PART I
Item 1. 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 offerings into the DVD technology, while
phasing out certain older product lines. The Company's current product
offerings primarily include DVD products, such as DVD loaders (the core
subassembly in a DVD player consisting of precision electro-optic and
electro-mechanical parts with sophisticated control electronics and
firmware), DVD-ROM drives, and DVD players under original equipment
manufacturer's (OEM's) or DVS' brand name. To a less extent, DVS' product
offerings also include video engines (video players for commercial kiosk
applications) and products for the computer peripheral market.
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 mid 1998, 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.
In June 1998, during a nationwide economical crisis in Korea, the
Company's
founder, Dr. Edmund Y. Sun, introduced to the Company the opportunity to
acquire Hyundai Electronics Industries, Co., LTD's ("Hyundai") DVD
operations. To aid the Company in completing the
acquisition, Dr. Sun provided $1.0 million loan to the Company as a short-
term note that was convertible to common shares. With the $1.0 million cash
and two million shares (pre-split) of the Company's common stock, DVS was
able to complete the acquisition. The two million shares of the
Company's common stock were issued to Hyundai in exchange for a perpetual,
worldwide, royalty-free license to Hyundai's DVD technologies and related
intellectual properties. The $1.0 million cash was paid to Hyundai to
acquire its production equipment, inventory, production supplies, test
equipment, furniture, and computer systems of Hyundai's DVD-ROM operations.
This acquisition provided the basis for the Company's turnaround in fiscal
year 2000.
In October 1998, primarily due to the efforts of Ms. Mali Kuo, and the
investors' confidence on Dr. Sun's technical insight and expertise, the
Company was able to enter an Investment Agreement with Oregon Power Lending
Institution ("OPLI"), whereby the Company started to receive the
additional
funding that it needed to continue its operations and implement its turnaround
efforts.
Pursuant to the Investment Agreement, OPLI may invest up to $12.25 million
with the Company. As of March 31, 1999, OPLI had provided $6.5 million for
the Company. The cash infusion from OPLI enabled the Company to establish the
operations of DVS Korea Co., Ltd. ("DVS Korea"), provide the
working capital
required to expand its DVD production and sales, reduce the liabilities that
the Company incurred in the past, pay for the costs of corporate
restructuring, as well as continued marketing, R&D, and corporate overhead.
As OPLI started funding with the Company, in consideration of the benefits
of all shareholders, OPLI urged the Company's management to expedite its
turnaround by substantially streamlining non-performing operations and
focusing its resources on DVD operations. This strategy has been effectively
carried out, as can be seen in the Company's operational results.
There have been a number of other investors or institutions interested to
provide additional funding for the Company, and there have been negotiations
during the recent past. The Company is open for financing through private
placement, equity line, public offering, or other means under agreeable
terms, for the purposes of expanding its business operations as well as other
uses deemed beneficial for the Company.
In April 1999, in preparation for the substantial growth of the DVD market,
the Company entered into an agreement with Chinapro Capital & Investment
Co.("Chinapro"), a subsidiary of state-owned businesses in China,
which also
assisted the Company to enter into a joint venture partnership with Shanghai
Industrial Investment (Group) Co., Ltd. in August 1999. Except for
financing, DVS shall retain all facets of management control, including, but
not limited to, the area of sales, marketing, manufacturing, and engineering.
These partners have provided local assistance to the Company in locating and
setting up facilities in China for production of the DVD products based on
the Company's technologies under certain favorable terms offered by the
governments. The partners also committed to substantial financial support for
the project, which will be needed to fund the production and sales of these
products at high volume. The Company has conducted training of local staff
and workers, and the production will start at a time deemed appropriate
by the management based on the market conditions and other factors.
The Company currently does not have any agreements or firm commitments with
respect to mergers, acquisitions, joint venture, or strategic alliances other
than what is described above; however, we have approached or been approached
for such proposals during this fiscal year. The Company may consider such
transactions under agreeable terms to create a synergy with complementary
businesses or technologies, thereby strengthening its viability and generating
higher return for its shareholders.
The principle executive offices of the Company are located at 278 Hope
Street, Mountain View, California 94041. The Company's telephone number is
(650) 564-9699.
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. Digital video signals can be stored on what is generally
viewed as a computer disc such as compact disc (CD), hard disc or a floppy
disc, and the signals 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 technologies, it was realized
that a 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
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 disc 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.
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. In March 1999, the
major recording studios and audio electronic manufacturers agreed to a
single standard for the production of DVD audio. 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.
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 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.
Products
The Company's current product offerings consist primarily of DVD-ROM
drive and DVD loader. The Company also produces and/or markets Video Engine
and other products for the consumer products, commercial video and computer
peripherals markets.
DVD-ROM Drives
The DVD-ROM drive is used in personal computers ("PC's") as a
storage medium.
A DVD-ROM drive looks and operates in a similar manner to that of a CD-ROM
drive. The principal benefits of a DVD-ROM drive versus a CD-ROM drive is
its substantially higher storage capacity and its ability to provide enhanced
multimedia capabilities for computer games and videos.
DVS' first DVD-ROM drive was produced in July 1998, rated at 2X DVD-ROM
speed. (The optical drive industry has established certain test criteria to
determine the speed at which a drive operates relative to a standard for
a DVD-ROM drive or that for a CD-ROM drive. The higher the speed, the higher
the "X" number.) In September 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 October. In January 1999, DVS introduced its 6.2X
speed DVD-ROM drive, which was produced and sold from February 1999. The
Company also introduced the 8X model in August 1999, the 10X model at the
Comdex Show in November 1999, and the 12X model at Computex in June 2000.
The Company's DVD-ROM drives are compatible with DVD-Video, 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.
DVD Loader
The Company has developed a number of models of DVD loaders with the ATAPI
or AV interfaces, which are offered with competitive pricing, quality,
functionality and service. Unlike DVD-ROM drives, there is no race of data
transfer rate among competing products. However, the ability to read
imperfect discs is one of the differentiating factors, for which the Company
has established a good reputation with its DVD products.
Video Engines
Since the early development of the video CD player, the Company has produced
a commercial version of the video CD player for use 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 applications. 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's 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 third Quarter of fiscal year 1999 to 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.
The Video Engine incorporating the latest DVD technologies is being
developed, which may be produced and marketed upon favorable evaluation
of the market conditions.
Other Products
On a smaller scale, the Company's product offerings also include other
computer peripherals such as rewritable compact discs (CD-RW's),
thin-film-transistor liquid crystal display (TFT LCD) monitors,
and DVD players.
When connected to a PC, the CD-RW drive allows the user to record data,
audio, images, or video on a CD disc that can be read by a CD-ROM drive,
an audio CD player, a video CD player, or a DVD-ROM drive, depending upon
the type of data recorded.
Compared with an ordinary CRT (Cathode Ray Tube) monitor, the TFT LCD
monitor as a flat-panel display offers much smaller size, footprint, and
power consumption. Some models of the TFT LCD monitor that the Company
offers also include a TV tuner, so that the monitor can also be used as
a regular TV.
As is well known to many, there is a global trend for the DVD players
to replace the video cassette tape players. As a manufacturer of the
major subassembly in a DVD player, the Company has an advantage to
include the DVD player in its product offerings.
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 fiscal 2000, the Company's research and development efforts
focused on enhancing its DVD technologies, including improving quality,
reducing costs, enhancing functionality, adopting to new and improved
key components, developing new products, and helping customers adopt the
Company's products, etc., in an effort to remain at the leading edge of
DVD technology development, and be competitive in the industry.
Currently the Company has about 50 engineering personnel, of which some are
also supporting the sales and marketing efforts 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 product models will be
developed on a timely basis.
Competition
The Company is the only US-based company that designs and manufactures
DVD-ROM drives and DVD loaders. There are a number of foreign-based
electronic manufacturers substantially larger in size and greater in
financial, marketing, and other resources than the Company, such as Sony,
Hitachi, etc, that are competitors or potential competitors of the
Company. Some of them may develop alternative products to compete with the
Company's products. They may also begin operations or expand their existing
operations into the Company's market segments. In the distribution and sales
of other products of the Company, there are also many well known competitors
with substantially greater resources.
The Company has developed certain strategies to remain competitive in the
market. However, 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. The Company has also
implemented strategies in this regard, which have succeeded in attracting and
retaining talented and hardworking personnel with very low turnover. However,
there can be no assurance that the Company will continue to be successful in
attracting and retaining such qualified personnel in the future.
Manufacturing
The Company's DVD-ROM drives and DVD loaders have been manufactured in South
Korea at a well-established manufacturer's facility under the direct
supervision of DVS Korea's production and engineering staff. Pursuant to the
agreement with the Company's partners in China, the Company may also
manufacture these DVD drives in factories in China.
The Company no longer performs manufacturing of video CD players and video
servers at the Company's Panyu, China and Suwanee, Georgia locations,
respectively. The Video Engine 200 was manufactured by LG Electronics in
South Korea for the Company on a subcontract basis, but the Company does
not plan to manufacture Video Engines in the near future. The Company has
also gradually phased out its assembly of computer peripheral products,
and engaged manufacturers in Korea or southeast Asia to manufacture them
for the Company on an OEM basis. Some of the factories in China have
produced, or agreed to produce, DVD players for the Company under the
Company's brand using the DVD loaders supplied by the Company.
Marketing and Distribution
The Company's DVD-ROM drives have been sold to OEM's and distributors of
PC's and PC peripherals. Beginning in late 1999, due to the global over
supply of DVD-ROM drives, the Company temporarily stopped its production
of DVD-ROM drives and devoted its DVD production lines to the production of
DVD loaders, which were more profitable and in high demand. However, the
Company continued to develop more advanced models of DVD-ROM drives such as
the 8X to 12X models described above. Since the worldwide demand for
DVD-ROM drives has again been on the rise, the Company's production and
sales of DVD-ROM drive is scheduled to resume beginning in September 2000.
The Company continues to pursue potential customers for its DVD-ROM drives
both at the OEM level and the distributor level. The Company is optimistic
as to the rate of growth and eventual size of the world-wide DVD-ROM drive
market, which are expected to be approximately 24, 41.5 and 67 million units
in calendar years 2000, 2001 and 2002, respectively; and the Company hopes to
expand its presence in the DVD-ROM drive market.
The Company sells its DVD loaders to many of the OEM's of DVD players that
do not make the DVD loaders by themselves, including many in China,
Taiwan, Hong Kong, and other countries. China is one of the largest market
for DVD players, and some of the DVD player manufactures in China have also
been active in exporting their products outside China at very competitive
prices. To date some of their models have been offered in the United States
and Europe under OEM's brands.
During fiscal 2000, with active marketing and field engineering, the sales
of the Company's DVD loaders have dramatically increased, and the Company
has enjoyed a substantial share of the DVD loader market. A market study
shows that the world-wide market sizes for DVD players will be 12, 20 and
26 million units in calendar years 2000, 2001 and 2002, respectively. The
Company is optimistic that its DVD loader business will continue to grow in
the foreseeable future.
The Company sells the Video Engine product line to Kiosk integrators, who
integrate the product as part of a complete solution, including software
titles. Although Video Engines offer a higher margin, the volume is
relatively small. Subject to favorable evaluation of this product line,
the Company may continue the Video Engine business and develop next
generation Video Engines to incorporate the DVD technologies.
Over the years the Company has established global sales and distribution
channels for consumer electronic and computer peripheral product lines,
as well as business relations with the manufacturers of these products.
The Company sells these products to OEM's or distributors under the OEM's
brand or the Company's brand.
The Company's representatives attend tradeshows to increase the awareness
and interest in the Company's product offerings. The Company employs about
ten full time marketing and sales personnel based in U. S. and South Korea,
who may travel to other parts of the world, to sell its products to OEM and
distributors. The Company also works with agents and distributors to conduct
its international business.
Suppliers
The pick-ups for DVD-ROM drives or DVD loaders may be purchased from
suppliers such as Matsushita, Sankyo, and Samsung. The chip sets used in
these products are available from sources such as Matsushita, Neomagic, and
Cirrus Logic. The drives' mechanism as well as some other precision
mechanical parts are designed by the Company and manufactured by
subcontractors under its close supervision. The Company's engineering
team has been experienced in developing multiple electronic designs of the
DVD products to adopt the key electronic components from multiple suppliers,
so that the Company may minimize its dependency on the supply from any
particular supplier of a key component.
There is, however, no assurance that the Company will not experience
substantial disruptions due to shortage of supply of any component or
material needed for its production in the future.
There are also a number of suppliers for the other products that the
Company offers. Due to the volume of these products relative those of the
DVD products, the supply issue for these other products is not expected
to have material effect on the Company's business at this time.
Employees
At March 31, 2000, the Company had 93 full time employees. The Company
believes that its future prospects will depend, in part, on its ability to
obtain additional management, finance, accounting, marketing, sales,
manufacturing, and technical personnel. Competition for such personnel
is substantial, and the number of persons with relevant experience is
limited. None of the Company's employees is represented by a labor union.
The Company believes that its employees relations are good.
Business Risks
OUR OPERATING RESULTS FLUCTUATE SIGNIFICANTLY, AND AN UNANTICIPATED
DECLINE IN
REVENUE MAY DISAPPOINT INVESTORS OR SECURITIES ANALYSTS AND RESULT IN A
DECLINE
IN OUR STOCK PRICE.
