U.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, 1997
___ 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.)
5960 GOLDEN HILLS DRIVE, MINNEAPOLIS, MN 55416-1040
(Address of principal executive offices) (Zip code)
Registrants telephone number, including area code: (612) 542-0061
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. $6,949,652
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Issuer, based upon the closing bid price of the
Common Stock on January 30, 1998 as reported on the NASDAQ Small Cap Market, was
approximately $2,771,475. Shares of the voting and non-voting common equity 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, 1998, Registrant had outstanding 3,215,283 shares of Common
Stock.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS
<PAGE>
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
identification, medical, desktop computer video applications,
video-teleconferencing and computer-based and non-computer based solutions.
The Company believes that there are 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 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 identification, medical and other market
segments that are primarily due to new, flexible, lower cost digital
applications that allow for unique solutions targeted at potential niche
markets.
The Company's short term strategy is to develop or acquire image
capture solutions for specific niche markets in education, audio visual,
identification and medical applications where it already has distribution
resources and can provide value-added solutions.
The Company reported in March 1998 that it has reached an agreement
in principal to acquire the assets and certain intellectual property rights of
Video Dynamics, Inc (VDI). The founders of VDI have over 50 years combined
experience in designing video image capture solutions for medical professionals,
healthcare institutions and other manufacturers. The founders will be employees
of the Company. The closing is anticipated within the next 30 days.
<PAGE>
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, identification
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 an
integral part of a solution.
The Company has three primary markets of focus for 1998:
Videomicroscopy for education and industrial inspection market, photo
identification and security for corporate, education and memberships markets and
audio visual for the educational and professional presentation markets. As new
markets emerge for the FlexCam family of products we will be evaluating and
determining our focus for the next year. Our business partners also use our
image capture devices in medical, identification and industrial applications.
EDUCATION/VIDEOMICROSCOPY PRODUCT LINE CALLED THE "DIDACTA SERIES"
* SCHOLASTICCAM
* STUDENTCAM
* TEACHCAM W/ ILLUMABASE
* MICROSCOPECAM
* DOCCAM
* MEDCAM
* IDCAM
VideoLabs released a new product family to our
Educational/Videomicroscopy channel in late 1997. The "Didacta Series", which is
Greek for education, consists of new and existing image capture devices:
ScholasticCam, StudentCam, TeachCam w/ IllumaBase, MicroscopeCam, DocCam, MedCam
and IDCam.
The company's first product was the ScholasticCam (formerly known as
FlexCam) camera. The ScholasticCam consists of an integrated desktop 1/4"
high-resolution color CCD video camera and microphone mounted on flexible
18-inch gooseneck which allows precise, unobtrusive positioning of the camera
for hands-free operation. The ScholasticCam provides high-quality, S-video
output, industry-standard NTSC or PAL video and line-level audio primarily for
the classroom videoconferencing, video journals and image capture applications.
<PAGE>
The StudentCam is an affordable presentation option for educational
applications. It comes with three microscope adapters and integrated microphone.
It was designed to encourage classroom participation between teacher and student
when used with or without a microscope.
The TeachCam w/ IllumaBase is a new offering within the Didacta
series. The camera base has been transformed into the IllumaBase, a built-in
light source that allows users to present micro images without the use of a
microscope. This new feature also allows for 35mm slide presentations without
the use of a projector. In addition, the gooseneck has been lengthened to 27"
for use with taller microscopes. The camera and accessories ship complete in a
new wooden storage box for ease of storage and mobility. The TeachCam w/
IllumaBase started first shipments to customers in November 1997.
The MicroscopeCam is the ideal tool for medical, scientific,
teaching and other applications using a fluorescent microscope; its design is
perfect for the study of any branch of science. Using its microscope adapters,
the customer can connect MicroscopeCam to virtually any microscope to display
slides and scientific objects or to view X-rays from fluorescent light panels on
a monitor.
The MedCam features an 8' cable neck versus the signature gooseneck
for those applications that require more mobility. Its high-resolution C-Mount
lens and audio capability makes it the perfect choice for attachment to
telescopes and specialized equipment in a variety of medical applications.
The DocCam is VideoLabs high-quality presentation camera. Designed
to compete with the overhead "document cameras" of Elmo, Canon, Panasonic and
other manufacturers, the DocCam offers similar capability at less cost. The
DocCam's sharp 6mm lens projects 8 x 12 and A4 documents placed so that the
audience and the presenter may read without turning upside-down. The lens may
also be focused down to within four inches, which effectively produces
"microscopic" magnification of 50:1. VideoLabs DocCam features S-Video and an
automatic iris, resulting in superior color quality and includes stereo
microphones.
The IDCam is designed for the photo identification application. The
camera's 16mm C-mount (interchangeable) lens can be used for photo ID,
fingerprint or signature capture. The IDCam includes a 2-button image brightness
adjustment for virtually any lighting condition. It is compatible with all Photo
ID capture boards and software.
MULTIMEDIA PRODUCT LINE
* PLANETVIEW
* STINGERPRO CAPTURE CARD FOR WINDOWS 3.1/95/NT
Our videoconferencing solution, PLANETVIEW, includes the
ScholasticCam, Enhanced CU-SeeMe videoconferencing software from White Pine and
the StingerPro Video Overlay and Capture Card for the PCI bus. It offers an
affordable package for corporate and educational networks or home use.
PLANETVIEW is compatible with either Macintosh or Windows.
The StingerPro Video Overlay and Capture Card was specifically
designed by the Company to be a full-featured, low-cost, high-speed multimedia
card for the Windows 3.x/95/NT user. The PCI bus card acts as a single frame
grabber, full-motion video capture and an excellent videoconferencing tool. The
Stinger Pro also has TWAIN drivers which make it the optimal choice for
integration with photo ID solutions.
THE COMPANY'S PROPOSED PRODUCTS
The Company's engineering team is committed to the development of a
minimum of three products for 1998. This commitment is part of engineering's
eighteen month plan which in turn is part of the Company's 1998 business plan.
<PAGE>
PROFCAM
The ProfCam is a product that the Company is committed to developing
for release in the second quarter of 1998. This is a feature rich, high
resolution (approximately 500 tv lines) camera which will provide the customer
with full functionality by automatic, remote control and manual camera settings.
The ProfCam will enable the Company's product offerings to be introduced to the
higher education and corporate audio-visual markets.
FLEXCAM DIGITAL
The second product to be developed by the Company's engineering team
is a motion digital video camera to be released in the second quarter of 1998 as
part of a videoconferencing package for schools and the corporate market to
provide point to point or group videoconferencing over the internet or
intranets. The digital video camera is compatible with all Windows based
computers and eliminates the video capture card needed with analog cameras. The
company will offer a variety of videoconferencing software packages to be
bundled with the digital video camera.
IMAGINIZER
The third product the Company's engineering team is committed to
develop is a product that will plug directly into both the analog monitors and
computers in schools. This product is scheduled for release in the third quarter
of 1998. Currently computers require a video capture card, such as the Company's
Stinger Pro. This product will eliminate the need for any video capture card,
thus providing a plug and play camera for both analog devices such as monitors,
projectors, VCR's and digital devices such as computers.
The Company also intends to market cameras designed specifically for
industrial arts and health educators in 1998.
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 an annual commitment in sales. This was 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 relationships to a long term commitment.
The Company's Resellers consist of Value Added Resellers, Mail Order
Suppliers, System Integrators and Resellers of products. Our current Reseller
base is over 800 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, 1997, the Company's
products were being offered for sale by distributors in over fifty (50)
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 1997, approximately thirty seven
percent (37%) of the Company's gross revenue was from international markets
primarily in Europe.
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. 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.
<PAGE>
MAJOR CUSTOMERS
During 1997 the Company did not have any one customer with sales
over 10%. The Company reported a significant sale of product to the Immigration
and Naturalization Service (INS) in August 1997. The first phase of the project
has been completed along border crossing points on the Southwest border. The
next phase will cover the Northwest, then the Northeast and finally in the
Midwest. Although significant to the Company, total sales from this customer is
likely not to exceed 10% of total sales.
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. However, due to the Company's business partner program, sales
commitments for future sales do exist.
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 products for a period of five (5) years
(limited) from the date of receipt by the end user. This covers all defects and
faulty workmanship in the camera for one (1) year and a five (5) year limited
warranty on the gooseneck. The product registration card must be returned with a
dated copy of the invoice in order to validate the warranty. For OEM customers
product line warranty is generally negotiated with each customer.
RESEARCH AND DEVELOPMENT
In 1997, the Company's expenses relating to research and development
were $325,881. During 1996, the Company's expenses relating to research and
development were $384,804. The Company expenses the related costs to research
and development as they are occurred. The Company's current engineering staff
consists four (4) full-time equivalent employees. The Company also contracts
services for mechanical, electrical and software engineers as required.
MANUFACTURING AND SUPPLIES
The Company assembles its products at its facility in Golden Valley,
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 Golden Valley facility for final assembly. All finished products are
subjected to a minimum twelve hour burn-in and reliability test before they are
packaged and shipped to customers.
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 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,
<PAGE>
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, design, 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 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 67,000 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, 1997, the Company had twenty-one (21) full-time
employees, including six (6) in manufacturing, four (4) in engineering, product
development and warranty repair, six (6) in sales and marketing, and five (5) in
general administration, finance and customer service. 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 intend
to add employees in the engineering and sales departments.
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.
<PAGE>
GOVERNMENT REGULATION
Products sold by the Company are subject to regulations of the U.S.
Government Federal Communication Commission and European product compliance
requirements. All products sold by the Company have met mandatory requirements
of both the 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 Golden Valley, Minnesota,
where the Company has leased approximately 5,806 square feet of office and
research and development lab space and 2,633 square feet of manufacturing space
since October 1, 1997 under a lease that expires in September 30, 2002. The
Company believes the facility is in excellent condition. The annual rent plus
estimated tax costs and estimated monthly operating costs are approximately
$85,000. This is an increase over the last lease agreement, however to renew at
the old location, the costs would have been equivalent to the new location. The
Company was able to design the new facility gaining efficiencies in the office,
development and manufacturing departments.
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. Greg Craven is no longer employed
by the Company and the apartment was sold by the Company in April 1997 for a
small gain.
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, 1997.
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
under the symbol VLAB. 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, 1996 Low Bid High Bid
- ----------------------------------- ------- --------
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
FISCAL YEAR ENDED DECEMBER 31, 1997
- -----------------------------------
Quarter ended March 31, 1997 $.6875 $.8125
Quarter ended June 30, 1997 $1.25 $1.5625
Quarter ended September 30, 1997 $2.0625 $2.3125
Quarter ended December 31, 1997 $1.9375 $1.96875
b) Holders.
As of March 31, 1998 there were approximately 157 record holders of the
Company's Common Stock and approximately 1,800 beneficial shareholders.
<PAGE>
c) Dividends.
The Company has not declared any cash dividends on any class of common equity
for the last four 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
then 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 was a transition year for the Company. The Company recorded
its first four profitable quarters of operations, restored its reputation for
quality products and introduced the TeachCam with IllumaBase, a unique camera
for science teaching applications. 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 continued profitability on an annualized basis and
challenging all associates to meet plan and grow professionally.
RESULTS OF OPERATIONS
Net Sales for the year ending December 31, 1997 decreased six (6%)
from the prior year end from $7,405,548 in 1996 to $6,949,652 in 1997. This
sales decrease was primarily due to the restructuring early in the year. The
Company significantly restructured its customer base, replacing approximately
60% of the abandoned highly competitive, low margin computer market with
increased penetration in the education market. The strategy is to develop or
acquire image capture solutions for specific niche markets in education, audio
visual, identification and medical applications where it already has
distribution resources and can provide value-added solutions.
During 1997, sales in the U.S., Europe and Asia/Pacific were
respectively 63%, 31% and 6% of total sales. During 1996, sales in the U.S.,
Europe and Asia/Pacific were respectively 60%, 32% and 8% of total sales. The
decrease in sales volume in the Asia Pacific Region is primarily due to the lack
of sales due to the depressed Asian economy. The Company's sales representative
for the Asia/Pacific market resigned in July 1997 and was not replaced. The
Company's largest distributor purchased 8.4% of the total sales volume in 1997
and 8.5% in 1996 and is
<PAGE>
anticipated to keep the same volumes for 1998, however, the loss of any
significant order could adversely affect the Company.
Gross profits for the period ending December 31, 1997 were
$2,924,811 which was 42% of total sales compared to $1,077,677 which was 15% of
total sales for year ending December 31, 1996. This increase in gross profit for
1997 is primarily due to the 1996 year end write down of $1,575,000 to reflect
the valuation of inventory which became technologically obsolete in 1996
including a reserve for purchase commitments for addition obsolete inventory.
This inventory valuation write down was 21% of 1996 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 aggressively pursued different sources to either sell the
components at a discount or engineer the components into future products without
success. The Company also attributes approximate 6% of this increase in gross
profit to achieving the goals set for 1997 of reducing cost of materials and
costs associated to manufacturing overhead. The Company has set similar goals
for 1998 in reducing cost of materials used in manufacture and costs associated
to manufacturing overhead.
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.
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 phased out the off
shore components in the first quarter of 1997 with a higher quality solution.
The Company is committed to restoring the quality of its products in 1998 and
continues 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 discussed below. Selling,
general and administrative expenses decreased 37% from $3,675,060 in 1996 to
$2,322,598 in 1997. Selling expenses decreased from $1,677,189 in 1996 to
$765,737 in 1997. Research and development expenses decreased from $384,804 in
1996 to $325,881 in 1997. General and administrative expenses decreased from
$1,613,067 in 1996 to $1,230,980 in 1997. This decrease in selling, general and
administrative expenses is attributed to the reorganization of the Company in
late 1996. The Company established at 1996 year end reserves for retirement and
severance charges, 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. The litigation was settled within
the reserve in February 1997. In addition to the reduction of the selling,
general and administrative expenses because of the reserves set up in 1996, the
Company aggressively reduced SG&A expenses by over $900,000. This reduction
resulted from the Company reducing its employment base by 20%, closing the
European sales office and implementing a conservative operating budget for 1997.
The Company's operating income for the year ending December 31 ,
1997 was $602,213 compared to an operating loss of $2,597,383 for the year
ending December 31, 1996. The Company attributes the increase in operating
income to the cost control efforts discussed above and the increase in gross
margin. The Company anticipates that operating margins in 1998 will improve with
the objectives the Company has set for 1998 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 not
meet projections, overall income from operations will be adversely affected.
