5454U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
X Annual Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 for the fiscal year ended December 31, 1996
Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 34-0-23-858
VIDEOLABS, INC.
(Name of Small Business Issuer in its charter)
DELAWARE ` 41-1726281
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
10925 BREN ROAD EAST, MINNEAPOLIS, MN 55343
(Address of principal executive offices) (Zip code)
Registrants telephone number, including area code: (612) 988-0055
SECURITIES REGISTERED UNDER SECTION 12(b) OF THE EXCHANGE ACT:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
SECURITIES REGISTERED UNDER SECTION 12(g) OF THE EXCHANGE ACT:
COMMON STOCK, $.01 PAR VALUE
(title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No ___
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of Registrant's knowledge, in definitive Proxy or Information
Statements incorporated by reference in Part III of this Form 10-KSB or any
amendments to this form 10-KSB. [X]
State Issuer's revenues for most recent Fiscal Year. $7,405,548.
The aggregate market value of the Common Stock held by non-affiliates of
the Issuer, based upon the closing bid price of the Common Stock on January 31,
1997 as reported on the NASDAQ Small Cap Market, was approximately $1,514,259.
Shares of Common Stock held by each officer and director and by each person who
owns 5% or more of the outstanding Common Stock have been excluded in that such
persons may be deemed to be affiliates. This determination of affiliate status
is not necessarily a conclusive determination for other purposes.
As of February 28, 1996, Registrant had outstanding 3,134,948 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS
PART I
CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS
THAT COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO
DIFFER FROM THOSE PROJECTED IN FORWARD LOOKING STATEMENTS
In connection with the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, readers of this document and any document
incorporated by reference herein, are advised that this document and documents
incorporated by reference into this document contain both statements of
historical facts and forward looking statements. Forward looking statements are
subject to certain risks and uncertainties, which could cause actual results to
differ materially from those indicated by the forward looking statements.
Examples of forward looking statements include, but are not limited to (I)
projections of revenues, income or loss, earning or loss per share, capital
expenditures, dividends, capital structure and other financial items, (ii)
statements of the plans and objectives of the Company or its management of Board
of Directors, including the introduction of new products, or estimates or
predictions of actions by customers, suppliers, competitors or regulatory
authorities, (iii) statements of future economic performance, and (iv)
statements of assumptions underlying other statements and statements about the
Company or its business.
This document and any documents incorporated by reference herein also
identify important factors which could cause actual results to differ materially
from those indicated by forward looking statements. These risks and
uncertainties include price competition, the decisions of customers, the actions
of competitors, the effects of government regulation, possible delays in the
introduction of new products, customer acceptance of products and services, and
other factors which are described herein and/or in documents incorporated by
reference herein.
The cautionary statements made pursuant to the Private Litigation
Securities Reform Act of 1995 above and elsewhere by the Company should not be
construed as exhaustive or as any admission regarding the adequacy of
disclosures made by the Company prior to the effective date of such Act. Forward
looking statements are beyond the ability of the company to control and in many
cases the Company cannot predict what factors would cause results to differ
materially from those indicated by the forward looking statements.
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
VideoLabs, Inc. (the "Company") is a Delaware corporation which was
incorporated in 1992. The Company designs and manufactures image capture,
transmission and manipulation devices for use as components of systems for
security, medical, desktop computer video applications, video-teleconferencing
and computer-based and non-computer based audio-visual presentations. The
Company does not produce complete video systems but only certain components
thereof which are specifically described below. The Company sells its products
to individual and organizational customers who assemble complete solutions.
The Company believes that there are significant opportunities for growth
in the application of the core technologies of the Company in several market
segments. The potential for increases in use of image capture devices in audio
visual, education and computer markets is increasing rapidly as computer
processing power, speed and cost factors have all improved as has higher
capacity transmission utilities. The Company has also observed emerging
applications in the use of video image capture solutions in security, medical
and industrial market segments that are primarily due to new, flexible digital
applications that allow for unique solutions targeted at potential niche
markets.
The Company's first product was FlexCam, a very small color video camera
and microphone attached to a 3/8ths inch flexible 18- inch shaft which transmits
live video images of persons, objects or documents to a monitor or through a
separate video-capture board to the monitor of a computer. This product was
introduced in March 1993 with first shipments in April of 1993.
The Company's second product, the FlexCam/Document, introduced in July,
1993, was a specially designed electronic camera for use in transmitting video
information under difficult lighting conditions. The Company believes that
FlexCam and FlexCam/Document are very desirable electronic cameras for use in
video- teleconferencing because they are very small, requiring little space on
the desktop, they can be positioned to focus on either the people participating
in a conference or documents or objects referenced in such conference, and they
produce images of high quality.
The Company's third product, FlexCam/Teaching, introduced in July, 1994,
is specifically designed for the medical and education markets. It includes a
standard C-mount lens for classroom viewing and magnification of objects and
technical documents. With its microscope adapter, FlexCam/Teaching connects to
most microscopes for displaying slides, X-rays or scientific objects on monitors
for groups and classroom viewing.
During 1994 the Company introduced the concept of FlexCap, a Universal
Digital Camera Module (UDCM) which includes its own video- capture computer
board. This product was abandoned in November of 1996 due to rapid changes in
technology.
Additional products, the VideoShot and the T230Pro Video capture board,
were introduced in 1995 and the Stinger video capture card in 1996. All of these
products are designed for Windows-based computer capture. These products gave
the Company the ability to provide complete video solutions to the Windows-
based computer marketplace.
The Company's long term strategy is to build image capture transmission
and manipulation solutions for individual and organizational customers that can
earn appropriate returns for shareholders.
The Company's short term strategy is to develop or acquire image capture
solutions for specific niche markets in education, audio visual, security and
medical applications where it already has distribution resources and can provide
value-added solutions.
The Company Strategy
The Company's business strategy is to utilize its core competencies in
analog and digital image capture development and distribution to provide
solutions for individual and organizational customers and to earn an acceptable
return on equity for the Company's shareholders.
Focus on Profitable Growth
The Company is focused on internal growth in profitable niches in
professional image capture solutions for audio visual, education, security and
medical markets where it currently has distribution system capabilities. The
Company intends to become a multiple product supplier in these markets through
internal product development and through product acquisitions. The Company is
positioned to respond to growth opportunities in the desktop video and computer
videoconferencing markets as profitable niches and internal resources become
available.
The company has instituted an ISO 9001 quality program and is working with
its suppliers to reduce cost of goods sold and inventory levels while improving
quality and customer response times. During 1996 the Company reduced its
staffing levels and 1997 budgets to reduce overhead costs.
Furthermore the Company is working on partnerships with its suppliers and
distributors to reduce cost of goods sold and selling expenses while shortening
cycle times and putting the Company closer to our customers in the selling
channel.
PRINCIPAL PRODUCTS, SERVICES AND THEIR MARKETS
The Company's Current Products
The Company offers a unique line of video products ranging from image
capture devices, image transmission and image manipulation. The Company's
product offering enables our customers to sell stand alone products or as part
of a system integration.
The Company has four channels of focus in 1997: Videomicroscopy, Photo
Identification/Security, Audio Visual and PC/Videoconferencing. As new markets
emerge for the FlexCam family of products we will be evaluating and determining
our focus for the next year. Our customers also use our image capture devices in
medical, inspection and industrial applications.
VIDEOMICROSCOPY APPLICATIONS
* FLEXCAM TEACHING
* FLEXCAM STUDENT
* FLEXCAM MICROSCOPE
When the FlexCam Teaching camera was introduced to the microscope market
late August of 1994, the Company did not anticipate the extent of what impact
the FlexCam Teaching would have. It was a simple concept of reshaping a more
effective and easy to use camera for use with microscopes. The flexible
gooseneck wand allows users of the microscopes to easily attach the camera to a
microscope for previewing on a monitor or with the ability not to use a camera
tripod for presentations outside the microscope. Many schools are discovering
our image capture products have additional applications outside of the science
laboratories, including use in sharing video images with other schools around
the world through the Internet.
PHOTO IDENTIFICATION / SECURITY SOLUTIONS
* FLEXCAM ID
* T230 CAPTURE CARD
* FLEXCAM ID BADGING SYSTEM
* FLEXCAM ID
* T230 CAPTURE CARD
* IDTEL 2000 SOFTWARE
* PRIVILEGE CARD PRINTER
The original FlexCam was used in many security applications, one of which
is a basic head to shoulder image of an individual to provide greater security
within an institution. The FlexCam ID was developed solely for use with images
of individuals. The FlexCam ID was selected as the camera of choice for many
schools, health clubs, corporations and membership organizations. The FlexCam ID
system was developed late in 1996 to provide a complete turnkey system for use
with identification badging applications.
AUDIO VISUAL / PRESENTATION SOLUTIONS
* FLEXCAM DOCUMENT
* FLEXCAM
With the presentation market doubling over the last several years,
VideoLabs customers have seen significant growth for video and image capture
applications for this market. The FlexCam Document camera was developed in 1993
specifically for document presentations, as well as any other three dimensional
objects. The FlexCam Document camera is typically sold as an add on to a part of
a customers solution. The camera can be easily integrated with liquid crystal
displays, video projectors, as well as television monitors and VCRs.
PC & MACINTOSH GLOBAL VIDEOCONFERENCING
* FLEXCAM PLANETVIEW
* FLEXCAM
* STINGER PCI CAPTURE CARD
* ENHANCED CU-SEEME SOFTWARE
In 1992 the Company introduced FlexCam to the personal computer and
videoconferencing markets. The FlexCam is the Company's standard camera which
can be used with any videoconferencing product for integration. With the unique
gooseneck and audio integrated into one camera, which can be positioned in any
direction, System Integrators started to offer the FlexCam as part of their
solution.
The FlexCam PlaNETVIEW along with the Stinger PCI card and Enhanced
CU-SeeMe software is the Company's first turnkey solution for
videoconferencing. The FlexCam PlaNETVIEW allows consumers to videoconference
over the Internet and/or Intranet throughout the world.
The Company's Proposed Products
The Company's engineering is committed to the development of a minimum of
three new video capture devices for 1997. This commitment is part of
engineering's eighteen month plan which in turn is part of the Company's 1997
business plan.
STUDENTCAM
The first product which has been developed is the StudentCam camera. This
is a standard resolution color camera which does not share some of the enhanced
features of the new TeachCam and is priced accordingly. The StudentCam began
shipments in the first quarter of 1997.
TEACHCAM 6.0
The second product developed is the 6.0 TeachCam to replace the 3.0
TeachCam. This module was co-developed with a key supplier and is a product
improved version of the older 3.0 version. The 6.0 TeachCam began shipping on
schedule the first quarter of 1997 to the US markets and will start shipping
internationally late in the second quarter of 1997. The TeachCam will be
modified in late 1997 to add additional features not yet available from
competition.
PROFESSIONALCAM
The third product VLI engineering is committed to develop is a high
resolution enhanced feature camera which will be called the 7.0 ProfessionalCam.
This camera will provide the customer with full functional control of the
cameras settings as well as provide a high quality, high resolution video
signal. This camera will replace the existing 3.0 Document Camera as well. The
7.0 camera is scheduled for release during the third quarter of 1997.
STINGER NT
The Company is currently creating NT drivers and a developers kit for the
Stinger video capture card. This is in response to customers requests for this
driver for use on their NT platform systems. The Stinger is currently compatible
with Windows95 platforms. We believe that these additional drivers will enhance
the product as well as extending its sales life for the Company. The new drivers
are scheduled for release the second quarter of 1997.
Marketing and Distribution
The Company currently sells through Business Partners, Resellers and the
Internet. All of these distribution levels are maintained and sold with factory
direct sales and marketing employees from the Company.
The Company's Business Partners are Dealers and Distributors which have
worked with the Company to give a quarterly and annual commitments in sales.
This is a new initiative in 1997 for the Company. The Company supports this
channel through training, product demonstrations and joint marketing efforts.
All of the Company's Business Partners are required to sign annual contracts
and are considered partners versus traditional distributors, due to the change
from transactional to relationship.
The Company's Resellers consist of Value Added Resellers, Mail Order,
System Integrators and Resellers of products. Our current Reseller base is well
over 1,500 customers, which buy and resell our family of products direct to the
consumer. This channel is supported through training, product demonstrations and
vertical advertising.
In the international markets the Company sells its products through the
same Business Partner model as above. As of December 31, 1996, the Company's
products were being offered for sale by distributors in over thirty (30)
countries, including the United Kingdom, Germany, France, Italy, The
Netherlands, Switzerland, Scandinavia, Singapore, Korea, Hong Kong and
Australia. Arrangements with these distributors provide for significant
incentives for them to purchase the Company's products in large volumes. Through
exposure of the products at international trade shows, additional international
distributors are being actively solicited. In 1996, approximately forty percent
(40%) of the Company's gross revenue was from international markets.