Our recent growth rate may not be sustainable and you should not use our
past financial performance to predict future operating results. We had
incurred
net losses in the past. Our recent quarterly and annual operating results have
fluctuated, and will continue to fluctuate, due to the following factors, all
of which are difficult to forecast and many of which are not within our
control:
- the availability, timely delivery and cost of components from our
suppliers;
- competitive pricing pressures and related changes in selling prices;
- fluctuations in manufacturing yields and significant yield losses which
affect our ability to fulfill orders;
- new product announcements and introductions for competing products by us
or our competitors;
- product obsolescence;
- lower of cost or market inventory adjustments;
- unpredictability of changes in demand for, or in the mix of, our
products;
- the gain or loss of significant customers;
- market acceptance of products utilizing our technologies;
- changes in the channels through which our products are distributed and
the
timeliness of receipt of distributor resale information;
- exchange rate fluctuations;
- general economic, political and environmental-related conditions, such as
natural disasters;
- difficulties in forecasting, planning and management of inventory levels;
- unanticipated research and development expenses associated with new
product introductions; and
- the timing of significant orders and of license and royalty revenue.
A downturn in the market for consumer products such as personal computers
and DVD players that incorporate our products can also harm our operating
results.
Some of our customers may place orders at or near the end of a quarter. As
a result, we may not learn of revenue shortfalls until late in a quarter
and may
not be able to predict future revenues with accuracy. Additionally, our
costs
consist of salaries for personnel and materials that must be ordered
several
months in advance. These costs are based in part on our expectations for
future
revenues and are relatively fixed in the short term. As a result, any
revenue
shortfall below expectations could harm our business.
WE DEPEND ON A LIMITED NUMBER OF FOREIGN SUPPLIERS TO MANUFACTURE
CERTAIN KEY
COMPONENTS, AND THESE MANUFACTURERS MAY NOT BE ABLE TO SATISFY OUR
REQUIREMENTS
WHICH COULD CAUSE OUR REVENUES TO DECLINE.
We currently buy certain key components, including optical pick-ups, central
processing units, motors, and certain other integrated circuits, etc., from a
limited number of suppliers. We anticipate that these suppliers will
manufacture
these key components in sufficient amount to meet our production requirements.
If these suppliers fail to satisfy our requirements on a timely basis and at
competitive prices, we could suffer manufacturing delays, a possible loss of
revenues or higher than anticipated costs of revenues, any of which could
seriously harm our operating results.
Given the current constraints on worldwide manufacturing capacity of these
key components, our revenues for the next several quarters will largely be
determined by our ability to obtain adequate supplies from these
manufacturers.
We are currently unable to meet all of the demand for our products, and
have in
the past failed to meet scheduled shipment dates, due to our inability to
obtain
a sufficient supply of certain key components from our suppliers. The
suppliers
with which we currently have arrangements, together with any additional
supplier
at which capacity might be obtained, may not be willing or able to satisfy
all
of our manufacturing requirements on a timely basis at favorable prices. In
addition, we have encountered delays in qualifying new products and in
ramping
new product production and could experience these delays in the future. We are
also subject to the risks of service disruptions, raw material shortages and
price increases by the suppliers. Such disruptions, shortages and price
increases could seriously harm our operating results.
IF WE ARE UNABLE TO INCREASE OUR MANUFACTURING CAPACITY, WE MAY NOT
ACHIEVE
OUR PLANNED GROWTH.
In order to grow, we need to increase our present manufacturing capacity.
Events that we have not foreseen could arise which would limit our
capacity. In
addition, if we cannot satisfactorily increase our manufacturing capacity,
our
ability to grow will be severely impaired and this may harm our operating
results.
OUR FINANCING REQIREMENTS WILL INCREASE IN ORDER TO OBTAIN ADDITIONAL
MANUFACTURING CAPACITY IN THE FUTURE.
To obtain additional manufacturing capacity, we may be required to make
deposits, equipment purchases, loans, joint ventures, equity investments or
technology licenses in or with other companies. These transactions could
involve a commitment of substantial amounts of our capital and technology
licenses in return for production capacity. We may be required to seek
additional debt or equity financing if we need substantial capital in order to
secure this capacity and we cannot assure you that we will be able to obtain
such financing.
IF OUR SUPPLIERS FAIL TO ACHIEVE ACCEPTABLE MANUFACTURING YIELDS, WE WILL
EXPERIENCE HIGHER COSTS OF REVENUES AND REDUCED PRODUCT AVAILABILITY.
The fabrication of our products requires certain components produced in
a highly controlled and clean environment. Companies that supply our
components sometimes have experienced problems achieving acceptable
manufacturing yields. Low yields may result from marginal design or
manufacturing process drift. Yield problems may not be identified until the
components are well into the production process, which often makes them
difficult, time consuming and costly to correct. Furthermore we rely on
foreign suppliers of the key components, which increases the effort and time
required to identify, communicate and resolve manufacturing yield problems.
If our suppliers fail to achieve acceptable manufacturing yields, we will
experience higher costs of revenues and reduced product availability, which
would harm our operating results.
IF OUR SUPPLIERS DISCONTINUE THE MANUFACTURING PROCESSES OR LINES NEEDED
TO
MEET OUR DEMANDS, OR FAIL TO UPGRADE THE TECHNOLOGIES NEEDED TO MANUFACTURE
OUR PRODUCTS, WE MAY FACE PRODUCTION DELAYS AND LOWER REVENUES.
Our products' requirements may represent a small portion of the total
production of the suppliers that manufacture our components. As a result, we
are subject to the risk that a supplier may cease production on an older or
lower-volume manufacturing process that it uses to produce our parts.
Additionally, we cannot be certain our supplier will continue to devote
resources to advance the production technologies on which the manufacturing
of our parts is based. Each of these events could increase our costs and harm
our ability to deliver our products on time.
OUR DEPENDENCE ON THIRD-PARTY SUBCONTRACTORS TO ASSEMBLE AND TEST OUR
PRODUCTS
SUBJECTS US TO A NUMBER OF RISKS, INCLUDING AN INADEQUATE SUPPLY OF PRODUCTS
AND
HIGHER COSTS OF MATERIALS.
We depend on independent subcontractors to assemble and test our products.
Our reliance on these subcontractors involves the following significant risks:
- reduced control over delivery schedules and quality;
- the potential lack of adequate capacity during periods of strong demand
for such subcontractors' services;
- difficulties selecting and integrating new subcontractors;
- limited warranties on products supplied to us;
- potential increases in prices due to capacity shortages and other
factors;
and
- potential misappropriation of our intellectual property.
These risks may lead to increased costs, delayed product delivery or loss of
competitive advantage which would harm our profitability and customer
relationships.
OUR GROWTH DEPENDS UPON OUR ABILITY TO COMMERCIALIZE PRODUCTS.
In fiscal 1999 and 2000, substantial amount of our revenues came from the
DVD product line, which is central to our growth strategy. This line of
products encounters intense competition and is highly price sensitive. While
we are currently developing and introducing new products in this product line,
we cannot assure you that these products will reach the market on time, will
satisfactorily address customer needs, will be sold in high volume, or will
be sold at profitable margins.
OUR OPERATING EXPENSES ARE RELATIVELY FIXED, AND WE ORDER MATERIALS IN
ADVANCE
OF ANTICIPATED CUSTOMER DEMAND. THEREFORE, WE HAVE LIMITED ABILITY TO REDUCE
EXPENSES QUICKLY IN RESPONSE TO ANY REVENUE SHORTFALLS.
Our operating expenses are relatively fixed, and we therefore have limited
ability to reduce expenses quickly in response to any revenue shortfalls.
Consequently, our operating results will be harmed if our revenues do not
meet
our revenue projections. We may experience revenue shortfalls for the
following
reasons:
- significant pricing pressures that occur due to competition, over supply,
or other reasons;
- sudden shortages of raw materials or fabrication, test or assembly
capacity constraints that lead our suppliers to allocate available
supplies or capacity to other customers which, in turn, harm our ability
to meet our sales obligations; and
- the reduction, rescheduling or cancellation of customer orders.
In addition, we typically plan our production and inventory levels based on
customers' advance orders, commitments or forcasts, as well as our internal
assessment and forecasts of customer demand, which are highly unpredictable
and can fluctuate substantially, especially if the competition becomes more
intense or the demand becomes less strong due to seasonal or other factors,
when there would be less number of advance orders backed by firm guarantees.
From time to time, in response to anticipated long lead times to obtain
inventory and materials from our suppliers, we may order materials in advance
of anticipated customer demand. This advance ordering may result in excess
inventory levels or unanticipated inventory write-downs if expected orders
fail to materialize.
BECAUSE OUR PRODUCTS TYPICALLY HAVE LENGTHY SALES CYCLES, WE MAY
EXPERIENCE
SUBSTANTIAL DELAYS BETWEEN INCURRING EXPENSES RELATED TO RESEARCH AND
DEVELOPMENT AND THE GENERATION OF REVENUES.
It usually requires a number of months to realize volume shipments after
we first contact a customer. We first work with customers to achieve a design
win, which may take months or longer. Our customers then complete the design,
testing and evaluation process and begin to ramp up production, a period
which
typically lasts months or longer. As a result, a significant period of time
may
elapse between our research and development efforts and our realization of
revenue, if any, from volume purchasing of our products by our customers.
WE FACE INTENSE COMPETITION FROM COMPANIES WITH SIGNIFICANTLY GREATER
FINANCIAL,
TECHNICAL AND MARKETING RESOURCES THAT COULD ADVERSELY AFFECT OUR ABILITY
TO
INCREASE SALES OF OUR PRODUCTS.
We compete with major international electronics companies, many of which
have substantially greater financial, technical, marketing, distribution, and
other resources than we do. Many of our competitors have their own facilities
for the production of semiconductor components and have been active in
increasing their market shares and their capacity for the production of the
competing products. Our DVD products presently account for substantially most
of our revenues. The competitors or potential competitors are Hitachi,
Toshiba,
Sony, Pioneer, Teac, Sanyo, Samsung, Philips, Samsung, LG, and many others.
Some of the competitors or potential competitors are also suppliers for the
key components of some of our models. The division making competing DVD
products may have access to some of our proprietary information through
the division supplying components to us, or the influence on the parts
supplying division in ways that may adversely affect our parts supply.
Competition may also come from alternative technologies being developed
by these companies.
OUR MARKETS ARE SUBJECT TO RAPID TECHNOLOGICAL CHANGE AND, THEREFORE, OUR
SUCCESS DEPENDS ON OUR ABILITY TO DEVELOP AND INTRODUCE NEW PRODUCTS.
The markets for our products are characterized by:
- rapidly changing technologies;
- evolving and competing industry standards;
- changing customer needs;
- frequent new product introductions and enhancements;
- increased integration with other functions; and
- rapid product obsolescence.
To develop new products for our target markets, we must develop, gain access
to and use leading technologies in a cost-effective and timely manner and
continue to expand our technical and design expertise. In addition, we must
have
our products designed into our customers' future products and maintain close
working relationships with key customers in order to develop new products that
meet their changing needs.
In addition, DVD products are related to continually evolving industry
standards. Our ability to compete will depend on our ability to identify and
ensure compliance with these industry standards. As a result, we could be
required to invest significant time and effort and incur significant expense
to redesign our products and ensure compliance with relevant standards.
We cannot assure you that we will be able to identify new product
opportunities successfully, develop and bring to market new products, achieve
design wins or respond effectively to new technological changes or product
announcements by our competitors. In addition, we may not be successful in
developing or using new technologies or in developing new products or product
enhancements that achieve market acceptance. Our pursuit of necessary
technological advances may require substantial time and expense. Failure in
any
of these areas could harm our operating results.
OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY
DESIGN
ENGINEERING, SALES, MARKETING AND EXECUTIVE PERSONNEL AND OUR ABILITY TO
IDENTIFY, RECRUIT AND RETAIN ADDITIONAL PERSONNEL.
We are highly dependent on our principal management and engineering staff.
There is intense competition for qualified personnel in the semiconductor
industry, in particular the highly skilled technical personnel involved in the
development of DVD technologies and the production of DVD products.
Competition
is especially intense in Silicon Valley, where our corporate headquarters is
located, and South Korea, where our DVD products have been designed and
manufactured. We may not be able to continue to attract and retain
engineers or other qualified personnel necessary for the development of our
business or to replace engineers or other qualified personnel who may leave
our
employ in the future. Our anticipated growth is expected to place increased
demands on our resources and will likely require the addition of new
management
and engineering personnel and the development of additional expertise by
existing management personnel. The failure to recruit and retain key
technical
and management personnel could harm our business.
OUR ABILITY TO COMPETE SUCCESSFULLY WILL DEPEND, IN PART, ON OUR ABILITY
TO
PROTECT OUR INTELLECTUAL PROPERTY RIGHTS, WHICH WE MAY NOT BE ABLE TO
PROTECT.
We rely on a combination of patent, trade secrets, copyright and mask work
production laws and rights, nondisclosure agreements and other contractual
provisions and technical measures to protect our intellectual property
rights.
