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Previous: I2 TECHNOLOGIES INC, S-8, EX-23.1, 2000-08-15 |
Next: DIGITAL VIDEO SYSTEMS INC, 10QSB, EX-27.1, 2000-08-15 |
UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________to _________
Commission file number 0-28472
DIGITAL VIDEO SYSTEMS, INC.
(Exact name of Registrant as specified in its charter)
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278 Hope Street
Mountain View, CA 94041
(Address of principal executive offices, including zip code)
(650) 564-9699
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ]
The number of shares of Common Stock outstanding as of August 4, 2000, was 5,705,032.
Digital Video Systems, Inc.
FORM 10-Q Index
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheet -
June 30, 2000
Condensed Consolidated Statements of Operations -
Three months ended June 30, 2000 and 1999
Condensed Consolidated Statements of Cash Flows -
Three months ended June 30, 2000 and 1999
Notes to Condensed Consolidated Financial Statements -
June 30, 2000
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of the Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
Signatures
Digital Video Systems, Inc.
Condensed Consolidated Balance Sheet
(in thousands)
(Unaudited)
June 30, 2000
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Assets:
Current assets:
Cash and cash equivalents......................... $3,271
Restricted cash................................... 1,331
Accounts receivable, net.......................... 2,464
Inventories....................................... 3,480
Prepaid expenses and other current assets......... 3,525
Notes receivable - related party.................. 959
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Total current assets........................... 15,030
Property and equipment, net.......................... 2,242
Investment in Shanghai............................... 89
Notes receivable - related party..................... 1,623
Intangible assets.................................... 1,586
Other assets......................................... 2,666
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Total assets................................... $23,236
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Liabilities and Stockholders' Equity
Current liabilities:
Line of credit.................................... $5,731
Accounts payable.................................. 4,407
Other payables.................................... 1,193
Notes payable - related party..................... 1,100
Accrued liabilities............................... 2,444
Capital lease obligations.........................
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Total current liabilities...................... 14,875
Long Term Liabilities:
Notes payables - Long Term........................ 838
Minority interest................................. 1,117
Other long term liabilities....................... 320
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Total liabilities 17,150
Stockholders' equity:
Common stock......................................... 1
Additional paid-in capital........................... 68,088
Accumulated deficit.................................. (64,353)
Cumulative translation adjustments................... 2,627
Deferred compensation................................ (277)
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Total stockholders' equity 6,086
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Total liabilities and stockholders' equity $23,236
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See accompanying notes to condensed consolidated financial statements.
Digital Video Systems, Inc.
Condensed Consolidated Statements of Operations
(in thousands, except per share amounts)
(Unaudited)
Three Months Ended
June 30,
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2000 1999
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Net Revenue.................................. $22,755 $6,355
Cost of revenue.............................. 20,180 5,994
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Gross margin................................. 2,575 322
Operating expenses:
Research and development................... 724 658
Sales and marketing........................ 343 519
General and administrative................. 955 527
Acquired in-process research
and development........................... -- 63
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Total operating expenses................ 2,022 1,767
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Gain/(Loss) from operations............. 553 (1,445)
Interest expense............................. (202) (74)
Other income (expense), net.................. 200 139
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Income/(loss) before minority interest
and income taxes........................... 551 (1,380)
Income tax provision......................... (11) 0
Minority interest............................ (54) 0
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Net income/(loss)...................... $486 $(1,380)
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Basic net income/(loss) per share............ $0.11 $(0.31)
Diluted net income/(loss) per share.......... $0.09 $(0.31)
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See accompanying notes to condensed consolidated financial statements.
Digital Video Systems, Inc.
