, one or more of the
following conditions are met (none of such conditions having been met to
date):
(i) the Company's net income before provision for income taxes and
exclusive of any extraordinary earnings as audited and determined by the
Company's independent public accountants (the "Minimum Pretax Income")
amounts to at least $11,555,000 for the fiscal year ended March 31,
1997.
(ii) the Minimum Pretax Income amounts to at least $17,940,000 for the
fiscal year ending March 31, 1998;
(iii) the Minimum Pretax Income amounts to at least $33,098,000 for the
fiscal year ending March 31, 1999;
(iv) the Minimum Pretax Income amounts to at least $69,433,000 for the
fiscal year ending March 31, 2000;
(v) the Minimum Pretax Income amounts to at least $87,351,000 for the
fiscal year ending March 31, 2001;
(vi) commencing on May 9, 1996 and ending 18 months thereafter, the bid
price of the Company's Common Stock averages in excess of $24.00 per
share (subject to adjustment in the event of any reverse stock splits or
other similar events) for 60 consecutive business days;
(vii) commencing November 9, 1997 and ending 18 months thereafter, the
bid price of the Company's Common Stock averages in excess of $48.00 per
share (subject to adjustment in the event of any reverse stock splits or
other similar events) for 90 consecutive business days;
or
(viii) during the periods specified in (vi) or (vii) above, the Company
is acquired by or merged into another entity in a transaction in which
the value of the per share consideration received by the stockholders of
the Company on the date of such transaction or at any time during the
applicable period set forth in (vi) or (vii), respectively, equals or
exceeds the applicable levels set forth in (vi) or (vii), respectively.
The remaining Escrow Securities (representing 5,050,000 shares of
issued or issuable shares of Common Stock) will be released from escrow,
on a pro rata basis, if, and only if, one or more of the following
conditions is met (none of such conditions having been met to date):
(i) the Minimum Pretax Income amounts to at least $17,333,000 for the
fiscal year ended March 31, 1997;
(ii) the Minimum Pretax Income amounts to at least $25,117,000 for the
fiscal year ending March 31, 1998;
(iii) the Minimum Pretax Income amounts to at least $46,050,000 for the
fiscal year ending March 31, 1999;
(iv) the Minimum Pretax Income amounts to at least $94,070,000 for the
fiscal year ending March 31, 2000;
(v) the Minimum Pretax Income amounts to at least $118,708,000 for the
fiscal year ending March 31, 2001;
(vi) commencing on May 9, 1996 and ending 18 months thereafter, the bid
price of the Company's Common Stock averages in excess of $48.00 per
share(subject to adjustment in the event of any reverse stock splits or
other similar events) for 60 consecutive business days;
(vii) commencing November 9, 1997 and ending 18 months thereafter, the
bid price of the Company's Common Stock averages in excess of $96.00 per
share (subject to adjustment in the event of any reverse stock splits or
other similar events) for 90 consecutive business days; or
(viii) during the periods specified in (vi) or (vii) above, the Company
is acquired by or merged into another entity in a transaction in which
the value of the per share consideration received by the stockholders of
the Company on the date of such transaction or at any time during the
applicable period set forth in (vi) or (vii), respectively, equals or
exceeds the applicable levels set forth in (vi) or (vii), respectively.
The bid price amounts set forth above are subject to adjustment in
the event of any stock splits, reverse stock splits or other similar
events.