Policing unauthorized use of our products, however, is difficult, especially
in
foreign countries. Litigation may continue to be necessary in the future to
enforce our intellectual property rights, to protect our trade secrets, to
determine the validity and scope of the proprietary rights of others, or to
defend against claims of infringement or invalidity. Litigation could result
in substantial costs and diversion of resources and could harm our business,
operating results and financial condition regardless of the outcome of the
litigation.
We have acquired ownership or exclusive license to a number of patents
or patent applications related to our products. However, we cannot assure
you that any pending patent application will be granted, or that all such
patents can provide adequate protection for our intellectual property. Our
operating results could be seriously harmed by the failure to protect our
intellectual property.
IF WE ARE ACCUSED OF INFRINGING THE INTELLECTUAL PROPERTY RIGHTS OF OTHER
PARTIES WE MAY BECOME SUBJECT TO TIME-CONSUMING AND COSTLY LITIGATION. IF WE
LOSE, WE COULD SUFFER A SIGNIFICANT IMPACT ON OUR BUSINESS AND BE FORCED TO
PAY
DAMAGES.
Third parties may assert that our products infringe their proprietary
rights, or may assert claims for indemnification resulting from infringement
claims against us. Any such claims may cause us to delay or cancel shipment
of
our products or pay damages which could seriously harm our business,
financial
condition and results of operations. In addition, irrespective of the
validity
or the successful assertion of such claims, we could incur significant
costs in
defending against such claims.
In addition, we receive from time to time letters or communications from
other companies stating that such companies have patent rights which involve
our products. Any legal finding that we infringe the patent of another
company
would have a significantly negative effect on our operating results.
Furthermore, if such a finding were made, there can be no assurance that we
could license the other company's technology on commercially reasonable terms
or
that we could successfully operate without such technology. Moreover, if we
are
found to infringe, we could be required to pay damages to the owner of the
protected technology and could be prohibited from making, using or selling
any products that infringe the protected technology. In addition, the
management attention consumed by and legal cost associated with any
litigation
could have a negative effect on our operating results.
PUBLIC ANNOUNCEMENTS MAY HURT OUR STOCK PRICE. During the course of
lawsuits there may be public announcements of the results of hearings,
motions,
and other interim proceedings or developments in the litigation. If
securities
analysts or investors perceive these results to be negative, it could have
a
substantial negative effect on the trading price of our stock.
OUR LITIGATION MAY BE EXPENSIVE, MAY BE PROTRACTED AND CONFIDENTIAL
INFORMATION MAY BE COMPROMISED. Whether or not we are successful in any
litigation, we expect the litigation to consume substantial amounts of our
financial and managerial resources. Further, because of the substantial
amount of discovery required in connection with this type of litigation,
there is a risk that some of our confidential information could be
compromised by disclosure.
OUR BUSINESS MAY SUFFER DUE TO RISKS ASSOCIATED WITH INTERNATIONAL SALES
AND
OPERATIONS.
Our export products accounted for most of our revenues. Our international
business activities are subject to a number of risks, each of which could
impose unexpected costs on us that would have an adverse effect on
our operating results. These risks include:
- difficulties in complying with regulatory requirements and standards;
- tariffs and other trade barriers;
- costs and risks of localizing products for foreign countries;
- reliance on third parties to distribute our products;
- longer accounts receivable payment cycles;
- potentially adverse tax consequences;
- limits on repatriation of earnings; and
- burdens of complying with a wide variety of foreign laws.
We derived most of our product revenue from Asia during fiscal year 2000.
Additionally, our major suppliers and assembly subcontractors are all located
in Asia. Any kind of economic, political or environmental instability in
this region of the world can have a severe negative impact on our operating
results due to the large concentration of our production and sales activities
in this region. For example, during 1998 and 1997, several Asian countries
where we currently do business, such as Japan, Taiwan and Korea, experienced
severe currency fluctuation and economic deflation. If such situations
reoccur, it may negatively impact our total revenues and our ability to
collect payments from customers in these regions. During such period, the
lack of capital in the financial sectors of these countries can make it
difficult for our customers to open letters of credit or other financial
instruments that are guaranteed by foreign banks. Finally, the economic
situation in such period may exacerbate a decline in selling prices for our
products as our competitors may reduce product prices to generate needed
cash.
It should also be noted that we are greatly impacted by the political,
economic and military conditions in Taiwan and China, which are
continuously
engaged in political disputes. Both countries have recently conducted
military exercises in or near the other's territorial waters and airspace.
Such
disputes may continue and even escalate, resulting in an economic embargo, a
disruption in shipping or even military hostilities. This could severely
harm
our business by interrupting or delaying production or shipment of our
products.
Any kind of activity of this nature or even rumors of such activity could
severely negatively impact our operations, revenues, operating results, and
stock price.
BECAUSE A SMALL NUMBER OF CUSTOMERS HAVE ACCOUNTED FOR, AND ARE LIKELY TO
CONTINUE TO ACCOUNT FOR, A SUBSTANTIAL PORTION OF OUR REVENUES, OUR REVENUES
COULD DECLINE DUE TO THE LOSS OF ONE OF THESE CUSTOMERS.
More than half of our revenues come from a small number of customers. For
example, products sold to our top 10 customers accounted for more than 50% of
our revenues in fiscal year 2000, including one which accounted for about 30%.
If we were to lose any of these customers or experience any substantial
reduction in orders from these customers, our revenues and operating results
would suffer. In addition, the composition of our major customer base may
change from year to year as the market demand for our customers' products
changes.
WE DO NOT HAVE LONG-TERM CONTRACTS WITH OUR CUSTOMERS AND THE LOSS OF A
MAJOR
CUSTOMER COULD SERIOUSLY HARM OUR BUSINESS.
We do not typically enter into long-term contracts with our customers, and
we cannot be certain as to future order levels from our customers. When we do
enter into a long-term contract, the contract is generally terminable at the
convenience of the customer. An early termination by one of our major
customers
would harm our financial results as it is unlikely that we would be able to
rapidly replace that revenue source.
OUR BACKLOG MAY NOT RESULT IN FUTURE REVENUE WHICH WOULD SERIOUSLY
HARM OUR
BUSINESS.
Due to possible customer changes in delivery schedules and cancellations of
orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period. A reduction of backlog during any
particular period, or the failure of our backlog to result in future revenue,
could harm our business.
IF AN EARTHQUAKE OR OTHER NATURAL DISASTER STRIKES OUR FACILITY OR THOSE
OF
OUR SUPPLIERS OR CUSTOMERS, WE MAY BE UNABLE TO MANUFACTURE OR SELL OUR
PRODUCTS FOR A SUBSTANTIAL AMOUNT OF TIME AND WE WOULD EXPERIENCE LOST
REVENUES.
Our corporate headquarters are located in California near major earthquake
faults. In addition, some of our suppliers or customers are located in
regions
where earthquakes frequently strike, such as Taiwan. In the event of a major
earthquake or other natural disaster near our headquarters, our operations
could be harmed. Similarly, a major earthquake or other natural disaster
near
one or more of our major suppliers or customers, like the one that occurred
in
Taiwan in September 1999, could disrupt their operations, which could limit
the supply or sale of our products and harm our business.
IF WE DID NOT ADEQUATELY PREPARE FOR THE TRANSITION TO YEAR 2000, OUR
BUSINESS
COULD BE HARMED.
We have executed a plan designed to make our computer systems, applications,
computer and manufacturing equipment and facilities year 2000 compliant. To
date, none of our systems, applications, equipment or facilities have
experienced any difficulties from the transition to year 2000. However, it is
possible that significant difficulties could be discovered or could arise. We
cannot guarantee that our year 2000 readiness plan has been successfully
implemented, and actual results could still differ substantially from our
plan.
Where practicable, we have also attempted to mitigate our risks with respect
to the failure of our suppliers to be year 2000 compliant. The effect, if
any,
on our results of operations from any failure of our suppliers to be year
2000
compliant cannot yet be determined.
WE MAY REQUIRE ADDITIONAL CAPITAL IN ORDER TO BRING NEW PRODUCTS TO
MARKET, AND
THE ISSUANCE OF NEW EQUITY SECURITIES WILL DILUTE YOUR INVESTMENT IN OUR
COMMON
STOCK.
To fuel the growth of our business operations in the future, we need to
expand our production capacity and bring new products to market, which
require
significant working capital. To date we have established credit facilities
with Korean Banks for a total of $26 million, including $14 million for
issuing letters of credit. We have also formed alliance with state-run
businesses in China which have committed to facilitate substantial amount
of trade credit and financing for production in China under certain terms.
However, there is no assurance that these credit facilities will always be
available. We may also need to sell shares of our stock or seek additional
borrowings or outside capital infusions in the future. We cannot assure you
that such financing options will be available on terms acceptable to us, if
at all, and at the time and place that we need them. In addition, if we
issue shares of our common stock, our shareholders will experience dilution
with respect to their investment.
WE DEPEND ON MANUFACTURERS' REPRESENTATIVES AND DISTRIBUTORS TO GENERATE
SUBSTANTIAL AMOUNT OF OUR REVENUES.
We rely on manufacturers' representatives and distributors to sell our
products and these entities could discontinue selling our products at any
time. One of such agents are responsible for some of our sales in China,
accounting for more than 30% of our revenues during fiscal year 2000. The
loss of such an agent, or any other significant agents could seriously harm
our operating results.
OUR GROWTH CONTINUES TO PLACE A SIGNIFICANT STRAIN ON OUR MANAGEMENT
SYSTEMS AND
RESOURCES AND IF WE FAIL TO MANAGE OUR GROWTH, OUR ABILITY TO MARKET AND
SELL
OUR PRODUCTS AND DEVELOP NEW PRODUCTS MAY BE HARMED.
Our business is experiencing rapid growth which has strained our internal
systems and will require us to develop or adopt more sophisticated information
management systems in order to manage the business effectively. We have
recently completed the implementation of an ERP system. There is no guarantee
that this system and any new systems implemented in the future will be
adequate to address our expected growth, or that management will be able to
foresee in a timely manner other infrastructure needs before they arise. Our
success depends on the ability of our executive officers to effectively manage
our growth. If we are unable to manage our growth effectively, our results of
operations will be seriously harmed.
RISKS RELATED TO OUR INDUSTRY
THE SELLING PRICES FOR OUR PRODUCTS ARE VERY VOLATILE AND SUBJECT TO
INDUSTRY-WIDE FLUCTUATIONS. OUR SUCCESS IS DEPENDENT ON THE GROWTH AND
STRENGTH OF THE PC MARKET AND THE DVD VIDEO MARKET.
With a focus on the DVD product line, most of our revenues in fiscal year
2000 were generated from DVD products. Most of our new products currently
being developed are in the DVD product line, particularly DVD-ROM drives and
DVD loaders.
The sales of DVD-ROM drives are closely related to the strength
of the PC market and the popularity of PC's equipped with the DVD-ROM drive,
in competition with CD-ROM, CD-RW, or other devices. In case we experience an
unforeseen downturn of the PC market, an unexpected decline of the percentage
of PC's equipped with the DVD-ROM drive, or a global over-capacity of DVD-ROM
drives production, the operations of our DVD-ROM drive business will be
affected. Such situation seemed evident in late fiscal year 1999, which
lasted through the early part of fiscal year 2000, resulting in weakened
product demand, accelerated decline of average selling prices, and
accumulation of inventory at a reduced turn-over rate. It unfavorably
impacted our revenues, gross margins, profitability, and our financial
operations. While these conditions improved later, if they were to resume,
and if our operations could not properly adjust in time, our growth and
operating results would be harmed.
Similarly, the sales of our DVD loaders are related to the strength
of the markets for DVD video discs and DVD video players. If the DVD video
market becomes weakened, the sales of our DVD loaders will also be reduced.
Our business could be harmed by such industry-wide fluctuations in the
future.
OUR SUCCESS MAY BE AFFECTED BY UNUSUAL GROWTH OF CERTAIN NEW ELECTRONIC
PRODUCTS.
There may be new products being introduced in the future which meet
unusually high global demands. If the new products' customer base overlaps
a substantial portion of our products' customer base, or that the new products
use the same key component as our products, the demand for our products or the
supply of their key component may be reduced, which may seriously harm our
operations.
THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY COULD CREATE
FLUCTUATIONS
IN OUR OPERATING RESULTS.
The semiconductor industry has historically been cyclical, characterized
by wide fluctuations in product supply and demand. From time to time, there
are shortages or over-production of memory or other types of devices. Our
business could be harmed by such industry-wide fluctuations in the future.
When a shortage occurs with one or more key components, it may be difficult
for us to produce enough quantities of products to fill customers' orders,
and it may require us to pay a higher price for the components in shortage,
adversely affecting our margin and profitability.
THERE IS SEASONALITY IN OUR BUSINESS.
Sales of our products in the computer peripherals market and consumer
electronics market are subject to seasonality. As a result, sales of these
products are impacted by seasonal purchasing patterns with higher sales
generally occurring in the second half of each calendar year. There may be
a sharp decline of sales after the Christmas and New Year holiday. Sales
to China and certain other Asian regions may also decline during and after
the lunar New Year's holidays.
Item 2. Properties
The Company currently has the following facilities leased from third
parties, where our executive offices, manufacturing, engineering,
research and development and testing facilities are located.