Other income for 1997 consisted of interest income of $75,089
compared to interest income for 1996 of $54,007 and interest expense for 1997 of
$3,965 compared to interest expense of $2,117 for 1996. 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. common 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 profit of $230,354. The Company recorded a loss on the
sale of assets for 1997 of $19,913 consisting of the sale of computer equipment.
At December 31, 1997 the Company had a net operating loss carry
forward of approximately $1,189,000 and a general business credit carry forward
of $78,000 available to be carried to future periods. The loss carry forward and
general business credit carryforwards expire in 2008 through 2012 if not used.
In 1997, the Company recorded a deferred tax asset of $100,000 reflecting the
partial benefit of $1,189,000 in net operating loss carryforwards.
<PAGE>
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that at least $100,000 of the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could change in the near term if estimates of
future taxable income during the carryforward period change.
The net income for the year ending December 31, 1997 was $753,424
compared to a net loss for the year ending December 31, 1996 of $2,362,115. The
basic earnings per common share for 1997 was $0.24 per share compared to a basic
loss per common share for 1996 of $0.75 per share. Basic earning per common
share were based on the weighted average number of shares outstanding for 1997
and 1996 respectively of 3,168,480 and 3,134,498. Earnings per common share
assuming dilution for 1997 was $0.18 per share compared to a loss per common
share for 1996 of $0.75. During 1996, stock options and warrants for the
purchase of common stock were anti-dilutive and have not been included in the
1996 computation. The fully diluted weighted average number of shares
outstanding for 1997 was 4,086,558.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital, consisting principally of cash, certificates of
deposit, receivables and inventories, was $3,019,056 at December 31, 1997 and
$2,124,418 at December 31, 1996. The ratio of current assets to current
liabilities was 4:1 at December 31, 1997 and 2:1 at December 31, 1996. Working
Capital ratios have continued to improve due to the Company's positive cash flow
mainly due to the net income.
Inventories at December 31, 1997 were $1,153,665 compared to
$1,830,300 for 1996. Throughout 1997 the Company aggressively worked off excess
inventory levels and is committed to maintaining adequate levels for 1998. The
Company has to purchase components four months in advance, so if the Company's
projections are not accurate, inventories are higher than required. 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 $500,000 or 75% of eligible accounts
receivable (as defined), with outstanding borrowings due April 10, 1998. The
available line of credit is reduced by outstanding irrevocable letters of credit
which totaled $200,000 at December 31, 1997. The letter of credit may be drawn
upon by a major supplier of the Company. The letter of credit expires on April
10, 1998. There are no borrowings outstanding under this line of credit at
December 31, 1997. Advances under the note are secured by substantially all
corporate assets. Interest is charged at 1.5% over the bank's "index rate". The
interest rate at December 31, 1997 was 10% 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 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.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a
year in the date field. These programs were designed and developed without
considering the impact of the upcoming change in the century. If not corrected,
many computer applications could fail or create erroneous results by or at the
year 2000. The year 2000 issue affects virtually all companies and
organizations.
Management is currently evaluating its reliance on both internal and
external systems with respect to year 2000 issues. At this time, year 2000
issues are not expected to materially affect the Company's financial condition,
results of operations or liquidity.
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
The Stockholders
and Board of Directors
VideoLabs, Inc.
Golden Valley, Minnesota
We have audited the accompanying balance sheet of VideoLabs, Inc. as of December
31, 1997 and 1996, 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, 1997 and 1996, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Boulay, Heutmaker, Zibell & Co. P.L.L.P.
Certified Public Accountants
Minneapolis, Minnesota
February 13, 1998
<PAGE>
VIDEOLABS, INC.
Balance Sheet
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
December 31
ASSETS 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,746,928 $ 631,456
Certificates of deposit- restricted 275,833 513,788
Accounts receivable
Trade accounts, less allowance for doubtful accounts
of $35,000 in 1997 and $25,400 in 1996 626,320 799,799
Other receivables 9,228 6,157
Inventories 1,153,665 1,830,300
Deferred income taxes 100,000
Prepaid expenses 47,209 154,749
---------- ----------
Total current assets 3,959,183 3,936,249
PROPERTY HELD FOR SALE, net of $37,805 accumulated
depreciation 99,774
PROPERTY AND EQUIPMENT
Office and computer equipment 367,874 356,126
Machinery and equipment 97,340 90,951
Tooling 278,733 189,311
Leasehold improvements 45,016 21,249
---------- ----------
788,963 657,637
Less accumulated depreciation 468,556 355,877
---------- ----------
Net property and equipment 320,407 301,760
---------- ----------
TOTAL ASSETS $4,279,590 $4,337,783
========== ==========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
<PAGE>
VIDEOLABS, INC.
Balance Sheet
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1997 1996
- -----------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable $ 278,204 $ 1,057,869
Current maturities of long-term debt 22,605 10,285
Customer deposits 9,080 15,070
Accrued compensation 264,221 153,607
Purchase commitments, reserves and other 366,017 575,000
----------- -----------
Total current liabilities 940,127 1,811,831
LONG-TERM DEBT, net of current maturities 36,134 16,110
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value;
Authorized, 20,000,000 shares
Issued and outstanding, 3,215,283 shares in 1997 and
3,134,948 in 1996 32,152 31,349
Preferred stock, $.01 par value;
Authorized, 5,000,000 shares
No shares issued and outstanding
Additional paid-in capital 5,553,553 5,514,293
Accumulated deficit (2,282,376) (3,035,800)
----------- -----------
Total stockholders' equity 3,303,329 2,509,842
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 4,279,590 $ 4,337,783
=========== ===========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
<PAGE>
VIDEOLABS, INC.
Statement of Operations
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------
Years Ended December 31
1997 1996
- ------------------------------------------------------------------------------------
<S> <C> <C>
SALES $ 6,949,652 $ 7,405,548
COST OF SALES
Cost of goods sold 4,024,841 4,752,871
Adjustment for write down of inventories, including
purchase commitments 1,575,000
----------- -----------
Total cost of sales 4,024,841 6,327,871
----------- -----------
GROSS PROFIT 2,924,811 1,077,677
OPERATING EXPENSES
Selling expenses 765,737 1,677,189
General and administrative expenses 1,230,980 1,613,067
Research and development 325,881 384,804
----------- -----------
Total operating expenses 2,322,598 3,675,060
----------- -----------
OPERATING INCOME (LOSS) 602,213 (2,597,383)
OTHER INCOME (EXPENSE)
Interest income 75,089 54,007
Interest expense (3,965) (2,117)
Gain (loss) on sale of assets (19,913) 213,378
----------- -----------
Total other income, net 51,211 265,268
----------- -----------
INCOME (LOSS) BEFORE PROVISION FOR (RECOVERY OF)
INCOME TAXES 653,424 (2,332,115)
PROVISION FOR (RECOVERY OF) INCOME TAXES (100,000) 30,000
----------- -----------
NET INCOME (LOSS) $ 753,424 ($2,362,115)
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE $ 0.24 ($ 0.75)
=========== ===========
EARNINGS (LOSS) PER COMMON SHARE ASSUMING DILUTION $ 0.18 ($ 0.75)
=========== ===========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
<PAGE>
VIDEOLABS, INC.
Statement of Stockholders' Equity
Years Ended December 31, 1997 and 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
Net
Unrealized
Additional Gain On
Common Stock Paid-In Marketable Accumulated
Shares Amount Capital Securities Deficit
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCES -
DECEMBER 31, 1995 3,133,948 $ 31,339 $ 5,511,653 $ 219,215 ($ 673,685)
----------- ----------- ----------- ----------- -----------
Net loss (2,362,115)
Exercise of warrants 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)
Net income 753,424
Issuance of shares 244 2 (2)
Exercise of warrants 110,091 1,101 74,587
Purchase of stock (30,000) (300) (35,325)
----------- ----------- ----------- ----------- -----------
BALANCES -
DECEMBER 31, 1997 3,215,283 $ 32,152 $ 5,553,553 $ -- ($2,282,376)
=========== =========== =========== =========== ===========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
<PAGE>
VIDEOLABS, INC.
Statement of Cash Flows
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Years Ended December 31
1997 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 753,424 ($2,362,115)
Adjustments to reconcile net income (loss) to net cash
from (used for) operations:
Depreciation and amortization 140,905 221,867
Provision for losses on accounts receivable 9,640
Amortized premium on investments 861
(Gain) loss on sale of assets 19,913 (213,378)
Deferred income taxes (100,000) 30,000
Change in assets and liabilities
Accounts receivable 160,768 469,404
Inventories 676,635 569,647
Prepaid expenses 107,540 (47,947)
Trade accounts payable (779,665) 287,513
Customer deposits (5,990) (6,055)
Accrued compensation 110,614 88,995
Purchase commitments, reserves and other (208,983) 527,000
----------- -----------
Net cash from (used for) operating activities 884,801 (434,208)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (179,491) (70,177)
Proceeds from sale of assets 106,225 25,144
Purchase of certificates of deposit (474,167) (1,034,960)
Proceeds from maturities of certificates of deposit 712,122 1,098,072
Proceeds from sales and maturities of marketable securities 365,468
----------- -----------
Net cash from investing activities 164,689 383,547
</TABLE>
- Continued -
Notes to Financial Statements are an integral part of this Statement.
<PAGE>
VIDEOLABS, INC.
Statement of Cash Flows - Continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
Years Ended December 31
1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock and warrants $ 75,688 $ 2,650
Payments of long-term debt (14,081) (8,041)
Proceeds of long-term debt 40,000
Repurchase of common stock (35,625)
-----------
Net cash from (used for) financing activities 65,982 (5,391)
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,115,472 (56,052)
CASH AND CASH EQUIVALENTS - Beginning of Year 631,456 687,508
----------- -----------
CASH AND CASH EQUIVALENTS - End of Year $ 1,746,928 $ 631,456
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest $ 3,965 $ 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)
=========== ===========
Capital lease obligations incurred $ 6,426 $ 34,436
=========== ===========
</TABLE>
During 1997, the Company issued 244 shares of stock in a noncash transaction
During 1996, the Company retired $64,552 of fully depreciated fixed assets.
Notes to Financial Statements are an integral part of this Statement.
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
VideoLabs, Inc. designs, manufactures and markets image capture
solutions. The Products are sold throughout the world.
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.
At December 31, 1997 and 1996, the Company has recorded a reserve
for future inventory obsolescence of $60,000 due to the risk of technological
changes in the industry. During 1996, the Company recognized a write down of
inventories including future purchase commitments for a product that was not
marketable. 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, or recovery,
if any.
The Company has recorded a reserve for product warranties in the
amount of $20,000 in 1997 and $35,000 in 1996. This warranty accrual pertains
primarily to one product. It is not possible to estimate additional product
warranty costs, if any, at this time. Actual warranty costs could differ from
amounts estimated.
In 1997, the Company recorded a deferred tax asset of $100,000
reflecting the partial benefit of $1,189,000 in net operating loss
carryforwards, which expire in varying amounts between 2008 and 2012.
Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. Although realization is not assured,
management believes it is more likely than not that at least $100,000 of the
deferred tax asset will be realized. The amount of the deferred tax asset
considered realizable, however, could change in the near term if estimates of
future taxable income during the carryforward period change.
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.
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 equivalents. At times throughout the year, the
Company's cash deposited in financial institutions may exceed FDIC insurance
limits.
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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 estimated
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 equipment, 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 estimated 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 $238,500 and $351,000 in 1997 and 1996, respectively.
RECLASSIFICATIONS
The presentation of certain items in the financial statements for
1996 have been changed to conform to the classifications used in 1997. These
reclassifications had no effect on stockholders' equity or net loss as
previously reported.
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
EARNINGS (LOSS) PER COMMON SHARE
The following data show the amounts used in computing the weighted
average number of shares of dilutive potential common stock at December 31:
1997 1996
---- ----
Weighted average number of shares used
in basic earnings per share 3,168,480 3,134,498
Effect of dilutive securities:
Stock options 9,328
Stock warrants 908,750
--------- ---------
Totals 4,086,558 3,134,498
========= =========
No adjustments were made to income (loss) in either year for the
purpose of calculating earnings per share. Stock options and warrants were not
included in computing earnings per share in 1996 because their effects were
antidilutive.
The adoption of Statement of Financial Accounting Standard No. 128,
"Earnings Per Share", had no effect on the previously reported 1996 earnings per
share.
NEWLY ISSUED ACCOUNTING STANDARDS
In June 1997, Statement of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income" was approved for issuance. The Company will
adopt this Statement in fiscal 1998. 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
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.
At December 31, 1997 and 1996, the Company has two customers who
accounted for approximately $117,000 and $144,000, respectively, of the
outstanding trade accounts receivable balance.
During 1997 and 1996, the Company had total sales outside the United
States of approximately $2,559,000 and $2,907,000, respectively. Of these
amounts approximately $1,927,000 and $2,244,000, respectively, were sales to
customers in Europe, and $223,000 and $539,000, respectively, were sales to
customers in the Asia/Pacific region.
In 1997 and 1996, the Company had a supplier from which it made
purchases of approximately $1,500,000 and $1,600,000, respectively. Although no
long-term supply contract exists, the Company believes there are alternative
suppliers of this raw material.
At December 31, 1997 and 1996 the Company had purchase commitments
with four suppliers in the amount of $818,000 and $1,626,000, respectively (See
Note 13).
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1997 and 1996
3. MARKETABLE SECURITIES
The Company did not hold any marketable securities at December 31,
1997 and 1996.
The Company had U.S. Treasury Securities that 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 $303,468 in
1996. During 1996 the Company realized gains of $231,582 from sales of
available-for-sale marketable securities.
4. INVENTORIES
Inventories consisted of the following at December 31:
1997 1996
---- ----
Materials $1,227,508 $2,137,687
Work-in-process 171,921 335,486
Finished goods 446,499 747,127
---------- ----------
1,845,928 3,220,300
Reserves for inventory write down and
obsolescence (692,263) (1,390,000)
---------- ---------
$1,153,665 $1,830,300
========= =========
5. 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
property was sold in April 1997.