All of the Company's international sales are invoiced in United States
dollars. International sales are made on the basis of cash in advance by wire
transfer, credit card, or irrevocable letters of credit. Credit limits have been
established for several of the international distributors and all open accounts
of over $3,000.00 are credit insured. The Company's international sales are
subject to certain risks common to many export activities, such as government
regulations, export license requirements and the risk of imposition of tariffs
and other trade barriers.
The Company also is actively developing OEM customers for its products.
OEM customers purchase cameras from the Company and incorporate these cameras as
part of their own product offerings. As of December 31, 1996, the Company had
fifteen (15) active OEM customers.
Major Customers
During 1996 the Company did not have any significant sales to any one
customer. The Company did however in 1995 have significant sales of 13% to a
single customer that did not repeat that volume in 1996.
Backlog
The Company typically ships product within one to two weeks after receipt
of an order, which is common in this industry. Accordingly, backlog as of any
particular date is not representative of actual sales for any succeeding period.
Customer Service
The Company believes that customer service is a critical element in
maintaining strong customer relationships. Customer service includes
installation support, product training, technical support, applications support,
timely maintenance and effective operations manuals. Repair of the Company's
products is performed at the Company's manufacturing facility by trained
technicians.
The Company warrants its camera products against defects in materials and
workmanship for a period of one year from the date of manufacture. For OEM
customers, product line warranty is generally negotiated with each customer.
Research and Development
The year 1996 brought the development of new products for the education
market as well as video capture devices for PC video and videoconferencing
market. The Stinger video capture card was released early in the year as a low
cost, high quality video capture solution for PC users. Engineering continues to
develop new supporting software for this product with the aid of an experienced
contract software developer.
During fourth quarter of 1996, VLI engineering has developed an eighteen
month new product development plan. This plan will assist engineering with
utilization of existing resources in development of new products as forecast by
sales and marketing.
In 1996, the Company's expenses relating to research and development were
$384,804. During 1995, the Company's expenses relating to research and
development were $412,860. The current VLI engineering staff consists five (5)
full-time equivalent employees. The Company also contracts services from both
mechanical engineers and software engineers as required.
Manufacturing and Supplies
The Company assembles its products at its facility in Minnetonka,
Minnesota. The Company's manufacturing operation consists of procurement and
inspection of components and sub-assemblies, final assembly and testing of
finished products. After components have been procured, they are sent in kits to
sub- assembler companies, mostly located near the Company's facilities, which
then build the sub-assemblies. The sub-assemblies are then returned to the
Company's Minnetonka facility for final assembly. All finished products are
subjected to a minimum twelve hour reliability test before they are packaged and
shipped to customers. Beginning in 1996 some assembly operations were moved
offshore, particularly the assembly of analog camera technology. However,
because of inconsistent quality the Company has returned that operation to our
Minnesota facility.
Components and sub-assemblies are inspected for mechanical and electrical
compliance with the Company's specifications. All finished products are tested
against Company and customer specifications. The Company's products are shipped
in protective packaging to minimize potential damage during shipment.
Certain components and camera modules continue to be available only from a
single source, or a limited number of sources. The Company has several principal
suppliers. The Company attempts to keep an adequate supply of critical
components in its inventory to minimize the impact caused by the loss of a
significant supplier. There can be no assurance, however, that loss of a
supplier would not result in a material adverse effect on the ability of the
Company to meet its product shipment requirements.
Competition
The electronic camera market is highly competitive. The Company competes
with a number of companies ranging from very small businesses to large
companies, some of which have substantially greater financial, manufacturing,
marketing and product development resources than the Company. Some of these
other companies manufacture and sell electronic cameras as well as video-capture
equipment, and some are distributors for these products. The Company believes
that it competes most directly with Sony, Toshiba, Panasonic, Ken A Vision,
Sharp Electronics and Elmo.
Because the Company manufactures its product lines through the assembly of
component parts which are readily available in the world marketplace, there are
few barriers which would prevent others from designing and assembling products
similar to those sold by the Company.
The Company competes for electronic camera sales primarily on the basis of
image quality, focus, costs, flexibility, delivery time, reputation,
reliability, the effectiveness of its sales and distribution channels and its
customer service. The Company believes that its products compete favorably on
these factors, although there can be no assurance that this will continue to be
true in the future.
Intellectual Property Rights
The Company attempts to protect the proprietary rights to its products by
use of patents, copyrights, trade secret law and internal non-disclosure
safeguards. The source code for the software contained in the Company's products
is considered proprietary and is not furnished to customers. The Company has
also entered into confidentiality and non-compete agreements with certain key
engineering and technical employees as well as outside consultants. See
"Management." Despite these restrictions, it may be possible for competitors or
users to copy aspects of the Company's products or to obtain information that
the Company regards as proprietary.
The Company has received a patent for the FlexCam and intends to
vigorously defend that patent in the marketplace.
FlexCam was engineered by Suick Bay Technologies of Maple Grove, Minnesota
and Worrell Design of Minneapolis at the direction of the Company. The Company
has a royalty agreement with Worrell Design and pays two percent (2%) of
revenues resulting from the first 36,000 electronic camera sales and one percent
(1%) of the revenues from the subsequent 20,000 unit sales and one-half percent
(0.5%) of the next 20,000 unit sales. The Company has currently shipped
approximately 54,000 units under this agreement. The royalty agreement with
David Krekelberg of Suick Bay Technologies has been terminated.
The Company uses the name "FlexCam" under an indefinite license from Video
Dynamics, Inc. for a yearly payment of $5,000.
Because of the rapid pace of technological changes in the computer
industry, the Company believes that patent, trade secret and copyright
protection are less significant to its competitive position than are factors
such as the knowledge, ability and experience of the Company's personnel, the
Company's success at new product development and frequent product enhancements,
and the Company's name recognition and ongoing reliable product maintenance and
support.
Employees
As of December 31, 1996, the Company had twenty one (21) full-time
employees, including six (6) in manufacturing, five (5) in engineering, product
development and warranty repair, six (6) in sales and marketing, and four (4) in
general administration and finance. None of the Company's employees are
represented by a labor union or are subject to any collective bargaining
agreement. The Company has never experienced a work stoppage and believes that
its employee relations are satisfactory. The Company does not expect to add
employees during 1997.
During 1996, three significant employees named in the 10KSB for year ended
December 31, 1995, left the employ of the Company. Mr. Gary Campbell, Vice
president of Sales resigned and was not replaced. Frank Broghammer, CFO,
resigned and entered into a consultant agreement and was not replaced. Ward C.
Johnson, President and CEO, retired from the Company as an employee, but remains
on the Board of Directors for the Company and was replaced by James W. Hansen as
Acting President, Treasurer and CEO. There is no assurance that the persons who
replaced others who left the Company will be equal in performance to the
individuals previously holding these positions.
Environmental Compliance
Compliance with federal, state and local laws regarding the discharge of
materials into the environment has no material effect upon capital expenditures,
earnings, competitive position or finances of the Company.
Government Regulation
Products sold by the Company are subject to regulations of the US
Government Federal Communication Commission and European product compliance
requirements. All products sold by the Company have met mandatory requirements
of both FCC and CE regulations. The Company does not know of any pending
regulations which would affect its
operations or products.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's operations are located in Minnetonka, Minnesota, where the
Company has leased approximately 4,920 square feet of office and 3,153 square
feet of manufacturing and development space since September 1994 under a lease
that expires in September 1997. The Company believes the facility is in
excellent condition. The annual rental is approximately $61,000. The Company
will be evaluating its space requirements prior to the lease expiring in
September 1997.
In 1994 the Company purchased a condominium in Rotterdam, The Netherlands
for $137,579, for use by Company sales representatives. From September 1994
through November 15, 1996 this condominium was occupied by Greg Craven, a sales
representative of the Company who is also the adult son of Richard F. Craven, a
Director of the Company. The apartment is vacant and is listed for sale with a
Netherlands Real Estate Company.
ITEM 3. LEGAL PROCEEDINGS
There are no pending material legal proceedings against the Company or its
property.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to vote of the security holders during the
quarter ended December 31, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
a) Market Information.
The Company's Common Stock is traded on the NASDAQ Small Cap market. The
following table sets forth, for the periods indicated, the high and low bid
prices per share for the Company's Common Stock as reported to the Company by
NASDAQ. The Company's Common Stock began trading on May 10, 1994.
FISCAL YEAR ENDED DECEMBER 31, 1994 Low Bid High Bid
- ----------------------------------- ------- --------
May 10, 1994 through June 30, 1994 $3.25 $3.75
Quarter ended September 30, 1994 $3 $3.375
Quarter ended December 31, 1994 $2.25 $3.25
FISCAL YEAR ENDED DECEMBER 31, 1995
- -----------------------------------
Quarter ended March 31, 1995 $2.5 $3.375
Quarter ended June 30, 1995 $2 $2.25
Quarter ended September 30, 1995 $2 $2.25
Quarter ended December 31, 1995 $1.938 $2.25
FISCAL YEAR ENDED DECEMBER 31, 1996
- -----------------------------------
Quarter ended March 31, 1996 $2.5 $2.75
Quarter ended June 30, 1996 $3.375 $3.75
Quarter ended September 30, 1996 $1.875 $2
Quarter ended December 31, 1996 $.5625 $.75
b) Holders.
As of March 15, 1996 there were approximately 151 record holders of the
Company's Common Stock.
c) Dividends.
The Company has not declared any cash dividends on any class of common equity
for the last three fiscal years. The Company currently intends to retain
earnings for its use in operations and does not anticipate paying cash dividends
in the foreseeable future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
The Company was incorporated in July of 1992 to design and develop a
hardware and software videoconferencing system. Shortly after formation, the
Company sold its software development project due to capital constraints and
concentrated on the design, manufacture and sales of desktop cameras for the
integration into systems for computer video applications, video teleconferencing
and computer based audio-visual presentations.
The Company's first product was the FlexCam, a small color video camera
with a microphone attached to an 18-inch flexible shaft which transmits live
video images of persons, objects or documents through a video capture board to
the monitor of a computer. Subsequent products have been specifically designed
for specific market niches that have a need for high quality, flexible image
capture.
The Company completed several rounds of private financing during 1992 and
1993 and completed its IPO on May 10, 1994 at a price of $3.50 per share,
raising approximately $5 million in an underwriting transaction through R.J.
Steichen and Company.
The Company experienced steady growth through 1995 and reached
profitability due to the sale of the remaining investment in the original
software project the Company had spun out earlier. In 1994, the Company began
the development of the Universal Digital Camera Module (UDCM) and ordered
inventory to support sales expectations. The product was not subsequently
completed and a reserve for inventory value adjustments were taken at year end
1996. At the same time, the Company's founder and President retired and a
reserve was created for severance costs resulting from a layoff of 20% of the
current staff, along with a reserve for the settlement of a lawsuit relating to
the discontinued product development of the UDCM with a former officer and
director of the Company.
1997 will be a transition year for the Company. The Company is committed
to fulfilling the vision of its founders as it transitions to a revised purpose
statement with renewed focus on providing customer solutions involving our core
competency, image capture, achieving profitability on an annualized basis and
challenging all associates to meet plan and grow professionally.
Results of Operations
Net Sales for the period ending December 31, 1996 decreased nine (9%) from
the prior year end from $8,097,316 in 1995 to $7,405,548 in 1996. This sales
decrease was primarily due to a price reduction of the Company's product called
the FlexCam. The Company reduced the FlexCam's price from $595 to $395 due to
competitive pressures in the computer industry. Another significant reason was
the loss of sales to a significant 1995 customer that did not meet the same
volumes in 1996. The Company's unit volume sales remained constant to the prior
year. The Company anticipated that a price reduction of its FlexCam would
increase unit volumes, however this did not happen. Unit volumes did however
increase in the Company's Videomicroscopy industry which focuses on the
education market. Sales volumes in this market increased by 60% over the prior
year.
During 1996, sales in the U.S., Europe and Asia/Pacific were respectively
60%, 32% and 8% of total sales. During 1995 the percentage of sales in these
same regions were respectively 49%, 26% and 25% of total sales. The decrease in
sales volume in the Asia Pacific Region is primarily due to the lack of sales
from a significant customer that purchased 13% of total sales in 1995 and only
3% of total sales in 1996. The Company's largest customer in 1996 purchased
8.5% of the total sales volume in 1996 and is anticipated to keep the same
volumes for 1997, however, the loss of any significant order could adversely
affect the Company.
Gross profits for the period ending December 31, 1996 were $1,077,677
which was 15% of total sales compared to $3,040,094 which was 38% of total sales
for year ending December 31, 1995. This decrease in gross profit for 1996 is
primarily due to the yearend write down of $1,575,000 to reflect the valuation
of inventory which became technologically obsolete. This inventory valuation
write down was 21% of total sales. The Company started purchasing inventory in
late 1994 for the Universal Digital Camera Module (UDCM) product. The product
was never completed and the technology became obsolete. The Company is
aggressively pursuing different sources to either purchase the components from
the Company at a discount or engineer the components into a future product for
the Company.