Holders of Escrow Securities have agreed not to sell, transfer,
hypothecate, negotiate, pledge, assign, encumber or otherwise dispose of
any or all of the Escrow Securities unless and until (A) the Company
shall have given notice that the conditions for the release of the
Escrow Securities set forth in Paragraphs (a) and (b) above are met, or
(B) such disposition is (i) proposed in connection with an agreement by
which the Company is to be acquired by or merged into another entity in
which the consideration paid by the acquiror per share of the Company's
stock is no less than 80% of the minimum consideration required by
Paragraphs (a) (vi) and (vii)above as to a disposition of up to 50% of
the Escrow Securities or by Paragraphs (b)(vi) and (vii) above as to a
disposition of up to 100% of the Escrow Securities and (ii) approved by
at least 80% of the votes cast, in person or by proxy, by holders of the
Common Stock eligible to vote on such matter excluding the shares held
by the holders of the Escrow Securities, provided that the holders of at
least 50% of the Common Stock (excluding the shares held by the holders
of the Escrow Securities) actually vote on such matter, in person or by
proxy, or are present, in person or by proxy, at the meeting at which
the vote takes place. If the Company is acquired by or merges into
another company that thereafter owns all of the outstanding stock of the
Company except for the Escrow Securities, at any time from and after the
consummation of the merger or acquisition, holders of Escrow Securities
desiring to dispose of their Escrow Securities will be permitted to do
so if the acquiror gives notice as to conditions being met in Paragraphs
(a) and (b) above or consents in writing to the disposition, but no vote
or consent of the former stockholders of the Company will be required.
Any money, securities, rights or property distributed in respect
of the Escrow Securities, including any property distributed as
dividends or pursuant to any stock split, merger, recapitalization,
dissolution, or total or partial liquidation of the Company, shall be
held in escrow until release of the Escrow Securities. If none of the
applicable Minimum Pretax Income or bid price levels set forth above
have been met by July 15, 2001, the Escrow Securities, as well as any
dividends or other distributions made with respect thereto, will be
cancelled and contributed to the capital of the Company. The Company
expects that the release of the Escrow Securities to officers,
directors, employees and consultants of the Company will be deemed
compensatory and, accordingly, will result in a substantial charge to
reportable earnings, which would equal the fair market value of such
shares on the date of release. Such charge could substantially increase
the loss or reduce or eliminate the Company's net income for financial
reporting purposes for the period or periods during which such shares
are, or become probable of being, released from escrow. Although the
amount of compensation expense recognized by the Company will not affect
the Company's total shareholders' equity, it may have a negative effect
on the market price of the Company's securities.
The Minimum Pretax Income and bid price levels set forth above
were determined by negotiation between the Company and the Underwriter
of the IPO prior to the IPO and should not be construed to imply or
predict any future earnings by the Company or any increase in the market
price of its securities.
The share price targets established for the escrow securities have
expired. Escrow securities will only be released if the Company meets
the Operating Income targets as established by the escrow agreement.
Item 11. Certain Relationships and Related Transactions
In October 1996, the Company acquired all of the outstanding
capital stock of ViComp Technology, Inc. ("ViComp") for 491,253 shares
(the "Acquisition Shares") of the Company's Common Stock (the "ViComp
Acquisition"). Dr. Edmund Y. Sun, the Company's Vice Chairman of the
Board, was a co-founder of ViComp and owned 57.3% of the outstanding
capital stock of ViComp (for which he had paid a total of $1,000,000 in
September 1995 and January 1996) at the time of the ViComp Acquisition.
The Company issued to Dr. Sun 281,520 shares of the Company's Common
Stock for his ViComp capital stock in the ViComp Acquisition (57.3% of
the total 491,253 shares of Common Stock issued in the ViComp
Acquisition). One-half of the Acquisition Shares issued to Dr. Sun were
deposited in escrow and are subject to forfeiture and cancellation under
certain circumstances and may not be publicly resold until released from
escrow. The remaining 140,760 Acquisition Shares issued to Dr. Sun were
canceled in March 1998, as certain performance milestones that were a
condition of the ViComp acquisition were not met.
The ViComp Acquisition was unanimously approved by the
disinterested members of the Company's Board of Directors, and the
Company's Board of Directors was advised by Sutter Securities
Incorporated that the ViComp Acquisition is fair from a financial point
of view to the Company's stockholders other than Dr. Sun.
Upon the closing of the IPO in May 1996, Dr. Sun converted
1,335,949 shares of Series B Preferred shares into 1,335,949 shares of
Common Stock.
The Company borrowed $1,000,000 from Edmund and Jane Sun in June
1998. The loan from Dr. Sun was converted into 1,331,479 shares of the
Company's common stock in August 1998. Dr. Sun received registration
rights for these shares.