Approx. Monthly
Facility Location Square Feet Rent
------------------- ----------------- ----------- ---------
US Headquarters Mountain View, CA 6,500 $11,000
DVS Korea Co., Ltd. Seoul, Korea 35,500 24,000
China Office Shenzhen, China 1,700 1,000
We believe these facilities are adequate to meet our needs for at least
the next 12 months.
Item 3. Legal Proceedings
On May 8, 2000, Yasuo Kamatani and LaserDynamics Inc.
(collectively "LDI") sued Digital Video Systems, Inc.
("DVS") and
Konka (U.S.A.) Ltd. ("Konka") in the U.S. District Court for the
Southern District of Texas (Yasuo Kamatani and LaserDynamics Inc. v.
Konka (U.S.A.) Ltd. and Digital Video Systems, Inc., Civil Action
No. H-00-0791). LDI alleges that DVS and Konka are infringing
U.S. Patent Nos. 5,587,981 and 5,959,280. Both patents relate to
DVD players. On July 21, 2000, DVS filed its answer and counterclaims
in response to LDI's first amended
complaint. DVS contests the validity of both patents and LDI's
infringement allegations. The parties are exploring the possibility
of resolving the case.
From time to time, we may be involved in legal actions arising in the
ordinary course of business, such as reported in item 3. of Form 10-KSB
which the Company filed with the Securities and Exchange Commission on
July 1, 1999.
While we have accrued certain amounts for the estimated legal costs
associated with defending these matters, there can be no assurance that
these cases and other third party assertions will be resolved without
costly litigation, in a manner that is not adverse to our financial
position, results of operations or cash flows or without requiring
royalty payments in the future which may adversely impact gross
margins. No estimate can be made of the possible loss or possible
range of loss associated with the resolution of these contingencies.
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 and Class A Warrants currently trade on the
Nasdaq Smallcap Market under the symbol DVID and DVIDW. The following
table sets forth the high and low sale prices of the Company's Common
Stock and Class A Warrants for each quarter within the last two years
as reported on the Nasdaq Smallcap Market for the periods indicated.
These prices represent prices among dealers, do not include retail markups,
markdowns or commissions, and may not represent actual transactions.
Note: The Company effectuated a one-for-seven
reverse stock split of its
Common Stock in August 1999, which took effect on the market from August 17,
1999. For ease of comparison, in the table below, all prices of the Common
Stock for trading days prior to the stock split are adjusted to reflect the
prices as if the split had taken place prior to the beginning of Fiscal 1999.
Note also that the Company has not effectuated any split on its
Warrants or Units.
Note also that the Company has not effectuated any split on Warrants or Units.
Common Stock Class A Warrants
High Low High Low
-------- -------- --------- --------
Fiscal 2000
First quarter................ $8.750 $4.156 $0.219 $0.125
Second quarter............... 5.906 3.375 0.188 0.063
Third quarter................ 13.063 3.063 0.219 0.063
Fourth quarter............... 22.625 9.938 0.531 0.094
Fiscal 1999
First quarter................ $13.563 $6.125 0.500 0.188
Second quarter............... 7.438 2.188 0.188 0.031
Third quarter................ 17.062 3.500 0.281 0.063
Fourth quarter............... 19.250 5.688 0.531 0.094
On July 28, 2000, the last reported sale price for the Common Stock was $7.50
per share.
As of June 15, 2000, there were approximately 171 holders of record of
the Company's Common Stock. This number does not reflect the number of
beneficial holders of the Common Stock, which the Company believes is
more than 3,000.
The Company has never paid cash dividends on its Common Stock. At present,
the Company intends to retain any earnings for use in its business and does
not anticipate paying cash dividends in the foreseeable future.
Item 6. Management's Discussion and Analysis of Results of Operations and
Financial Condition
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 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, 2000.
The Company had made significant progress in fiscal 2000, achieving the
first profitable year in its history since it went public in 1996. Although
the amount of profit is relatively small, it signifies that the
Company's operations have turned around from the substantial losses
in the past.
The management and the employees have successfully carried
out the Company's strategy to focus on products based on its DVD
intellectual property portfolio, while aggressively reducing overhead
and pruning out the product lines and operations worldwide that were
under performing and considered dilutive to the Company's resources.
The results of these efforts have been dramatic, as highlighted in the
table below:
Fiscal year ended March 31,
(in millions) 2000 1999 1998
-------- -------- --------
Revenues ............ $60.3 $17.1 $17.6
Gross Profit ........ 7.8 0.7 -2.9
Net Profit (loss) ... 0.9 -18.8 -21.9
Revenues in this fiscal year, ending March 31, 2000, have increased by 252%
to $60.2 million, as compared to the prior year, ending March 31, 1999, of
$17.1 million.
Gross margins improved for the fiscal year ending March 31, 2000 (12.9%)
over the prior fiscal year ending March 31, 1999 (4.3%) reflecting the
pruning of unprofitable and low margin product lines.
Operating expenses, worldwide, continue under tight control with operating
expenses in the fiscal year ending March 31, 2000 of $6.6 million as
compared to $19.5 million for the fiscal year ending March 31, 1999,
a reduction of 66% year to year.
In summary we feel the Company's major objectives have been realized for the
period ending March 31, 2000:
- Market acceptance of our DVD products
- Revenues were more than 3.5 times those of the previous year.
- Margin up from 4.3% of revenue to 12.9%, also tripled.
- Operating expenses reduced from 114% of revenue to 11%. Operating expenses
excluding restructuring gain or loss also reduced from 107% of sales to 17%.
The Company is reporting a positive working capital position of $136,000 at
March 31, 2000. With credit lines of about $25 million established with banks,
which include about $16 million for issuing letters of credit, the Company
believes that it is financially able to fund its current operations.
In anticipation of the rapid growth in the coming fiscal year, the Company
continues to be active in securing additional sources of funds to meet its
growth plans.
New management has been put into place at our Korean subsidiary, bringing us
operational skills in high volume operations combined with the necessary
planning and financial controls to take our subsidiary to the next higher
level
of volume and profitability. The new president of DVS Korea, Mr. Byung Hung
Lee,
has held senior executive positions with both Samsung and Hyundai Groups and
is
highly regarded in the Korean electronics industry.
We believe our ongoing business is profitable at both the operating and
net income level. We will continue to encounter intense competition and
pricing pressure in the fiscal year ending March 31, 2001. However, we
are prepared to face the challenges, and we are budgeting revenues in
excess of $100 million, with significant operating and net income levels.
RESULTS OF OPERATIONS FOR THE FISCAL YEAR ENDED MARCH 31, 2000
("fiscal 2000")
COMPARED TO THE
FISCAL YEAR ENDED MARCH 31, 1999 ("fiscal 1999"").
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 fiscal 2000 and 1999. Please see Consolidated
Financial Statements of Operations for details.
Percent of Revenue
---------------------
Year Ended March 31,
---------------------
2000 1999
---------- ----------
Revenues................................... 100.0% 100.0%
Gross margin............................... 12.9% 4.3%
Research and development................... 3.9% 36.2%
Sales and marketing........................ 3.0% 18.0%
General and administrative................. 9.5% 50.4%
Purchased in-process research and
development............................... 0.0% 3.0%
Operating income(loss)..................... -1.9% -109.8%
Net income(loss)........................... 1.4% -110.1%
March 31, March 31, %
2000 1999 Change
(in thousands) ---------- ---------- -----------
Consolidated Revenue .......... $60,292 $17,111 252%
As reflected above, total revenues in fiscal 2000 were $60.3 million, about
3.5 times those of the prior year. This significant increase of $43.2
million was a result of the Company's decision to focus it's resources
on the DVD product line which accounted for approximately 93% of current
year revenue sale of DVD product as compared to 60% in the previous year.
International revenue represented approximately 95% and 58% of total
revenue for the years ended March 31, 2000 and 1999, respectively.
Revenues in the 4th quarter ended March 31, 2000, which is
generally a slower quarter in the year, were $14.7 million. Although
less than our previous forecast, revenues from this quarter alone
were close to the annual revenues of the whole fiscal year
1999 ended March 31, 1999.
March 31, March 31, %
2000 1999 Change
(in thousands) ---------- ---------- -----------
Gross margin................... $7,783 $744 946%
as a percentage of revenue... 12.9% 4.3% 200%
Gross margin increased from $0.7 million in fiscal 1999 to $7.8 million
in fiscal 2000, or an increase of 946%. Gross margin percentage also
tripled, from 4.3% in fiscal 1999 to 12.9% in fiscal 2000. The significant
increase in both the gross margin generated (946%) and the rate of gross
margin to revenue (200%) reflects the continuing efforts of the Company
to sell or dispose of product lines and businesses that are not
generating or not able to generate acceptable returns.
Gross margins in the 4th quarter ending March 31, 2000 were 14% versus
16% in the previous quarter ending December 31, 1999. In addition to
the quarter being generally a slower season, the reduction of margin was
in part due to phasing out of high margin but low volume products, with
more percentage of lower margin but high volume DVD loaders. Looking
ahead to fiscal year 2001 we expect to experience pricing pressure
on our loader product offering with a resulting degradation of margins.
However, cost improvements have been in process to favorably
impact our margins. We expect the margin for most of the sales
in fiscal year 2001 to be about 10%, give or take 1 to 2%.
March 31, March 31, %
2000 1999 Change
(in thousands) ---------- ---------- -----------
Research and development....... $2,367 $6,193 -62%
as a percentage of revenue... 3.0% 36.2% -92%
Research and development expenses consist primarily of personnel
and equipment prototype costs required for the Company's development
efforts.
Research and development expenses decreased by $3.8 million to $2.4
million in fiscal 2000 compared with $6.2 million for fiscal 1999.
Research and development expenses as a percentage of net revenues in
fiscal 2000 decreased to 3.0% from 36.2% in fiscal 1999. The
substantial decrease in these expenses in absolute dollars and as a
percentage of net revenues is attributable to reducing non-performing
operations and focusing the engineering resources on the DVD product line,
which has generated substantial growth in revenues.
These R&D expenses on the DVD product line were $2.1 million in the
fiscal
year ending March 31, 2000 as compared to about $.8 million for the fiscal
year ending March 31, 1999. The remaining R&D expenses of $0.3 and $5.4
million in fiscal 2000 and 1999, respectively, were in support of the other
product line. In fiscal 2000, the Video Engine and network video server
product
lines continued to be supported to generate a small but profitable revenue stream.
The $5.4 million for the prior year were mostly in support of project and product
lines discontinued as of March 31, 1999.
The Company expects that research and development expenses in dollar terms
will continue to increase as the Company expands its efforts to advance its
technologies and develop new and improved products.
March 31, March 31, %
2000 1999 Change
(in thousands) ---------- ---------- -----------
Sales and marketing............ $1,828 $3,072 -40%
as a percentage of revenue... 3.0% 18.0% -83%
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 also substantially decreased by $1.3
million, or 40%, to $1.8 million during fiscal 2000, compared with
$3.1 million in fiscal 1999. Sales and marketing expenses as a
percentage of net revenues decreased to 3.0% from 18% of fiscal 1999. The
decrease in these expenses in aggregate dollar spending and as a percentage
of net revenues for fiscal 2000 was also primarily the result of the
restructuring of the Company's product lines that took place in the
period, to focus the sales and marketing resources on the DVD product
line, which resulted in substantial increase in revenues. The Company
expects that sales and marketing expenses in dollar
terms will continue to increase as the Company increases its sales and
marketing efforts for continued growth of business.
March 31, March 31, %
2000 1999 Change
(in thousands) ---------- ---------- -----------
General and administrative..... $5,755 $8,627 33%
as a percentage of revenue... 9.5% 50.4% 81%
General and administrative expenses consist primarily of administrative
salaries and benefits, insurance, facility, legal, accounting, investor
relations and other business support costs.
As reflected in the table above general and administrative expenses for
fiscal 2000 were reduced $2.9 million or 33% as compared to fiscal year
1999. General and Administrative Expenses as a percentage of net revenues
in fiscal 2000 decreased to 9.5% from 50.4% in fiscal 1999.
Substantial amount of the General and Administrative Expenses were costs
for streamlining non-performing operations, such as severance pays and
disposal of certain assets; and legal and professional fees for resolving
issues incurred and unfinished in the past, such as the net tangible asset
requirements for continued listing on Nasdaq. As these issues are being
resolved, the Company anticipates that the General and Administrative
Expenses will continue to reduce in the fiscal year ending March 31, 2001.
Liquidity and Capital Resources
Working capital at March 31, 2000 was $136,000 compared to a working
capital deficit at March 31, 1999 of $(170,000). In addition to cash
generated from operations, and funds received from private sales of debt
and equity securities, the Company has established
credit lines of about $25 million with banks, which include about $16
million for issuing letters of credit, to fund the operations in Korea.
The Company continues to actively search for additional credit lines and
other sources of funds to support its growth plan. To that end, in July
2000, the Company entered into a letter agreement to secure an equity
line from an investment institution in the amount of $25 million, subject
to due diligence and certain other conditions. Additionallly the Company
has been informed by it's major shareholder that it will continue to
provide funds, when needed by the Company, in the form of exercising
stock option currently held. Estimated amount that could be obtained
from this would be $2.3 million. The Company believes that its existing
cash balance, cash generated from operations and its existing credit lines
will be sufficient to fund its current operations for at least the next
twelve months.