6. LINE OF CREDIT
The Company has a discretionary line of credit with its bank of the
lesser of $500,000 or 75% of eligible accounts receivable (as defined), with
outstanding borrowings due April 10, 1998. The available line of credit is
reduced by an outstanding irrevocable letter of credit which totaled $200,000 at
December 31, 1997. The letter of credit may be drawn upon by a major supplier of
the Company. The letter of credit also expires April 10, 1998. At December 31,
1997, restricted cash serves as collateral for two irrevocable letters of
credit. There were no borrowings outstanding under this line of credit at
December 31, 1997. Advances under the note are secured by substantially all
corporate assets. Interest is charged at 1.5% over the bank's "index rate". The
interest rate at December 31, 1997 was 10.00%. The terms of the note agreement
with the bank require the Company to maintain certain financial ratios with
which the Company was in compliance with December 31, 1997.
During 1996, the Company had 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 (restricted cash), 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. There were no borrowings outstanding under this line of
credit at December 31, 1996. Interest was 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 required the Company to maintain certain financial
ratios with which the Company was not in compliance with at December 31, 1996.
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1997 and 1996
F7. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Capital lease obligations, at implicit rates from 12% to 14%, payable in
installments to 1999 $20,319 $26,395
Note payable to bank, interest at the bank's "index rate" plus 1% (9.5% at
December 31, 1997), secured by substantially all corporate assets, payable
in installments to 2002 38,420
------- -------
Totals 58,739 26,395
Less amounts due within one year 22,605 10,285
------- -------
Net long-term debt $36,134 $16,110
======= =======
</TABLE>
Scheduled maturities of long-term debt are as follows at December
31, 1997:
1998 $22,605
1999 11,795
2000 8,114
2001 8,937
2002 7,288
-------
Total long-term debt $58,739
=======
8. 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 2002. 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:
1997 1996
---- ----
Machinery and equipment $40,826 $34,436
Accumulated amortization 17,672 4,384
------ -------
Net equipment under capital leases $23,154 $30,052
====== ======
At December 31, 1997, 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:
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1997 and 1996
8. LEASE OBLIGATIONS - Continued
Operating Capital
Leases Leases
------ ------
1998 $ 76,402 $17,033
1999 76,402 4,568
2000 76,402
2001 73,258
2002 51,291
------- ------
Total lease commitments $353,755 21,601
=======
Less amount representing interest 1,282
-----
Present value of minimum lease payments
(included in long-term debt) $20,319
=======
Rental expense for operating leases totaled $69,734 and $67,755 in
1997 and 1996, respectively.
9. STOCKHOLDERS' EQUITY
During 1997, the Board of Directors authorized the redemption of up to
100,000 shares of the Company's common stock. During 1997, 30,000 shares with a
cost of $35,625 were redeemed.
The Company has outstanding warrants to purchase common stock at prices
ranging form $0.69 to $4.20 per share. The warrants expire at various dates
through November 2000. Following is a summary of transactions:
Shares Under Warrants
1997 1996
---- ----
Outstanding, beginning of year 819,264 820,264
Exercised during the year (110,091) (1,000)
Granted during the year 1,361,130
--------- -------
Outstanding, end of year 2,070,303 819,264
========= =======
The Company has reserved 2,070,303 authorized shares for issuance as
warrants are exercised.
The Board of Directors has not yet established rights and
preferences for the Company's preferred stock.
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1997 and 1996
10. 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 non-qualified incentive stock option plan
for outside directors and non-employees, 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 1997 and 1996, respectively;
dividend yield of 0% for all years; expected volatility of 88% and 71%;
risk-free interest rates of 6.5 and 5.8 percent; and expected lives of four
years.
A summary of the Company's stock option plans as of December 31,
1997 and 1996 and changes during the years ending on those dates is listed
below:
<TABLE>
<CAPTION>
1997 1996
----------------------- ------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 405,000 $1.82 200,000 $2.51
Granted 200,000 1.00 255,000 .81
Expired - -
Forfeited (94,000) 2.22 (50,000) 2.79
------- -------
Outstanding at end of year 511,000 405,000 1.82
======= =======
Options exercisable at year end 422,250 226,750
======= =======
Weighted-average fair value of
options granted during the year $ .67 $ .47
</TABLE>
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1997 and 1996
10. STOCK BASED COMPENSATION - Continued
The following table summarizes information about fixed stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Weighted-Average
Number Remaining Options
Price Outstanding Contractual Life Exercisable Vesting
----- ----------- ---------------- ----------- -------
<S> <C> <C> <C> <C>
$3.13 22,000 0.8 years 16,500 25% each year for four years.
2.13 39,000 1.8 years 19,500 25% each year for four years.
.81 85,000 3.0 years 21,250 25% each year for four years.
.81 165,000 9.0 years 165,000 In whole or in part over ten years.
1.00 100,000 3.4 years 100,000 In whole or in part over ten years
1.00 40,000 9.4 years 40,000 In whole or in part over ten years.
2.13 20,000 2.2 years 20,000 In whole or in part over three years.
2.65 20,000 2.2 years 20,000 In whole or in part over three years.
.69 20,000 2.2 years 20,000 In whole or in part over three years.
-------- --------
511,000 422,250
======= =======
</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 $38,869 and $3,776 for the years ended
December 31, 1997 and 1996, respectively. The compensation cost would have
reduced net income in 1997 and increased net loss in 1996 by the same amounts.
Basic earnings per share would have decreased by $0.01 in 1997. There would be
no effect in fiscal 1996.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of the Company's financial instruments are as
follows at December 31:
1997 1996
---------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
Cash and equivalents $1,746,928 $1,746,928 $ 631,456 $ 631,456
Certificates of deposit 275,833 275,833 513,788 513,788
Long-term debt, exclusive
of capital leases 38,420 38,420
The carrying values of cash and equivalents and certificates of
deposit approximate fair values. The fair value of long-term debt is based on
estimates of current rates at which the Company could borrow funds with similar
remaining maturities.
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1997 and 1996
12. INCOME TAXES
The income tax provision consists of the following components:
1997 1996
---- ----
Current $ - $ -
Deferred (100,000) 30,000
------- ------
Net provision for (recovery of) income taxes ($100,000) $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 more likely than not
realized. This difference is reconciled as follows:
1997 1996
---- ----
Federal statutory income benefit rate (34.0%) (34.0%)
State tax (benefit) rate, net (2.0) (2.0)
Permanent differences 5.8
Valuation allowance 14.9 37.3
---- ----
Effective tax benefit rate (15.3%) 1.3%
==== =====
The total deferred tax assets and liabilities included in the net
deferred tax asset are as follows:
1997 1996
---- ----
Deferred tax assets (primarily inventory and,
litigation reserves, net operating loss and tax
credit carryforwards) $946,000 $1,061,000
Deferred tax liabilities (property and equipment) (4,000) (11,000)
Deferred tax asset valuation allowance (842,000) (1,050,000)
------- ---------
Net deferred tax asset $100,000 $ -
======= =========
The net decrease in valuation allowance was $208,000 in 1997. The
net increase in the valuation allowance was $816,000 in 1996.
For income tax purposes, the Company had a federal net operating
loss carryforward at December 31, 1997 and 1996 of approximately $1,189,000 and
$819,000, respectively. At December 31, 1997 and 1996 the Company also had a
general business credit carryforward of approximately $78,000, available to be
carried to future periods. The net operating loss carryforward and general
business credit carryforward expire in 2008 through 2012 if not used.
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1997 and 1996
13. COMMITMENTS AND CONTINGENCIES
At December 31, 1996 the Company 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 was a defendant in a lawsuit by a former
consultant claiming damages for payment of royalties on products developed by
the claimant. A settlement in this lawsuit was reached in 1997, and the
settlement amount is within the amount accrued at December 31, 1996.
14. 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 1997 and 1996.
<PAGE>
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, 1997 and 1996.
Statement of Operations - Years Ended December 31, 1997 and 1996.
Statement of Stockholders' Equity - Years Ended December 31, 1997 and 1996.
Statement of Cash Flows - Years ended December 31, 1997 and 1996.
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, 1997 are filed as part of this Report and should
be read in conjunction with the Financial Statements of the
Company.
None
<PAGE>
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
(10) (xviii) Johnson Retirement Agreement - Filed with
1996 10KSB
(10) (xix) Hansen Consulting Agreement - Filed with
1996 10KSB
(10) (xx) Broghammer Consulting Agreement - Filed with
1996 10KSB
(10) (xxi) Hansen Employment Agreement - filed herewith
(10) (xxii) Office Warehouse Lease - 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
(24) 3. Contained in the Report of Independent Auditors
(25) 3. 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's Annual Report to Shareholders.
2. Incorporated by reference to Company's Annual Report to Shareholders.
3. Filed herewith, see following page
Financial Data Schedules Per FAS No. 128 Regarding Earnings Per
Share Calculation
<TABLE>
<CAPTION>
Exhibit No. # of Columns in FDS Periods Covered [Restated] Tag Used
----------- ----------------- --------------- -------------------
<S> <C> <C> <C>
27.1 1 Fiscal year end 1997 No
27.2 2 Quarters 1 and 2 for 1996 Yes
27.3 1 Quarter 3 for 1996 Yes
27.4 1 Fiscal year end for 1996 Yes
27.5 3 Quarters 1, 2, and 3 for 1997 Yes
</TABLE>
<PAGE>
(b) Reports on Form 8-K
On June 12, 1997, the following information was reported on form
8-K:
The Company had outstanding warrants to purchase an aggregate of
481,764 shares of Company common stock that were originally issued at exercise
prices of $1.50, $2.50, $2.65 and $2.80 per share. Such warrants contained
provisions for the adjustment of the purchase price and the number of shares
purchasable under the warrant in the event the Company subsequently issued
certain securities. As part of a settlement with a former employee, the Company
issued options to purchase common stock at an exercise price of $.6875 per
share. On April 28, 1997, the Company notified the holders of the adjustable
warrants that as a result of the issuance of the options, the purchase price for
shares of Company common stock under their warrants had adjusted down to $.6875
per share, and the number of shares of Company common stock purchasable under
their warrants proportionately increased, pursuant to the terms of their
respective warrants. Other outstanding warrants, issued at exercise prices of
$3.50 and $4.20 per share did not have the provision for adjustment. As a result
of the adjustments, as of April 28, 1997 the aggregate number of shares of
Company common stock purchasable under the adjusted warrants increased from
481,764 to 1,842,894, and the aggregate number of shares of Company common stock
purchasable under all warrants outstanding increased from 819,264 to 2,180,394.
The Company's interim, President and CEO, James W. Hansen, has
agreed to accept on a permanent basis the positions of President, CEO, Chairman
and Treasurer as of June 1, 1997.
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
Chairman and CEO
Dated: March 31, 1998
<PAGE>
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 31, 1998
Chief Executive Officer, Director
and Chairman of the Board of Directors
/s/ Ward C. Johnson
Ward C. Johnson Director March 31, 1998
/s/ Richard F. Craven
Richard F. Craven Director March 31, 1998
/s/ John A. Collins
John A. Collins Director March 31, 1998
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated effective as of June 1, 1997, by and between
VideoLabs, Inc., a Delaware corporation (the "Company") and James W. Hansen, a
Minnesota resident ("Executive"), and The Hansen Company, a Minnesota
corporation (the "Consultant").
WHEREAS, the Company desires to employ Executive upon and subject to
the terms and conditions set forth in this agreement, and Executive desires to
render services for the Company on such terms and conditions; and
WHEREAS, the Company desire to confirm its engagement of Consultant
and to revise its compensation arrangements with Consultant, and the Consultant
(which is corporation wholly owned by Executive) desires to join this Agreement
to confirm such engagement and revision.
NOW, THEREFORE, in consideration of the premises and the respective
undertakings of the Company and Executive set forth below, the Company and
Executive agree as follows:
1. EMPLOYMENT. The Company hereby employs Executive as Chairman of
the Board, Chief Executive Officer, President, and Treasurer, and other such
positions of subsidiaries as assigned by the Board of Directors, and Executive
accepts such employment and agrees to perform services for the Company, for the
period and upon the other terms and conditions set forth in this agreement.
2. TERM OF EMPLOYMENT. The term of Executive's employment hereunder
shall commence on the effective date hereof and shall continue for an initial
term of three (3) years ("Term of Employment"). The Term of Employment shall
automatically renew for additional one year terms thereafter unless prior
written notice of nonrenewal is given by either Executive or the Company at
least sixty (60) days prior to the annual anniversary date of this agreement.
Notwithstanding the foregoing, the Executive may terminate the Term of
Employment at any time upon ninety (90) days prior written notice to the
Company.
3. POSITION AND DUTIES.
3.01 Service with Company. During his Term of Employment,
Executive agrees to perform such reasonable employment duties, consistent with
the terms of this agreement and the offices held by Executive as provided in
section 1 above, as the Board of Directors of the Company shall assign to him
from time to time. Such duties and employment responsibilities shall be
performed in accordance with the Company's rules, regulations and instructions
now in force or which may be adopted by the Company in the future.
<PAGE>
3.02 Performance of Duties. During his Term of Employment, the
Executive agrees to serve the Company to the best of his ability. The Executive
shall have active involvement and be fully committed to the business and affairs
of the Company, and shall devote at least three (3) days per week to the affairs
of the Company. The Company acknowledges that Executive has employment and/or
businesses other than the Company. Executive hereby confirms that he is under no
contractual commitments inconsistent with his obligations set forth in this
agreement. During his Term of Employment, however, Executive shall not render or
perform services for any other corporation, firm, entity or person, nor will he
become involved in the operations or management of any other commercial
corporation, firm, entity or person, which is in competition with the business
of the Company.
3.03 Noncompetition. In consideration of the payments to be made
to the Executive under this Agreement, including without limitation the
severance payments provided in Section 8.02 which the Executive acknowledges
constitute new and valuable consideration, the Executive hereby covenants and
agrees that during the Term of Employment, and for a period of twenty-four (24)
months following the termination of Executive's employment for any reason (the
"Restricted Term"), the Executive shall not, directly or indirectly, own,
manage, operate, control, act as an advisor or consultant to, or participate in,
the ownership, management, operation, or control of any business involving the
manufacture or sale, whether at wholesale or retail, of image capture,
transmission or manipulation devices in any geographic market served by the
Company during the Restricted Term; provided, however, that the foregoing shall
not prevent the Executive from owning not more than a one percent (1%) interest
in any entity engaged in such a competing business whose securities are traded
on any securities exchange or in the over-the-counter markets.