The Company currently leases its principal executive offices from
Sun and Sun LLP. The lease term commenced on December 17, 1998 and
expires on December 16, 2003, subject to an option in favor of the
Company to extend the lease one time for an additional five years. The
lease payments are currently $11,600 per month, subject to an annual
upward adjustment of 3%. The lease provides the Company with the
option, exercisable within 180 days of the lease's commencement date, to
have a professional appraiser do a market survey to determine the fair
market rent for the premises. Following such a survey, the Company
would have the option to pay the rent set forth in the lease or the rent
determined by the appraiser. The lease provides that the lessor's
consent is required for certain assignments and that the transfer of 25%
or more of the voting power of the Company would be considered an
assignment for such purposes. Thus, if Oregon Power Lending Institution
were to acquire over 25% of the voting power of the Company after the
commencement date of the lease, it would be considered an assignment.
In such an event, the lessor would have the right to terminate the lease
or increase the lease payments to 110% of their current rate. Pursuant
to the lease, the Company is responsible for most costs of maintaining
the premises and for the payment of property taxes. The lease also
contains other, customary provisions including indemnities for
environmental and other matters.
Hyundai Electronics Industries Company, Ltd. purchased 3,247,473
shares of the Company's Series A Preferred Stock for approximately
$5,000,000 and 649,526 shares of the Company's Series B Preferred Stock
for approximately $1,000,000 from the Company in January 1994 and April
1995, respectively. In connection with such purchases, Hyundai was
given the right to designate a director, a right of first refusal
relating to sales of the Company's securities and certain registration
rights. Such right of first refusal terminated in connection with the
IPO and Hyundai waived its registration rights for 13 months following
the closing of the IPO in May 1996. Hyundai's Series A Preferred Stock
and the Series B Preferred Stock were converted into 3,896,999 shares of
Common Stock upon the closing of the IPO in May 1996.
In 1993, Hyundai and the Company entered into agreements relating
to the Company's development of a consumer karaoke player, a karaoke
jukebox, encoding machines and a karaoke network system. These
agreements were subsequently amended in 1994 in connection with the
Company and Hyundai agreeing to a manufacturing relationship for karaoke
jukebox players. The Company and Hyundai subsequently entered into the
1995 Hyundai Technical Assistance and License Agreement (the "Technical
Agreement") which subsumed part of the agreements entered into in 1993
and obligated the Company to develop MPEG-2 compressor products. The
Technical Agreement is still in force.
In June 1998, the Company acquired a perpetual, worldwide,
royalty-free license to DVD-ROM technology owned by Hyundai in exchange
for 2,000,000 shares of the Company's Common Stock. In addition, the
Company, through a new, 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
cash. The Company believes that the terms of this acquisition were fair
to the Company and that the consummation of this transaction was in the
best interests of the Company. The Company obtained a fairness opinion
from Houlihan Lokey Howard & Zukin Financial Advisors, Inc., a
nationally recognized independent valuation firm, with respect to the
fairness of the financial terms of the transaction to the Company.
On October 15, 1998, Digital Video Systems, Inc. ("DVS") entered
into an Investment Agreement with Oregon Power Lending Institution, an
Oregon corporation ("OPLI"). Pursuant to this Investment Agreement, DVS
gave OPLI the right to invest up to $12.25 million in DVS in exchange
for certain securities that would be convertible into a maximum of
24,276,595 shares of DVS common stock.
Pursuant to the First Tranche of the Investment Agreement, on
November 11, 1998, the Company issued 2,000 shares of Series C Preferred
to OPLI in exchange for $2.0 million cash. Each share of DVS Series C
Preferred is convertible into 2,127.6595 shares of DVS common stock.
Between November 12, 1998 and March 23, 1999, OPLI also made a series of
loans to DVS in exchange for Convertible Promissory Notes in the
aggregate principal amount of $4,475,326.40 cash. These Convertible
Promissory Notes accrue interest at 10% per annum, and the outstanding
principal amount (and any accrued and unpaid interest thereon) may be
converted into shares of DVS Series C Preferred at a conversion price of
$1,000 per share. Lastly, pursuant to the Investment Agreement, OPLI
has an option to purchase 2.0 million shares of DVS common stock at $.75
per share.