Condensed Consolidated Statements Of Cash Flows
(in thousands)
(Unaudited)
Three Months Ended
June 30,
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2000 1999
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Cash flows from operating activities:
Net income (loss)................................ $486 $(1,380)
Adjustments to reconcile net loss to net
cash used in operating activities:
Minority Interest............................ 31 --
Depreciation and amortization................ 454 324
Acquired in-process research and development. -- 63
Stock options compensation expense........... 28 --
Changes in operating assets and liabilities:
(Increase) decrease in restricted cash....... _____ --
Accounts receivable.......................... (589) (1,314)
Inventories.................................. 1,289 3,768
Prepaid expenses and other current assets.... (1,431) 261
Other assets................................. (1,303) --
Accounts payable............................. (1,111) (970)
Accrued liabilities.......................... (519) (1,564)
Other payable................................ 441 --
Other long-term liabilities.................. 320 --
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Net cash provided by (used in) operating
activities................................... (1,904) (812)
Investing activities:
Acquisition of property and equipment............ (357) (116)
Other investing activities....................... -- 51
Investment in Shanghai joint venture............. (2) --
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Net cash provided by (used in) investing
activities................................... (359) (65)
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Financing activities:
Proceeds from short-term loan ................... -- 15
Proceed from issuance of notes payable........... 441 --
Proceeds from line of credit borrowings.......... 172 --
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Net cash provided by (used in) financing
activities................................... 613 15
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Net (decrease) in cash and cash equivalents...... (1,650) (862)
Effect of exchange rate changes.................. (28) --
Cash and cash equivalents at beginning of period. 6,280 1,276
Cash and cash equivalents at end of period....... $4,602 $414
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Supplemental disclosure of non-cash transaction:
Interest paid................................ 202 74
See accompanying notes to condensed consolidated financial statements.
Digital Video Systems, Inc.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
The accompanying unaudited condensed consolidated financial statements of DVS include the accounts of the Company and its subsidiaries. The statements have been prepared by the Company in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited financial statements included in the Company's Annual Report and Form 10-KSB for the fiscal year ended March 31, 2000.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited financial statements and include all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the interim periods presented. Operating results for the three-month period ended June 30, 2000 are not necessarily indicative of the results that may be expected for any other interim period or the full fiscal year ending March 31, 2001. All significant inter-company balances and transactions have been eliminated.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Significant estimates include impairment write-downs of fixed assets and intangibles and the level of accounts receivable and inventory reserves. Actual results could differ from those estimates.
Basic net loss per share is computed using the weighted average number of common shares outstanding during the periods. Diluted net loss per share is computed using the weighted average number of common and potentially dilutive common shares during the periods, except those that are anti-dilutive. Basic and diluted net loss per share is calculated as follows (in thousands):
Three Months Ended
June 30,
2000 1999
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Net income (loss)........................... $486 $(1,380)
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Weighted average common shares
outstanding............................... 4,523 4,455
Dilutive stock options and warrants......... 1,067 0
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Total fully diluted shares.................. 5,590 0
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Basic net income/(loss) per share........... $0.11 $(0.31)
Diluted net income/(loss) per share......... $0.09 $(0.31)
At June 30, 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 June 30, 2000 and 1999, respectively, 18,450,000 and 18,450,000 of Class A and B warrants were excluded from the calculation of diluted earnings per share because their effect is anti-dilutive. At June 30, 2000 and 1999 respectively 65,928 and 207,454 options were excluded from the calculation of diluted earnings per share because their effect was anti-dilutive.
The Company has adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income," as of the first quarter of fiscal year ended March 31, 2000 ("Fiscal 2000"). SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components, however is has no impact on the Company's net loss or stockholders' equity. The components of comprehensive income, net of tax, are as follows (in thousands):
Three Months Ended
June 30,
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2000 1999
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Net income (loss).......................... $486 $(1,380)
Cumulative foreign currency
translation adjustments.................. 825 (36)
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Comprehensive income (loss).............. 1,311 $(1,416)
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Accumulated other comprehensive loss presented on the accompanying consolidated condensed balance sheets consists of the cumulative foreign currency translation adjustments.
Inventories consisted of the following:
June 30,
2000
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Inventories:
Raw materials $ 983
Work in process 1,996
Finished goods 814
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Total inventories 3,793
Less inventory reserves (313)
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Net inventories $3,480
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Note 5
A foreign investment income tax credit is available to offset
income taxes on the company's subsidiary and net operating
loss carryforwards are available to offset current US taxable
income.