4. COMPENSATION.
4.01 Base Salary. As base compensation for all services to be
rendered by the Executive under this agreement during the Term of Employment ,
the Company shall pay to Executive a minimum monthly base salary of $5,000.00
per month, which salary shall be paid in accordance with the Company's normal
payroll procedures and policies and be reviewed annually by the Board of
Directors.
4.02 Stock Options. Executive shall be granted, effective May 29,
1997, an option to purchase up to 50,000 shares of the Company's common stock,
par value $.01 per share, pursuant to the Company's Stock Option Plan, at an
exercise price equal to the closing bid price for such common stock on May 29,
1997 (which was $1.00 per share). All such stock options shall be granted under,
and pursuant to all terms and conditions of, the Qualified Stock Option Plan.
The Board may consider additional grants annually.
4.03 Benefits. Executive shall be entitled to such
company-sponsored benefits as are provided to executive employees of the
Company, subject to the terms and conditions of the applicable policies and/or
plans.
4.04 Expenses. The Company will pay or reimburse Executive for
all
<PAGE>
reasonable and necessary out-of-pocket expenses incurred by him in the
performance of his duties under this agreement, subject to the presentment of
appropriate vouchers in accordance with the Company's normal polices for expense
verification. Executive shall be entitled to reimbursement for educational
expenses approved by the Board of Directors, and membership costs for the Young
Presidents Organization.
4.05 Bonuses. Executive shall be entitled to participation in the
Company's management bonus pool, to the same extent as other management
personnel of the Company.
4.06 Confirmation of Consulting Services. Each of the Consultant
and the Company hereby acknowledge the existing Consulting Agreement dated as of
October 15, 1996. From and after the date of this Agreement, the Consulting
Agreement shall be terminated, and null and void, except as provided in this
Section. Consultant shall provide management consulting services and assistance,
as required by the Company from time to time, and shall receive total
compensation of $2,000 per month, subject to review by the Board of Directors,
based upon an average of sixteen (16) hours of services by Consultant per month.
The Consultant's engagement may be terminated by the Company upon thirty (30)
days written notice. The provisions of Sections 5 through 17 of the Consulting
Agreement shall continue to apply between the Consultant and the Company from
and after the date of this Agreement as if set forth fully herein. The
Consultant shall be deemed an affiliate of the Executive and activities of the
Consultant shall be within the restrictions set forth in Section 3.03 of this
Agreement.
5. CONFIDENTIAL INFORMATION. Except as permitted or directed by the
Company's Board of Directors, during the Term of Employment or at any time
thereafter Executive shall not divulge, furnish or make accessible to anyone or
use in any way (other than in the ordinary course of the business of the
Company) any confidential or secret knowledge or information of the Company
which Executive has acquired or become acquainted with or will acquire or become
acquainted with prior to the termination of the Term of Employment, whether
developed by himself or by others, concerning any trade secrets, confidential or
secret designs, processes, formulae, plans, devices or material (whether or not
patented or patentable) directly or indirectly useful in any aspect of the
business of the Company, any customer or supplier lists of the Company, any
confidential or secret development or research work of the Company, or any other
confidential information or secret aspects of the business of the Company.
Executive acknowledges that the above-described knowledge or information
constitutes a unique and valuable asset of the Company and represents a
substantial investment of time and expense by the Company and its predecessors,
and that any disclosure or other use of such knowledge or information other than
for the sole benefit of the Company would be wrongful and would cause
irreparable harm to the Company. Both during and after the Term of Employment,
Executive will refrain from any acts or omissions that would reduce the value of
such knowledge or information to the Company. The foregoing obligations of
confidentiality, however, shall not apply to any knowledge or information which
is now published or which subsequently becomes generally publicly known in the
form in which it was obtained from the Company, other than as a direct or
indirect result of the breach of this agreement by Executive. It is hereby
acknowledged that it is not the intention of the forgoing provisions to preclude
the Executive from securing gainful employment with subsequent employers who are
not competitors of the Company or who would otherwise have no reasonable
commercial use of the above described knowledge or information, but only to
protect the Company's legitimate proprietary information or knowledge.
6. VENTURES. If, during the Term of Employment, Executive is engaged
in or associated with the planning or implementing of any project, program or
venture involving the
<PAGE>
Company and a third party or parties, all rights in such project, program or
venture shall belong to the Company. Except as formally approved by the
Company's Board of Directors, Executive shall not be entitled to any interest in
such project, program or venture or to any commission, finder's fee or other
compensation in connection therewith other than the salary or other compensation
to be paid to Executive as provided in this agreement.
7. PATENT, COPYRIGHTS AND RELATED MATTERS.
7.01 Disclosure and Assignment. Executive will promptly disclose
in writing to the Company complete information concerning each and every
invention, discovery, improvement, device, design, apparatus, practice, process,
method or product, whether patentable or not, made, developed, perfected,
devised, conceived or first reduced to practice by Executive, either solely or
in collaboration with others, during the Term of Employment, or within six
months thereafter, whether or not during regular working hours, relating to any
phase of the business of the Company conducted at such time (hereinafter
referred to as "Developments"). Executive, to the extent that he has the legal
right to do so, hereby acknowledges that any and all of said Developments are
the property of the Company and hereby assigns and agrees to assign to the
Company and all of the Executive's right, title and interest in and to any and
all of such Developments.
7.02 Future Developments. As to any future Developments made by
Executive and which are first conceived or reduced to practice during the Term
of Employment, or within six months thereafter, but which are claimed for any
reason to belong to an entity or person other than the Company, Executive will
promptly disclose the same in writing to the Company and shall not disclose the
same to others if the Company, within sixty (60) days thereafter, shall claim
ownership of such Developments under the terms of this agreement. If the Company
makes such claim, Executive agrees that, insofar as the rights (if any) of
Executive are involved, it will be settled by arbitration in accordance with the
rules of the American Arbitration Association. The locale of the arbitration
shall be Minneapolis, Minnesota (or other locale convenient to the Company's
principal executive offices). If the Company makes no such claim, Executive
hereby acknowledges that the Company has made no promise to receive and hold in
confidence any such information disclosed by Executive.
7.03 Limitation on Sections 7.01 and 7.02. The provisions of
sections 7.01 and 7.02 shall not apply to any Development meeting the following
conditions:
(a) such Development was developed entirely on
Executive's own time; and
(b) such Development was made without the use of any
Company equipment, supplies, facility or trade
secret information; and
(c) such Development does not relate (i) directly to
the business of the Company, or (ii) to the
Company's actual or demonstrably anticipated
research or development.
<PAGE>
7.04 Executive Assistance. Executive agrees to assist Company in
obtaining patents or copyrights on any Developments assigned to the Company that
Company, in its sole discretion, seeks to patent or copyright. Executive also
agrees to sign all documents and do all things deemed necessary by Company to
obtain and/or maintain such patents or copyrights, to assign them to Company,
and to protect them against infringement. The obligations of this Section 7 are
continuing and shall survive the termination of Executive's employment with
Company.
7.05 Appointment of Agent. Executive irrevocably appoints the
Company to act as Executive's agent and attorney in fact to perform all acts
necessary to obtain/or maintain patents or copyrights to any Developments
assigned by Executive to Company under this Agreement if (i) Executive refuses
to perform those acts or (ii) is unavailable, within the meaning of the United
States patent and copyright laws. Executive acknowledges that the grant of the
foregoing power of attorney is coupled with an interest and shall survive the
death or disability of Executive and the termination of Executive's employment
with Company.
7.06 Notice and Acknowledgment. Executive acknowledges that this
section of this agreement does not apply to a Development for which there was no
equipment, supplies, facilities or trade secret information of the Company used
and which was developed entirely on Executive's own time, and which does not
relate directly to the business of the Company or the Company's actual or
demonstrably anticipated research or development, or which does not result from
any work performed by Executive for the Company.
8. TERMINATION.
8.01 Grounds for Termination. This agreement shall be terminated
prior to the end of the Term of Employment under the following circumstances:
(a) By mutual agreement of Executive and the Company;
(b) Immediately upon the death of Executive;
(c) Upon delivery by Executive of a notice of
termination to the Company, in which event this
agreement shall be terminated ninety (90) days
after receipt of such notice; and
(e) Immediately, in the event of (i) Executive's
personal dishonesty, willful misconduct, breach of
fiduciary duty, intentional failure to perform
stated duties, willful violation of any laws
(other than minor traffic violations or similar
offenses), or material breach of the policies or
procedures of the Company. The Company agrees to
give Executive thirty (30) days notice to cure
those limited items that can actually be cured
prior to effecting termination pursuant to this
subsection, such termination to be deemed to be
termination for cause; or (ii) the bankruptcy or
insolvency of the Company.
<PAGE>
Notwithstanding any termination of this agreement, Executive, in consideration
of his employment hereunder to the date of such termination, shall remain bound
by the provisions of this agreement which specifically relate to periods,
activities or obligations upon or subsequent to the termination of Executive's
employment, and the Company shall remain bound by the provisions of section 5
(to the extent that they relate to time periods prior to the date of such
termination).
8.02 Severance Payment for Termination by Company Following a
Change in Control. If a Change in Control of the Company occurs during the Term
of Employment and following such Change in Control, the Company terminates the
employment of Executive other than for Cause during the six (6) month period
following the Change in Control, Executive shall be entitled to severance
compensation, in full and complete satisfaction of any and all obligations of
the Company under this Agreement and as the sole and exclusive remedy available
to Executive as a result of the termination, equal to the Executive's then
current base salary (and the last annual bonus paid, if any) for the twenty-four
(24) month period following the effective date of termination subject to
applicable withholdings and in accordance with the regular payroll practices of
the Company. Any employee benefits provided to Executive shall terminate upon
the effective date of termination, subject to such continuation rights as may be
available to Executive by law. Nothing in this agreement, including the
severance payments described in this section, shall in any way be construed to
extend the period of Executive's employment with the Company subject to Board
approval.
For purposes of this section, a Change in Control shall mean
either of the following:
(a) a change in control of a nature that would be
required to be reported in response to Item 6(e)
of Schedule 14A of Regulation 14A promulgated
under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), whether or not the
Company is then subject to such reporting
requirement; or
(b) a merger or consolidation to which the Company is
a party if, following the effective date of such
merger or consolidation, the individuals and
entities who were shareholders of the Company
prior to the effective date of such merger or
consolidation have beneficial ownership (as
defined in Rule 13d-3 under the Exchange Act) of
less than fifty percent (50%) of the combined
voting power of the surviving corporation
following the effective date of such merger or
consolidation.
8.03 Surrender of Records and Property. Upon termination of his
employment with the Company, Executive shall deliver promptly to the Company all
records, manuals, books, blank forms, documents, letters, memoranda, notes,
notebooks, reports, data, tables, calculations or copies thereof, which are the
property of the Company or which relate in any way to the business, products,
practices or techniques of the Company, and all other property, trade secrets
and confidential information of the Company, including, but not limited to, all
<PAGE>
documents which in whole or in part contain any trade secrets or confidential
information of the Company, which in any of these cases are in his possession or
under his control. Provided, however, that Executive shall be entitled to retain
items of sentimental value, copies of which shall be provided to the Company at
the request of the Company and at the Company's expense.
9. MISCELLANEOUS.
9.01 Governing Law. This agreement is made under and shall be
governed by and construed in accordance with the laws of the State of Minnesota.
9.02 Prior Agreements. This agreement contains the entire
agreement of the parties relating to the subject matter hereof and supersedes
all prior agreements and understandings with respect to such subject matter, and
the parties hereto have made no agreements, representations or warranties
relating to the subject matter of this agreement which are not set forth herein.
9.03 Withholding Taxes. The Company may withhold from all salary,
bonus, severance pay or other benefits payable under this agreement all federal,
state, city or other taxes as shall be required pursuant to any law or
governmental regulation or ruling.
9.04 Amendments. No amendment or modification of this agreement
shall be deemed effective unless made in writing and signed by the parties
hereto.
9.05 No Waiver. No term or condition of this agreement shall be
deemed to have been waived, nor shall there be any estoppel to enforce any
provisions of this agreement, except by a statement in writing signed by the
party whom enforcement of the waiver or estoppel is sought. Any written waiver
shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than specifically waived.
9.06 Severability. To the extent any provision of this agreement
shall be invalid or unenforceable, it shall be considered deleted here from and
the remainder of such provision and of this agreement shall be unaffected and
shall continue in full force and effect. In furtherance and not in limitation of
the foregoing, should the duration or geographical extent of, or business
activities covered by, any provision of this agreement be in excess of that
which is valid and enforceable under applicable law, then such provision shall
be construed to cover only that duration, extent or activities which may validly
and enforceably be covered. Executive acknowledges the uncertainty of the law in
this respect and expressly stipulates that this agreement be given the
construction which renders its provisions valid and enforceable to the maximum
extent (not exceeding its express terms) possible under applicable law.
9.07 Assignment. This agreement shall not be assignable, in whole
or in part, by either party without the written consent of the other party.
<PAGE>
9.08 Injunctive Relief. Executive agrees that it would be
difficult to compensate the Company fully for damages for any violation of the
provisions of this agreement, including without limitation the provisions of
sections 5, 6, and 7. Accordingly, Executive specifically agrees that the
Company shall be entitled to temporary and permanent injunctive relief to
enforce the provisions of this agreement and that such relief may be granted
without the necessity of proving actual damages. This provision with respect to
injunctive relief shall not, however, diminish the right of the Company to claim
and recover damages in addition to injunctive relief.
9.09 Mandatory Arbitration, In the event any dispute arises under
this Agreement, or as to the breach hereof, and if the dispute cannot be settled
within a reasonable time through direct negotiations between the parties, which
the parties agree to pursue in good faith, such dispute shall be submitted to
binding arbitration conducted in Minneapolis, Minnesota, in accordance with the
then-current Commercial Rules of the American Arbitration Association ("AAA").
The costs and expenses of the arbitration shall be paid by the party against
whom the arbitrators render a decision, if a decision is rendered against a
party, otherwise the costs and expenses shall be shared equally by Executive and
the Company. The arbitrators shall have full power and authority to rule on any
question of law in the same manner as any judge of any court of competent
jurisdiction, and the decision of the arbitrators shall be final and conclusive
upon the parties, and shall not be subject to any appeal or review if the
arbitrators have followed the Commercial Rules of the AAA. The arbitrators shall
have full power to make any award (including the award of equitable remedies)
that shall under the circumstances presented to them be deemed to be proper;
provided that the arbitrators shall not have the power to award punitive damages
or to limit, expand or otherwise modify the terms of this Agreement. Judgment
may be entered upon any award rendered by the arbitrators in accordance with
applicable law in any court of competent jurisdiction.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this agreement
effective as of the date and year first written above.