Cost of sales includes all materials, labor, packaging, manuals and
related overhead costs which are directly attributable to the cost of
manufacture and shipment of the Company's products. Cost of sales does not
include royalty costs or commission costs related to the sales of products. The
Company has set goals for 1997 to reduce the cost of materials used in
manufacture and costs associated to manufacturing overhead. The Company has
already realized some of these reductions in the first quarter of 1997.
In 1996 the Company changed to an off shore supplier to reduce costs and
realized quality problems. This resulted in higher manufacturing overhead cost
for quality repair and warranty repair work. The Company is phasing out of the
off shore components in the first quarter of 1997 and into a higher quality
solution. The Company is committed to restoring the quality of its products in
1997 and thus hired a quality technician early in 1997 to develop an ISO 9001
quality program.
Selling, general and administrative expenses include all costs of the
Company except those related directly to the manufacture of products described
above and other income and expense items below. Selling, general and
administrative expenses increased 16% from $3,164,461 in 1995 to $3,675,060 in
1996. Selling expenses and research and development expenses remained constant
over the two years. General and administrative expenses increased by
approximately $500,000. The Company attributes this increase to the reserves
that the Company established at year end for retirement and severance charges of
approximately 20% of the current employment base of the Company, for a charge to
cover future warranty costs, and a charge to litigation reserves for settlement
costs associated with the lawsuit with a former officer and director of the
Company.
After restructuring in late 1996, the Company reduced its employment base
by 20% in addition to cutting over $600,000 of other operating expenses out of
its 1997 operating plan.
The Company's operating loss for the year ending December 31 , 1996 was
$2,597,383 compared to an operating loss of $124, 367 for the year ending
December 31, 1995. The Company attributes the increase in operating losses to
the fourth quarter adjustments in 1996 as mentioned above, which decreased
income by approximately $1.9 million. The Company anticipates that operating
margins in 1997 will improve with the objectives the Company has set for 1997
including raw material cost reductions, manufacturing overhead cost reductions
and SG&A cost reductions. However, even if these efficiencies are achieved, if
the sales volumes do meet projections, overall income from operations will be
adversely affected.
Other income for 1996 consisted of interest income of $54,007 compared to
interest income for 1995 of $98,456 and an interest expense for 1996 of $2,117.
In 1995 the Company converted its $100,000 note receivable from RSI, Inc. into
88,888 shares of RSI, Inc. common stock. The Company sold 25,000 shares of RSI,
Inc. commons stock at the time of RSI, Inc.'s initial public offering which
resulted in a non-operating gain on sale of assets of $198,606 for 1995. The
Company sold the remaining 63,888 shares at a discount in May 1996 after
receiving consent from the underwriter for a book profit of $230,354.
At December 31, 1996 the Company had a net operating loss carry forward of
approximately $819,000 and a general business credit carry forward of $58,000
available to be carried to future periods. The loss carry forward and general
business credit carryforwards expire in 2008 through 2011 if not used.
The net loss for the year ending December 31, 1996 was $2,362,115 compared
to a net income for the year ending December 31, 1995 of $202,694. The loss per
share for 1996 was $0.75 per share compared to earnings per share for 1995 of
$0.06 per share. The items that negatively impacted this loss were discussed
above.
Earnings and loss per common share amounts were computed using the
weighted average number of shares outstanding during each period. The weighted
average number of shares outstanding for the years ended December 31, 1996 and
1995 was 3,134,498 and 3,133,948, respectively. During 1996, stock options and
warrants for the purchase of common stock were anti-dilutive and have not been
included in these computations. The fully diluted weighted average number of
shares outstanding for 1995 was 3,183,948, however, this had no effect on
earnings per share.
Liquidity and Capital Resources
Working Capital, consisting principally of cash, certificates of deposit,
receivables and inventories, was $2,124,418 at December 31, 1996 and $4,526,387
at December 31, 1995. The ratio of current assets to current liabilities was 2:1
at December 31, 1996 and 6:1 at December 31, 1995. A large portion of this
decrease in working capital and current ratio was due to the year end
adjustments of inventory valuation, retirement and severance costs, litigation
reserves and product warranty reserves totaling approximately $1.9 million.
Inventories at December 31, 1996 were higher than required due to sales
volumes in the fourth quarter of 1996 not meeting projections. The Company has
to purchase long lead time components four months in advance, so if the
Company's projections are not accurate, inventories are higher than required.
The Company anticipates that excess inventory will be liquidated in the first
two quarters of 1997. However, in the event that such inventory becomes
obsolete, the Company's cash would be substantially diminished and the Company
could be put into a position of needing funds.
Currently the Company has a discretionary working capital line of credit
with its bank of the lesser of $1,500,000 or 80% of eligible accounts receivable
(as defined) plus $500,000 in cash collateral, with outstanding borrowings due
April 10, 1997. The available line of credit is reduced by outstanding
irrevocable letters of credit which totaled $1,201,909 at December 31, 1996. The
letters of credit may be drawn upon by major suppliers of the Company. The
letters of credit expire from March 1997 through April 1997. There are no
borrowing outstanding under this line of credit at December 31, 1996. Advances
under the note are secured by substantially all corporate assets, including
assignment of a certificate of deposit with a minimum amount of $500,000.
Interest is charged at 1% over the bank's index rate. The interest rate at
December 31, 1996 was 9.25%. The terms of the note agreement with the bank
require the Company to maintain certain financial ratios that the Company has
not attained. The Company is presently negotiating with the same bank for a
$500,000 line of credit that would be supported by the Company's accounts
receivable and cash collateral of a $200,000 certificate of deposit thus making
available the $300,000 of the preceding certificate of deposit. The requirement
for the $200,000 certificate of deposit would be reviewed in 90 days and could
be withdrawn subject to the Company meeting its planned objectives for that 90
day period. This line of credit would be used to support letters of credit with
the Company's suppliers.
The Company believes that it has sufficient liquidity to support its
anticipated growth during the next twelve months. However, this belief is
predicated upon meeting the anticipated sales forecast. If the projections are
not met, the inventory reductions anticipated by the Company will not occur.
This would materially adversely affect the Company's cash position.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT AUDITORS
To the Stockholders
and Board of Directors
VideoLabs, Inc.
Minnetonka, Minnesota
We have audited the accompanying balance sheet of VideoLabs, Inc. as of December
31, 1996 and 1995, and the related statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of VideoLabs, Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Certified Public Accountants
Minneapolis, Minnesota Boulay, Heutmaker, Zibell & Co. P.L.L.P
February 11, 1997
<TABLE>
<CAPTION>
VIDEOLABS, INC.
Balance Sheet
December 31
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 631,456 $ 687,508
Certificates of deposit- restricted 513,788 576,900
Marketable securities 353,963
Accounts receivable
Trade accounts, less allowance for doubtful accounts
of $25,400 in 1996 and 1995 799,799 1,259,517
Other receivables 6,157 15,843
Inventories 1,830,300 2,399,947
Deferred income taxes 30,000
Prepaid expenses 154,749 106,802
---------- ----------
Total current assets 3,936,249 5,430,480
Property Held for Sale, net of $37,805 accumulated
depreciation 99,774
Property and Equipment
Office and computer equipment 356,126 324,068
Machinery and equipment 280,262 312,723
European real estate 137,579
Leasehold improvements 21,249 21,249
Vehicles 31,623
---------- ----------
657,637 827,242
Less accumulated depreciation 355,877 265,107
---------- ----------
Net property and equipment 301,760 562,135
---------- ----------
Total assets $4,337,783 $5,992,615
========== ==========
Notes to Financial Statements are an integral part of this Statement
</TABLE>
VIDEOLABS, INC.
Balance Sheet
December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
----------- -----------
Current Liabilities
Accounts payable $ 1,057,869 $ 770,356
Current maturities of long-term debt 10,285
Customer deposits 15,070 21,125
Accrued compensation 153,607 64,612
Purchase commitments, reserves and other 575,000 48,000
----------- -----------
Total current liabilities 1,811,831 904,093
Long-Term Debt, net of current maturities 16,110
Commitments and Contingencies
Stockholders' Equity
Common stock, $.01 par value;
Authorized, 20,000,000 shares
Issued and outstanding, 3,134,948
shares in 1996 and 3,133,948 in 1995 31,349 31,339
Preferred stock, $.01 par value;
Authorized, 5,000,000 shares
No shares issued and outstanding
Additional paid-in capital 5,514,293 5,511,653
Unrealized gain on marketable securities 219,215
Accumulated deficit (3,035,800) (673,685)
----------- -----------
Total stockholders' equity 2,509,842 5,088,522
----------- -----------
Total liabilities and
stockholders' equity $ 4,337,783 $ 5,992,615
=========== ===========
Notes to Financial Statements are an integral part of this Statement.
VIDEOLABS, INC.
Statement of Operations
Years Ended December 31
1996 1995
----------- -----------
Sales $ 7,405,548 $ 8,097,316
Cost of Sales
Cost of goods sold 4,752,871 5,057,222
Adjustment for write down of
inventories including purchase commitments 1,575,000
----------- -----------
Total cost of sales 6,327,871 5,057,222
=========== ===========
Gross Profit 1,077,677 3,040,094
Operating Expenses
Selling expenses 1,677,189 1,647,029
General and administrative expenses 1,613,067 1,104,572
Research and development 384,804 412,860
----------- -----------
Total operating expenses 3,675,060 3,164,461
----------- -----------
Operating Loss (2,597,383) (124,367)
Other Income (Expense)
Interest income 54,007 98,456
Interest expense (2,117)
Gain on sale of assets 213,378 198,605
----------- -----------
Total other income, net 265,268 297,061
----------- -----------
Income (Loss) Before Provision for
(Recovery of)Income Taxes (2,332,115) 172,694
Provision for (Recovery of) Income Taxes 30,000 (30,000)
----------- -----------
Net Income (Loss) ($2,362,115) $ 202,694
=========== ===========
Earnings (Loss) per Share ($ .75) $ .06
=========== ===========
Notes to Financial Statements are an integral part of this Statement.
VIDEOLABS, INC.
Statement of Stockholders' Equity
Years Ended December 31, 1996 and 1995
Net
Unrealized
Common Stock Additional Gain On
---------------- Paid-In Marketable Accumulated
Shares Amount Capital Securities Deficit
------ ------ ------- ---------- -------
Balances -
December 31, 1994 3,133,948 $31,339 $5,511,403 ($876,379)
Net income 202,694
Issuance of warrant 250
Net unrealized gain
on marketable
securities $219,215
--------- ------ ---------- -------- ---------
Balances -
December 31, 1995 3,133,948 31,339 5,511,653 219,215 (673,685)
Net loss (2,362,15)
Exercise of warrant 1,000 10 2,640
Change in unrealized
gain on marketable
securities (219,215)
--------- ------ ---------- -------- ---------
Balances -
December 31, 1996 3,134,948 $31,349 $5,514,293 $ -- $($3,035,800)
========= ======= ========== ======== ============
Notes to Financial Statements are an integral part of this Statement.
<TABLE>
<CAPTION>
VIDEOLABS, INC.
Statement of Cash Flows
Years Ended December 31
1996 1995
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) ($2,362,115) $ 202,694
Adjustments to reconcile net income
(loss) to net cash used
for operations:
Depreciation and amortization 221,867 194,362
Provision for losses on accounts receivable 5,383
Amortized premium on investments 861
Gain on sale of assets (213,378) (170,943)
Deferred income taxes 30,000 (30,000)
Change in assets and liabilities
Interest receivable 3,094 7,744
Accounts receivable 466,310 (265,716)
Inventories 569,647 (1,088,210)
Prepaid expenses (47,947) (73,582)
Accounts payable 287,513 (272,978)
Customer deposits (6,055) (31,735)
Accrued compensation 88,995 27,266
Purchase commitments, reserve and other 527,000 48,000
----------- -----------
Net cash used for operating activities (434,208) (1,447,715)
Cash Flows from Investing Activities
Capital expenditures (70,177) (208,349)
Proceeds from sale of equipment 25,144 800
Purchase of certificates of deposit (1,034,960) (810,650)
Proceeds from maturities of
certificates of deposit 1,098,072 333,750
Purchase of marketable securities (63,713)
Proceeds from sales and maturities of
marketable securities 365,468 2,645,743
----------- -----------
Net cash from investing activities 383,547 1,897,581
- Continued -
Notes to Financial Statements are an integral part of this Statement.
</TABLE>
VIDEOLABS, INC.