Net cash used by operating activities was $1.0 million for the fiscal year
ended March 31, 2000, compared to $12.2 million net cash used for the fiscal
year ended March 31, 1999. Substantially all of the net cash used by
operating activities in the fiscal year ending March 31, 2000 was
represented by the issuance of a note receivable to OPLI in the amount of
$3.5 million, increased Accounts Receivable of $1.1 million, increase in
Other Assets of $1.3 million, and increased Accrued Liabilities of $1.4
million. Net cash provided in FY 2000 was net income of $.8 million
adjusted for non-cash charges for depreciation and
amortization of $1.3 million, reduction in inventories of $3.0 million, an
increase in Other Payables of $.4 million,the minority interest in our
Korean subsidiary of $.3 million and the loss of $.3 million taken upon
the sale of the minority interest, and several lessor items totaling $.3
million. Substantially all of the net cash used in operating activities for
the fiscal year ended March 31, 1999 totaling $12.2 million was made up of
net losses of $18.8 million and increased inventory of $2.8 million. This
was offset by charges for depreciation and amortization expense of $2.0
million, increase in accounts payable of $2.8 million,a reduction in accrued
liabilities of $1.0 million, increased prepaid expenses and other current
assets of $1.2 million, reduction in Accounts Receivable of $.4 million,
loss on disposal of fixed assets $.3 million, and retructuring loss taken
of $1.1 million.
Net cash used in investing activities was $0.8 million for the fiscal year
ended March 31, 2000 compared to $2.0 million used by investing activities
for the fiscal year ended March 31,1999. Substantially all of the cash used
in investing activities for the fiscal year ended March 31, 2000 consisted
of the acquisition of property and equipment of $0.8 million. Net cash used
by investing activities for the fiscal year ended March 31, 1999 was in the
acquisition of property and equipment of $3.8 million and the sales of short
term investments of $0.2 million partially offset by the proceeds from sale
of assets of $.8 million and the maturity of short term investments of $1.3
million.
Net cash provided from financing activities for the year ended March 31,
2000
was $6.6 million and consisted of bank borrowings of $5.6 million, issuance
of notes payable of $0.7 million, repayment of a note receivable $0.9
million, exercise of stock options in the amount of $0.3, and cash
received from purchase of minority interest in Korean subsidiary of $0.5
million. Offsetting the cash provided was a repayment of short term bank
borrowings of $1.4 million.
For the prior fiscal year ending March 31, 1999 net cash provided of $9.6
million was generated from the sale of common stock of $1.0 million, sale
of convertible promissory notes and preferred stock totaling $6.5 million,
and short term borrowings of $2.1 million.
The above activities resulted in increases in cash and cash
equivalents to $6.3 million at the end of fiscal 2000 compared
with $1.3 million for fiscal 1999.
Year 2000 Compliance
In prior years, we implemented a Year 2000 project to address the issue of
computer software and hardware correctly processing dates through and beyond
the Year 2000. The goal of this project was to ensure that all computer
software
and hardware that we use or rely upon is retired, replaced or made Year 2000
compliant before December 31, 1999. For example, the accounting system that
we used were found to have some Y2K related problems under certain conditions.
We have successfully switched to a new system which is Year 2000 Compliant.
To date, we have not experienced any other Year 2000 related operational
issues and are not aware of any material potential
problems that may arise as a result of Year 2000 issues either from our own
internal systems or from the products and services of third parties upon
which
we rely. However, we cannot provide any assurance that no Year 2000 issue
will
effect our operations or those of the third parties in the future.
The costs of our Year 2000 readiness program is estimated to be
approximately $100,000, which were charged to expense as incurred, and did
not include potential costs related to any customers or other claims or
the cost
of internal software or hardware replaced in the normal course of business.
Any
remaining expenses related to remediation efforts will be charged to expenses
as incurred. We will continue to monitor our business-critical computer
applications and those of our suppliers and vendors throughout the Year 2000
to ensure that any latent Year 2000 problems that may arise are promptly
addressed.
Outlook
The Company continues to focus on high-volume products based upon its DVD
intellectual property portfolio. Within one year of introduction, our
offerings of DVD-ROM drives and DVD loaders have gained acceptance in the
marketplace and fueled the rapid growth of the Company, establishing an
entryway for future product offerings. The Company is finalizing its next
generation DVD-ROM drive and new models of DVD loaders, to be shipping in
Fall 2000 at significant levels.
We believe our ongoing business is profitable at both the operating and
net income level. We will continue to encounter intense competition and
pricing pressure in the fiscal year ending March 31, 2001. Cost
improvement programs and other measures have been in place to offset
the pricing pressure. The margin for most of the sales in the coming
fiscal year is expected to be maintained at the level of about 10%,
give or take 1 to 2%.
The outlook for the first quarter ending June 30, 2000 is profitability
with revenues in excess of $20 million. For the fiscal year ending
March 31, 2001 we are budgeting revenues of about $100 million
with solid operating and net income levels.
Item 7. Financial Statements
DIGITAL VIDEO SYSTEMS, INC.
Index to Consolidated Financial Statements
Page
Report of Burr, Pilger & Mayer, Independent Auditors.........
Report of C. G. Uhlenberg & Co., LLP, Independent Auditors...
Consolidated Balance Sheet - Year ended March 31, 2000.......
Consolidated Statements of Operations -
Years ended March 31, 2000 and 1999......................
Consolidated Statements of Stockholders' Equity -
Years ended March 31, 2000 and 1999......................
Consolidated Statements of Cash Flows -
Years ended March 31, 2000 and 1999......................
Notes to Consolidated Financial Statements...................
REPORT OF BURR, PILGER & MAYER, INDEPENDENT AUDITORS
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, 2000, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for the year ended March 31, 2000. The consolidated financial
statements are the responsibility of the Digital Video Systems, Inc.'s
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
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 audit provides a reasonable basis for our opinion.
In our opinion, 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, 2000, and the results
of their operations and their cash flows for the year ended March 31, 2000
in conformity with generally accepted accounting principles.
Burr, Pilger & Mayer, Inc.
Palo Alto, California
July 28, 2000
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
Except for Note 7 for which
the date is July 21, 2000
DIGITAL VIDEO SYSTEMS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share amounts)
March 31, 2000
ASSETS
Current assets:
Cash and cash equivalents.......................... $4,259
Restricted cash ................................... 2,021
Accounts receivable, less allowance for doubtful
accounts of $4,348 ............................... 1,875
Inventories........................................ 4,769
Prepaid expenses and other current assets.......... 2,094
Notes receivable - related party................... 639
----------
Total current assets............................. 15,657
----------
Property and equipment, net of depreciation.......... 2,227
Investment in Shanghai............................... 87
Notes receivable - related party..................... 1,943
Intangibles.......................................... 1,698
Other assets......................................... 1,363
----------
Total assets .................................... $22,975
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Line of Credit..................................... $5,559
Accounts payable................................... 5,518
Other payable...................................... 396
Notes payable - related party...................... 729
Accrued liabilities................................ 2,963
Capital lease obligation........................... 356
----------
Total current liabilities........................ 15,521
Long-term liabilities:
Notes payable - long-term.......................... 768
Minority interest.................................. $1,086
----------
Total liabilities................................ 17,375
==========
Stockholders' equity:
Preferred stock, $0.0001 par value,
5,000,000 shares authorized; no shares issued
and outstanding at March 31, 2000................. --
Common stock, $0.0001 par value,
80,000,000 shares authorized; 5,646,905
shares issued and outstanding at March 31, 2000... 1
Additional paid-in capital......................... 68,088
Accumulated deficit................................ (63,986)
Cumulative translation adjustments................. 1,802
Deferred Compensation.............................. (305)
----------
Total stockholders' equity....................... 5,600
----------
Total liabilities and stockholders' equity....... $22,975
==========
The accompanying notes are an integral part of this statement.
DIGITAL VIDEO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Year Ended March 31,
---------------------
2000 1999
---------- ----------
(as restated)
Net revenue.................................... 60,292 17,111
Cost of revenue................................ 52,509 16,367
---------- ----------
Gross profit............................... 7,783 744
---------- ----------
Operating expenses:
Research and development..................... 2,367 6,193
Sales and marketing.......................... 1,828 3,072
General and administrative................... 5,755 8,627
Purchased in-process research and
development................................. 125 500
Restructuring (gain) loss.................... (3,450) 1,134
---------- ----------
Total operating expenses................... 6,625 19,526
---------- ----------
Gain (loss) from operations ............... 1,158 (18,782)
Other income (expenses)
Interest expense............................. (389) (104)
Other income................................. 778 54
Loss on disposal of fixed assets............. (87) --
Loss on sale of interest in Korean subsidiary (262) --
---------- ----------
Income (loss) before income tax provisions
and minority interests................... 1,198 (18,832)
Provision for income taxes................... (13) --
---------- ----------
Income (loss) before minority interests.... 1,185 (18,832)
Minority interest.............................. 324 --
---------- ----------
Net income(loss)........................... $ 861 ($18,832)
========== ==========
Basic net income (loss) per share.............. $ 0.20 ($1.27)
========== ==========
Diluted net income (loss) per share............ $ 0.16 ($1.27)
========== ==========
The accompanying notes are an integral part of this statement.
DIGITAL VIDEO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARES)
Convertible Additional
Accumulated
Preferred paid-in capital
Other Defer-
Stock Common Stock ---------------- Accumu-
Comprehensive red
------------- ----------------- Preferred Common lated
Income Compen-
Shares Amount Shares Amount Stock Stock Deficit
(Expense) sation Total
------ ------ ---------- ------ ------- ------- ------- -------
----- ------- -------
BALANCE AT March
31, 1998 as previously
reported.......... -- $-- 20,970,164 $3 -- $56,510 ($46,015)
($249) ($73) $10,176
------ ------ ---------- ------ ------- ------- ------- -------
----- ------- -------
1 for 7 stock split
effective August 13,
1999.............. -- -- (17,974,426) (2) -- 2 -- --
-- --
------ ------ ---------- ------ ------- ------- ------- -------
----- ------- -------
BALANCE AT March
31, 1998.......... -- -- 2,995,738 1 -- $56,512 ($46,015)
($249) ($73) $10,176
------ ------ ---------- ------ ------- ------- ------- -------
----- ------- -------
Comprehensive income:
Net loss.......... -- -- -- -- -- -- (18,832) --
-- (18,832)
Translation
adjustment...... -- -- -- -- -- -- -- 1,849
-- 1,849
-------
(16,983)
-------
Comprehensive income
Exercise of common
stock options.... -- -- 24,881 -- -- 23 -- --
-- 23
Issuance of common
stock to Hyundai
for DVD-ROM
technology....... -- -- 285,714 -- -- 3,500 -- --
-- 3,500
Conversion of
promissory notes
to common stock.. -- -- 301,391 -- -- 1,307 -- --
-- 1,307
Issuance of common
stock options.... -- -- -- -- -- 2 -- --
-- 2
Issuance of preferred
stock............ 6,475 -- -- -- 3,378 2,649 -- --
-- 6,027
Amortization of
deferred
compensation..... -- -- -- -- -- -- -- --
73 73
------ ------ ---------- ------ ------- ------- ------- -------
----- ------- -------
BALANCE AT March
31, 1999......... 6,475 -- 3,607,724 1 3,378 63,993 (64,847)
1,600 0 4,125
------ ------ ---------- ------ ------- ------- ------- -------
----- ------- -------
Comprehensine income:
Net loss.......... -- -- -- -- -- -- 861 -
- -- 861
Translation
adjustment...... -- -- -- -- -- -- --
202 -- 202
-------
1,063
-------
Comprehensine income:
Exercise of common
stock options.... -- -- 33,712 -- -- 193 -- -
- -- 193
Conversion of pre-
ferred stock to
common stock..... (6,475) -- 1,968,083 -- (3,378) 3,378 -- -
- -- --
Issuance of common
stock............ -- -- 37,386 -- -- 123 -- -
- -- 123
Deferred compensation
for options granted -- -- -- -- -- 401 -- -
- (311) 90
Amortization of
deferred
compensation..... -- -- -- -- -- -- -- -
- 6 6
------ ------ ---------- ------ ------- ------- ------- -------
----- ------- -------
BALANCE AT March
31, 2000.......... -- -- 5,646,905 1 -- 68,088 (63,986)
1,802 (305) 5,600
====== ====== ========== ====== ======= ======= =======
============ ======= =======
The accompanying notes are an integral part of this statement.