VIDEOLABS, INC.
By /s/ Richard F. Craven
Its Director
/s/James W. Hansen
THE HANSEN COMPANY
By /s/ James W. Hansen
Its President
LEASE
This Lease is entered into as of August 6, 1997 , between MEPC AMERICAN
PROPERTIES INC., a Delaware corporation ("Lessor") and VIDEOLABS, INC., a
Delaware corporation, ("Tenant")
1. Definitions. In this Lease:
(a) "Building" means that certain office/warehouse building containing
approximately 91,368 square feet of net rentable area located on the
Land in Golden Valley, Minnesota.
(b) "Premises" means that certain portion of the Building at 5960 Golden
Hills Drive, Golden Valley, Minnesota, which space is shown
crosshatched on the drawing attached to this Lease as Exhibit A, and
is estimated to contain 8,439 Square Feet.
(c) "Office Space" means that portion of the Premises, based upon the
final floor plan for the Premises, constructed for purposes of office
use and designated as such in Exhibit A.
(d) "Warehouse Space" means that portion of the Premises, based upon the
final floor plan for the Premises, constructed for purposes of
manufacturing, production or warehouse use and designated as such in
Exhibit A.
(e) "Term" means the period of 5 years and 0 months, beginning on October
1, 1997 and ending on September 30, 2002 , subject to the provisions
of Sections 2 and 7 and the other provisions of this Lease.
(f) "Commencement Date" means the later of a date 45 days after Lessor
delivers possession of the Premises to Tenant or October 1, 1997.
(g) "Lease Year" means a period of 12 consecutive months commencing on the
first day of the first full month of the Term and each 12-month period
thereafter during the Term.
(h) "Monthly Base Rent" means the following amounts per Rentable Square
Foot multiplied by the number of Square Feet of Office Space and
Warehouse Space in the Premises divided by 12:
<PAGE>
RATE SQUARE FEET
---- -----------
LEASE YEAR OFFICE/WAREHOUSE OFFICE/WAREHOUSE MONTHLY BASE RENT
1 - 5 $9.50/$4.50 5,806/2,633 $5,583
The amount of the Monthly Base Rent will not change during the Term
unless space is added to or deleted from the Premises as provided in
this Lease or by written amendment of this Lease.
(I) "Costs" means the estimated monthly Tax Costs plus the estimated
monthly Operating Costs.
(j) "Monthly Rent" means the Monthly Base Rent plus Tenant's Share of the
Costs.
(k) "Tenant's Share" means the percentage obtained by dividing the Square
Feet of the Premises by the Square Feet in the Building, which
percentage on the date of this Lease is estimated to be 9.24 % based
on the number of square feet stated in paragraph (b) above and based
upon a current estimate of the Square Feet in the Building of 91,368
square feet.
(l) "Operating Costs" means all costs, charges and expenses incurred by
Lessor in connection with ownership, operation, security, maintenance
and repair of the Land, the Building, other improvements on the Land,
appurtenances to the Building, parking, roadways, landscaping,
lighting, sidewalks, and common or public areas, including but not
limited to real estate taxes and insurance on Common Areas, interior
and exterior Building maintenance, insurance, utilities, fees or
expenses for management by Lessor or any other party (not to exceed 5%
of gross rents from the Building), amortization (over the useful life
and at Lessor's cost of capital) of capital investments made to reduce
Operating Costs, or required under any governmental law or regulation
which was not applicable to the Building at the time it was
constructed, and amortization of repairs made to extend the life of
the Building and other improvements. Operating Costs will not include
mortgage principal or interest, depreciation on the Building or
fixtures, advertising expenses, real estate brokers' commissions or
the cost of tenant improvements.
In addition, Operating Costs shall not include any costs or expenses
for: leasing or obtaining new or renewal tenants or preparation of
space for other tenants; repair or replacement of the Building or its
contents or components to the extent covered by insurance or warranty;
expenses of enforcing any lease; refinancing, leasing or selling the
Land or Building; any aspect of the Phase II Building; any item or
service that Tenant separately pays Lessor or third parties or that
Lessor
<PAGE>
provides selectively to one or more other tenants (whether or not
Lessor is reimbursed); testing, cleaning, abating or otherwise
remedying any hazardous substances from the Land or Building which
were present prior to the Commencement Date or brought on to the Land
or Building after the Commencement Date by Lessor or another tenant;
contributions to operating cost reserves, to the extent such reserves
will not be used during the calendar year created; any bad debt or
rent loss reserves; operation and maintenance incurred due to the
nature of the business conducted by another tenant (e.g. food service
tenants). The estimate of the Operating Costs for the first year of
the Term is attached hereto as Exhibit D.
(m) "Tax Costs" means all real estate taxes, levies, charges, and
installments of assessments (including interest on deferred
assessments) assessed, levied or imposed on, or allocated to, the Land
and Building (except to the extent included in Operating Costs) and
all reasonable attorneys' fees, consultants' fees, witness fees, court
costs and other expenses of Lessor in connection with any good faith
proceeding to contest these amounts.
(n) "Square Feet" means the number of square feet calculated from
dimensional architect's drawings by measuring to the outside surface
of exterior walls and to the centerline of walls separating areas
leased or held for lease to others.
(o) "Lease" means this Lease, all Exhibits attached to this Lease, and all
properly executed amendments, modifications and supplements to this
Lease.
(p) "Section" means a section of this Lease.
(q) "Exhibit" means an Exhibit attached to and thereby made a part of this
Lease.
(r) "Land" means the land described on Exhibit B.
(s) "Taking" means acquisition by a public authority having the power of
eminent domain of all or part of the Land or Building by condemnation
or conveyance in lieu of condemnation.
(t) "Casualty" means a fire, explosion, tornado, or other cause of damage
to or destruction of the Building.
(v) "Common Areas" means any halls, lavatories, loading facilities,
driveways and open lot parking areas, designed for the nonexclusive
use of the owner and occupants of the Building, and not designed or
intended for the exclusive use of a single tenant, as designated by
Lessor from time to time.
<PAGE>
(w) "Tenant's Work" means all improvements, alterations, fixtures and
equipment constructed or installed for Tenant's use and occupancy of
the Premises or desired by Tenant to complete the Premises for
occupancy.
2. Premises and Construction.
Lessor leases the Premises to Tenant, and Tenant leases the Premises from
Lessor, for the Term, under the terms and conditions of this Lease.
The Premises will be constructed by The Bainey Group, Inc., substantially in
accordance with final construction drawings, plans, and specifications approved
by Lessor, (Tenant Improvements) all at Tenant's expense except for the tenant
allowance hereinafter described. Lessor will contribute a credit against the
cost of the Tenant Improvements up to $158,000.00 (Tenant Allowance). Tenant
will be responsible for any costs in excess of the Tenant Allowance. Tenant
shall pay Lessor upon request, the amount by which the actual cost to Lessor for
all work, exceeds the Tenant Allowance. Any other work desired by Tenant to
complete the Premises for occupancy will be performed by Lessor or Tenant's
contractor approved by Lessor, at Tenant's sole expense.
When Tenant takes possession of all or a portion of the Premises, that will be
deemed conclusive evidence that the Premises or the portion are in satisfactory
condition on that date, and that Lessor has completed all work for which it is
responsible, subject only to latent defects and to deficiencies (if any) listed
in a written notice delivered by Tenant to Lessor not more than 30 days after
the date of taking possession.
3. Rent.
Tenant will pay the Monthly Rent to Lessor at P.O. Box 73547, Chicago, Illinois
60673-7547, or such other place as Lessor may designate, in advance on the first
day of each month during the Term, without demand, deduction or setoff. The
Monthly Rent may change as the Costs are adjusted annually under Sections 4 and
5.
Monthly Rent will begin on the later of October 1, 1997 or the Commencement
Date. If the Term begins on a day other than the first day of a month, the
Monthly Rent for that month will be prorated by multiplying the Monthly Rent by
the number of days of that month included in the Term and dividing the product
by the number of days in that month.
Any Monthly Rent or other amounts payable by Tenant to Lessor under this Lease
which are not paid within 10 days after the date due will bear interest from the
date due to the date paid at the rate of 18% per annum or the maximum rate of
interest permitted by law, whichever is less, and the interest will be paid to
Lessor on demand. In addition, Tenant will pay Lessor a $100 service charge for
all Monthly Rent not paid by the 10th day of the month for which it is payable,
which service charge is to partially cover expense involved in handling
delinquent
<PAGE>
payments. All amounts to be paid by Tenant to Lessor under this Lease will be
deemed to be additional rent for purposes of payment and collection.
If any taxes, special assessments, fees or other charges are imposed against
Lessor by any governmental unit or agency with respect to rentals under this
Lease, Tenant will pay these amounts to Lessor when due, except that Tenant will
have no obligation to pay any income tax on rentals unless the tax is imposed in
lieu of real estate taxes.
4. Cost Adjustments.
The initial Monthly Rent is based in part on the estimated Operating Costs and
Tax Costs. Prior to the first day of each calendar year after the date of this
Lease, or as soon as reasonably possible after the first day of the year, Lessor
will furnish Tenant with an reasonable estimate of the Costs if greater than the
initial Costs, and the Monthly Rent will be increased by 1/12th of Tenant's
Share of the difference between the initial estimate of Costs and the current
estimate.
After the end of each calendar year, including the year in which the Term
expires, Lessor will give Tenant a statement of the actual Costs for that
calendar year. If the actual Costs exceed the estimated Costs for that year,
Tenant will pay Tenant's Share of the excess to Lessor within 20 days after
receiving the statement. If the actual Costs are less than the estimated Costs
for that year, Lessor will pay Tenant's Share of the difference to Tenant with
the statement. If Tenant does not give Lessor written notice within one year
after receiving Lessor's statement that Tenant disagrees with the statement and
specifying the amounts in dispute, Tenant will be deemed to have waived the
right to contest the statement. Tenant will file no petition in Tax Court
regarding the Tax Costs without Lessor's prior written consent. If Lessor
contests Tax Costs and receives a refund or incurs additional Tax Costs after
adjustments for actual Tax Costs have been made, the actual Tax Costs will be
corrected accordingly and the appropriate adjustment will be made between Lessor
and Tenant. The portion of Costs to be paid by Tenant for the years in which the
Term begins and ends will be prorated by multiplying the actual Costs by a
fraction, the numerator of which is the number of days of that year in the Term
and the denominator of which is 365.
Subject to the one-year limitation set forth in this Section, if Tenant has a
good faith belief that Lessor has overstated Operating Costs, Tenant may, upon
30 days prior written notice to Lessor, audit all books and records pertaining
to Operating Costs. Such audit shall be: (i) conducted at the place where such
books and records are maintained; (ii) conducted during regular business hours;
(iii) conducted by an auditor approved by Lessor (which approval Lessor agrees
not to unreasonably withhold or delay); (iv) restricted to one audit per
operating year; and (v) at the sole cost and expense of Tenant. Any such audit
rights must be exercised by Tenant within one year after the statement given by
Lessor under this Section, or such audit rights shall be deemed to be waived.
Tenant shall provide Lessor with a complete copy of the report of such auditor
with reasonably detailed breakdowns, and unless Lessor shall elect to challenge
specific items of such report within 180 days following receipt thereof, such
<PAGE>
determination shall be binding and conclusive upon both Lessor and Tenant. In
the event that any such audit shall reveal that Tenant has overpaid its
proportionate share of Operating Costs, Lessor shall refund to Tenant such
overpayment within 30 days of written demand from Tenant for such overpayment.
If Lessor shall dispute the amount of the Operating Costs as determined by
Tenant's auditor, Lessor may have an auditor inspect Tenant's report and the
books and records pertaining to the Operating Costs. Unless such inspection is
performed and a report delivered to Tenant in accordance with the next sentence
hereof, all within 180 days from the date when the results of Tenant's audit are
delivered to Lessor, the Operating Costs as determined by Tenant's auditor shall
be binding and conclusive. Lessor shall provide Tenant with a complete copy of
the report of Lessor's auditor with reasonably detailed breakdowns, and unless
Tenant shall elect to challenge specific items of such report within 60 days
following receipt thereof, such determination shall be binding and conclusive
upon both Lessor and Tenant.
5. Cost Computations and Allocations.
If the Building is not fully occupied during any partial or full year, an
adjustment will be made in computing the actual Operating Costs for such year so
that it is computed as though the Building had been fully occupied during that
year.
6. Fiscal Year.
The year used to determine Costs may be changed to a different 12-month period
designated by Lessor for all tenants of the Building. If the calendar year is
changed to a fiscal year, or if a fiscal year is changed to a different fiscal
year, prorations will be made for the estimated Costs and the actual Costs so
that the same time period is used to determine each and so that Costs are not
included in more than one time period.
7. Possession.
Tenant shall be entitled to take possession of the Premises before the
Commencement Date provided such possession does not unreasonably interfere with
the construction of Tenant Improvements and provided that all provisions of this
Lease will apply to such period except for the payment of Monthly Rent.
If Lessor is delayed in delivering possession of all or any portion of the
Premises to Tenant, Tenant will take possession of the Premises on the date when
Lessor delivers possession of all of the Premises, and the last day of the term
will be extended so that the length of the Term remains the same. If the
extended Term would end on a day other than the last day of a month, the Term
will be further extended to the last day of the month in which the Term ends.
This Lease will not be void or voidable and Lessor will not be liable to Tenant
for any loss or
<PAGE>
damage resulting from any delay in delivering possession of the Premises to
Tenant, but unless the delay is principally caused by or attributable to Tenant,
its employees, agents or contractors, no Monthly Rent will be due for the period
prior to the date Lessor delivers possession of the Premises, unless Tenant
elects to take possession of a portion of the Premises, in which case Monthly
Rent will be due for the portion of the Premises taken. Tenant's occupancy of
the Premises will constitute Tenant's acceptance of the Premises subject only to
latent defects and punch list items.
If Tenant pays the Monthly Rent and other charges and performs all of Tenant's
obligations under this Lease, Lessor promises that Tenant may peaceably and
quietly possess and enjoy the Premises under this Lease.