Statement of Cash Flows - Continued
Years Ended December 31
1996 1995
--------- ---------
Cash Flows from Financing Activities
Issuance of common stock and warrants $ 2,650 $ 250
Payments of long-term debt (8,041) --
--------- ---------
Net cash (used for) from financing activities (5,391) 250
--------- ---------
Net (Decrease) Increase in Cash and Cash (56,052) 450,116
Equivalents
Cash and Cash Equivalents - Beginning of Year 687,508 237,392
--------- ---------
Cash and Cash Equivalents - End of Year $ 631,456 $ 687,508
========= =========
Supplemental Cash Flow Information
Cash paid during the year for interest $ 2,117 $ --
========= =========
Cash paid during the year for taxes $ -- $ --
========= =========
Supplemental Schedule of Noncash Investing
and Financing Activities
Unrealized gain on marketable securities
classified as available-for-sale,
net of tax effect ($219,215) $ 219,215
========= =========
Capital lease obligations incurred $ 34,436
=========
During 1996, the Company retired $64,552 of fully depreciated fixed assets.
During 1995, the Company converted a note receivable for $100,000 into
88,888 shares of the debtor's common stock.
Notes to Financial Statements are an integral part of this Statement.
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
VideoLabs, Inc. designs, manufactures and markets products for computer based
video systems and video communications. The products are sold throughout the
world. The Company extends credit in the normal course of business to its
customers who are generally companies in the computer industry. The Company
performs credit evaluations of its customers' financial condition and generally
requires no collateral.
ACCOUNTING ESTIMATES
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could differ from those estimates.
The Company has recognized a write down of inventories including future purchase
commitments for a product that is not expected to be marketable. In addition,
the Company has recognized a reserve for future inventory obsolescence of
$60,000 in 1996 and $30,000 in 1995 due to the risk of continuing technological
changes in the industry. Management believes this will reduce inventory to the
lower of cost or market. While it is possible that the estimate will change
materially in the near term, no estimate can be made of the range of additional
loss, if any.
The Company has recorded a reserve for product warranties in the amount of
$35,000. This warranty accrual pertains primarily to new products shipped in the
last half of the year. It is reasonably possible that actual warranty costs
could differ from amounts estimated. It is not possible to estimate any
additional product warranty costs, if any, at this time.
Fourth quarter adjustments in 1996, which decreased income by approximately
$1,975,000, were made to reflect changes in the valuation of inventory,
retirement and severance charges, and for costs associated with litigation
involving the Company. The Company had fourth quarter adjustments in 1995, which
increased income by approximately $100,000, to adjust estimated realization of
deferred tax assets and gain on sale of assets.
In 1995, the Company recorded a net deferred tax asset of $30,000, reflecting
the benefit of approximately $591,000 of net operating loss carryforward,
reduced by a deferred tax allowance valuation. The amount of the deferred tax
asset considered to be realizable was reduced to $0 during 1996 due to the
uncertainty that the Company will be able to use the net operating loss
carryforwards in the future.
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1996 and 1995
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
CASH AND CASH EQUIVALENTS
For purposes of the statements of cash flows, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash. At times throughout the year, the Company's cash deposited in
financial institutions may exceed FDIC insurance limits.
MARKETABLE SECURITIES
The Company classifies its marketable debt securities as "held-to- maturity" if
it has the intent and ability to hold the securities to maturity. All other
marketable securities are classified as "available-for-sale". Securities
classified as held-to-maturity are carried at amortized cost. Securities
classified as available- for-sale are carried at their estimated fair value.
Realized gains and losses, determined using the average cost method, are
included in earnings; unrealized holding gains and losses on available-for- sale
securities are reported as a separate component of stockholders' equity, net of
any tax effect.
PROPERTY AND EQUIPMENT
Property and equipment is recorded at the lower of cost or fair value.
Depreciation is provided over estimated useful lives by the use of straight-line
and accelerated methods. The present values of capital lease obligations are
classified as long-term debt and the related assets are included in machinery
and equipment. Amortization of machinery and equipment under capital leases is
included in depreciation expense.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when incurred.
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes
related primarily to differences between the bases of accounts receivable,
inventory, property and equip ment, and certain accrued liabilities for
financial and income tax reporting. Deferred taxes are also recognized for
operating losses that are available to offset future taxable income and tax
credits that are available to offset future income taxes payable. Deferred tax
assets are subject to a valuation allowance based on the esti mated realization
of those assets.
INVENTORIES
Materials and work-in-process are stated at the lower of average cost or market.
Finished goods are stated at the lower of moving average cost or market.
ADVERTISING
The Company expenses the costs of advertising as incurred. Advertising expense
was $351,008 and $315,132 in 1996 and 1995, respectively.
EARNINGS (LOSS) PER COMMON SHARE
Earnings (loss) per common share amounts were computed using the weighted
average number of shares outstanding during each period. The weighted average
number of shares outstanding for the years ended December 31, 1996 and 1995 was
3,134,498 and 3,133,948, respectively. During 1996, stock options and warrants
for the purchase of common stock were anti-dilutive and have not been included
in these computations. The fully diluted weighted average number of shares
outstanding for 1995 was 3,183,948, however, this had no effect on earnings per
share.
NEWLY ISSUED ACCOUNTING STANDARDS
In February 1997, Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" was approved for issuance. The Company will adopt this Statement in
fiscal 1997. The effect of this Statement has not been determined, however, the
impact on the Company's financial position and results of operations is not
expected to be material.
2. MAJOR CUSTOMERS AND SUPPLIERS
In 1996, the Company has two customers who accounted for approximately $144,000
of the outstanding trade accounts receivable balance at December 31, 1996.
In 1995, the Company derived approximately $1,025,000 of its revenue from sales
to a single customer. This customer also accounted for approximately $256,000 of
the outstanding trade accounts receivable balance at December 31, 1995, which
amount was secured by a letter of credit.
During 1996 and 1995, the Company had total sales outside the United States of
approximately $2,907,000 and $4,110,000, respectively. Of these amounts
approximately $2,244,000 and $2,071,000, respectively, were sales to customers
in Europe, and $539,000 and $2,039,000, respectively, were sales to customers in
the Asia/Pacific region.
In 1996 and 1995, the Company had a supplier from which it made purchases of
$1,600,000 and $1,900,000, respectively. Although no long-term supply contract
exists, the Company believes there are alternative suppliers of this raw
material.
At December 31, 1996 the Company had purchase commitments with four suppliers in
the amount of $1,626,000 (See Note 14).
3. MARKETABLE SECURITIES
At December 31, 1996 the Company held no investments. The cost and fair value of
the Company's investments in marketable debt and equity securities at December
31, 1995 was as follows:
Gross
Amortized Unrealized Fair
Cost Gains Value
---- ----- -----
December 31, 1995
Available-for-Sale
Equity securities $ 71,875 $219,215 $291,090
Held-to-Maturity
U.S. Treasury Securities 62,873 62,873
-------- --------- --------
Totals $134,748 $219,215 $353,963
======== ======== ========
The U.S. Treasury Securities matured in 1996. The amortized cost basis was
$62,000 and there was no realized gain or loss. Proceeds from sales of
securities held as available-for-sale were $303,456 and $131,743 in 1996 and
1995, respectively. During 1996 and 1995 the Company realized gains of $231,582
and $103,618, respectively, from sales of available-for-sale marketable
securities.
4. NOTE RECEIVABLE
On December 30, 1993, the Company sold the rights to a teleconferencing codec (a
data compression and decompression hardware and software product) which it had
been developing since the Company's inception. The sale, to a start-up company
owned by a VideoLabs, Inc. director and stockholder, also included certain
equipment. The Company received a $100,000 note in this transaction which was
converted into common stock of the debtor in 1995 (Note 3). Deferred profit of
$95,000 was recognized in 1995 when the note was converted to common stock.
5. INVENTORIES
Inventories consisted of the following at December 31:
1996 1995
---- ----
Materials $2,137,687 $1,822,647
Work-in-process 335,486 243,895
Finished goods 747,127 363,405
---------- ----------
3,220,300 2,429,947
Reserves for inventory write down and
obsolescence (1,390,000) (30,000)
---------- ----------
$1,830,300 $2,399,947
========== ==========
6. EUROPEAN REAL ESTATE
During fiscal 1994, the Company purchased real estate in the Netherlands for use
as an office and residence by its European salesperson who is a related party.
The residence was provided to the salesperson as part of his compensation. The
Company no longer employs a salesperson in Europe and the residence is listed
for sale.
7. LINE OF CREDIT
The Company has a discretionary working capital line of credit with its bank of
the lesser of $1,500,000 or 80% of eligible accounts receivable (as defined)
plus $500,000 in cash collateral, with outstanding borrowings due April 10,
1997. The available line of credit is reduced by outstanding irrevocable letters
of credit which totaled $1,201,909 at December 31, 1996. The letters of credit
may be drawn upon by major suppliers of the Company. The letters of credit
expire from March 1997 through April 1997. There were no borrowings outstanding
under this line of credit at December 31, 1996. Advances under the note are
secured by substantially all corporate assets, including assignment of a
certificate of deposit with a minimum amount of $500,000. Interest is charged at
1% over the bank's "index rate". The interest rate at December 31, 1996 was
9.25%. The terms of the note agreement with the bank require the Company to
maintain certain financial ratios. The Company was not in compliance with all
such terms of the agreement at December 31, 1996. Such lack of compliance may
prevent the Company from drawing on the line of credit.
During 1995, the Company had a discretionary working capital line of credit with
its bank of the lesser of $1,000,000 or 75% of eligible accounts receivable (as
defined), with outstanding borrowings due July 26, 1996. The Company was
required to maintain at least a 50% cash collateral with its bank against all
loan advances and/or letter of credit commitments throughout the year. Any
credit available in excess of $1,000,000 was required to be secured by equal
cash deposits. Advances under the note are secured by substantially all
corporate assets. Interest was charged on borrowings at 1% over the bank's
reference rate, which was 8.5% at December 31, 1995. There were no borrowings
under this line of credit at December 31, 1995. The terms of the note agreement
with the bank required the Company to maintain certain financial ratios.
At December 31, 1995, the available balance on the line of credit of $1,216,000
was reduced by outstanding, irrevocable bank letters of credit totaling
$1,153,500 which were secured by certificates of deposit of $576,900.
8. LONG-TERM DEBT
Long-term debt consists of the following at December 31, 1996:
Capital lease obligations, at implicit
rates from 12% to 14%, payable in
installments to 1999 $26,395
Less amounts due within one year 10,285
-------
Net long-term debt $16,110
=======
Scheduled maturities of long-term debt are as follows at December 31, 1996:
1997 $10,285
1998 11,693
1999 4,417
-------
Total long-term debt $26,395
=======
9. LEASE OBLIGATIONS
The Company leases various items of equipment over terms of 3 to 5 years. The
Company also leases office and warehouse space. Equipment leases expire at
varying dates over the next three years. The office and warehouse lease expires
in September 1997. The Company is obligated to pay costs of property taxes and
operating costs under the terms of the office and warehouse lease.
Property and equipment includes the following amounts for capital leases at
December 31, 1996:
Machinery and equipment $34,436
Accumulated amortization 4,384
-------
Net equipment under capital leases $30,052
=======
At December 31, 1996, the Company had the following minimum commitments for
payments of rentals under leases which at inception had a noncancellable term of
more than one year:
Operating Capital
Leases Leases
------ ------
1997 $42,615 $13,101
1998 1,511 13,101
1999 4,568
------- -------
Total lease commitments $44,126 30,770
=======
Less amount representing interest 4,375
-------
Present value of minimum lease payments
(included in long-term debt) $26,395
=======
Rental expense for operating leases totaled $67,755 and $56,899 in 1996 and
1995, respectively.
10. STOCKHOLDERS' EQUITY
The Company has outstanding warrants to purchase common stock at prices ranging
from $1.50 to $3.50. Expiration dates vary from July 1997 to November of 2000.
Following is a summary of transactions:
Shares Under Warrants
---------------------
1996 1995
---- ----
Outstanding, beginning of year 820,264 818,264
Exercised during the year (1,000)
Granted during the year 2,000
------- -------
Outstanding, end of year 819,264 820,264
======= =======
11. STOCK BASED COMPENSATION
The Company has a qualified incentive stock option plan, whereby options to
purchase shares of the Company's common stock are granted at a price not less
than the fair market value of the stock at the date of grant. Each option
expires no later than ten years from the date of grant. If options are granted
to persons owning more than ten percent of the voting stock of the Company, the
Plan provides that the exercise price shall not be less than 110% of the fair
market value per share at the date of grant, and will expire no later than five
years from the date of grant. The plan has authorized 300,000 options for the
purchase of Company stock.
The Company has another incentive stock option plan, with 500,000 authorized
options to purchase the Company's stock. The plan is substantially the same as
the plan discussed above. However, the exercise price may be lower than, greater
than, or equal to the stock price at the date of issuance.
The fair value of each option grant is estimated on the date of grant using the
Black-Sholes option-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995, respectively; dividend yield of 0%
for all years; expected volatility of 71% and 48%; risk-free interest rates of
5.8 and 6.0 percent; and expected lives of four years.