DIGITAL VIDEO SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
March 31,
-------------------
2000 1999
--------- ---------
OPERATING ACTIVITIES (as restated)
Net income (loss)..................... $ 861 ($18,832)
Adjustments to reconcile net loss to
net cash used in operating activities:
Minority interest................... 324 --
Loss on sale of interest in Korean
subsidiary........................ 262 --
Restructuring (gain) loss........... (3,450) 1,134
Depreciation........................ 607 771
Amortization........................ 676 1,205
Loss on disposal of fixed assets.... 87 309
Stock options compensation expense.... 134 --
Purchased in-process research and
development........................ -- 500
Write-off of operating and
intangible assets ................. -- 101
Changes in operating assets and
liabilities:
Accounts receivable............... (1,113) 378
Inventories....................... 3,016 (2,783)
Prepaid expenses and other
current assets.................. (119) 1,173
Other assets...................... (1,290) --
Accounts payable.................. 79 2,841
Accrued liabilities............... (1,445) 988
Other payable..................... 396 --
--------- ---------
Net cash provided by (used in)
operating activities........... (975) (12,215)
--------- ---------
INVESTING ACTIVITIES
Acquisition of property and equipment. (758) (3,807)
Proceeds from disposal of
property and equipment............... -- 842
Sale of short-term investment......... -- (217)
Maturities of short-term investments.. -- 1,250
Other investing activities............ -- (83)
Investment in Shanghai joint venture.. (87) --
--------- ---------
Net cash provided by (used in)
investing activities........... (845) (2,015)
--------- ---------
FINANCING ACTIVITIES
Proceeds from the sale of common
share................................ -- 952
Proceeds from the sale of
convertible promissory notes......... -- 4,475
Proceeds from the sale of
preferred stock...................... -- 2,000
Proceeds from the exercise of stock
options.............................. 316 24
Proceeds from line of credit borrowing 5,559 --
(Repayment) proceeds from
bank borrowings...................... (1,352) 2,140
Proceeds from repayment of notes
receivable........................... 868 --
Proceeds from exercise of option to purchase
interest in Korean subsidiary........ 500 --
Proceeds from issuance of notes payable 729 --
--------- ---------
Net cash (used in) provided by
financing activities........... 6,620 9,591
--------- ---------
Effect of exchange rate changes....... 202 --
Net increase (decrease) in cash and
cash equivalents..................... 5,002 (4,639)
Cash and cash equivalents at beginning
of year.............................. 1,276 5,915
--------- ---------
Cash and cash equivalents at end of
year.................................. $6,280 $1,276
========= =========
Supplemental disclosure of cash flow
information:
Interest paid....................... $462 $104
========= =========
Supplemental disclosure of non-cash
transaction:
Issuance of stock for
acquisition of DVD-ROM asset........ $ -- $3,500
Capital lease....................... $ 356 $ --
Conversion of promissory notes into Series C
Convertible Preferred Stock $4,475 $ --
Conversion of Series C Convertible Preferred
Stock into Common Stock shares $6,475 $ --
The accompanying notes are an integral part of this statement.
DIGITAL VIDEO SYSTEMS, INC.
Notes to Consolidated Financial Statements
Amounts in Thousands
1. The Company and its Significant Accounting Policies
The Company
Digital Video Systems, Inc. ("DVS" or "the Company")
develops and markets DVD-ROM drives, DVD loaders, video engines,
and certain computer peripherals.
A significant portion of the Company's operations are based outside
of the United States, principally in South Korea and China. 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.
Financial Results & Liquidity
The accompanying financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplate
continuation of the Company as a going concern. However, the Company
has sustained losses from operation in recent years and has an accumulated
deficit of $63,986. In addition, the company has used rather than provided,
cash in its operations. As a result of the foregoing matters, recoverability
of a major portion of the recorded assets amounts shown in the accompanying
balance sheet is dependent upon continued operations of the Company,
which in turn is dependent upon the company's ability to obtain financing
until operations produce funds sufficient to meet its financing requirements
on a continuing basis. The financial statements do not include any
adjustments relating to the recoverability and classification of the recorded
asset amounts or amounts and classification of liabilities that might be
necessary should the Company be unable to continue in existence.
Management has recently reduced operating expenses, exited and sold the
residual assets form certain operations, benefited from the current
profitability of the Company's foreign subsidiary, DVS Korea, and obtained
equity and debt financing . However, substantial amounts of funding
are needed to discharge the Company's liabilities from prior years in
which substantial operating losses were incurred, and to meet the operating
obligations of the U.S. based headquarters and other operations. A
substantial portion of the Company's assets are dedicated to the operations
of DVS Korea . The funds from that operation, to support the U.S
Headquarters and other activities, is currently limited to payments of
$100 per month under a license agreement between DVS Korea and the U.S.
based parent company which was effective April 1, 2000.
Management has received a commitment from its largest shareholder, OPLI,
to provide equity financing up to $2.2 million through the exercise of
existing common stock options and to accelerate payments due under its
$2.5 million note to the Company as the Company requires working capital
during its next business cycle. Also, management has recently executed
a letter of agreement for a common stock issue up to $25 million. However,
this financing is currently contingent upon successful completion of due
diligence procedures, legal review and the underlying securities becoming
the subject of an effective registration statement. Management believes
the Company will have sufficient working capital to provide it with the
ability to continue in existence through its next fiscal year.
Basis of Presentation
The accompanying condensed consolidated financial statements of DVS 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 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 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. Restricted cash of $2,021
represents short term investments and marketable securities for DVS Korea
for collateral related to short term borrowings and other required deposits.
As of March 31, 2000, the estimated fair value of the cash equivalents and
short-term investments consisted of cash and money market funds in the
amount of $6,280.
Revenue Recognition
Net revenues include product and component sales, development and revenue
from development and servicing activities.
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
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
$10 and $330 in fiscal 2000 and 1999, respectively.
Property and Equipment
Property and equipment are stated at cost net of accumulated depreciation
and amortization over their estimated useful lives. Depreciation and
amortization are computed using the straight-line method over the assets
estimated useful lives of three to seven 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, 1999, the Company wrote-down
the assets of its New Media division and ViComp subsidiary.
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. Transaction gains
and losses, which have not been material to date, are included in interest
and other income in the accompanying statement of operations.
Comprehensive Income
The Company adopted SFAS 130 on April 1, 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. 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, 2000, and 1999.
2. 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. At times cash balances held at financial
institutions were in excess of federally insured limits. At March 31, 2000,
the Company had an amount of $638 over the FDIC limit. 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.
Continued
3. Inventories
Inventories consisted of the following at March 31, 2000:
Raw materials ................ $ 1,554
Work-in-process .............. 2,610
Finished goods ............... 2,016
-------
Total inventories ........ 6,180
Less inventory reserves .. (1,411)
-------
Net inventories .......... $ 4,769
=======
4. Property and Equipment
Property and equipment consisted of the following at March 31, 2000:
Machinery and computer equipment ...... $ 3,370
Furniture and fixtures ................ 782
Total property and equipment ...... 4,152
Accumulated depreciation .............. (1,925)
Net property and equipment ........ $ 2,227
Depreciation expense totaled $607 and $771 in 2000 and 1999, respectively.
Property and equipment included $893 of capitalized leases, with related
accumulated depreciation of $521.
5. Intangible Assets
Intangible assets consisted of the following at March 31, 2000:
Goodwill .................................. $ 655
Intangible assets of acquired businesses .. 2,400
Purchased licenses ........................ 500
-------
Total intangible assets ............... 3,555
Less: accumulated amortization ........ (1,857)
-------
$ 1,698
=======
Intangible assets will be amortized on a straight-line basis over their
estimated useful lives of three or seven years. The intangibles-developed
technology acquired was determined during fiscal year March 31, 2000 to
provide future product developments in the coming years. Thus, the
estimated useful life of the amortization period was changed effective
July 1, 1999 from three to seven years.
6. 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 285,714 shares of the Company's
common stock. In addition, the Company, through a 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
million 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.
This transaction was accounted for as a purchase. The total purchase price
of approximately $4.7 million included cash of $1 million, the issuance of
285,714 shares of common stock and related acquisition costs of $162.
In-process research and development of $500 was expensed for the year
ended March 31, 1999.
Based upon a valuation, the purchase price was allocated at March 31,
1999 as follows:
Current assets ........................ $ 75
Equipment ............................. 1,032
Intangibles-developed technology ...... 2,400
Goodwill .............................. 655
In-process research and development ... 500
--------
$ 4,662
========
7. Prior Period Adjustments
During the fiscal year ended March 31, 1999, the Company entered into an
agreement which granted Oregon Power Lending Institution, an Oregon
corporation (OPLI) options to acquire 428,572 shares of common stock in
connection with the conversion of promissory notes into preferred stock.
The options were 100% vested upon grant. None of the options have been
exercised to date. On the March 31, 1999 financial statements, the
Company recorded $2,649 as a general and administrative expense equal to
the fair value of these options. Since the options were granted as part
of capital fundraising efforts, an adjustment of $2,649 has been made to
reverse this expense in the prior year and charge to additional paid-in
capital.
In addition, settlement costs of $450 representing commissions owed
associated with the previously mentioned capital fundraising were accrued
in the prior year and charged to a general and administrative expense. An
adjustment has been made to reverse this expense in the prior year and
charge additional paid-in capital upon issuance of these shares.
Additional
Net Paid-In
Income(Loss) Capital
------------ ----------
As originally reported ............... $ (21,931) $ 70,470
Adjustment for options issued with
preferred stock .................. 2,649 (2,649)
Adjustment for equity finder fee ..... 450 (450)
---------- ----------
Restated balance ..................... $ (18,832) $ 67,371
========== ==========
8. Note Receivable - Related Party
On September 30, 1999, the Company entered into an Asset Purchase and Option
Agreement ("the Agreement") with OPLI, a related party. Pursuant
to the Agreement, the Company sold the assets used in its Digital Video
Business, which are comprised of the Ad Insertion Business segment and the
Video on Demand Businesses. The assets included the tangible personal
property used in the Digital Video Business, including all fixed assets,
inventory and equipment used in the Digital Video Business, the Company's
right to operate the Digital Video Business, all books and records of the
Company which relate to the Digital Video Business, all of the Company's
patents and other intellectual property relating to the Digital Video
Business, and all goodwill related to the Digital Video Business (as more
fully described in the Agreement, the "Purchase Assets".) Certain
assets described in the Agreement, including outstanding accounts receivable
related the Digital Video Business, were excluded from the transaction.
The purchase price for the Purchased Assets and for the Option (described
below) was $3,450. The purchase price was paid by delivery of a promissory
note in the principal amounts of the purchase price (the Note). Principal
on the Note is payable in 36 equal monthly installments commencing on
October 31, 1999. The unpaid principal balance of the Note bears interest
at an annual rate of 7%. The Note is secured by a first priority security
interest in favor of the Company in the Purchased Assets and a first
priority pledge in favor of the Company of 862,500 shares of common stock
of the Company owned by OPLI
Pursuant to the terms of the Agreements, OPLI received the option (the Option)
to acquire 212,000 shares (the Option Shares) of the common stock of DVS
Korea Ltd., a corporation organized under the laws of the Republic of Korea
and a wholly owned subsidiary of the Company (DVS Korea). The Option Shares
constitute 20% of the issued and outstanding shares of capital stock of DVS
Korea. The option was exercisable in whole or in part, for an aggregate
exercise price of $500 payable in cash upon exercise of the Option.
The Digital Video Business assets sold to OPLI were written off the books
as of March 31, 1999 as part of a restructuring. As a result, no book
value for these assets exists as of the date of the transaction. During the
fiscal year ended March 31, 2000, OPLI purchased the Digital Video Business
from DVS for a total of $3.45 million in the form of the note receivable
discussed above.
The sale of the assets was recorded as a note receivable and a $3.45 million
recognized as a restructuring gain.
OPLI exercised its right to acquire the option shares in November, 1999.
The Company received cash in the amount of $500 and recognized a $262
loss on the sale.
9. Line of Credit
The Company has lines of credit with several Korean banks during the year
ended March 31, 2000, with borrowing limits varying from $1 million to $4.5
million. The total borrowing limit as of March 31, 2000 was $9.1 million.
Borrowings under these lines of credit incur interest at prime rates between
7.75% to 10.30%, and are guaranteed by The Korea Technology Guarantee Trust
Fund. The expiration dates for these lines of credit are September 30,
2000. Cash and cash equivalent deposits of approximately $2 million are
restricted as collateral for lines of credit.
The provisions of these lines of credit contain no covenants related to
the maintenance of working capital or other financial ratios. As of March
31, 2000, the Company owed a total of $5,559 on the lines of credit. The
Company also has $15.8 million as payment guarantees for letters of credit.
10. Notes Payable
The Company has unsecured loans from various related parties for the year
ended March 31, 2000. Interest rates for these loans vary from 8% to 10%.
As of March 31, 2000, a summary of the outstanding balances for related
party loans is as follows:
Related Party Interest Rate Due Date Balance
------------- ------------- --------- --------
EMEE 10% On demand $ 65
OPLI 10% On demand 10
OPLI 10% On demand 90
OPLI 10% On demand 14
Jiahong Zang 8% On demand 20
Edmund Sun 8% 8/31/00 530
--------
$ 729
========
11. Long-term Debt
Long-term debt for the year ended March 31, 2000 consisted of the following:
Unsecured note payable due to Hanvit Bank, with
interest rate of 6%, due on June 15, 2004 .......... $ 618
Unsecured note payable due to Hare & Co., with
interest rate of 6%, due on October 29, 2001 ....... 150
-------
Total debt ....................................... $ 768
Less current portion ............................. (--)
-------
Total long-term debt ............................. $ 768
=======
Repayments of long-term borrowings for:
Amount
------
2000 ......... $ --
2001 ......... 253
2002 ......... 206
2003 ......... 206
2004 ......... 103
------
Total .... $ 768
======
12. Commitments
Lease Commitments
The Company leases its facilities and certain office equipment under
uncancelable 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, 2000 are as follows:
2001 ......... $ 481
2002 ......... 130
2003 ......... 135
Thereafter ... 98
-------
$ 844
=======
Rent expense charged to operations was approximately $434 and $823 for the
fiscal years ended March 31, 2000 and 1999, respectively. Future lease
payments under capital leases amounting to $356 are due in the fiscal year
ending March 31, 2000.