8. Use.
Tenant will use the Premises for general business offices and light
manufacturing and for no other purpose.
Tenant will not commit or permit any act or omission which results in the
violation of any law, governmental regulation, or insurance policy of Lessor,
relating to the Building, or which will increase Lessor's insurance rates on the
Building. Tenant will not permit any conduct or condition which may unduly
disturb or endanger other occupants of the Building.
9. Care of Premises.
Tenant will, at all times during the Term and any renewals and extensions, at
its sole expense, keep and maintain the Premises in a clean, safe, sanitary, and
first class condition and in compliance with all applicable laws, codes,
ordinances, rules, and regulations. Tenant's obligations will include but not be
limited to the maintenance, repair and replacement, if necessary, of heating,
air conditioning and ventilating fixtures, equipment and systems, all lighting
and plumbing fixtures, all interior walls, partitions, doors and windows,
including the regular painting thereof, all exterior entrances, windows, doors,
and docks and the replacement of all broken glass, to the extent a part of the
Premises and excluding any defects in the Tenant Improvements. When used in this
Section, the term "repairs" shall include replacements and overhauling equipment
when necessary, and all such repairs made by the Tenant shall be equal in
quality and class to the original work as of the Commencement Date. Provided,
however, where repairs or replacements are required to be made by reason of the
gross negligence of Lessor, the costs will be reimbursed by Lessor and payable
by Lessor to Tenant on demand. The Tenant shall keep and maintain all portions
of the Premises and the sidewalk and areas adjoining the same in clean and
orderly condition, free of accumulation of dirt, rubbish, snow, and ice, except
that Lessor will contract for snow removal from the sidewalks for snowfalls
which require snow plowing of the parking lot (approximately 2 inches or more).
If Tenant fails, refuses or neglects to maintain or repair the Premises as
required in this Lease
<PAGE>
after 10 days prior written notice has been given Tenant, Lessor may make such
repairs without liability to Tenant for any loss or damage that may accrue to
Tenant's merchandise, fixtures, or other property or to its business, and upon
completion, Tenant will pay to Lessor all costs plus 15% for overhead incurred
by Lessor in making such repairs upon presentation to Tenant of bill for the
repairs.
Lessor shall keep the foundation, roof, and structural portions of the walls of
the Building (except interior walls erected by Tenant) and any electrical,
lighting, plumbing or sewer systems which are used for the benefit of the entire
Building, in good condition and repair, except for repairs required thereto by
reason of the acts or omissions of Tenant, subject to Tenant's obligation to pay
Tenant's Share of Operating Costs.
Lessor shall also be responsible for the maintenance and repair of all common
areas. Repairs shall include replacements and other improvements as are
necessary to maintain the property in good order and condition. If Lessor is
required to make any of the foregoing repairs by reason of Tenant's acts or
omissions, Lessor shall have the right, but shall not be obligated, to make such
repairs or replacements on behalf of and for the account of Tenant. In such
event, such work shall be paid for in full by Tenant as additional rent unless
such work is paid for by the insurance required under this Lease.
Tenant, at its own cost and expense, will enter into a regularly scheduled
preventive maintenance and service contract with a maintenance contractor
approved by Lessor for servicing all hot water, heating and air conditioning
systems and equipment within the Premises. The service contract must include all
services suggested by the equipment manufacturer in its operations and
maintenance manual and must become effective within 30 days of the date Tenant
takes possession of the Premises.
10. Building Rules.
Rules and Regulations for the Premises and the Building in effect on the date of
this Lease are attached as Exhibit C. Lessor will have the right to adopt
different or additional reasonable rules and regulations for the entire
Building, and to rescind or amend the attached rules and regulations, from time
to time. Tenant will abide by the rules and regulations then in force and will
cause Tenant's employees to observe and comply with them.
11. Compliance with Laws.
Tenant will, at its expense, promptly comply with all laws, ordinances, rules,
orders, regulations and other requirements of governmental authorities now or
subsequently pertaining to the Premises. Tenant will pay any taxes or other
charges by any governmental authority on Tenant's property or trade fixtures in
the Premises or relating to Tenant's use of the Premises other than Tax Costs.
<PAGE>
The Premises shall not be used in any manner which under any requirement of law
or of any public authority would require Lessor to make any addition or
alteration to or in the Building Tenant will be responsible for compliance with
the Americans with Disabilities Act of 1990 as it applies to the Premises. The
Premises shall not be used in any manner which will increase the rates required
to be paid for public liability or for all risk insurance covering the Building.
Tenant shall occupy the Premises, conduct its business and control its agents,
employees, invitees, and visitors in such a way as is lawful and reputable and
will not permit or create any nuisance, noise, odor, or otherwise interfere
with, annoy, or disturb any other Tenant in the Building in its normal business
operations or Lessor in its management of the Building. Outside storage on the
Land of any type of equipment, property, or materials owned or used by Tenant or
its customers and suppliers is not permitted.
12. Hazardous Substances.
The term "Hazardous Substances", as used in this Lease, means pollutants,
contaminants, toxic or hazardous wastes or any other substances, the removal of
which is required or the use of which is restricted, prohibited or penalized by
an "Environmental Law", which term means any federal, state or local law or
ordinance relating to pollution or the protection of the environment. Tenant
agrees that (a) no activity will be conducted on the Premises that will produce
any Hazardous Substance, except for activities which are part of the ordinary
course of Tenant's business (the "Permitted Activities"), provided the Permitted
Activities are conducted in accordance with all Environmental Laws and have been
approved in advance in writing by Lessor; (b) the Premises will not be used for
storage of any Hazardous Substances, except for temporary storage of materials
used in the Permitted Activities (the "Permitted Materials"), provided the
Permitted Materials are properly stored in a manner and location meeting all
Environmental Laws and approved in advance in writing by Lessor; (c) no portion
of the Premises or Land will be used by Tenant as a landfill or a dump; (d)
Tenant will not install any underground tanks of any type;
(e) Tenant will not cause any surface or subsurface conditions to exist or come
into existence that constitute, or with the passage of time may constitute, a
public or private nuisance; (f) Tenant will not permit any Hazardous Substances
to be brought onto the Premises, except for Permitted Materials, and if so
brought, Tenant will immediately remove them, with proper disposal, and will
undertake all required cleanup procedures under the Environmental Laws. If, at
any time during or after the term of the Lease, the Premises are found to be
contaminated or subject to conditions prohibited in this Lease as a result of
the actions or omissions of Tenant, its agents or contractors, Tenant will
indemnify and hold Lessor harmless from all claims, demands, actions,
liabilities, costs, expenses, damages and obligations of any nature arising from
or as a result of the use of the Premises by Tenant. The foregoing
indemnification will survive the termination or expiration of this Lease.
13. Signs.
<PAGE>
Tenant will not place or permit any signs on the exterior or windows of the
Building, or within the Premises if visible from the exterior of the Building or
from hallways or other Common Areas of the Building, except lettering and
numerals for identification purposes on or near doorways as approved in advance
by Lessor. At it's expense, Tenant may place a sign with its company name, on
the Building. Such sign will be identical in size, color and composition, to
other tenant signs on the Building. Lessor shall determine the placement of the
sign on the Building.
14. Alterations.
After completion of the Building, Lessor will have no obligation to do any
redecorating or remodeling or to make any repairs or alterations. Tenant will
not make any alterations, additions or improvements in or to the Premises which
exceed $5,000 in each instance so long as such alterations, additions or
improvements do not adversely affect the Building structure or electrical or
mechanical systems of the Building and do not affect the value of the Building,
without first obtaining the written consent of Lessor. Tenant will get Lessor's
prior written approval of any contractor or subcontractor who is to perform work
on the Premises at Tenant's request. Lessor may require Tenant to post a bond,
cash or other security to protect the Premises from mechanic's liens. All
alterations by Tenant will be constructed with new materials, in a good and
workmanlike manner, and in compliance with the plans and specifications approved
by Lessor and all applicable laws, ordinances, rules, orders, regulations, or
other requirements of governmental authorities. Tenant will pay for any labor,
services, materials, supplies or equipment furnished or alleged to have been
furnished to Tenant in or about the Premises, and will pay and discharge any
mechanic's, materialmen's or other lien against the Premises resulting from
Tenant's failure to make such payment, or will contest the lien and deposit with
Lessor cash equal to 150% of the amount of the lien. If the lien is reduced to
final judgment, Tenant will discharge the judgment and Lessor will return the
cash deposited by Tenant. Lessor may post notices of nonresponsibility on the
Premises as provided by law.
All alterations, additions and improvements to the Premises made at Lessor's or
Tenant's expense, except movable office furniture and Tenant's movable trade
fixtures and equipment, will become the property of Lessor upon installation and
will be surrendered with the Premises upon termination of this Lease unless
Lessor elects otherwise in writing.
15. Utilities and Services.
Lessor will provide mains and conduits to supply water, gas, electricity and
sanitary sewer services to the Premises. Tenant will pay all separately metered
charges for sewer usage, garbage disposal, refuse removal, water, electricity,
gas, heating, air conditioning and ventilation costs, telephone, and any other
utility services furnished to the Premises during the Term. If any of such
services are furnished by Lessor, the cost of all such services furnished by
Lessor will be a part of the Operating Costs. Lessor will not be liable for any
loss or damage
<PAGE>
resulting from any temporary interruption of these services due to repairs,
alterations or improvements, or any variation, interruption or failure of these
services due to governmental controls, unavailability of energy, or any other
cause beyond Lessor's control. No such interruption or failure of these services
will be deemed as an eviction of Tenant or will relieve Tenant from any of its
obligations under this Lease.
16. Entry by Lessor.
Lessor and its agents and contractors and mortgagees will have the right to
enter the Premises at reasonable times for inspecting, cleaning, repairing, or
exhibiting the Premises, but Lessor will have no obligation to make repairs,
alterations or improvements except as expressly provided in this Lease.
17. Subordination.
At the request of any mortgagee or ground lessor, this Lease will be subject and
subordinate to any mortgage or ground lease which may now or hereafter encumber
the Building, and Tenant will execute, acknowledge and deliver to Lessor any
reasonable document requested by Lessor to evidence the subordination. Such
subordination is on the condition that Tenant receive written confirmation that
Tenant's right of possession of the Premises as provided in this Lease will not
be disturbed by the mortgagee or ground lessor so long as Tenant is not in
default under this Lease. If the interest of Lessor is transferred to any party
by reason of foreclosure of a mortgage or cancellation of a ground lease, or by
delivery of a deed in lieu of foreclosure or cancellation, Tenant will
immediately and automatically attorn to such party. Tenant agrees that upon
notification by Lessor or any mortgagee or ground lessor of the election of a
mortgagee or ground lessor to subordinate its interest in the Premises to this
Lease, this Lease will become prior to the mortgage or ground lease.
18. Estoppel Certificates.
Within 10 days after written request from Lessor, Tenant will execute,
acknowledge and deliver to Lessor a document furnished by Lessor, which document
may be relied upon by Lessor and any prospective purchaser or mortgagee of the
Building, stating (a) that this Lease is unmodified and is in full force and
effect (or if modified, that the Lease is in full force and effect as modified
and stating the modifications), (b) the dates to which rent and other charges
have been paid, (c) the current Monthly Rent, (d) the dates on which the Term
begins and ends, (e) that Tenant has accepted the Premises and is in possession,
(f) that Lessor is not in default under this Lease to Tenant's knowledge, or, if
Lessor is in default, specifying any such default, and (g) including such other
information as the prospective purchaser or mortgagee may reasonably require.
19. Waiver of Claims and Assumption of Risks.
<PAGE>
Lessor and Tenant release each other from any liability for loss or damage by
fire or other casualty coverable by a standard form of "all risk" insurance
policy, whether or not the loss or damage resulted from the negligence of the
other, its agents or employees. Each party will use reasonable efforts to obtain
policies of insurance which provide that this release will not adversely affect
the rights of the insureds under the policies. The releases in this Section will
be effective whether or not the loss was actually covered by insurance. Tenant
assumes all risk of loss or damage of Tenant's property within the Premises,
including any loss or damage caused by water leakage, fire, windstorm,
explosion, theft, act of any other tenant, or other cause. Lessor will not be
liable to Tenant, or its employees, for loss of or damage to any property in the
Premises.
20. Indemnification.
Tenant will indemnify Lessor and its agents and employees against all claims,
demands and actions, and all related costs and expenses (including attorneys'
fees) for injury, death, disability or illness of any person, or damage to
property, occurring in the Premises or arising out of Tenant's use of the
Premises, except to the extent caused by the willful misconduct or negligence of
Lessor or someone acting on its behalf.
Lessor will indemnify Tenant against all claims, demands and actions, and all
costs and expenses relating thereto (including reasonable attorneys' fees), for
injury, death, disability or illness of any person or persons occurring in, on
or about the Land and Building exclusive of the Premises, caused by the willful
misconduct or negligence of Lessor or its officers, employees, agents,
contractors or someone acting on Lessor's behalf.
21. Insurance.
Tenant will keep commercial general liability insurance in force at its expense
by an insurer and policy acceptable to Lessor in its reasonable opinion. The
policy will name Lessor and its mortgagee as additional insureds, for limits of
at least $3,000,000 in the aggregate. Tenant will carry fire and "all risk"
coverage insurance for Tenant's property and improvements in the Premises. Prior
to Tenant's occupancy of the Premises, Tenant will deliver to Lessor the
liability and casualty policies or certificates by the insurer showing this
coverage to be in effect with premiums paid. The insurance will provide that
Lessor will be notified in writing 30 days prior to cancellation of, material
change in, or failure to renew, the insurance.
22. Assignment and Subletting.
Tenant may assign this Lease or sublet all or part of the Premises in excess of
500 square feet only with Lessor's prior written consent. If Tenant receives a
bona fide offer for an assignment of Tenant's interest under this Lease or to
sublease all or part of the Premises and Tenant requests Lessor's consent, a
copy of the offer will be furnished to Lessor. In the case of a proposed
assignment or sublease of all of the Premises, Lessor may terminate this Lease,
either
<PAGE>
conditioned on execution of a new lease between Lessor and the party making the
offer on the same terms as the offer to Tenant or without that condition. In the
case of a proposed sublease for less than all of the Premises, Lessor may amend
this Lease to exclude the portion of the Premises to be subleased, either
conditioned on execution of a new lease between Lessor and the party making the
offer on the same terms as in the offer to Tenant or without that condition.