A summary of the Company's stock option plans as of December 31, 1996 and 1995
and changes during the years ending on those dates is listed below:
1996 1995
-------------------------- ----------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
Outstanding at beginning
of year 200,000 $2.51 127,528 $2.98
Granted 255,000 .81 114,000 2.19
Expired - - - -
Forfeited (50,000) 2.79 (41,528) 3.04
------- -------
Outstanding at end of year 405,000 1.82 200,000 2.51
======= =======
Options exercisable at 226,750 85,500
year end
Weighted-average fair
value of options
granted during
the year $.47 $.97
The following table summarizes information about fixed stock options outstanding
at December 31, 1996.
<TABLE>
<CAPTION>
Weighted-Average
Number Remaining Options
Price Outstanding Contractual Life Exercisable Vesting
----- ----------- ---------------- ----------- -------
<S> <C> <C> <C> <C> <C>
$2.65 12,000 .8 years 12,000 In whole or in part over four years.
3.13 31,000 1.8 years 15,500 25% each year for four years.
2.13 97,000 8.8 years 24,250 25% each year for four years.
2.81 10,000 2.8 years 10,000 In whole or in part over four years.
.81 90,000 4.0 years 25% each year for for years.
.81 165,000 5.0 years 165,000 In whole or in part over ten years.
------- -------
405,000 226,750
======= =======
</TABLE>
The Company has chosen to account for stock based compensation in accordance
with APB Opinion 25. If compensation cost would have been recognized in
accordance with Statement of Financial Accounting Standards No. 123,
compensation cost would have been $119,850, which would have increased the net
loss by the same amount and loss per share by $.04 in 1996.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of the Company's financial instruments are as follows at
December 31, 1996 and 1995:
1996 1995
------------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and equivalents $631,456 $631,456 $687,508 $687,508
Certificate of deposit 513,788 513,788 576,900 576,900
Marketable securities 353,963 353,963
---------- ---------- ---------- ----------
$1,145,244 $1,145,244 $1,618,371 $1,618,371
========== ========== ========== ==========
The carrying values of cash and equivalents and certificates of deposit
approximate fair values. The fair value of marketable securities were estimated
at 50% of their quoted market price due to restrictions on sale and uncertainty
as to the volatility of the market price of this investment in a start-up
company.
13. INCOME TAXES
The income tax provision consists of the following components:
1996 1995
---- ----
Current $69,000
Deferred $30,000 (30,000)
Tax benefit of net operating loss carryforward 69,000
------- --------
Net provision for (recovery of) income taxes $30,000 ($30,000)
======= ========
The provision for (recovery of) income taxes differs from that which would
result from applying Federal statutory rates to the earnings (loss) before
income taxes because a valuation allowance has been provided to reduce the
deferred tax asset to the amount that is estimated to be realized. This
difference is reconciled as follows:
1996 1995
---- ----
Federal statutory rate 34.0% 34.0%
State tax rate - net 6.5 6.5
Permanent differences 0 2.2
Net operating loss (77.1) (42.7)
Valuation allowance 35.3 17.4
==== ====
Effective tax rate (1.3%) 17.4%
==== ====
The total deferred tax assets and liabilities included in the net deferred tax
balance are as follows:
1996 1995
---- ----
Deferred tax assets (primarily inventory
reserve, litigation reserve, net
operating loss and tax
credit carryforward) $1,061,000 $292,000
Deferred tax liabilities (property
and equipment) (11,000) (28,000)
Deferred tax asset valuation allowance (1,050,000) (234,000)
---------- --------
Net deferred taxes $ -- $ 30,000
========== ========
The net increase in the valuation allowance was $816,000 and $102,000 in 1996
and 1995, respectively.
At December 31, 1996, for income tax purposes, the Company had a federal net
operating loss carryforward of approximately $819,000 and a general business
credit carryforward of approximately $58,000 available to be carried to future
periods. The net operating loss carryforward and general business credit
carryforward expire in 2008 through 2011 if not used.
14. COMMITMENTS AND CONTINGENCIES
The Company has accrued a loss on purchase commitments and established a reserve
for pending litigation. The Company has purchase commitments related to raw
materials for a product the Company will not be able to bring to market. The
Company is a defendant in a lawsuit by a former consultant claiming damages for
payment of royalties on products developed by the claimant. A tentative
settlement has been reached, and the settlement amount is within the amount
accrued.
15. EMPLOYEE BENEFIT PLAN
The Company sponsors a discretionary 401(k) profit sharing plan and trust
covering employees who are over 18 years of age and have completed 90 days of
service. The Company made no contributions to the Plan in 1996 and 1995.
ITEM 8. CHANGES AND DISAGREEMENTS WITH THE ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Company has not changed public accountants and has not had any
disagreements with such accountants on accounting and disclosure matters.
PART III
Certain information required by Part III is omitted from this report in
that the Registrant will file a definitive Proxy Statement pursuant to
Regulation 14A (the "Proxy Statement") not later than 120 days after the end of
the fiscal year covered by this report, and certain information included therein
is incorporated herein by reference. Only those sections of the Proxy Statement
which specifically address the items set forth herein are incorporated by
reference.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The information required by this Item is incorporated by reference to the
Company's Proxy Statement.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to the
Company's Proxy Statement.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report.
1. Financial Statements: The following Financial Statements
of the Company and Report of Independent Auditors are incorporated
as Item 7 of this report.
Balance Sheet - December 31, 1996 and 1995.
Statement of Operations - Years Ended December 31, 1996 and 1995.
Statement of Stockholders' Equity - Years Ended December 31, 1996 and
1995.
Statement of Cash Flows - Years ended December 31, 1996
and 1995.
Notes to Financial Statements.
Report of Independent Auditors.
Financial Data Schedule
2. Financial Statement Schedules: The following financial statement
schedules of the Company for the fiscal year ended December 31, 1996 are filed
as part of this Report and should be read in conjunction with the Financial
Statements of the Company.
Schedule
I Marketable securities at December 31, 1996 see note 3, to the
Financial Statements.
3. Exhibits: The exhibits listed in the following Index to Exhibits are
filed as a part of, or incorporated by reference into this Report.
Exhibit Form SB-2*
No. Exhibit No. Description
--- ----------- -----------
(3)(i) 3.1 Certificate of Incorporation
(3)(ii) 3.2 by-laws
(4) Pg. 29 Instruments defining the rights of
security holders, including indentures.
(10) Material contracts.
(10)(i) 1.1 Underwriting Agreement
(10)(ii) 1.2 Selected Dealer Agreement
(10)(iii) 4.2 Warrant to Purchase Shares of Common
Stock
(10)(iv) 4.3 Bridge Note
(10)(v) 4.4 Bridge Warrant
(10)(vi) 10.3 Settlement and License Agreement
(10)(vii) 10.4 Design Royalty Agreement
(10)(viii) 10.5 Waiver of Contract Rights by Messrs.
Johnson, Craven, Clapp and Collins
(10)(ix) 10.6 Johnson Employment Agreement
(10)(x) 10.8 Asset Sale Agreement with RSI (formerly
Rocket Science, Inc.)
(10)(xi) 10.14 Krekelberg Employment Agreement
(10)(xii) 10.13 Suick Bay Technologies Royalty
Agreement
(10)(xiii) 1.1 Underwriting Agreement
(10)(xiv) 10.10 CLI Purchase Order
(10)(xv) 10.15 Underwriter lockup Agreements
(10)(xvi) 10.1 Office Warehouse Lease
(10)(xvii) 10.7 Letter of Credit Americana Bank-filed
herewith
(10)(xviii) Johnson Retirement Agreement-filed herewith
(10)(xix) Hansen Consulting Agreement-filed herewith
(10)(xx) Broghammer Consulting Agreement-filed
herewith
(27) Financial Data Schedule-filed herewith
Footnote No.
------------
(11) 1. Statement regarding computation of per
share earnings
(13) 2. Annual report to security holders,
Form 10-Q or quarterly report to security
holders
(25) Power of Attorney-filed herewith
* Incorporated by reference to the exhibit filed with the Registrants
Registration Statement on Form SB-2 filed March 26, 1994, and amended on April
27, 1994, which became effective on May 10, 1994.
1. Incorporated by reference to Company Annual Report to Shareholders.
2. Incorporated by reference to Annual Report to Shareholders.
(b) Reports on Form 8-K
On December 4, 1995, the following information was reported on
form 8-K
David E. Krekelberg, Vice President of Engineering, resigned from the
Board of Directors of the Company effective November 29, 1995, and as an officer
and employee of the Company effective December 31, 1996.
On January 15, 1996, the following information was reported on
form 8-K
Alvin J. Porter, resigned from the Board of Directors of the Company
effective December 29, 1995. The Company does not anticipate that the vacancy on
the board of directors left by Mr. Porter will be filled.
On November 8, 1996, the following information was reported on
form 8-K
VideoLabs announced the retirement of its CEO and President, Ward C.
Johnson. Johnson was a founder of the Company and has been President since 1992.
Johnson will remain as Chairman of the Board, and a Director of VideoLabs until
the next annual meeting of shareholders. He will also continue to assist in
bringing several new product introductions to completion.
Mr. Johnson's successor is James Hansen, a business advisor.
Hansen will serve as CEO and President on an interim basis until a
permanent selection can be made. Mr. Hansen will provide strategic
input and leadership, and evaluate potential options to optimize
shareholder value for the Company.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended, the Registrant caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
VIDEOLABS, INC.
By: /s/ James W. Hansen
James W. Hansen
President and CEO
Dated: March 26, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James W. Hansen and Jill R. Larson,
jointly and severally, attorneys-in-fact, each with the power of substitution,
for any and all capacities, to sign any amendments to this Report on Form
10-KSB, and to file the same, with exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorneys-in-fact, or his substitute
or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of 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 Title Date
- --------- ----- ----
/s/James W. Hansen
James W. Hansen President, Treasurer March 26, 1997
Chief Executive Officer,
/s/ Ward C. Johnson
Ward C. Johnson Director, March 26, 1997
/s/ Richard F. Craven
Richard F. Craven Director. March 26, 1997
/s/ John A. Collins
John A. Collins Director. March 26, 1997
MEMORANDUM OF UNDERSTANDING
This Agreement, dated as of November 1, 1996, between Videolabs, Inc.
(the "Company") and Ward Johnson, residing at 4507 Mooreland Avenue South,
Edina, Minnesota ("Johnson").
WHEREAS, Johnson has served as the President and CEO of the Company;
and
WHEREAS, Johnson and the Company desire to terminate Johnson's
employment as an officer of the Company on the terms and conditions set forth
herein;
NOW, THEREFORE, the parties hereto agree as follows.
1. Resignation. Effective November 1, 1996, Johnson hereby resigns from
each and every office and employment position with the Company with the limited
exception that beginning November 1, 1996 and continuing for the next seventeen
(17) months thereafter, Johnson shall serve as an employee of the Company solely
for the purpose of coordinating the consulting work to be provided to the
Company by Intertrade Associates Corp. as provided for in Section 3 hereof. The
compensation to be paid to Johnson for his services in coordinating such
activity shall be $1000 per month payable in accordance with the Company's
normal payroll schedule. At the end of such seventeen (17) month period
Johnson's employment shall terminate and no additional compensation or benefits
will be payable to Johnson with respect to his status as an employee of the
Company, except as specifically provided for herein. During this seventeen (17)
month term, the Company shall provide Johnson with the same health benefits
provided to officers of the Company from time to time. Upon expiration of such
seventeen (17) month term, Johnson shall be eligible for COBRA benefits from the
Company. As promptly as practicable, Johnson shall return to the Company all
documents, financial statements and other financial data, product information,
trade secrets, customer lists and other materials, records or information
relating to the Company and its business, whether in documentary form or stored
in computer readable discs or similar electronic storage devices ("Company
Information").
2. Temporary Appointment. The Company agrees to cause Johnson to be
appointed as of November 1, 1996, to the position of Chairman of the Board of
Directors of the Company until the next annual meeting of the Company's
shareholders. In such position Johnson will have no operating responsibilities
nor any authority over the officers, employees or directors of the Company and
his sole function as Chairman will be to preside over meetings of the Board of
Directors. Johnson shall receive the same amount and type of compensation as
non-employee Directors of the Company, including payment of meeting fees and
discretionary awards of stock options. Johnson will have voice mail at the
Company and use of limited secretarial services but shall have no office or desk
at the Company's premises.
3. Consulting Services.
(a) The Company shall retain Johnson's consulting firm,
Intertrade Associates Corp., a Minnesota company ("Intertrade") to
perform certain consulting services for the Company for a period of
seventeen (17) months, commencing November 1, 1996. The following
monthly fees shall be payable to Intertrade upon satisfactory
performance of such services subject to adjustment as provided in
paragraph 3(b) below:
Month 1 through Month 3 $ 9000 per month
Month 4 through Month 6 $ 7000 per month
Month 7 through Month 9 $ 5000 per month
Month 10 through Month 17 $ 3000 per month
Payments shall be made monthly against invoice from Intertrade upon
approval by the Company's CEO or CFO.