On March 23, 1999, the Company and OPLI entered into a Conversion
Agreement whereby OPLI agreed irrevocably and without exception to
exercise its right to convert the Demand Notes to Preferred Stock on the
first day any action with respect to the Transactions approved by
written consent of a majority of shareholders was taken in accordance
with applicable federal securities laws. The issuance of the securities
to OPLI is being conducted as a private offering pursuant to Section
4(2) of the Securities Act of 1933, as amended.
The majority of the Company's shareholders were asked to agree to
a written consent which approved (i) the transactions contemplated by
that certain Letter Agreement (the "Investment Agreement"), dated as of
October 15, 1998, between the Company and Oregon Power Lending
Institution ("OPLI"), including the issuance by the Company of (A) up to
$10,000,000 face value of Series C Convertible Preferred Stock (the
"Preferred Stock"), (B) options (the "Options") to purchase up to
3,000,000 shares of the Company's Common Stock and (C) shares of Common
Stock upon the conversion of the Preferred Stock and the exercise of the
Options, and (ii) the convertibility of one or more demand promissory
notes issued or to be issued in lieu of a portion of the Preferred Stock
to be issued under the Investment Agreement and the issuance of Common
Stock upon conversion thereof (collectively, clauses (i) and (ii), the
"Transactions").
The Transactions were unanimously approved by the Company's Board
of Directors on October 14, 1998 and ratified by a majority of
shareholders on March 23, 1999. Accordingly, the 2,000 shares of Series
C Preferred Stock that OPLI initially owned were converted into
4,255,320 shares of DVS common stock, of which 3,212,767 shares were
transferred to certain third parties and 1,042,553 shares were retained
by OPLI. All of the Company's outstanding Convertible Promissory Notes
to OPLI in the aggregate amount of $4,598,273.12 were also converted
into 4,598 shares of Series C Preferred, which were then immediately
converted into 9,782,981 shares of DVS common stock. A total of
25,207,000 shares of DVS common stock were outstanding immediately prior
to the foregoing conversions, and a total of 39,245,301 shares were
outstanding immediately thereafter. Including its option to purchase 2.0
million shares of common stock, OPLI would hold the beneficial ownership
of 12,825,534 shares of common stock of DVS, or 31.1% of the total
outstanding common shares (including the shares issuable upon conversion
of the option).
On January 8, 1999, prior to the time Mali Kuo became a director
or an officer of the Company, she entered into a finder's agreement (the
"Finder's Agreement") with the Company. Pursuant to the Finder's
Agreement, Ms. Kuo was authorized to introduce a specified group of
prospective investors and lenders to the Company. The Finder's
Agreement provides that Ms. Kuo shall be compensated through the grant
of options for private placements of debt or equity, or credit lines
that she arranges under certain conditions.
Item 13. Exhibits and Reports on Form 8-K
Exhibit
Number Exhibit Description
3.1 Amended and Restated Certificate of Incorporation of the
Company.(1)
3.2 Bylaws of the Company.(1)
4.1 Specimen Common Stock Certificate.(3)
4.2 Form of Warrant Agreement (the "Warrant Agreement") by and among
the
Company, American Stock Transfer & Trust Company and the
Underwriter
(including forms of Class A and Class B Warrant certificates).(3)
4.3 Form of Underwriter's Unit Purchase Option (issued in connection
with
the Company's initial public offering).(1)
4.4 Warrant Agreement.(1)
4.5 Escrow Agreement dated as of April 23, 1996 among American Stock
Transfer & Trust Company, the Company and Optionholders listed on
Exhibit B thereto.(3)
4.6 Form of Subscription Agreement from the Bridge Financing.(2)
4.7 Escrow Agreement dated as of October 17, 1996 made by and between
the
Company and Dr. Edmund Y. Sun.(4)
4.8 Escrow Agreement dated as of October 17, 1996 made by and among
the
Company, Dr. Edmund Sun and American Stock Transfer & Trust
Company.(4)
4.9 Escrow Agreement dated as of October 17, 1996 made by and among
the
Company, the shareholders named on the signature pages thereto and
American Stock Transfer & Trust Company.(4)
4.10 Form of Amendment to the Warrant Agreement.(4)
4.11 Form of Underwriter's Unit Purchase Option.(4)
10.1 1993 Amended and Restated Stock Option Plan.(2)
10.2 Employment Agreement as of March 1, 1996 between the Company and
Dr.