If Lessor fails to give Tenant written notice of its decision to terminate or
amend this Lease within 20 days after receiving a copy of the offer to Tenant,
Lessor will not unreasonably withhold its consent to the assignment or sublease
described in the offer. The provisions of this Section will be binding on Tenant
and any assignee or subtenant of Tenant and will apply to all portions of the
Premises remaining subject to this Lease and to each request by Tenant, or its
assignee or subtenant, for Lessor's consent to a further or subsequent
assignment or subletting.
If Tenant requests Lessor's consent to assign this Lease, or sublease all or
part of the Premises, to a corporation which controls, is controlled by, or is
under common control with, Tenant, or to a corporation which acquires
substantially all of the assets of Tenant, Lessor will not withhold consent if
(a) after the assignment or sublease the control relationship between Tenant and
the other corporation remains the same, (b) Tenant provides Lessor with current
financial statements of the assignee or sublessee in form reasonably acceptable
to Lessor, and (c) Tenant provides Lessor with a copy of the proposed assignment
or sublease at least 15 days before the assignment or sublease is executed.
If Lessor consents to one or more assignments or subleases, Tenant will still
remain liable for all obligations of the Tenant under this Lease.
Lessor's interest in this Lease will be freely assignable and the obligations of
the Lessor arising or accruing under this Lease after an assignment will be
enforceable only against the assignee.
23. Damage or Destruction.
If the Premises or Building is damaged by Casualty, the damage (excluding damage
to improvements paid for by Tenant or trade fixtures, equipment or personal
property of Tenant) will be repaired by Lessor at its expense to a condition as
near as reasonably possible to the condition prior to the Casualty, but if more
than 25% of the total Square Feet in the Building is rendered untenantable,
Lessor may terminate this Lease as of the date of the Casualty by giving written
notice to Tenant within 30 days after the Casualty.
If this Lease is not terminated, Lessor will begin repairs within 90 days after
the Casualty and complete the repairs within a reasonable time, subject to acts
of God, strikes and other matters not within the control of Lessor. If Lessor
fails to begin and proceed with repairs as required, Tenant may give Lessor
notice to do so. If Lessor has not begun the repairs within 30 days after
Tenant's notice, Tenant may terminate this Lease by written notice to Lessor
within 15
<PAGE>
days after expiration of the 30-day period. If this Lease is terminated because
of the Casualty, rents and other payments will be prorated as of the Casualty
and will be proportionately refunded to Tenant or paid to Lessor, as the case
may be. During any period in which the Premises or any portion of the Premises
is made untenantable as a result of the Casualty, the Monthly Rent will be
abated for the period of time untenantable in proportion to the square foot area
untenantable.
24. Eminent Domain.
If there is a Taking of 25% or more of the Premises or 25% or more of the total
Square Feet in the Building, either party may terminate this Lease as of the
date the public authority takes possession, by written notice to the other party
within 30 days after the Taking. If this Lease is so terminated, any rents and
other payments will be prorated as of the termination and will be
proportionately refunded to Tenant, or paid to Lessor, as the case may be. All
damages, awards and payments for the Taking will belong to Lessor irrespective
of the basis upon which they were made or awarded, except that Tenant may claim
and will be entitled to any amounts specifically awarded for Tenant's trade
fixtures or equipment or as a relocation payment or allowance. If this Lease is
not terminated as a result of the Taking, Lessor will restore the remainder of
the Premises to a condition as near as reasonably possible to the condition
prior to the Taking, the rent will be abated for the period of time the space is
untenantable in proportion to the square foot area untenantable and this Lease
will be amended appropriately to reflect the deletion of the space taken.
25. Defaults.
If (a) Tenant defaults in the payment of rent or other amounts under this Lease
and the default continues for 10 days after written notice by Lessor to Tenant,
(b) Tenant defaults in any other obligation under this Lease and the default
continues for 30 days after written notice by Lessor to Tenant, (c) any
proceeding is begun by or against Tenant to subject the assets of Tenant to any
bankruptcy or insolvency law or for an appointment of a receiver of Tenant or
for any of Tenant's assets, or (d) Tenant makes a general assignment of Tenant's
assets for the benefit of creditors, then Lessor may, with or without
terminating this Lease, cure the default and charge Tenant all costs and
expenses of doing so, and Lessor also may reenter the Premises, remove all
persons and property, and regain possession of the Premises, without waiver or
loss of any of Lessor's rights under this Lease, including Lessor's right to
payment of Monthly Rent. Lessor also may terminate this Lease as to all future
rights of Tenant, without terminating Lessor's right to payment of Monthly Rent
and other charges due under this Lease.
Tenant waives any right of restoration to possession of the Premises after
reentry, notice of termination, or after judgment for possession. If this Lease
is terminated under this Section, Tenant promises and agrees to pay all Monthly
Rent and other charges due for the remainder of the original Term, and all
attorneys' fees and other expenses. If Tenant defaults in any of its obligations
under this Lease, it will promptly pay all costs (including attorneys' fees) of
<PAGE>
enforcing Tenant's obligations, whether or not this Lease is terminated and
whether or not suit is brought. No right or remedy will preclude any other right
or remedy, no right or remedy will be exclusive of or dependent upon any other
right or remedy, and any right or remedy may be exercised independently or in
combination.
If Tenant is in default and notice of termination of Tenant's right to
possession has been mailed to Tenant at the Premises and it appears in Lessor's
reasonable judgment that Tenant has abandoned or vacated the Premises, Lessor
may reenter the Premises and retake possession without legal action, without
relieving Tenant of the obligation to pay Monthly Rent or any other obligations
under this Lease, and without any liability to Tenant for re-entry removal of
Tenant's property.
26. Waiver of Lease Provisions.
No waiver of any provision of this Lease will be deemed a waiver of any other
provision or a waiver of that same provision on a subsequent occasion. The
receipt of rent by Lessor with knowledge of a default under this Lease by Tenant
will not be deemed a waiver of the default. Lessor will not be deemed to have
waived any provision of this Lease by any action or inaction and no waiver will
be effective unless it is done by expressed written agreement signed by Lessor.
Any payment by Tenant and acceptance by Lessor of a lesser amount than the full
amount of all Monthly Rent and other charges then due will be applied to the
earliest amounts due. No endorsement or statement on any check or letter for
payment of rent or other amount will be deemed an accord and satisfaction, and
Lessor may accept such check or payment without prejudice to its right to
recover the balance of any rent or other amount or to pursue any other remedy
provided in this Lease. No acceptance of payment of less than the full amount
due will be deemed a waiver of the right to the full amount due together with
any interest and service charges.
27. Return of Possession to Lessor.
On expiration of the Term or sooner termination of this Lease, Tenant will
return possession of the Premises to Lessor, without notice from Lessor, in good
order and condition, except for ordinary wear and damage, destruction or
conditions Tenant is not required to remedy under this Lease. If Tenant does not
return possession of the Premises to Lessor, Tenant will pay Lessor all
resulting damages Lessor may suffer and will indemnify Lessor against all claims
made by any new tenant of all or any part of the Premises. Tenant will give
Lessor all keys for the Premises and will inform Lessor of combinations on any
locks and safes on the Premises. Any property left in the Premises after
expiration or termination of this Lease or after the Premises have been vacated
by Tenant will become the property of Lessor to dispose of as Lessor chooses.
28. Holding Over.
<PAGE>
If Tenant remains in possession of the Premises after expiration of the Term
without a new lease, it may do so only with written consent by Lessor, and any
such holding over will be from month-to-month subject to all the same provisions
of this Lease, except that the Monthly Base Rent will be the Monthly Base Rent
stated in Lessor's consent if a new Monthly Base Rent is stated, or 150% of the
Monthly Base Rent under this Lease if no new Monthly Base Rent is stated in
Lessor's consent. Any holding over without Lessor's consent will be at 150% of
the Monthly Rent under this Lease. The month-to-month occupancy may be
terminated by Lessor or Tenant on the last day of any month by at least 30 days'
prior written notice to the other.
29. Security Deposit.
Upon execution of the Lease by Tenant, Tenant shall deliver to Lessor as a
security deposit, an irrevocable clean letter of credit in the form set forth in
Exhibit E attached hereto, issued by a commercial banking institution having
offices in Minneapolis, Minnesota and acceptable to Lessor in its reasonable
judgment, in the face amount of $158,000.00 (the "Letter of Credit"). The Letter
of Credit shall be held by Lessor as security for the performance of Tenant's
obligations under this Lease. If the Letter of Credit expires prior to the date
of expiration or earlier termination of this Lease, then not later than 60 days
before the expiration of the Letter of Credit, Tenant shall deliver to Lessor a
renewal or replacement Letter of Credit in the same form and containing the same
terms as those of the expiring Letter of Credit but reduced in face amount in
proportion to the balance of the Term remaining. The Letter of Credit shall be
held by Lessor as security for the performance of Tenant's obligations under
this Lease. Lessor shall have the right to draw on the Letter of Credit pursuant
to the following terms and conditions:
a. Lessor shall give Tenant at least five (5) days written notice of its
intention to draw on the Letter of Credit setting forth the basis for Lessor's
right to draw on the Letter of Credit.
b. Tenant fails to remedy the condition as described in such notice within
said five (5) day period.
c. A default as described in Section 25 of the Lease has occurred, proper
notice has been given by Lessor and such default has not been cured by Tenant
within the required period of time, or Tenant fails to deliver a renewal or
replacement Letter of Credit before the sixty (60) day period as described
above.
If Lessor draws on the Letter of Credit based on Tenant's failure to deliver a
renewal or replacement Letter of Credit, the proceeds of any such draw, upon
receipt, shall be held by Lessor as a security deposit to secure Lessor in the
event of a default by Tenant under Section 25 of the Lease. In the event of any
such default, assuming proper notice has been given and the default has not been
cured, Lessor shall have the right to apply so much of the security deposit as
is necessary to cure such default. Lessor may commingle the security deposit
funds with other funds but will refund the deposit to Tenant without interest
upon termination of this Lease, after subtracting any amounts necessary to cure
any defaults of Tenant under Section 25
<PAGE>
of the Lease, or to repair or restore the premises to the condition required
under this Lease.
Tenant's obligation to maintain the Letter of Credit shall continue through July
1, 1999 after such time as Tenant delivers to Lessor a Balance Sheet for Tenant
indicating that Tenant's "total shareholders' equity" for at least two
consecutive fiscal quarters prior to the preparation of such Balance Sheet is
not less than $4,500,000.00. Such Balance Sheet shall be executed by the Chief
Financial Office/Controller of Tenant and such officer shall state that the
Balance Sheet fairly represents the financial condition of Tenant as of the date
of such Balance Sheet and that such Balance Sheet was prepared and reported in a
manner which is consistent with the preparation and reporting of Balance Sheets
previously provided by Tenant to Lessor prior to the execution of this Lease. If
such "total shareholders' equity" condition is satisfied as evidenced by the
Balance Sheet and if Tenant deposits with Lessor cash or a substitute Letter of
Credit in the same form as described above in the amount of $5,583.00 as a
security deposit, then Lessor will return the Letter of Credit to Tenant, or
will return the remaining proceeds of the Letter of Credit if it has been drawn
upon.
30. Brokers.
Lessor and Tenant represent and warrant one to another that except, for Scott
Fredriksen with the Welsh Companies, neither of them has employed or otherwise
used any broker or agent in relation to this Lease. Lessor will indemnify and
hold Tenant harmless, and Tenant will indemnify and hold Lessor harmless, from
and against any claims for brokerage or other commissions or fees arising out of
any breach of the foregoing representation and warranty by the respective
indemnitors.
31. Notices.
Any notice under this Lease will be in writing, and will be sent by prepaid
certified mail, or by telegram confirmed by certified mail, addressed to Tenant
at the Premises and to Lessor at 1550 Utica Avenue South, Suite 120, St. Louis
Park, Minnesota 55416, or to such other address as is designated in a notice
given under this Section. A notice will be deemed given on the date mailed.
Lessor's statements of Costs and other routine mailings to tenants need not be
sent by certified mail.
32. Governing Law.
This Lease will be construed under and governed by the laws of Minnesota. If any
provision of this Lease is illegal or unenforceable, it will be severable and
all other provisions will remain in force as though the severable provision had
never been included.
33. Entire Agreement.
<PAGE>
This Lease contains the entire agreement between Lessor and Tenant regarding the
Premises. Tenant agrees that it has not relied on any statement, representation
or warranty of any person except as set out in this Lease. This Lease may be
modified only by an agreement in writing signed by Lessor and Tenant. No
surrender of the Premises, or of the remainder of the Term, will be valid unless
accepted by Lessor in writing.
34. Successors and Assigns.
All provisions of this Lease will be binding on and for the benefit of the
successors and assigns of Lessor and Tenant, except that no person or entity
holding under or through Tenant in violation of any provision of this Lease will
have any right or interest in this Lease or the Premises.
35. Relocation.
Tenant acknowledges that CyberOptics Corporation ("CyberOptics") or its
successor or assignee is a tenant of the Building and has, during the Term, a
prior right to expand its leased premises into the floor area on which the
Premises are located. If CyberOptics properly exercises its expansion right and
gives Lessor written notice thereof on or before October 1, 1998, then Lessor
shall, on or before November 2, 1998, notify Tenant in writing of such exercise
and shall also specify whether Lessor has commenced construction of or will be
constructing a second building as part of its Golden Hills Development (the
"Phase II Building").
If Lessor has not and will not be constructing the Phase II Building, then
Lessor's notice to Tenant shall inform Tenant that it must vacate the Premises
as of June 30, 1999. In such event, Tenant shall vacate the Premises on or
before June 30, 1999, the Lease shall terminate as of June 30, 1999, and the
parties hereto shall have no further rights or obligations hereunder except as
the same may have accrued prior to the Lease termination date. If Lessor has
commenced or will be constructing the Phase II Building, and if Tenant is
occupying the Premises at the time of Lessor's notice, then Lessor will further
notify Tenant that Lessor will relocate Tenant for the remainder of the Term,
effective as of July 1, 1999, to a new premises in the Phase II Building similar
in area and appropriateness for Tenant's purposes ("New Premises").