(b) The amounts payable by the Company in connection with the
consulting services referred to in Paragraph 3(a) shall be reduced by
fifty percent (50%) of the amount of "Net Revenues" (as hereinafter
defined) which are earned by Johnson or Intertrade during the seventeen
(17) month term of the consulting arrangement. Johnson shall submit a
monthly statement of Net Revenues showing the details of the
calculation of the Net Revenues and described herein. Fifty percent
(50%) of the Net Revenues will be deducted from the final payments due
Johnson under Paragraph 3(a); provided that if such final payments are
not sufficient to reimburse the Company for such 50% of Net Revenues,
Johnson shall personally reimburse the Company for the shortfall. For
the purposes of this Agreement, the term "Net Revenues" shall mean:
(i) salary paid to Mr. Johnson by businesses other than the
Company;
(ii) the gross revenues of Intertrade other than the
consulting payments paid pursuant to Paragraph 3(a) and less
the amount of all expenses incurred by Intertrade in earning
such revenues, except compensation or benefits (including but
not limited to reimbursement of expenses) to Johnson or any
relative of Johnson; and
(iii) the net income calculated in accordance with the
previous subparagraph for any new company of which Johnson is
at least a fifty percent (50%) owner but specifically
excluding Amcom, Inc. and Z.H. Computer, Inc.
(c) The Company shall pay Intertrade a bonus of $5,000 upon
delivery to the Company of each of the following three products
provided such product is satisfactory in the sole discretion of the
Company: Lo Cost Camera, Portable Camera, USB Camera. For purposes of
this paragraph, "delivery" shall be defined as the first shipment of
each such product to a final customer for payment by such customer.
(d) The Company shall permanently transfer to Intertrade at no
cost the computer used by Johnson while an employee of the Company.
Johnson shall provide the Company with a disc of Company data and files
stored on such computer. The Company will transfer to Intertrade, where
possible at minimal cost to the Company, any software licenses needed
to operate any software currently loaded on to such computer.
4. Continuing Assistance. For the next seventeen (17) months, Johnson
agrees to assist the Company at no cost other than reimbursement for direct
out-of-pocket expenses incurred by Johnson, in connection with any matters
(including but not limited to any litigation, governmental investigations or
inquiries) currently underway or which may arise in the future and which relate
to actions which occurred during his tenure as an officer or employee of the
Company. Johnson agrees to assist the Company in connection with the preparation
of disclosure documents and periodic reports by the Company under federal or
state securities laws or regulations, NASD or stock exchange rules or other
similar requirements. Such assistance shall include prompt completion and return
of Director and Officer Questionnaires relating to his tenure as an officer or
employee of the Company.
5. Confidentiality. Johnson agrees that he shall forever hold as
confidential and not disclose to any person any Company Information or any trade
secrets, proprietary, financial, competitive or technical information regarding
the Company, its business, products or customers of which he has knowledge,
except as may be required by law.
6. Noncompetition. Johnson shall not, and Johnson shall cause
Intertrade and any other corporation or entity which is controlled by Johnson
not to, (i) engage in any business, (ii) own or control any interest in or
control any business or entity, or (iii) be employed by any business or entity,
whether as an officer, director, employee, consultant or independent contractor,
which competes with the business of the Company anywhere in the United States
for a period of seventeen (17) months from the date of this Agreement.
7. Future Development Activities. For a period of seventeen (17) months
from the date of this Agreement, in the event that Johnson, Intertrade or any
other entity controlled by Johnson shall create or develop any technology,
technique, product or device which may be useful or of interest to the Company
in connection with the business, technologies, techniques or products of the
Company (a "Development"), Johnson shall offer, or shall cause Intertrade or
such other entity to offer, to the Company the exclusive right of first refusal
to purchase, license or otherwise acquire or utilize such Development on
commercially reasonable terms which reflect both the anticipated costs and
benefits associated with pursuing such Development. Johnson shall provide
written notice to the Company of such Development and the terms of his offer of
all development rights to such Development and the compensation to be paid to
Johnson as a result thereof. The Company shall have the option for a period of
thirty 30 days to accept such offer in writing. In the event that the Company
determines to accept such offer, such Development shall be sold, licensed or
otherwise transferred by Johnson to the Company pursuant to such terms. In the
event that the Company declines to match such offer, Johnson will abandon the
Development and will not sell, license, or otherwise transfer all or any portion
of such Development to any other person or entity.
8. Termination of Prior Agreement; Mutual Releases. Each of the Company
and Johnson hereby acknowledge and agree that this Agreement shall supersede the
Employment Agreement dated February 1, 1994 between the Company and Johnson and
that such Employment Agreement is hereby terminated and of no further force or
effect. Each of the Company and Johnson hereby forever releases the other from
and waives any claims of any kind which either may have against the other
arising from or in connection with Johnson's employment by the Company except as
provided in Sections 5, 6 and 7.
9. Public Announcement. Any public announcement of the termination of
Johnson's termination of employment with the Company shall be subject to the
prior approval of each of the Company and Johnson, which approval shall not be
unreasonably withheld.
10. Miscellaneous.
(a) Notices. All notices permitted or required to be given
hereunder shall be in writing and shall be deemed given if delivered
personally or by overnight courier service or five (5) days after
having been mailed by certified mail, return receipt requested and
postage prepaid, to the parties at the following addresses (or at such
other address for a party as may be specified by like notice):
(i) If to the Company:
Videolabs, Inc.
10925 Bren Road East
Minneapolis, Minnesota 55343
(ii) If to Johnson:
Mr. Ward Johnson
4507 Mooreland Avenue South
Edina, Minnesota 55425
(b) Assignment. Neither party shall assign its rights under
this Agreement without the prior written consent of the other party.
The respective rights and obligations of the parties set forth in this
Agreement shall be binding on and inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
(c) Expenses. Each party shall bear its respective costs and
expenses incurred in connection with the preparation of this Agreement.
(d) Severability. If any provision of this Agreement is held
to be invalid or unenforceable, such invalidity or unenforceability
shall not affect or impair the validity or enforceability of the
remaining provisions of this Agreement.
(e) Waiver. Any waiver of a provision of this Agreement must
be in writing signed by the party waiving its rights and shall apply
only in the specific instance and for the specific purpose given. The
giving of a waiver in one instance or for one purpose shall not create
any implied obligation to give a waiver in another instance or for
another purpose.
(f) No Third Party Obligations. Nothing expressed or implied
in this Agreement is intended to confer upon any person(s) or legal
entity other than Johnson and the Company, and their respective
successors and assigns, any rights, remedies, obligations or
liabilities under or by reason hereof.
(g) Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto and supersedes all prior
agreements and understandings, both written and unwritten, with respect
to the subject matter hereof. This Agreement may not be amended except
in a writing duly executed by Johnson and the Company.
(h) Governing Law. This Agreement shall be governed by and
construed and enforced in accordance with, the laws of the State of
Minnesota.
(i) Headings. Titles to sections hereof are for information
purposes only.
(j) Remedies. In the event of the violation or the threatened
violation by Johnson of any of the covenants contained in this
Agreement, the Company shall have (i) the right and remedy to
specifically enforce the provision of Paragraphs 5, 6 and 7 of this
Agreement, it being acknowledged that any such violation or threatened
violation will cause irreparable injury to the Company and that money
damages will not provide an adequate remedy to the Company, and (ii)
any and all damages available and to which it is entitled by law.
(k) Construction of Agreement. This Agreement is the product
of negotiations between Johnson and the Company, Johnson acknowledges
that he was afforded the opportunity to consult with legal counsel, and
no provision shall be construed for or against either party by reason
of ambiguity in language.
(l) ADEA/MHRA Waiver. Johnson may rescind and revoke this
Agreement for any reason within fifteen (15) calendar days after signing it. To
be effective, the rescission or revocation must be in writing and hand delivered
or mailed to the Company's legal counsel, James B. Lockhart, Popham, Haik,
Schnobrich & Kaufman, Ltd., 222 South Ninth Street, Minneapolis, Minnesota
55402, within the 15-day period. If mailed, the rescission or revocation must be
postmarked within the 15-day period, properly addressed as set forth in the
preceding sentence, and sent by Certified Mail, Return Receipt Requested. If
delivered by hand, it must be given to James B. Lockhart within the 15-day
period.
IN WITNESS WHEREOF, the parties have set their hand and seal through
their duly authorized representatives on the date first above written.
VIDEOLABS, INC.
By /s/
------------------------
James W. Hansen
Its President
/s/
------------------------
WARD JOHNSON
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("AGREEMENT"), made effective as of October
15, 1996, by and between VideoLabs Inc., a Delaware corporation (the "COMPANY"),
and The Hansen Company, a Minnesota corporation ("CONSULTANT").
RECITALS:
A. The Company and Consultant desire to enter into this Agreement to
confirm the terms and conditions of Consultant's retention as an independent
consultant.
AGREEMENTS:
NOW, THEREFORE, in consideration of the mutual promises, agreements and
covenants contained in this Agreement, the parties hereby covenant and agree as
follows:
1. ENGAGEMENT OF CONSULTANT TO PERFORM CONSULTING SERVICES. The Company
hereby engages Consultant to provide general and overall managerial and
financial advice and consulting services to the Company as may be requested by
the Company from time to time, and Consultant accepts such engagement and hereby
agrees to perform such services for the Company, as an independent contractor,
and not as an employee, during the Term of this Agreement. The services to be
performed by Consultant hereunder shall include the services and duties
generally provided by each of a president and a treasurer of a corporation, and
such additional services as may be reasonably requested from time to time by the
Company (collectively, the "SERVICES"). All of the Services provided by the
Consultant shall be provided through, and only through, Mr. James W. Hansen (the
"PRINCIPAL"), a principal of the Consultant, unless otherwise agreed by the
Board of Directors of the Company. The Consultant shall at all times be and
remain subject to the control and direction of the Board of Directors, and in
performing Services the Consultant shall at all times carry out the directions
and instructions of the Board of Directors.
2. AUTHORITY AND TITLE; PERFORMANCE STANDARDS. During the Term, the
Principal, on behalf of the Consultant, shall be designated as the acting
president and treasurer of the Company, and shall have the powers and
authorities, and shall be subject to the duties and obligations, inherent in
such offices. The Principal shall report directly to the Board of Directors and
such other persons, if any, as may be directed by the Board of Directors.
Consultant shall perform the Services as and when requested by the Company, on a
substantially full-time (at least 30 hours per week) basis during the Term.
Consultant may determine the particular hours and days for the performance of
the Services, provided that the Services are performed on a timely basis, and
provided that Principal is generally available during normal business hours of
the Company. Except as otherwise provided herein, Consultant shall not be
prohibited from providing services to others during the Term, provided the
Principal is made available to the Company on a substantially full-time basis to
provide Services hereunder. In the performance of the Services, Consultant shall
act in good faith and shall use all reasonable efforts to comply with all
reasonable requests of the Company during the term of this Agreement. Consultant
shall perform the Services diligently and to the best of Consultant's, and
Principal's, ability. Consultant, and Principal, shall be subject to any and all
fiduciary duties owed to the Company which are inherent with the offices of
president and treasurer. Any action or decision of the Company under this
Agreement, shall be determined by the Board of Directors. Consultant represents
and warrants to the Company that there are no restraints upon Consultant or
Principal which will or could prohibit Consultant from fulfilling its
obligations hereunder.
3. TERM. Subject to the terms and provisions of this Agreement, the
term of this Agreement and Consultant's engagement hereunder, shall be for an
initial period of three months commencing on the effective date hereof, unless
terminated earlier in accordance with the terms and provisions of Section 7
hereof (the "TERM"). The Term shall automatically be extended for additional
periods of three months after the initial term unless, at least thirty (30) days
prior to the end of the initial or any extension Term, either party gives
written notice to the other of their intention not to renew the Term.
4. CONSULTING FEE; WARRANTS. In consideration for the Services rendered
hereunder, Consultant shall receive a fee of Eight Thousand and No/100 Dollars
($8,000.00) per month (the "FEE") during the Term, pro rated daily for any
partial months. The Fee shall be payable monthly, in arrears, following
Consultant's submittal of an invoice to the Company. The Company's Board of
Directors may, in their absolute and sole discretion, have the Company pay the
Consultant up to an additional Fifty Thousand Dollars ($50,000.00) for the
Services rendered, based upon the performance of the Company. Nothing contained
in the Agreement, however, shall require the Company to pay any amounts for the
Services in addition to the Fee. Unless this Agreement is terminated by the
Company for cause pursuant to Section 7 and provided that Consultant performs
the Services in a manner consistent with the provisions of Sections 2 and 3
above, Company shall pay the Consultant the Fee whether or not Services are
requested by the Company. The Consultant acknowledges and agrees that only the
Consultant, and not the Principal, shall be entitled to the Fee or any portion
thereof. The Consultant shall be solely responsible for any compensation or
renumeration to the Principal.