Edmund Sun.(2)
10.3 Product Agreement made March 16, 1993 between Hyundai and the
Company.(1)
10.4 Technical Assistance and License Agreement made March 16, 1993
between
Hyundai and the Company.(1)
10.5 1995 Hyundai Technical Assistance and License Agreement.(1)
10.6 Consulting Agreement made as of February 1, 1996 between the
Company
and Intermarkt.(1)
10.7 Sublease Agreement, dated as of November 15, 1995, between the
Company
and McAfee Associates, Inc. (along with consent to sublease and
master
lease agreement).(1)
10.8 House Leasing Agreements dated August 31, 1994 and September 6,
1994
for facility in Taiwan (translated).(1)
10.9 Form of Indemnity Agreement with the Company's officers and
directors.
(1)
10.10 Series A Preferred Stock Purchase Agreement made as of January 21,
1994 between the Company and Hyundai.(1)
10.11 Series B Preferred Stock Purchase Agreement made as of April 1995
between the Company and Hyundai.(1)
10.12 Consulting and Employment Agreement between the Company and Robert
B.
Pfannkuch entered into as of March 15, 1996.(2)
10.13 Agreement and Plan of Merger dated as of October 17, 1996 by and
between the Company, ViComp Technology, Inc. and the shareholders
of
ViComp Technology, Inc.(4)
10.14 Registration Rights Agreement dated as of October 17, 1996 by and
between the Company and the shareholders of ViComp Technology,
Inc.
named therein.(4)
10.15 1996 Stock Option Plan.(4)
10.16 Consulting Agreement made as of September 27, 1996 between the
Company
and Sitrick and Company Inc.(4)
10.17 Office Lease Agreement commencing on October 15, 1996 between the
Company and Paulsen Office Park.(4)
10.18 Lease, dated July 17, 1996, between the Company and Ken Yang Real
Estate (Shanghai) Co. Ltd.(4)
10.19 Letter dated April 10, 1997 from Robert B. Pfannkuch to the
Company
regarding resignation as an Officer.(5)
10.20 Employment Agreement between the Company and Thomas R. Parkinson
entered into March 28, 1997.(5)
10.21 Settlement Agreement and General Release entered into January 30,
1997
between the Company and Janis P. Gemignani.(5)
10.22 Joint Venture Agreement dated as of August 5, 1997 by and between
D.V.S. H.K., a wholly-owned subsidiary of the Company, and Panyu
Tian Le Electrical Appliance Manufacturing Co., Ltd. (6)
10.23 Asset Purchase Agreement dated as of July 25, 1997 by and between
the Company and Arris Interactive LLC. (7)
10.24 Amendment No. 1 to Asset Purchase Agreement by and between the
Company and Arris Interactive LLC dated as of August 1, 1997. (7)
10.25 Form of Escrow Agreement by and between the Company and Arris
Interactive LLC. (7)
10.26 1997 Employee Stock Purchase Plan. (8)
10.27 1993 Amended and Restated Stock Option Plan. (8)
10.28 1996 Amended and Restated Stock Option Plan. (8)
10.29 Employment Agreement dated as of August 1, 1997 by and between the
Company and Gary Franza. (9)
10.30 Ownership Shares Transfer Agreement by and between D.V.S. H.K.,
a wholly-owned subsidiary of the company, and Panyu.(10)
10.31 Lease Agreement by and between D.V.S. H.K., a wholly-owned
subsidiary of the Company, and Panyu.(10)
10.32 Form of Joint Venture Partner Substitution Agreement (superceded
).(10)
10.33 Employment Agreement dated as of January 12, 1998 by and
between the Company and Edward Miller.(10)
10.34 Lease Agreement by and between Digital Video Systems, Inc. and
Dell Enterprises. (10)
10.35 Asset Purchase Agreement dated as May 8, 1998 by and between
the Company and Hyundai Electronic Industries Company, Ltd. (11)
10.36 Amendment to Asset Purchase Agreement dated June 23, 1998 by and
between the Company and Hyundai Electronic Industries Company,
Ltd. (11)
10.37 Joint Venture Partner Substitution Agreement (11)
10.38 Amendment to the Asset Purchase Agreement dated March 26, 1998
by and between the Company and Arris Interactive LLC. (11)
10.39 Employment Agreement dated as of May 8, 1998 by and between the
Company and Sung Hee Lee. (12)
10.40 Subscription Agreement dated June 24, 1998 by and between the
Company and Dr. Edmund Sun. (12)