This document contains forward-looking statements within the meaning of the "safe-harbor" provisions of the Private Securities Litigation Act of 1995 that involve risks and uncertainties, including, without limitation, statements with respect to the Company's strategy, proposed sales of the Company's products, markets, and the development of the Company's products. The Company's actual results may differ materially from those described in these forward-looking statements due to a number of factors, including, but not limited to, the uncertainty of market acceptance of DVD-ROM drives, DVD loaders, DVD players, Video Engines and other products, planned growth of the Company's operations, dependence on a limited number of suppliers of certain components used in the Company's operations, risks associated with rapid technological change and obsolescence and product development, conducting business in foreign countries, such as China and South Korea, the competitive market for the Company's products, and other risk factors described in the Form 10-KSB, or in other documents the Company files from time to time with the Securities and Exchange Commission. 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 affect operating results. 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 and the condensed consolidated financial statements and notes thereto included herein for the three months ended June 30, 2000.
In the quarter ended June 30, 2000, the Company has successfully continued to execute its strategy to focus on products based on its DVD intellectual property portfolio, improving the performance of its main product lines with reduced overhead. These efforts have resulted in substantial improvements compared with the same period a year ago, as highlighted in the table below:
Three Months Ended
June 30,
(in thousands) 2000 1999
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Revenues ............ $22,755 $6,355
Gross Profit ........ 2,575 321
Net Profit (loss) ... 486 (1,380)
In dollar terms, revenues for the quarter ended June 30, 2000 were more than 3.5 times those for the same quarter one year ago; while gross profit was about 8 times that of the last year. The net profit of $486 thousand also compared favorably with the $1.38 million losses in the same quarter of the previous year. More detailed discussion and comparison of the results is presented below.
The following table sets forth for the periods indicated certain income and expense items expressed as a percentage of the Company's total revenues for the three months ended June 30, 2000 compared to the three months ended June 30, 1999. See Consolidated Statements of Operations for more details.
Percent of Revenue
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Three Months Ended
June 30,
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2000 1999
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Revenues 100.0% 100.0%
Gross margin 11.3% 5.1%
Research and development 3.2% 10.4%
Sales and marketing 1.5% 8.2%
General and administration 4.2% 8.3%
Acquired in process R & D 0.0% 1.0%
Operating income (loss) 2.4% -22.7%
Net income (loss) 2.1% -21.7%
In terms of percentage of revenue, gross margin was more than doubled, while the percentages of the expenses in different categories were down from the level of the previous year to about 1/3, 1/5, 1/2, or less.
Three months ended
June 30,
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2000 1999 Change
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Consolidated Revenue $22,755 $6,355 258%
Total revenues increased by $16.4 million, or 258%, for the three months ended June 30, 2000, compared with the three months ended June 30, 1999. International revenues represented approximately 94% of the current quarter (primarily sales of DVD loaders) as compared to essentially 80% in the like quarter a year ago. About 3.7% of the revenues were generated from the sales of equipment and parts to selected customers. Such sales may not occur on a regular basis.
Three months ended
June 30,
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2000 1999 Change
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Gross margin $2,575 $321 700%
as a percentage of revenue 11.3% 5.1%
Gross margin increased by $2.25 million, or 700%, from $321 thousand for the same quarter of 1999. The gross margin as a percentage of total revenue also increased significantly, due to the increasing procurement volumes, coupled with effective value engineering over the past year, and sales of production and testing equipment.
In order to remain competitive on the market, we expect the margin to be maintained at about 10% (+/- 1 or 2%) for the remainder of the fiscal year. Engineering for cost improvements has been on going, to offset the impact of lowering prices.
Three months ended
June 30,
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2000 1999 Change
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Research and Development $724 $658 10%
as a percentage of revenue 3.2% 10.4%
The R&D expenses consist primarily of personnel and equipment prototype costs required for the Company's product development efforts. In terms of percentage of revenue, research and development expenses for the quarter ended June 30, 2000 were down by more than 2/3 from the previous year, although in dollar terms they were up by $66 thousand. This is in line with the Company's plan that, in dollar amounts, the research and development expenses will increase as the business grows, to expand its efforts on advancing technologies and developing new and improved products.
