Digital Video Systems Announces Preliminary Fourth Quarter/Year End
Results, Management/Business Restructuring for Increased Fiscal
Responsibility and Hyundai Operations Acquisition
06/30/98
Business Wire
(Copyright (c) 1998, Business Wire)
LOS GATOS, Calif.--(BUSINESS WIRE)--June 30, 1998--Digital Video Systems Inc. (NASDAQ:DVID) has announced preliminary operating results for the fourth quarter and the fiscal year ended March 31, 1998.
Overview
Highlights of the announcement include completion of the acquisition of DVD -ROM manufacturing capabilities and technology from Hyundai Electronics Industries Co. Ltd.; the formation of a wholly owned subsidiary, DVS-Korea, to manage the new DVD -ROM operation; and related changes in manufacturing and use of DVS' Panyu, China facility.
In its U.S. headquarters, DVS has implemented significant strategic management restructuring and promotions aimed at refocusing DVS' business goals and increasing its emphasis on financial management; central to this restructuring is the promotion of chief financial officer, Edward M. Miller, to chief executive officer.
DVD -ROM Acquisition
On June 23, 1998, Digital Video Systems completed the acquisition of a perpetual, worldwide, royalty-free license to DVD -ROM technology owned by Hyundai Electronics Industries Co. Ltd. (Hyundai) in exchange for 2,000,000 shares of the company's common stock.
In addition, the company, through a newly formed, wholly owned subsidiary, DVS-Korea, completed the acquisition of DVD -ROM manufacturing capabilities, a related research and development team and management from Hyundai for $1,000,000 in cash. The management team at DVS-Korea has begun to implement the company's plan to ramp up production of DVD -ROM products and expects to commence limited production of DVD -ROM product in July or August 1998.
The company has agreed to file a registration statement covering the shares issued to Hyundai within 180 days of the transaction closing.
Dr. Edmund Y. Sun, the company's chairman and chief technology officer stated, "We are extremely excited by the advanced technology, experienced management team and market opportunities that this acquisition brings to DVS."
Sun further stated, "DVS hopes to begin generating revenue in July or August 1998 from our new DVD -ROM business unit and the company will begin supplying new pre-production DVD -ROM Drives in August 1998 to various OEM prospects."
Operations
The company reported its preliminary operating results for the fourth quarter and the fiscal year ended March 31, 1998 (fiscal 1998). These results (which are subject to adjustment upon completion of the annual audit by the company's independent certified accountants) included a loss of $14,684,000 for the fourth quarter, of which $7,800,000 was associated with the write-down of assets and establishment of reserves. The loss for the full fiscal 1998 year was $25,718,000.
As a result of an increase in product revenue which was partially offset by a decrease in component revenue, the company's total revenue in fiscal 1998 increased by $3,500,000, or 24.9%, to $17,638,000 compared with total revenue of $14,121,000 in fiscal 1997.
Product revenue in fiscal 1998 consisted of revenue from the sale of Video CD players, digital advertisement insertion systems, computer peripheral products, and sub-assemblies. Product revenue increased to $14,524,000 for fiscal 1998 compared with product revenue of $7,903,000 generated in 1997.
Gross margin includes product margin, development and service margin and component margin, with product margin comprising the largest component. While product gross margin decreased in fiscal 1998, this was offset by an increase in development and service margin. Thus, overall gross margin decreased 301.9% to negative $2,900,000 in fiscal 1998.
The decrease in gross margin and gross margin percentage for fiscal 1998 was primarily due to the recognition of the cost of all shipments made by the company's Panyu, China based joint venture (Panyu Joint Venture) while the company deferred recognition of the associated revenue until such time as cash is received.
Due primarily to business acquisitions and the Panyu Joint Venture, the company's research and development, sales and marketing and general and administrative expenses increased during fiscal 1998. The company intends to continue its focus on research and development and expects that research and development expenses will continue to increase in absolute dollars as the company expands its development efforts.