10.41 Investment Agreement by and between Digital Video Systems, Inc.
and Oregon Power Lending Institution (13)
10.42 Convertible Promissory Note of $1,000,000 payable to Oregon Power
Lending Institution dated November 12, 1998. (14)
10.43 Convertible Promissory Note of $500,000 payable to Oregon Power
Lending Institution dated December 31, 1998. (14)
10.44 Convertible Promissory Note of $200,000 payable to Oregon Power
Lending Institution
dated January 21, 1999. (14)
10.45 Convertible Promissory Note of $100,000 payable to Oregon Power
Lending Institution dated February 2, 1999. (14)
10.46 Convertible Promissory Note of $186,000 payable to Oregon Power
Lending Institution dated February 3, 1999. (14)
10.47 Convertible Promissory Note of $100,000 payable to Oregon Power
Lending Institution dated February 5, 1999. (14)
10.48 Convertible Promissory Note of $100,000 payable to Oregon Power
Lending Institution dated February 8, 1999. (14)
10.49 Convertible Promissory Note of $433,326.40 payable to Oregon Power
Lending Institution dated February 11, 1999. (14)
10.50 Agreement with Hana Bank dated November 16, 1998 for a $2,500,000
credit facility. (To be translated)
10.51 Agreement with Hanvit Bank dated December 17, 1998 for a
$3,000,000 credit facility. (To be translated)
10.52 Lease agreement with Hyundai Capital Services dated January 28,
1999. (14)
10.53 Regarding the issuance of common stock and Series C Preferred
Stock in connection with that certain investment agreement entered
into with Oregon Power Lending Institution and also
constituting notice of action taken without a meeting. (15)
10.54 Sublease Agreement dated as of November 17, 1998 by and among
Digital Video Systems, Inc., Savoir Technology Group and
Technology Park Atlanta, Inc.
10.55 Lease Termination Agreement dated as of November 17, 1998 by and
between Digital Video Systems, Inc and Dell Enterprises.
10.56 Lease agreement dated as of December 18th , 1998 by and between
Digital Video Systems, Inc. and Sun & Sun LLP.
10.57 Agreement dated as of February __, 1999 by and among Digital Video
Systems, Inc., Savoir Technology Group and Technology Park
Atlanta, Inc.
10.58 Employment Agreement dated as of February 18, 1999 by and between
Digital Video Systems, Inc. and Mali Kuo.
10.59 Finder's Agreement dated as of January 8,1999 by and between
Digital Video Systems, Inc. and Mali Kuo.
10.60 Agreement dated as of April 28, 1999 by and between Digital Video
Systems, Inc. and Chinapro.
21 List of Subsidiaries
23.1 Consent of C. G. Uhlenberg & Co. LLP, Independent Auditors
Young Wha Corporation, Principal Independent Auditor of
Significant Subsidiary
27 Financial Data Schedule
99.1 Certain Considerations
(1) Incorporated by reference from the Company's Registration
Statement on Form SB-2 (Registration No. 333-2228), as filed with
the Commission on March 8, 1996.