13. Minority Interest
During the fiscal year ended March 31, 2000, OPLI, a related party to the
Company, entered into an agreement with the Company to purchase the
Company's DV business and an option to purchase 20% of DVS Korea stock for
$3.45 million, and an additional $0.5 million to exercise the option when
certain conditions are met.
OPLI exercised the option to purchase 20% of DVS-Korea effective November
23, 1999. DVS Korea's net book value of the 20% interest at that time was
$762. The difference between the 20% interest in the net book value and
the option price of $262 has been recognized as a loss on the consolidated
financial statements for fiscal year ended March 31, 2000.
14. Income Taxes
The components of income (loss) before provision for income taxes were as
follows:
Year Ended March 31,
2000 1999
(as restated)
----------- -------------
Domestic ....... $ (786) $ (12,635)
Foreign ........ 1,647 (6,197)
----------- -------------
Total ........ $ 861 $ (18,832)
=========== =============
The provision for income taxes in 2000 was comprised of foreign taxes
amounting to $13.
The differences between the expense (benefit) for income taxes and the
amount computed at the U.S. statutory income tax rate are as follows:
Year Ended March 31,
2000 1999
-------- ----------
Tax at U.S. statutory rate .................... $ 306 $ (7,460)
Utilization prior year net operating losses ... (293) --
Losses for which no tax was recognized ........ -- 7,448
Other, net .................................... -- 12
-------- ----------
Total ..................................... $ 13 $ --
======== ==========
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, 2000 are as
follows :
Deferred tax assets:
Net operating loss carryforwards .................. $ 14,975
Reserves and other accrued expenses
not yet deductible for taxes .................. 279
Depreciation timing differences ................... (248)
---------
Total deferred assets ......................... 15,006
---------
Valuation allowance for deferred tax assets ... (15,006)
---------
Net deferred tax assets ....................... $ --
=========
The increase in valuation allowance for deferred taxes for the year ended
March 31, 2000 and 1999 was $1,187 and $539, respectively.
The Company has federal net operating loss carryforwards as of March 31,
2000 of approximately $42 million expiring at various dates through 2019
and $8 million state net operating loss carryforwards expiring at various
dates through 2004. 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.
Under Korean tax regulations the Company's Korean subsidiary is allowed a
foreign investment exemption, currently 80% of taxable income, for 7 years
from the taxable year after the year in which the Korean subsidiary first
recognize taxable income, which was fiscal 2000. The Korean subsidiary is
then allowed an additional 3 year exemption at 50% of its foreign
investment ratio.
15. Net Income (Loss) Per Share
The computation of net income (loss) per share was as follows:
Income (loss) Shares Per Share
(Numerator) (Denominator) Amount
---------- ------------ --------
Twelve months ended March 31, 2000:
Basic income ....................... $861 4,363,152 $ .20
Effect of dilutive stock
options and warrants ............. -- 1,092,240 (.04)
---------- ------------ --------
Diluted loss per share ............. $861 $5,455,392 $ .16
========== ============ ========
Twelve months ended March 31, 1999:
Basic and diluted loss ............. $(18,831) $2,449,142 $(7.69)
Effect of dilutive stock
options and warrants ............. -- -- --
---------- ------------ --------
Basic and diluted net loss
per share ......................... $(18,831) $2,449,142 $(7.69)
========== ============ ========
At March 31, 2000 and 1999 1,143,645 and 1,143,645 shares of common stock in
escrow were excluded from the calculation of basic and diluted earnings per
share.
At March 31, 2000 and 1999, respectively, 18,450,000 and 18,450,000 of
Class A and Class B warrants were excluded from the calculation of
diluted loss per share because their effect is anti-dilutive. At March
31, 2000 and 1999, respectively, 65,928 and 207,454 options were excluded
from the calculation of diluted loss per share because their effect was
anti-dilutive.
16. Stockholder's Equity
Stock Split
On August 13, 1999, the Company declared a 1 for 7 reverse stock split
of the Company's common stock. All share and per share data in the
accompanying consolidated financial statements have been restated to
give effect to the stock split.
Preferred Stock
In March 1999, the Company issued 6,475 shares of Series C Convertible
Preferred Stock to OPLI in exchange for the conversion of $4,475 of
Convertible Promissory Notes and $2,000 in cash. In connection with the
transaction OPLI was also granted two year options to acquire 428,571
shares of common stock at $5.25 per share. The transaction was
approved by a majority vote of the common shareholders.
Common Stock
In April 1999, OPLI converted the 6,475 shares of Series C Convertible
Preferred Stock into 1,968,083 shares of common stock. The options to
acquire 428,571 shares at $5.25 per share are outstanding at March 31,
2000.
Escrowed Securities
As of March 31, 2000, 1,143,645 shares of the Company's common stock,
17,350 outstanding options to purchase common stock and 220,270 options
available for future grant were subject to escrow.
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, 1,116,135 of their
shares and options to purchase 264,671 shares of common stock,
respectively, into escrow, and a holder of an option to purchase 28,571
shares of Common Stock outside the Company's 1993 stock option plan
placed all of such options into escrow. Additionally, 33,479 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 year ended March 31, 2001
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.
16. Stockholder's Equity
Escrowed Securities
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.
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 537,505 shares of common stock for issuance under the 1993
Stock Option Plan (the "1993 Plan"), 214,286 shares of common
stock for issuance under the 1996 Stock Option Plan (the "1996
Plan"), and 571,429 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.
Had compensation expense been determined for stock options granted during
the years ended March 31, 2000 and 1999, based on the fair value at grant
dates consistent with SFAS No. 123, the Company's condensed Pro Forma
Statement of Operations for those periods would have been as follows:
Year Ended March 31,
2000 1999
Net income (loss): --------- ----------
As reported .................... $ 861 $(18,831)
========= ==========
Pro forma ...................... $ 429 $(19,964)
========= ==========
Basic income (loss) per share:
As reported .................... $ .20 $(7.69)
========= ==========
Pro forma ...................... $ .10 $(8.15)
========= ==========
Diluted income (loss) per share:
As reported .................... $ .16 $(7.69)
========= ==========
Pro forma ...................... $ .08 $(8.15)
========= ==========
Stock Option Plans
The weighted average estimated fair values of employee stock options
granted during fiscal year 2000 and 1999 were $2.77 and $8.82 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 2000 and 1999:
Year Ended March 31,
2000 1999
------------- -------
Risk-free interest rate ... 5.06% - 6.62% 5.90%
Dividend yield ............ 0.00% 0.00%
Volatility ................ 96% - 114% 180.00%
Average life .............. 4.50 1.27
Option activity under the 1993 Plan, 1996 Plan and 1998 Plan was as follows:
Outstanding Options
--------------------------
Number of Weighted Avg
Shares Exercise Price
---------- --------------
Balance at March 31, 1998 ... 484,017 $17.42
Options authorized ........ -- --
Options granted ........... 463,557 7.42
Options exercised ......... (21,607) 1.12
Options canceled .......... (408,564) 17.43
---------- --------------
Balance at March 31, 1999 ... 517,403 8.20
Options granted ........... 893,243 3.96
Options exercised ......... (33,570) 5.46
Options canceled .......... (228,928) 11.32
---------- --------------
Balance at March 31, 2000 ... 1,094,148 4.21
The following table summarizes information regarding stock options
outstanding at March 31, 2000:
Weighted
Average
Remaining Weighted Number Weighted
Range of Outstanding at Contractual Average Exercisable at Average
Exercise Prices March 31, 2000 Life (Years) Exercise Price March 31, 2000 Exercise
Price
--------------- -------------- ------------ -------------- -------------- ----------
----
0.973 - 4.816 884,265 9.39 3.82 126,940 3.53
5.467 - 7.658 26,930 8.81 5.84 8,186 6.14
7.875 - 11.158 176,024 8.44 8.39 118,290 8.63
15.092 - 50.750 6,928 7.73 17.41 6,928 17.41
-------------- --------------
1,094,148 260,344
============== ==============
Other Options and Warrants
In connection with the sale of preferred stock to OPLI, the Company
granted 24-month options to purchase 428,571 shares of Common stock at
an exercise price of $5.25. None of these options have been exercised to
date.
The Board authorized a grant of options to Dr. Sun to purchase 695,752
shares subject to shareholders'
approval and certain other conditions. These options have an exercise
price of $ 3.85. The Board of Directors has authorized a contingent grant
of options for Mali Kuo to purchase 250,000 shares of the Company's common
stock, subject to attainment of certain financing targets for the Company.
These options have an aggregate exercise price of $6.37 and expire within
a certain time. None of these options have been exercised to date. 42,143
shares have been earned and issued through March 31, 2000.
Employee Stock Purchase Plan
In September 1997, the shareholders approved 71,429 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, 2000, no
shares have been distributed to employees under this plan.
17. 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.
18. Segment Information
The Company operates in one business segment, which includes developing,
producing and marketing digital video systems and sub-assemblers and
computer peripherals.
Year Ended March 31,
2000 1999
Product Line --------- ---------
Net sales
DVD products ... $56,000 $12,300
CD product ..... 1,900 1,300
All other ...... 2,392 3,511
--------- ---------
$60,292 $17,111
========= =========
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.
Geographic information for revenues and long-lived assets for the year ended
March 31, 2000 and 1999 are as follows:
Year Ended March 31,
2000 1999
Product Line ---------- ----------
Net sales
Domestic ......... $ 5,542 $ 7,173
Foreign .......... 54,750 9,938
---------- ----------
$ 60,292 $ 17,111
========== ==========
In fiscal year ended March 31, 2000 foreign sales to China were
approximately $44.5 million.
Identifiable assets
Domestic ......... $ 5,277 $ 5,802
Foreign .......... 17,698 10,291
---------- ----------
$ 22,975 $ 16,093
========== ==========
During fiscal year March 31, 2000, the Company had one major customer, who
individually accounted for over 10% of sales of $17.9 million. During fiscal
year 1999, no single customer had 10% or more of sales.
19. 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. Management is
in the process of settlement with Ambient Capital Group and $450 has been
provided as a liability related to this lawsuit.
The Company is also in litigation with its former corporate council regarding
unpaid fees. The Company has filed a cross-complaint against the firm.
The Company is in the process of settlement related to this litigation
and has accrued $150 as a liability related to this lawsuit.
The Company has been named as a defendant in several other lawsuits in
the normal course of its business. In the opinion of management, after
consulting with legal counsel, the liabilities, if any, resulting from
these matters will not have a material effect on the consolidated
financial statements of the Company.
Item 8. Changes in and Disagreements with Accountants on Accounting
and
Financial Disclosure
Not Applicable.
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
--------------- ----- ----------------------- -------------
Edmund Y. Sun 51 Co-Chairman and Chief 1992
Technology Officer
Mali Kuo 47 Co-chairman and Chief 1999
Executive Officer
Ande Abbott 57 Director 1999
Michael Chen 48 Director 1998
Young Sam Cho 46 Director 1998
Philip B. Smith 64 Director 1995
Douglas Watson 48 Director 1998
Jiahong Zong 56 Director 1999
Robert Baker 69 Corporate Controller --
Dr. Edmund Y. Sun founded the Company in 1992 and has served as its Chairman
of the Board since that time. Dr. Sun has also served as Chief Technical
Officer of the Company since June 1998. From October 1992 to June 1998,
Dr. Sun served as the Company's Chief Executive Officer and from October
1992 to May 1996, he served as the Company's President. 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
previously a founder, Vice President and Chief Technical Officer of Weitek
Corporation, a public company involved in high-speed three-dimensional
shaded graphics systems and the use of high speed chips in various computer
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 California Institute
of Technology, and a B.S. in Electrophysics from 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. 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
representative in the United States for a major PCB manufacturer in Taiwan.
From 1993 to the present, Ms. Kuo has arranged numerous 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 in the San Francisco Bay
Area. Ms. Kuo received her college education from Shih Chien College in
Taiwan.
Ande Abbott has served as a Director since June 1999. Mr. Abbott has been a
respected member of organized labor union 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 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. Mr. Abbot 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.
Michael Chen has served as a Director and a member of the Executive Committee
since November 1998. Since 1992, Mr. Chen has served as the President of
EMEE, Inc., a developer of intelligent electronic devices for automotive
applications. Between 1987 and 1991, he worked at Cadence Design Systems,
Inc., a world leader of ICCAD systems. Between 1981 and 1986, he worked at
Xerox Palo Alto Research Center (PARC). Mr. Chen holds a B.S. degree in
Physics from National Taiwan University, a M.S. degree and Ph.D. candidacy
in Electrical Engineering from Stanford University.
Young Sam Cho has served as a Director since September 1998. Mr. Cho has
also 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 B.A. degree in Business Administration
from Seoul National University.
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 its 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, Mr. Smith was at Citibank for 15 years, where he
founded Citicorp Venture Capital and served as its President and Chief
Executive Officer. Since 1988, Mr. Smith has also been the managing general
partner of The 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. Mr. Smith holds a B.S.E. from
Princeton University and an M.B.A. from Harvard University.