This includes the development of additional DVD products. Further, the company expects that sales and marketing expenses will continue to increase in absolute dollar terms as the company continues to expand its sales and marketing efforts worldwide. The company expects that general and administrative costs will increase in dollar terms but decline as a percentage of net revenues as the company continues to expand its businesses.
In addition to utilizing substantial amounts of cash to support operating activities, the company's cash position has been substantially impaired by a cash diversion at the Panyu Joint Venture. In the operation of the Panyu Joint Venture, the company experienced increasingly severe problems with its original local Chinese Partner (the JV Partner).
In December 1997, the JV Partner transferred its 49% interest to the company, which then transferred 10% of the total interests in the Panyu Joint Venture to a third party to maintain the joint venture's legal status under Chinese law. Until the transfer, the JV Partner acted as a distributor for the company's finished goods manufactured by the Panyu Joint Venture.
Based upon the results of recent review of the Panyu Joint Venture's books and records, the company believes that the JV Partner diverted substantially all of the revenues generated by the Panyu Joint Venture (approximately $2.1 million) for the company's third quarter in fiscal 1998. In addition, the company believes that the JV Partner removed substantial amounts of inventory from the Panyu Joint Venture's premises without authorization or payment.
The company has retained Chinese counsel to provide advice on how to recover such losses and is currently investigating available legal remedies, although there can be no assurance that any amounts will be recovered from the JV Partner.
At the end of fiscal 1998 the company had working capital of $8,300,000 compared with $32,700,000 at the end of fiscal 1997.
Financing
As a result of the company's significant recent operating losses and the cost of acquiring and funding prior acquisitions, the company's working capital has been substantially reduced. With the closing of the purchase from Hyundai of its DVD -ROM operation and the planned launch of its DVD -ROM products, the company's available working capital was inadequate to acquire and fund the DVD -ROM operation while maintaining the company's other activities.
To provide additional working capital, the company, in June 1998, borrowed $1,000,000 from Sun. The loan from Sun will be repaid in full by the company selling shares of its common stock to him in July 1998 (with the price to be equal to 100% of the average closing price of the company's common stock over the next five trading days) and with Sun to receive registration rights to cover these shares.
Notwithstanding the financing provided by Sun, the company will need to generate additional liquidity to meet its current obligations and maintain its current level of operations or to fund any significant future increase in revenues. The company is actively seeking additional financing to meet those needs. However, there can be no assurance that the company will obtain additional financing, or that any financing obtained will be on terms favorable to the company or sufficient to meet the company's immediate needs.
Management/Business Restructuring for Increased Fiscal Responsibility
The company's board of directors has completed an extensive review of the company's current operations and is refocusing the company's strategic plan to better take advantage of its core strengths in engineering while recognizing that its currently limited working capital cannot support the development and expansion of all of its product lines.
The company's goal will be to quickly bring to market higher-margin products based on the company's engineering capabilities, such as the DVD player and DVD -ROM product lines, and to provide adequate technical and marketing support for currently marketed products that management believes meet these requirements, such as network video products.
In addition, the company intends to convert its commercial Video CD product lines to DVD -based product lines. To meet the company's objective of achieving profitability by the second half of the current fiscal year, operations will be streamlined and lower-margin product lines or other operations that are likely to generate significant negative cash flow for the foreseeable future will be eliminated.
As part of this plan the company will discontinue sales of consumer Video CD players in China (where oversupply and intense competition have eroded margins for manufacturers) and will discontinue the New Media Division's current product line while completing development of its Catapult ad insertion product for potential sale or license to a third party.
In connection with refocusing its strategic business goals, the company is increasing its emphasis on financial management.
"Given the company's history of losses, the numerous issues involved in conducting operations both in the United States and a number of Asian countries, and the need to strengthen the company's financial condition, the company believes that in order to succeed it must have a finance-oriented leader who can effectively manage the cost side of its business," explained Sun. "The company is fortunate to have an internal candidate to fill this role. Thus, effective as of June 23, 1998 the company has elevated Edward M. Miller to the role of chief executive officer."
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