(2) Incorporated by reference from Amendment No. 1 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-2228) as
filed with the Commission on April 23, 1996.
(3) Incorporated by reference from Amendment No. 2 to the Company's
Registration Statement on Form SB-2 (Registration No. 333-2228),
as filed with the Commission on May 8, 1996.
(4) Incorporated by reference from the Company's Registration
Statement on Form SB-2 (Registration Statement No. 333-15471), as
filed with the Commission on November 4, 1996.
(5) Incorporated by reference from the Company's Form 10KSB for the
Fiscal Year Ended March 31, 1997 as filed with the Commission on
June 30, 1997.
(6) Incorporated by reference to the Company's Current Report on Form
8-K filed with the Commission on August 15, 1997.
(7) Incorporated by reference to the Company's Current Report on Form
8-K filed with the Commission on September 26, 1997.
(8) Incorporated by reference to the Company's Definitive Proxy
Statement filed with the Commission on August 11, 1997.
(9) Incorporated by reference from the Company's Form 10QSB for the
quarter ended September 30, 1997 as filed with the Commission on
November 19, 1997.
(10) Incorporated by reference from the Company's Form 10QSB for the
quarter ended December 31, 1997 as filed with the Commission on
February 12, 1998.
(11) Incorporated by reference from the Company's Form 10KSB for the
Fiscal Year Ended March 31, 1998 as filed with the Commission on
July 14, 1998.
(12) Incorporated by reference from the Company's Form 10QSB for the
quarter ended June 30, 1998 as filed with the Commission on August
14, 1998.
(13) Incorporated by reference to the Company's Current Report on Form
8-K filed with the Commission on November 3, 1998.
(14) Incorporated by reference from the Company's Form 10QSB for the
quarter ended December 31, 1998 as filed with the Commission on
February 23, 1999.
(15) Incorporated by reference to the Company's Definitive Proxy
Statement filed with the Commission on April 7, 1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
June 30, 1999 By /s/ Mali Kuo
-----------------------------------
Mali Kuo
Chief Executive Officer
and Co-Chairman
In accordance with the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Capacity Date
- -------------------------- ---------------------------------- -------------
/s/ Edmund Y. Sun Co-Chairman of the Board and June 30, 1999
- ---------------------------
Edmund Y. Sun
/s/ Young Sam Cho Director June 30, 1999
- ---------------------------
Young Sam Cho
/s/ Philip B. Smith Director June 30, 1999
- ---------------------------
Philip B. Smith
/s/ Ande Abbott Director June 30, 1999
- ---------------------------
Ande Abbott
/s/ Doughas Watson Director June 30, 1999
- ---------------------------
Douglas Watson
/s/ Michael Chen Director June 30, 1999
- ---------------------------
Michael Chen
C. G. UHLENBERG & CO. LLP
SUCCESSOR INDEPENDENT AUDITOR'S CONSENT
We consent to use in of our report dated June 29, 1999, of this annual
report of Digital Video Systems, Inc. on Form 10-KSB for the year ended
March 31, 1999.
C. G. Uhlenberg & Co. LLP
Redwood City, California
June 30, 1999
June 30, 1999
Young Wha Corporation (Korea)
C.G. Uhlenberg & Co. LLP
647 Veterans Blvd.
Redwood City, CA. 94063, USA
INDEPENDENT AUDITORS' CONSENT
We consent to the use in the annual report of Digital Video Systems,
Inc. on Form 10-KSB of our report dated April 24, 1999 relating to the
financial statements of DVS Korea Co., Ltd. not presented separately in
the annual report.
/s/ Chan-Seok Oh, Partner
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted
from the Balance Sheet and Statement of Operations included in the
Company's Form 10-K for the year ended March 31, 1998 and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
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<S> <C>
<FISCAL-YEAR-END> Mar-31-1999
<PERIOD-START> Apr-01-1998
<PERIOD-END> Mar-31-1999
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<ALLOWANCES> 4,275
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