If Tenant is relocated, all of the terms of this Lease (excepting this Section
35) shall remain in full force and effect, Lessor shall pay the expenses of
improving the New Premises with improvements comparable to those located in the
Premises, and Tenant shall pay all expenses of moving Tenant, its property,
signage and equipment to the New Premises, including stationery and telephone
relocation costs.
Tenant further acknowledges that CyberOptics has a prior right to expand its
leased premises into the floor area in the Phase II Building where the New
Premises would otherwise be located.
<PAGE>
If CyberOptics properly exercises its Phase II Building expansion option on or
before October 1, 2001, then Lessor shall, on or before October 31, 2001, notify
Tenant in writing of such exercise and shall inform Tenant that it must vacate
the New Premises as of June 30, 2002.
In such event, Tenant shall vacate the New Premises on or before June 30, 2002,
this Lease shall terminate as of June 30, 2002, and the parties hereto shall
have no further right or obligations hereunder except as the same may have
accrued prior to the Lease termination date.
36. Renewal Option.
Lessor grants Tenant the option to extend the Term for 60 months (the "Renewal
Period") subject to the following conditions:
(a) Lessor has not exercised its option to relocate Tenant under Section 35
of this Lease.
(b) At the time Tenant exercises the option, Tenant is not in default under
this Lease.
(c) Tenant gives Lessor prior written notice on or before October 1, 2001
of Tenant's election to extend the Term.
(d) CyberOptics Corporation does not elect to lease the Premises.
(e) The Monthly Base Rent for the Renewal Period will be the monthly fair
market rent ("Fair Market Rent") for the Premises at the commencement of
the Renewal Period, considering all provisions of this Lease and the rates
for comparable space in a comparable building if leased subject to the same
provisions as this Lease, and considering any tenant improvements
allowances and other inducements which are or are not included, and
assuming a willing Lessor and a willing tenant each of which is under no
obligation to lease the space.
The Fair Market Rent shall be determined as follows: Within 30 days after
Lessor receives notice from Tenant regarding Tenant's election to exercise
the Renewal Option, Lessor will give notice to Tenant of Lessor's
determination of the Fair Market Rent of the Premises, and Lessor's
determination will constitute the Fair Market Rent unless Tenant objects in
writing within 30 days after Tenant's receipt of Lessor's notice. If Tenant
so objects, and the parties are unable to agree upon the Fair Market Rent
within 30 days after the Tenant's objection, then by written notice to
Lessor within 10 days thereafter Tenant may rescind its exercise of the
option to renew. If such notice of recision is not given, Tenant will be
deemed to have requested arbitration of the Fair Market Rent under this
paragraph, in which case the Fair Market Rent will be determined by
appraisal within 120 days after Tenant's objection notice by a board of
<PAGE>
appraisers consisting of three reputable real estate appraisers (each an
"Expert"), each of whom is a member of the American Institute of Real
Estate Appraisers with the designation of "MAI" and each of whom has at
least 10 years experience with real estate appraising in the Minneapolis
metropolitan area. One Expert will be appointed by Tenant, and the second
Expert will be appointed by Lessor. The third Expert will be appointed by
the first two Experts.
If the first two Experts are unable to agree on a third Expert within 10
days after the appointment of the second Expert, or if either party refuses
or neglects to appoint an Expert as herein provided within 10 days after
the appointment of the first Expert, then the third Expert or the second
Expert, whose appointment was not made as provided above, may be appointed
by the chief judge of the Hennepin County District Court. If determinations
of at least two of the Experts are identical in amount, that amount will be
determined to be the Fair Market Rent. If the determinations of all three
Experts are different in amount, the highest appraised value will be
averaged with the middle value (that average being referred to as "Sum A").
The lowest appraised value will be averaged with the middle value (that
average being referred to as "Sum B"), and the Fair Market Rent will be
determined as follows: (i)if neither Sum A nor Sum B differs from the
middle appraised value by more than 10% of the middle appraised value, then
the Fair Market Rent will be the average of the three appraisals, (ii)if
either Sum A or Sum B (but not both) differs from the middle appraised
value by more than 10% of the middle appraised value, then the Fair Market
Rent will be the average of the middle appraised value and the appraised
value closer in amount to the middle appraised value, and (iii)if both Sum
A and Sum B differ from the middle appraised value by more than 10% of the
middle appraised value, then the Fair Market Rent will be equal to the
middle appraised value. Written notice of the Fair Market Rent as duly
determined in accordance with this Section shall be promptly given to
Lessor and Tenant and will be binding and conclusive on them. Each party
will bear its own expenses in connection with the board proceeding
(including the Expert appointed by it), and the fees of the third Expert
will be borne equally. If, for any reason, the Fair Market Rent has not
been determined at the time of the commencement of the Renewal Period, then
the Fair Market Rent will be the amount set forth in Lessor's
determination, and if the determination of the Experts as provided above
indicates that a lesser or greater amount should have been paid than that
which was actually paid, a proper adjustment will be made in a payment from
Lessor to Tenant, or Tenant to Lessor, as the case may be.
(f) All of the other terms, covenants and conditions applicable to the
Renewal Period shall be the same as set forth in this Lease, except that
there will be no further option to extend the Term after the Renewal
Period, and no provisions of this Lease relating to leasehold improvements,
allowances, or other incentives or concessions, if any, will apply to the
Renewal Period, unless hereafter agreed upon between the parties in
writing.
<PAGE>
(g) At the request of either, Lessor and Tenant will execute and deliver
appropriate documents covering extension of the Term, the new Monthly Base
Rent and other terms of this Lease during the extended Term.
(h) The rights of Tenant under this Section will not be severed from this
Lease or separately sold, assigned or transferred, and will expire on the
expiration or earlier termination of this Lease.
<PAGE>
Lessor and Tenant have executed this Lease to be effective as of the date stated
in the first paragraph of this Lease.
LESSOR:
MEPC AMERICAN PROPERTIES INC.
By: /s/ Peter Johnson
Its: Senior Vice President
And
By: /s/ Richard A. Weiblen
Its: Vice President
TENANT:
VIDEOLABS, INC.
By: /s/ James W. Hansen
Its: President
And
By: /s/ Jill R. Larson
Its: Vice President of Administration
<PAGE>
EXHIBIT A
PREMISES
(Attach drawing with Premises crosshatched)
<PAGE>
EXHIBIT B
LAND
<PAGE>
EXHIBIT C
RULES AND REGULATIONS
1. Tenant will not use the Premises in any manner which conflicts with any
law, ordinance, or governmental rule or regulation now or subsequently
in force.
2. Tenant will not install any awnings or other attachments or structures
on the exterior of the Building.
3. Curtains, draperies or other window coverings will not be installed in
the Premises without first obtaining written approval by Lessor of the
exterior color and material.
4. No food will be prepared or cooked in the Premises without prior
written consent by Lessor other than in connection with normal
breakroom/lunchroom activities.
5. Tenant will not operate or permit to be operated in the Premises any
sound producing equipment or device which can be heard outside the
Premises.
6. Tenant will not bring or permit to be brought into the Building any
animals or birds.
7. Tenant will not disturb, solicit or canvass any occupant of the
Building and will cooperate to prevent same.
8. Tenant will refer to Lessor all contractors or installation technicians
rendering any service for Tenant for approval by Lessor before any
contractual services are performed. This will include but is not
limited to installation of telephone, cable or fiberoptic lines or
equipment, electrical devices and attachments, and any installations
affecting floors, walls, woodwork, trim, windows, ceilings, equipment
or other portions of the Building.
9. Lessor will not be responsible for any property, equipment, money or
jewelry lost or stolen from the Premises or the public areas of the
Building, regardless of whether or not the loss occurs when the
Premises are locked.
10. Lessor may designate the maximum weight and proper position of any
heavy equipment, including safes and large files to be placed in the
Building, and only those which in the opinion of Lessor will not damage
the floors, structures or elevators may be moved into the Building.
11. Any damage in connection with the moving or installing of Tenant's
furniture, equipment, appliances or other articles will be paid for by
Tenant.
<PAGE>
12. Lessor may permit entrance to the Premises by use of pass keys
controlled by Lessor or its employees, contractors or service
personnel, for the purpose of performing Lessor's janitorial services.
13. Lessor may at its option set aside a parking area to be used by Tenant
and its employees, which area will be used by Tenant and its employees
to the exclusion of other areas. Such area will be no less than as
required by City code. Lessor will provide and install, at Tenant's
expense, two (2) visitor parking stalls at Tenant's main entrance.
14. Tenants will not locate furnishings or cabinets adjacent to mechanical
or electrical access panels or over air conditioning outlets so as to
prevent operating personnel from servicing such units as routine or
emergency access may require.
15. No portion of the Building shall be used for the purpose of lodging
rooms or sleeping quarters.
<PAGE>
EXHIBIT D
1997 OPERATING AND TAX ESTIMATES
GOLDEN HILLS 1 BUILDING
General Building Maintenance $ .08
HVAC .02
Electrical .04
Water/Sewer .04
Landscape Maintenance .08
Snow Removal .14
Insurance .08
Management Fee .34
-----
Total Operating Costs $ .82
Real Estate Taxes $1.21
-----
TOTAL OPERATING AND TAX $2.03
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,746,928
<SECURITIES> 275,833
<RECEIVABLES> 626,320
<ALLOWANCES> 35,000
<INVENTORY> 1,153,665
<CURRENT-ASSETS> 3,959,183
<PP&E> 788,963
<DEPRECIATION> 468,556
<TOTAL-ASSETS> 4,279,590
<CURRENT-LIABILITIES> 940,127
<BONDS> 0
0
0
<COMMON> 32,152
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,279,590
<SALES> 6,949,652
<TOTAL-REVENUES> 6,949,652
<CGS> 4,024,841
<TOTAL-COSTS> 2,322,598
<OTHER-EXPENSES> 51,211
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 753,424
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 753,424
<EPS-PRIMARY> .24
<EPS-DILUTED> .18
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) BALANCE
SHEET AND STATEMENT OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH (B) 10QSB
</LEGEND>
<RESTATED>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996
<CASH> 972,671 982,227
<SECURITIES> 353,963 62,873
<RECEIVABLES> 852,953 1,050,118
<ALLOWANCES> 31,383 0
<INVENTORY> 2,547,824 2,806,170
<CURRENT-ASSETS> 4,844,596 5,026,569
<PP&E> 818,431 836,655
<DEPRECIATION> 319,520 371,748
<TOTAL-ASSETS> 5,343,507 5,491,476
<CURRENT-LIABILITIES> 454,789 871,814
<BONDS> 0 0
0 0
0 0
<COMMON> 31,339 31,349
<OTHER-SE> 4,857,379 4,588,313
<TOTAL-LIABILITY-AND-EQUITY> 5,343,507 5,491,476
<SALES> 1,450,805 3,266,289
<TOTAL-REVENUES> 1,450,805 3,266,289
<CGS> 972,210 2,098,805
<TOTAL-COSTS> 695,004 1,650,133
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 16,605 0
<INCOME-PRETAX> (199,804) (482,649)
<INCOME-TAX> 0 30,000
<INCOME-CONTINUING> 0 (512,649)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 260,354
<CHANGES> 0 0
<NET-INCOME> (199,804) (252,295)
<EPS-PRIMARY> (0.06) (0.08)
<EPS-DILUTED> (0.06) (0.08)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) 10QSB
INCOMESTATEMENT & BALANCE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
(B) 10QSB
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<CASH> 633,227
<SECURITIES> 500,000
<RECEIVABLES> 1,012,280
<ALLOWANCES> 37,208
<INVENTORY> 2,827,111
<CURRENT-ASSETS> 5,135,454
<PP&E> 845,576
<DEPRECIATION> 423,626
<TOTAL-ASSETS> 5,557,404
<CURRENT-LIABILITIES> 930,621
<BONDS> 0
0
0
<COMMON> 31,349
<OTHER-SE> 4,595,434
<TOTAL-LIABILITY-AND-EQUITY> 5,557,404
<SALES> 2,201,032
<TOTAL-REVENUES> 2,201,032
<CGS> 1,421,521
<TOTAL-COSTS> 786,903
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,121
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,121
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 631,456
<SECURITIES> 513,788
<RECEIVABLES> 799,799
<ALLOWANCES> 25,400
<INVENTORY> 1,830,300
<CURRENT-ASSETS> 3,936,249
<PP&E> 657,637
<DEPRECIATION> 355,877
<TOTAL-ASSETS> 4,337,783
<CURRENT-LIABILITIES> 1,811,831
<BONDS> 0
0
0
<COMMON> 31,349
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 4,337,783
<SALES> 0
<TOTAL-REVENUES> 7,405,548
<CGS> 6,327,871
<TOTAL-COSTS> 3,675,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,117
<INCOME-PRETAX> (2,362,115)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,362,115)
<EPS-PRIMARY> (.75)
<EPS-DILUTED> (.75)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 434,048 1,458,786 1,846,208
<SECURITIES> 513,788 305,000 293,333
<RECEIVABLES> 653,379 760,649 832,312
<ALLOWANCES> 29,591 35,591 22,914
<INVENTORY> 1,686,004 1,330,761 1,028,008
<CURRENT-ASSETS> 3,356,786 3,880,822 4,048,540
<PP&E> 646,191 627,048 679,366
<DEPRECIATION> 387,108 404,498 434,719
<TOTAL-ASSETS> 3,712,316 4,128,372 4,353,187
<CURRENT-LIABILITIES> 1,140,318 1,315,466 1,174,529
<BONDS> 0 0 0
0 0 0
0 0 0
<COMMON> 31,349 31,349 32,453
<OTHER-SE> 0 0 0
<TOTAL-LIABILITY-AND-EQUITY> 3,712,316 4,128,372 4,353,187
<SALES> 1,599,487 2,038,222 1,770,482
<TOTAL-REVENUES> 1,599,487 2,038,222 1,770,482
<CGS> 945,826 1,155,564 1,036,514
<TOTAL-COSTS> 607,157 675,167 502,289
<OTHER-EXPENSES> 0 0 19,009
<LOSS-PROVISION> 0 0 0
<INTEREST-EXPENSE> 0 0 0
<INCOME-PRETAX> 46,047 240,908 285,688
<INCOME-TAX> 0 0 0
<INCOME-CONTINUING> 0 0 0
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 46,047 240,908 285,688
<EPS-PRIMARY> .01 .08 .09
<EPS-DILUTED> .01 .06 .06
</TABLE>