5. RELATIONSHIP OF PARTIES. Consultant (whether or not acting through
the Principal) is and shall be deemed to be an independent consultant, and the
Company and Consultant acknowledge and agree that the relationship created by
this Agreement is not that of joint venturers or of employer and employee.
Consultant and Principal shall not be entitled to participate in any life,
disability, accident and health insurance, hospitalization, pension, retirement,
or any other employee benefits of the Company. Consultant shall be responsible
for any and all taxes associated with the payment of the Fee, and shall report
and pay such taxes consistent with the provisions of this Agreement. The Company
shall not be entitled to direct the method of performance of the Services.
Consultant, through the Principal as acting president and treasurer, shall have
the authority to bind the Company to any contract, agreement or arrangement
without specific approval or authorization by the Board of Directors, but only
with respect to transactions in the ordinary course of the business of the
Company. All contracts, agreements, arrangements or other transactions which are
not in the ordinary course of the business of the Company shall require the
specific or general authorization of the Board of Directors. The provisions of
this Section shall survive the expiration or termination of this Agreement.
6. REIMBURSEMENT FOR EXPENSES. Consultant shall be reimbursed by the
Company for all reasonable travel and other expenses actually and properly
incurred in the performance of the Services hereunder; provided, however, that
all such travel and other out-of-pocket expenses must be approved in advance by
the Company. For all such expenses, Consultant shall furnish to the Company
statements, receipts and vouchers as and when required by and to the reasonable
satisfaction of the Company.
7. TERMINATION. Notwithstanding any provisions of this Agreement to the
contrary, this Agreement and Consultant's retention hereunder may be terminated
prior to the expiration of the Term in the event of the occurrence of any of the
following:
(a) The Company may terminate this Agreement and Consultant's
retention hereunder without cause upon five (5) days notice; provided,
however, that in the event of a termination without cause, the entire
unpaid portion of the Fee for the remaining portion of the Term shall
be paid by the Company through the remainder of such Term,
notwithstanding such termination.
(b) The Company may terminate this Agreement and Consultant's
retention hereunder for cause. As used in this Section 8(b), the term
"CAUSE" shall mean: (i) gross negligence of Consultant or Principal in
the performance of the Services; (ii) willful neglect of Consultant's
or Principal's duties or willful refusal to comply with the reasonable
requests for Services by the Company; (iii) dishonesty, theft, fraud or
other criminal act on the part of Consultant or Principal; or (iv)
Consultant's or Principal's material breach of the covenants contained
herein and the failure by Consultant to promptly cure such breach or
failure within ten (10) days after a written demand for performance is
delivered to Consultant by the Company, specifying such cause. In the
event of a termination by the Company for cause, the Company shall have
no obligation to pay any portion of the Fee payable for periods after
the date of such termination.
8. CONFIDENTIAL INFORMATION. Consultant acknowledges that the
confidential and proprietary information and data (which shall mean information
or data not known or generally available to the public) obtained by Consultant
or Principal during the course of performing Services under this Agreement
concerning the Company's business, affairs, products, inventions, processes,
techniques, equipment, machinery, apparatus, business operations, technical
information, drawings, specifications, materials, know how, and the like, and
any knowledge or information developed by Consultant or Principal as a result of
performing Services hereunder (collectively referred to as the "CONFIDENTIAL
INFORMATION"), are all the sole property of the Company. Consultant agrees to
hold, and to cause Principal to hold, all Confidential Information in confidence
and not to disclose the same, without the prior written consent of the Company,
to anyone for any reason at any time (unless so required by law or legal
process, and then only after written notice to the Company and a reasonable
opportunity for the Company to challenge, at its cost, such disclosure).
Consultant shall not, directly or indirectly, use or permit the use of any
Confidential Information for any purpose, other than performing the Services
hereunder, without the written consent of Company. Consultant shall use its best
efforts to prevent publication, disclosure or other use or transmission of any
Confidential Information. Upon the termination or expiration of this Agreement,
or earlier if requested by the Company, Consultant agrees to return to the
Company all Confidential Information in the possession of Consultant, regardless
of the form of such Confidential Information. The provisions of this Section
shall survive the expiration or termination of this Agreement.
9. INTELLECTUAL PROPERTY RIGHTS.
(a) Without limiting the Company's rights arising by law or
custom, Consultant acknowledges that the Company shall exclusively own,
and Consultant hereby assigns, transfers, and conveys to the Company,
all discoveries, work product, trademarks, service marks, trade names,
brand names, software, copyrights, inventions, improvements, patents
and other intellectual property rights produced, created, developed or
conceived by Consultant or Principal prior to or during the Term of
this Agreement, whether registered or unregistered, which relate to the
Company's business (collectively, the "INTELLECTUAL PROPERTY RIGHTS").
Consultant shall disclose all such Intellectual Property Rights to the
Company, and Consultant agrees to execute and deliver all documents
required by the Company to document or perfect the Company's exclusive
ownership of the Intellectual Property Rights.
(b) Consultant further agrees that all copyrightable works
developed by the Consultant or the Principal, either alone or with
others, prior to or during the Term of this Agreement, which relate in
any way to the Company's business, shall be considered to be works made
for hire and the ownership of and the copyrights to such works shall be
the exclusive property of the Company. Consultant shall disclose all
such works to the Company, and Consultant agrees to execute and deliver
all documents required by the Company to document or perfect the
Company's exclusive ownership of such works.
(c) Upon the termination or expiration of this Agreement, or
earlier if requested by the Company, Consultant agrees to return to the
Company all tangible (including electronic storage) elements of the
Intellectual Property Rights and works in the possession of Consultant,
regardless of the form of such Intellectual Property Rights and works.
(d) The provisions of this Section shall survive the
expiration or termination of this Agreement.
10. NONCOMPETITION COVENANT. Consultant hereby agrees that, during the
Term and for a period of one year thereafter, Consultant shall not, directly or
indirectly, own, manage, operate, control, be employed by, act as an advisor or
consultant to, or participate in, the ownership, management, operation, or
control of any business involving the design, development, manufacture,
distribution or sale (whether at wholesale or retail) of image capture devices
or otherwise in competition with the businesses of the Corporation, as now or
hereafter conducted, in any geographic market served by the Corporation during
the restriction period; provided, however, that nothing contained in this
Section shall prohibit the Consultant from owning stock in a publicly traded
company which is in competition with the Company provided Consultant's aggregate
holdings therein do not exceed one percent (1%) of the capital of such company.
The provisions of this Section shall survive the expiration or termination of
this Agreement.
11. CONSIDERATION; REMEDIES. Consultant acknowledges and agrees that
the covenants set forth in Sections 8, 9 and 10 above are conditions to the
offer of retention by the Company on the terms and for the compensation provided
hereunder and that a portion of the consideration paid to Consultant hereunder
is being paid by the Company in consideration for such covenants. Consultant
further acknowledges and agrees that any breach or threatened breach of any of
the covenants set forth in Sections 8, 9 or 10 above would result in immediate
and irreparable injury to the Company for which money damages would be an
inadequate remedy. Accordingly, Consultant agrees that the Company will have the
right to obtain equitable relief including an injunction to enforce the terms of
Sections 8, 9 or 10 of this Agreement in addition to any other legal or
equitable remedies that may be available to the Company. In the event of any
violation by Consultant of the terms of Sections 8, 9 or 10 of this Agreement,
Consultant agrees to pay the reasonable costs and legal fees to the Company in
pursuing any of its rights with respect to this Agreement, in addition to the
damages sustained by the Company. The provisions of this Section shall survive
the expiration or termination of this Agreement.
12. NOTICES. Except as otherwise specifically provided, any notice in
writing required or permitted to be given in respect of this Agreement shall be
sufficiently given if delivered to the party by hand, by Federal Express or
similar overnight carrier service or mailed by registered or certified mail,
postage pre-paid, return receipt requested to the following addresses:
Company: VideoLabs, Inc.
10925 Bren Road East
Minneapolis, Minnesota 55343
Attn: Chairman of the Board
Phone: (612) 988-0055
Telecopy: (612) 988-0066
Consultant: The Hansen Company
26 Highway 96 East
Dellwood, Minnesota 55110
Attn: President
Phone: (612) 426-1822
Telecopy: (612) 426-1822
Any notices shall be deemed to have been received by the party to whom
it is addressed if mailed as aforesaid on the third business day following the
date of mailing, or if sent by facsimile transmission as aforesaid on the first
business day following the date of transmission. Consultant shall be required to
inform the Company of any change of address as soon as it occurs.
13. NO WAIVER. The failure or delay on the part of any party in
exercising any right, power or remedies under this Agreement or available to
such party at law or in equity, shall not operate or be construed as a waiver of
such right, power or remedy. Any waiver of a right, power or remedy under this
Agreement must be in writing and signed by the party granting the waiver. The
giving of a waiver in one instance or for one purpose shall not create any
implied obligation to give a waiver in another instance or for another purpose.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota, without giving effect to
choice of law principle thereof.
15. ENTIRE AGREEMENT. The parties hereto agree that this Agreement
constitutes the entire understanding of the parties and supersedes and replaces
all oral or written representations and that this Agreement shall not be
amended, modified or supplemented in any respect except by a subsequent written
Agreement signed by both parties hereto.
16. SUCCESSORS AND ASSIGNS. The Agreement shall inure to the benefit of
and be binding upon the parties hereto and upon the heirs, executors,
administrators and personal representatives of Consultant and the successors and
assigns of the Company.
17. SEVERABILITY. Subject to the provisions of applicable law, in the
event that any term or provision of this Agreement, or any part or aspect
thereof, shall be deemed by a court of competent jurisdiction to be overly broad
in scope or duration or both, the court considering the same shall have the
power and authority, and the parties hereby direct such court to exercise such
power and authority, to modify such term or provision to limit such scope and
duration so that such term or provision is no longer overly broad and to enforce
the same as so limited. Subject to the foregoing sentence, in the event that any
provisions of this Agreement shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall attach only to such
provisions and shall not affect or render invalid or unenforceable any other
provision of this Agreement, it being the intent of the parties that the terms
and provisions of this Agreement shall be deemed to be severable into separate
and independent covenants.
18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts each of which when executed shall be deemed to be an original and
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Consulting
Agreement as of the date and year first above written.
VIDEOLABS, INC. THE HANSEN COMPANY
By /s/ By /s/
----------------------- -----------------------
Richard F. Craven James W. Hansen
Its Director Its President
PRINCIPAL JOINING RESTRICTIONS
The Principal hereby acknowledges that the Principal will receive personal
benefit from the Consultant entering into this Agreement. As an inducement to
the Company to enter into this Agreement, the Principal hereby agrees to be
personally bound to all of the covenants, restrictions and obligations of the
Company contained in Sections 8, 9, 10 and 11 of the Agreement.
/s/
-----------------------
James W. Hansen
CONSULTING AGREEMENT
THIS CONSULTING AGREEMENT ("AGREEMENT"), made effective as of December
1, 1996, by and between Videolabs Inc., a Delaware corporation (the "COMPANY"),
and Frank Broghammer, a resident of the State of Minnesota ("CONSULTANT").
RECITALS:
A. Prior to November 1, 1996, Consultant was employed by the Company as
the Chief Operating and Financial Officer of the Company and, since that date,
has been providing services to the Company as a consultant, and independent
contractor; and
B. The Company and Consultant desire to enter into this Agreement to
confirm the terms and conditions of Consultant's retention as an independent
consultant.
AGREEMENTS:
NOW, THEREFORE, in consideration of the mutual promises, agreements and
covenants contained in this Agreement, the parties hereby covenant and agree as
follows:
1. ENGAGEMENT OF CONSULTANT TO PERFORM CONSULTING SERVICES. The
Consultant hereby confirms that he resigned from each and every office and
employee position with the Company effective as of the date set forth in Recital
A hereto. The Company hereby engages Consultant to provide managerial and
technical advice and consulting services to the Company as may be requested by
the Company from time to time, and Consultant accepts such engagement and hereby
agrees to perform such services for the Company, as independent contractor, and
not as an employee, during the Term of this Agreement. The services to be
performed by Consultant hereunder shall include the following services as
reasonably requested from time to time by the Company (collectively, the
"SERVICES"):
(a) Providing assistance to the Company, and its personnel, in
connection with particular projects of the Company as designated by the
Company from time to time; and
(b) Providing consulting and advice with respect to the
manufacturing, engineering and financial operations and procedures of
the business of the Company as requested from time to time by the
Company; and
(c) Facilitating the transition of projects and operations of
the Company that the Consultant was involved with while employed by the
Company; and
(d) Providing assistance to the Company with respect to any
matters (including, without limitation, any litigation, governmental
investigations or inquiries) relating to actions or events that
occurred during Consultant's tenure as an employee of the Company; and
(e) Providing such other services related to any of the
foregoing as may be reasonably requested by the Company from time to
time during the term of this Agreement.