Three months ended
June 30,
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2000 1999 Change
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Sales and Marketing $343 $519 -34%
as a percentage of revenue 1.5% 8.2%
Sales and marketing expenses consist primarily of personnel and consulting costs involved in the selling process and in the marketing of the Company's products, sales commissions, and expenses of promotion activities. Sales and marketing expenses decreased by 34% for the three month period ending June 30, 2000, compared with the same period in the previous fiscal year. In terms of percentage of revenue, these expenses were also substantially reduced. For the near term the Company intends to maintain approximately the same level of spending on sales and marketing in terms of the percentage of revenue. As the Company's expected growth continues the sales and marketing expenses in dollar terms are expected to increase.
Three months ended
June 30,
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2000 1999 Change
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General and Administrative $955 $527 81%
as a percentage of revenue 4.2% 8.3%
General and administrative expenses consist of administrative salaries and benefits, insurance, facility, legal, accounting, investor relations and other business support costs. In terms of percentage of revenue, the G&A expenses of this quarter were about half of the same period a year ago. However, in dollar terms, they were up by $428 thousands. The Company believes that the level of these expenses will be lowered in the next quarter and remain at about that same level through fiscal year 2001.
Working capital at June 30, 2000 was $155,000 compared to a working capital deficit of $1.2 million at June 30, 1999. The combination of credit lines opened in the past nine months, attaining profitability, and well managed account receivable and inventory levels have made this change possible, while increasing sales levels by $16 million to 3.5 times in the period.
Net cash used in operating activities was $1.9 million for the three months ended June 30, 2000 as compared to $0.8 million for the three months ended June 30, 1999. The principal use of cash was the build up of prepaids and other assets in the amount of $2.7 million, reduction of accounts payable in the amount of $1.1 million and increase in accounts receivable of $0.5 million. This total use of $4.9 million was offset in part net income plus depreciation and amortization totaling $0.9 million, reduction in inventories of $1.3 million and other increases in payables of $0.7 million. Substantially all of the net cash used in operating activities in the three months ended June 30, 1999 represented the net loss of $1.4 million adjusted for non-cash charges for depreciation and amortization of $0.3 million and acquired in-process research and development of $0.06 million and net cash provided by decrease in inventories of $3.8 million, and decrease in prepaids and other assets of $0.2 million, and net cash used to fund increased in accounts receivable of $1.3 millions, decrease in accounts payable of $1 million, and accrued liabilities of $1.6 million.
Net cash used in investing activities was $0.35 and $0.1 million for the three months ended June 30, 2000 and 1999 respectively. All of the cash used in investing activities consisted of the acquisition of property and equipment.
Net cash provided by financing activities was $0.6 million for the three months ended June 30, 2000. Consisting of the issuance of notes payable totaling $0.4 million and line of credit borrowings of $0.2 million. Activity in the prior year was minimal.
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 Y2K issue will affect 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.
The backlog at June 30, 2000 was approximately $15 million, with about 75% backed by letters of credit. As the peak season approaches, the backlog has increased recently. The outlook for the second quarter ending September 30, 2000 is continued profitability with revenues in excess of $26 million. Our forecast for the fiscal year ending March 31, 2001 remains at revenue in excess of $100 million with solid operating and net income levels.
Except as listed below, all information required by items in Part II is omitted because the items are inapplicable or the answer is negative.
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 the Form 10-KSB which the Company filed with the Securities and Exchange Commission on July 31, 2000.
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.
Exhibit 27.1 - Financial Data Schedule
Form 8-K, dated June 16, 2000, changes in registrant's certifying accountant.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Date: August 14, 2000 | ||
| DIGITAL VIDEO SYSTEMS, INC. | ||
| By: | /s/ Mali Kuo Mali Kuo Co-Chairman of the Board and Chief Executive Officer |
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