Douglas 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 (AMC), a ship repair and
dismantling firm which he founded in 1992, currently operating in San
Francisco and Long Beach. 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. In addition to his marine business experience, Mr. Watson
has an extensive background in commercial and industrial real estate.
Jia-Hong Zang is a director nominee. Mr. Zang worked for the
Metallurgical Research Center in Beijing for about 18 years before he was
assigned a management position at China Metallurgical Import $amp; Export
Corporation (CMIEC), a state-owned business with more than thirty branch
offices in China and six subsidiaries worldwide, for international trading
of minerals, metals and related equipment, machinery and other products.
In 1993, after working at CMIEC for about eight years, he was transferred
to the United States as Vice President of United Hercules Inc. (UHI) in
New York, a subsidiary of CMIEC. Since 1995, he has also served as President
of Universal Metal Resources, Inc., an affiliate of UHI. Mr. Zang was
graduated from the Department of Steel Engineering of Shijinshan
Metallurgical Institute in Beijing, China.
Robert Baker joined the Company in May 1997 as the Corporate Controller.
He has handled a number of special assignments and assisted in the
downsizing of U.S. operations. From October 1994 to March 1997, Mr. Baker
was the Chief Financial Officer of Shape, Inc., a manufacturer of home video
entertainment and computer related products. From 1987 to 1994, Mr. Baker
was President and Chief Executive Officer of Technology Service Group,
Inc., a developer and manufacturer of payphones for the Bell operating
companies and large independent telephone companies.
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. There are no family relationships among the officers
or directors of the Company.
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.
Dr. Sun and Ms. Kuo, Co-Chairmen of the Board, are each ex-officio
members of each committee of the Board of Directors, except for the
compensation, audit and option committees. In addition to the two
Co-Chairmen, the composition of the committees of the Board is as
described hereafter. The Company's compensation committee was formed to
make recommendations to the Board of Directors concerning salaries and
incentive compensation for officers and employees of the Company. The
compensation committee currently consists of Messrs. Watson, Smith and
Abbott. The audit committee reviews the scope of the audit and other
accounting related matters. The Company's audit committee currently
consists of Messrs. Smith and Watson. The Company's risk management
committee was formed to establish systems and policies to supervise and
manage the Company's risk of doing business outside the United States.
The risk management committee currently consists of Messrs. Smith and Chen.
The nominating committee was formed to make recommendations to the Board
of Directors as to nominees to serve on the Board of Directors. The
nominating committee currently consists of Messrs. Smith and Watson. The
Board of Directors also has an executive committee, which committee is
authorized to exercise all the powers and authority of the Board of
Directors in the management of the business and affairs of the Company, to
the fullest extent permitted by law. The executive committee currently
consists of Messrs. Watson and Chen. The Company also has a committee of
"outside directors" within the meaning of Section 162(m) of the
Internal
Revenue Code of 1986, as amended, comprised of Messrs. Smith and Abbott,
to make grants of options to executive officers under the Company's stock
option plans. The Company has no other committees of its Board of Directors.
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, 2000, 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, Ms. Kuo, Messrs Abbott, Chen, Cho, Smith, Watson,
and Zang filed a late Form 3 to report the receipt of stock options.
Item 10. Executive Compensation
Executive Compensation
The following table sets forth the compensation for the fiscal
year ended March 31, 2000, 1999 and 1998 paid by the Company to its
Chief Executive Officer and the other executive officers of the Company
who earned in excess of $100,000 (collectively, the "Named Executive
Officers") based on salary and bonus for the fiscal year ended March 31,
2000:
Annual Long-Term
Compensation Compensation
(1) Awards
------------------------------------ ------------
Fiscal Options
Name and Principal Year Ended Salary Other Annual Granted
Position March 31, (US$) Compensation (shares)
------------------- ---------- -------- ------------ ------------
Mali Kuo (2) 2000 113,653 100,000
Co-Chairman and Chief 1999 -- 57,142
Executive Officer
Edmund Sun 2000 -- (3)
Co-Chairman and Chief 1999 46,045 57,142
Technical Officer 1998 165,157
Robert Baker (4) 2000 87,114 63,985
Corporate Controller 1999 100,000 7,142
Robert Werbicki (5) 2000 107,949 --
former Executive Vice 1999 207,137 10,714
President 1998 144,806 20,686
(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. Includes options to purchase 71,428
shares granted to Co-Chairman and 28,572 shares for employment as
the CEO.
(3) Dr. Sun 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
1999. Options grants in fiscal 2000 are subject to shareholders' approval.
(4) Mr. Baker has served as the corporate controller of the Company and
other positions since May 1997.
(5) Mr. Werbicki served as the Executive Vice President of Computer
Products since August 1997. He resigned on January 12, 2000.
DIRECTOR COMPENSATION
Non-employee directors in general 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.
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
former 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, 2000, 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 was
paid a salary of $160,000 during the first year of the agreement, and
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 in fiscal 2000 has been voluntarily
deferred.
On February 1999, the Company entered into an employment agreement
with Ms. Mali Kuo, pursuant to which Ms. Kuo was granted options to
purchase 57,142 shares of Common Stock. Although such options may vest
at a rate of 25% per quarter, she may not exercise such options until
February 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.
On September 20, 1999, the Company entered into a two-year employment
agreement with Robert Baker, pursuant to which Mr. Baker became the
Company's acting Chief Financial Officer with an annual salary of at least
$75,000, as well as options to purchase 19,700 shares of Common Stock
during the period of his employment at an exercise price of $4.90 per
share. The options vest at a monthly rate of 4.167% during the period of
Mr. Baker's employment with the Company. Mr. Baker may exercise his options
to purchase any and all shares vested upon termination of his employment
up to twelve months after Mr. Baker's date of termination. In the event
Mr. Baker is terminated by the Company for any reason other than good
cause, Mr. Baker shall be entitled to severance pay equal to three months
of his then current salary.
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 options to purchase
14,285 shares of Common Stock at $32.83 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 options to purchase 10,714 shares at $15.092 per share. Mr.
Werbicki received an annual salary of $150,000. Mr. Werbicki was 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 was
calculated
based on 5% of the Gross Margin, but no less than $75,000 per annum. The
second year's bonus was 5% of the Gross Margin with no minimum bonus and
the third year was between 2% to 5% of the Gross Margin which would 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 was renewable at the end of the initial three-year term by
mutual agreement of the parties. Mr. Werbicki became a consultant for
the Company from January 12, 2000.
STOCK OPTION PLANS
1993 Stock Option Plan
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 537,505 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, 2000, options to purchase
0 shares of Common Stock were granted under the 1993 Stock Option
Plan.
1996 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 214,286 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
71,429 shares of Common Stock may be granted to any one employee in any
twelve month period.
During the fiscal year ended March 31, 2000, options to purchase
189,581 shares of Common Stock were granted under the 1996 Stock Option
Plan.
1998 Stock Option Plan
In May 1998, the Board of Directors adopted the Company's 1998 Stock Options
Plan (the "1998 Plan"), which was subsequently approved by the
stockholders
in November 1999. The 1998 Stock Options Plan provides for the grant of
options to officers, directors, other employees and consultants of the
Company to purchase up to an aggregate of 571,429 shares of Common Stock.
The 1998 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 Plan. Options granted under the 1998 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 Plan or any other option plan adopted by the Company. Nonqualified
options may be granted under the 1998 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 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 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 Plan is effective for ten years, unless sooner
terminated or suspended. The 1998 Plan provides that options covering no more
than 107,142 shares of Common Stock may be granted to any one employee in any
twelve month period.
During the fiscal year ended March 31, 2000, options to purchase
677,628 shares (pre-split) of Common Stock were granted under the 1998
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.
Amount and Nature of Percent
Name and Address (1) Beneficial Ownership (2) Ownership
-------------------- ------------------------ ---------
Edmund Sun 1,203,815 (3) 20.5%
Mali Kuo 67,559 (4) 1.2
Robert Baker 15,570 0.3
Ande Abbott 2,232 --
Michael Chen 7,416 0.1
Young Sam Cho 6,672 (5) 0.1
Philip B. Smith 27,998 0.5
Douglas Watson 7,738 0.1
Jia Hong Zang 1,488 --
Hyundai Electronics 842,428 (6) 14.3
Industries Co., Ltd
Oregon Power Lending 1,975,076 (7) 33.6
Institution
All executive officers 22.6
and directors as a group
(1) Except as otherwise indicated, the address of each principal
stockholder is c/o the Company at 278 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 29,022 shares owned by Dr. Sun's sons and 4,509 shares owned by
Dr. Sun's sister and her family. Also includes options to purchase
32,440 shares of Common Stock. Excludes options to purchase
211,916 shares of Common Stock which are not exercisable within 60
days.
(4) Includes options to purchase 67,559 shares of Common Stock.
Excludes options to purchase 89,583 shares of Common Stock which
are not exercisable within 60 days
(5) 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 6,672
shares of Common Stock. Excludes options to purchase 22,185 shares
of Common Stock which are not exercisable within 60 days.
(6) Mong Hun Chung is the Chairman and largest individual shareholder of
Hyundai and may be considered a beneficial owner of such shares.
(7) Includes options to purchase 428,571 shares of Common Stock. These
shares are fully vested.
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 1,155,189 shares (the "Escrow Shares") and options
to purchase
283,665 shares (the "Escrow Options") and the Company has placed
through March 31, 1997 options issuable under the 1993 Stock Option Plan
to purchase 4,003 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 and 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 721,429 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, 2000;
(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 721,429 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, 2000;
(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 70,179 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 40,217 shares of the Company's
Common Stock for his ViComp capital stock in the ViComp Acquisition
(57.3% of the total 70,179 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 20,109 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 was 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 190,850
Shares of Series B Preferred shares into 190,850 shares of Common Stock.
The Company borrowed $1,000,000 from Edmund and Jane Sun in June
1998. The loan from Dr. and Mrs. Sun was converted into 190,211 shares
of the Company's common stock in August 1998. Dr. and Mrs. Sun
received registration rights for these shares.
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 556,714 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 285,714
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 and 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
3,468,085 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 303.9542 shares of DVS common stock (pre-
split). 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 3.0 million shares (pre-split) of DVS common
stock at $5.25 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 was conducted as a private offering pursuant to Section
4(2) of the Securities Act of 1933, as amended.
In March 1999, 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 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 428,571 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
607,903 shares of DVS common stock, of which 458,967 shares
were transferred for no cash considerations to certain OPLI related parties
and 148,936 shares were retained by OPLI. All of the Company's
outstanding Convertible Promissory Notes to OPLI in the aggregate amount
of $4,475,000 were also converted into shares of Series C
Preferred. The Series C Preferred, together with the interest
were later converted into 1,397,569 shares
of DVS common stock. A total of 3,601,000 shares of DVS
common stock were outstanding immediately prior to the
foregoing conversions, and a total of 5,606,472 shares
were outstanding immediately thereafter. Including its option to
purchase 285,714 shares of common stock, OPLI would hold the
beneficial ownership of 1,832,219 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 Ms. 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
(a) Exhibits
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 and 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 and 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 and 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 and 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 and 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.
10.61 Agreement dated as of July 28, 1999 by and between Digital Video
Systems, Inc. and Shanghai Industrial Investment (Group) Co., Ltd.
10.62 Purchase and Option Agreement dated as of September 30, 1999 by and
between Digital Video Systems, Inc. and Oregon Power Lending Institution.
(16)
21 List of Subsidiaries
23.1 Consents of Burr, Pilger & Mayer, Inc., Independent Auditors and
C. G. Uhlenberg & Co. LLP, Independent Auditors.
27 Financial Data Schedule
(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.
(16) Incorporated by reference to the Company's Current Report on Form
8-K filed with the Commission on September 30, 1999.
(b) Current Report on Form 8-K
The Company filed a Current Report on Form 8-K on March 7, 2000 to report
the
change in its independent auditors from C. G. Uhlenberg & Co. LLP to
Burr,
Pilger & Mayer. On March 21, 2000, the Company filed an amended Current
Report on Form 8-K/A to file the letter supplied by C. G. Uhlenberg & Co.
LLP to the Securities and Exchange Commission.
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.
July 31, 2000 By /s/ Mali Kuo
----------------------------------
Mali Kuo
Chief Executive Officer
and Co-Chairman
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Mali Kuo and Edmund Y. Sun, and each
of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and re-substitution, for him and in his name, place,
and stead, in any and all capacities, to sign any and all amendments to
this Report, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of
them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as
fully to all intents and purposes as he might or could do in person,
hereby ratifying and confirming that all said attorneys-in-fact and agents,
or any of them or their or his substitute or substitutes, may lawfully
do or cause to be done by virtue hereof.
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 Chief July 31, 2000
--------------------------- Technical Officer
Edmund Y. Sun
/s/ Ande Abbott Director July 31, 2000
---------------------------
Ande Abbott
/s/ Michael Chen Director July 31, 2000
---------------------------
Michael Chen
/s/ Young Sam Cho Director July 31, 2000
---------------------------
Young Sam Cho
/s/ Philip B. Smith Director July 31, 2000
---------------------------
Philip B. Smith
/s/ Doughas Watson Director July 31, 2000
---------------------------
Douglas Watson
/s/ Jiahong Zang Director July 31, 2000
---------------------------
Jiahong Zang