2. PERFORMANCE STANDARDS. Consultant shall perform the Services as and
when requested by the Company, provided that Consultant shall not be required to
devote an average of more than four (4) hours per week to the performance of
Services during the term of this Agreement, and shall not be required to perform
Services other than during normal business hours of the Company. In the
performance of the Services, Consultant shall act in good faith and shall use
all reasonable efforts to comply with all reasonable requests of the Company
during the term of this Agreement. Consultant shall perform the Services
diligently and to the best of his ability. Consultant represents and warrants to
the Company that there are no restraints upon him which will prohibit Consultant
from fulfilling his obligations hereunder.
3. TERM. Subject to the terms and provisions of this Agreement, the
term of this Agreement and Consultant's engagement hereunder, shall be for a
period commencing on the date hereof and ending on May 31, 1997 unless
terminated earlier in accordance with the terms and provisions of Section 7
hereof (the "TERM"). The Term may not be extended beyond such date without the
prior written consent of both parties hereto.
4. CONSULTING FEE. In consideration for the Services rendered
hereunder, Consultant shall receive a fee of Three Thousand Seven Hundred Fifty
and No/100 Dollars ($3,750.00) for the six month Term of this Agreement. The Fee
shall be payable in equal installments concurrent with the regular payroll of
the Company. Unless this Agreement is terminated by the Company for cause
pursuant to Section 7 and provided that Consultant performs the Services in a
manner consistent with the provisions of Section 2 above, Company shall pay the
Consultant the Fee whether or not Services are requested by the Company. In the
event the Company requests Services, such as special project Services, from the
Consultant that will exceed the hour limitations set forth in Section 2 of this
Agreement, the Consultant and the Company shall negotiate in good faith the
compensation for such expanded Services, which compensation shall be in addition
to the Fee provided hereunder. However, unless otherwise agreed in writing, the
Consultant shall not be required to exceed the hour limitations set forth in
this Agreement, and the Company shall not be required to pay the Consultant more
than the Fee.
5. RELATIONSHIP OF PARTIES. Consultant is and shall be deemed to be an
independent consultant, and the Company and Consultant acknowledge and agree
that the relationship created by this Agreement is not that of joint venturers
or of employer and employee. Consultant shall not be entitled to participate in
any life, disability, accident and health insurance, hospitalization, pension,
profit-sharing, retirement, stock option or any other plan or employee benefits
of the Company. The Company shall not be entitled to direct the method of
performance of the Services. Consultant shall not have the authority to bind the
Company to any contract, agreement or arrangement, and Consultant shall not make
any representation to any third party to the contrary.
6. REIMBURSEMENT FOR EXPENSES. Consultant shall be reimbursed by the
Company for all reasonable travel and other expenses actually and properly
incurred in the performance of the Services hereunder; provided, however, that
all such travel and other out-of-pocket expenses must be approved in advance by
the Company. For all such expenses, Consultant shall furnish to the Company
statements, receipts and vouchers as and when required by and to the reasonable
satisfaction of the Company.
7. TERMINATION. Notwithstanding any provisions of this Agreement to the
contrary, this Agreement and Consultant's retention hereunder may be terminated
prior to the expiration of the Term in the event of the occurrence of any of the
following:
(a) The Company may terminate this Agreement and Consultant's
retention hereunder without cause upon five (5) days notice; provided,
however, that in the event of a termination without cause, the entire
unpaid portion of the Fee shall be due and payable on the date of such
termination.
(b) The Company may terminate this Agreement and Consultant's
retention hereunder for cause. As used in this Section 8(b), the term
"CAUSE" shall mean: (i) gross negligence of Consultant in the
performance of the Services; (ii) willful neglect of his duties or
willful refusal to comply with the reasonable requests for Services by
the Company; (iii) dishonesty, theft, fraud or other criminal act on
the part of Consultant; or (iv) Consultant's material breach of the
covenants contained herein and the failure by Consultant to promptly
cure such breach or failure within ten (10) days after a written demand
for performance is delivered to Consultant by the Company, specifying
such cause. In the event of a termination by the Company for cause, the
Company shall have no obligation to pay any portion of the Fee payable
for periods after the date of such termination.
8. CONFIDENTIAL INFORMATION. Consultant acknowledges that the
confidential and proprietary information and data (which shall mean information
or data not known or generally available to the public) obtained by him during
the course of his performance under this Agreement (or his work prior to the
date hereof for the Company) concerning the Company's business, affairs,
products, inventions, processes, techniques, equipment, machinery, apparatus,
business operations, technical information, drawings, specifications, materials,
know how, and the like, and any knowledge or information developed by Consultant
as a result of performing Services hereunder (collectively referred to as the
"CONFIDENTIAL INFORMATION"), are all the sole property of the Company.
Consultant agrees to hold all Confidential Information in confidence and not to
disclose the same, without the prior written consent of the Company, to anyone
for any reason at any time (unless so required by law or legal process, and then
only after written notice to the Company and a reasonable opportunity for the
Company to challenge, at its cost, such disclosure). Consultant shall not,
directly or indirectly, use or permit the use of any Confidential Information
for any purpose, other than performing the Services hereunder, without the
written consent of Company. Consultant shall use his best efforts to prevent
publication, disclosure or other use or transmission of any Confidential
Information. Upon the termination or expiration of this Agreement, or earlier if
requested by the Company, Consultant agrees to return to the Company all
Confidential Information in the possession of Consultant, regardless of the form
of such Confidential Information.
9. INTELLECTUAL PROPERTY RIGHTS.
(a) Without limiting the Company's rights arising by law or
custom, Consultant acknowledges that the Company shall exclusively own,
and Consultant hereby assigns, transfers, and conveys to the Company,
all discoveries, work product, trademarks, service marks, trade names,
brand names, software, copyrights, inventions, improvements, patents
and other intellectual property rights produced, created, developed or
conceived by Consultant prior to or during the Term of this Agreement,
whether registered or unregistered, which relate to the Company's
business (collectively, the "INTELLECTUAL PROPERTY RIGHTS"). Consultant
shall disclose all such Intellectual Property Rights to the Company,
and Consultant agrees to execute and deliver all documents required by
the Company to document or perfect the Company's exclusive ownership of
the Intellectual Property Rights.
(b) Consultant further agrees that all copyrightable works
developed by the Consultant, either alone or with others, prior to or
during the Term of this Agreement, which relate in any way to the
Company's business, shall be considered to be works made for hire and
the ownership of and the copyrights to such works shall be the
exclusive property of the Company. Consultant shall disclose all such
works to the Company, and Consultant agrees to execute and deliver all
documents required by the Company to document or perfect the Company's
exclusive ownership of such works.
(c) Upon the termination or expiration of this Agreement, or
earlier if requested by the Company, Consultant agrees to return to the
Company all tangible (including electronic storage) elements of the
Intellectual Property Rights and works in the possession of Consultant,
regardless of the form of such Intellectual Property Rights and works.
(d) Notwithstanding the foregoing, the provisions of Section
9(a) does not apply to any Intellectual Property Rights for which no
equipment, supplies, facility or trade secret information of Company
was used and which was developed entirely on Consultant's own time, and
which does not relate to the business of the Company or to the
Company's actual or demonstrably anticipated business activities.
10. CONSIDERATION; REMEDIES. Consultant acknowledges and agrees that
the covenants set forth in Sections 8 and 9 above are conditions to the offer of
retention by the Company on the terms and for the compensation provided
hereunder and that a portion of the consideration paid to Consultant hereunder
is being paid by the Company in consideration for such covenants. Consultant
further acknowledges and agrees that any breach or threatened breach of any of
the covenants set forth in Sections 8 or 9 above would result in immediate and
irreparable injury to the Company for which money damages would be an inadequate
remedy. Accordingly, Consultant agrees that the Company will have the right to
obtain equitable relief including an injunction to enforce the terms of Sections
8 or 9 of this Agreement in addition to any other legal or equitable remedies
that may be available to the Company. In the event of any violation by
Consultant of the terms of Sections 8 or 9 of this Agreement, Consultant agrees
to pay the reasonable costs and legal fees to the Company in pursuing any of its
rights with respect to this Agreement, in addition to the damages sustained by
the Company. The provisions of Sections 8, 9 or 10 hereof shall survive the
termination of this Agreement for any reason whatsoever.
11. RELEASE; RESCISSION. As a material inducement to the Company to
enter into this Agreement, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the Consultant hereby
waives, releases, acquits and forever discharges the Company from any and all
claims, actions, suits, causes of action, demands, damages, costs and expenses
of any kind which the Consultant ever had, may now have, or may acquire in the
future, against the Company and arising from or in connection with any event or
occurrence prior to the effective date of this Agreement. The Consultant
acknowledges and agrees that he has carefully read and understood the foregoing
release, has entered into this Agreement knowingly and voluntarily, and has been
advised and had the opportunity to consult with counsel before executing this
Agreement.
By executing this Agreement, Consultant confirms that he received the
opportunity to take up to 21 days after receiving this Agreement to consider
whether to enter into this Agreement. Consultant understands that the foregoing
release includes a release of any claims he could have under the Minnesota Human
Rights Act, Minnesota Statutes Chapter 363, and the federal Age Discrimination
in Employment Act, 29 U.S.C. ss.ss. 621-634. Consultant has been advised and
understands that he may rescind and revoke this Agreement for any reason within
fifteen (15) calendar days after signing this Agreement. To be effective, the
rescission or revocation must be in writing and hand delivered or mailed to the
President of Videolabs, Inc., 10925 Bren Road East, Minneapolis, Minnesota
55343, within the fifteen day period. If mailed, the rescission or revocation
must be postmarked within the fifteen day period, properly addressed as set
forth in the preceding sentence, and sent by Certified Mail, Return Receipt
Requested. If delivered by hand, it must be give to the President within the
fifteen day period. Consultant understands that if Consultant rescinds or
revokes this Agreement as provided in this paragraph, then this Agreement will
terminate, and be null and void, and Consultant will not receive the benefits
and payments provided for in this Agreement.
12. NOTICES. Except as otherwise specifically provided, any notice in
writing required or permitted to be given in respect of this Agreement shall be
sufficiently given if delivered to the party by hand, by Federal Express or
similar overnight carrier service or mailed by registered or certified mail,
postage pre-paid, return receipt requested to the following addresses:
Company: Videolabs, Inc.
10925 Bren Road East
Minneapolis, Minnesota 55343
Attn: President
Phone: (612) 988-0055
Telecopy: (612) 988-0066
Consultant: Frank Broghammer
895 Forest Arms Lane
Orono, MN 55364
Phone: (612) 472-3199
Telecopy: (612) 472-4822
Any notices shall be deemed to have been received by the party to whom
it is addressed if mailed as aforesaid on the third business day following the
date of mailing, or if sent by facsimile transmission as aforesaid on the first
business day following the date of transmission. Consultant shall be required to
inform the Company of any change of address as soon as it occurs.
13. NO WAIVER. The failure or delay on the part of any party in
exercising any right, power or remedies under this Agreement or available to
such party at law or in equity, shall not operate or be construed as a waiver of
such right, power or remedy. Any waiver of a right, power or remedy under this
Agreement must be in writing and signed by the party granting the waiver. The
giving of a waiver in one instance or for one purpose shall not create any
implied obligation to give a waiver in another instance or for another purpose.
14. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Minnesota, without giving effect to
choice of law principle thereof.
15. ENTIRE AGREEMENT. The parties hereto agree that this Agreement
constitutes the entire understanding of the parties and supersedes and replaces
all oral or written representations and that this Agreement shall not be
amended, modified or supplemented in any respect except by a subsequent written
Agreement signed by both parties hereto.
16. SUCCESSORS AND ASSIGNS. The Agreement shall inure to the benefit of
and be binding upon the parties hereto and upon the heirs, executors,
administrators and personal representatives of Consultant and the successors and
assigns of the Company.
17. SEVERABILITY. Subject to the provisions of applicable law, in the
event that any term or provision of this Agreement, or any part or aspect
thereof, shall be deemed by a court of competent jurisdiction to be overly broad
in scope or duration or both, the court considering the same shall have the
power and authority, and the parties hereby direct such court to exercise such
power and authority, to modify such term or provision to limit such scope and
duration so that such term or provision is no longer overly broad and to enforce
the same as so limited. Subject to the foregoing sentence, in the event that any
provisions of this Agreement shall be held to be invalid or unenforceable for
any reason, such invalidity or unenforceability shall attach only to such
provisions and shall not affect or render invalid or unenforceable any other
provision of this Agreement, it being the intent of the parties that the terms
and provisions of this Agreement shall be deemed to be severable into separate
and independent covenants.
18. COUNTERPARTS. This Agreement may be executed in any number of
counterparts each of which when executed shall be deemed to be an original and
one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Consulting
Agreement as of the date and year first above written.
VIDEOLABS, INC. CONSULTANT
By /s/ /s/
---------------------- ----------------------
James Hansen Frank Broghammer
Its President
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