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, 1998
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ------- SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-23858
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)
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. $6,162,986
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 February 28, 1999 as reported on the NASDAQ Small Cap Market, was
approximately $2,697,826. 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, 1999, Registrant had outstanding 4,505,562 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
PROXY STATEMENT AND ANNUAL REPORT TO SHAREHOLDERS
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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 was originally incorporated 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 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 led by 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.
In November 1996, the Company brought in a new President and Chief
Executive. The Company's marketing and development efforts were redirected away
from the retail computer market and developed a new strategy to develop
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or acquire image capture solutions for specific niche markets in education,
videoconferencing, audio visual, identification and medical applications where
it already has distribution resources and can provide value-added solutions.
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.
On April 6, 1998, the Company acquired substantially all of the operating
assets of Video Dynamics, Inc. a Florida corporation. In connection with such
purchase, the Company also assumed substantially all of Video Dynamics'
operating liabilities as of the date of closing. The purchase price for the
acquisition consisted of $200,000 in cash and 201,478 shares of common stock of
the Company ($300,000 at a per share value of $1.49, the average of the closing
price of the Common Stock over the 20 trading days preceding closing). In
addition to the foregoing, the Company issued a promissory note in the amount of
$10,000, payable without interest on or before September 30, 1998. The Company
funded from cash on hand the cash purchase price at closing. The Company
acquired all of Video Dynamics assets, which included four patents relating to
medical instrument camera technology and approximately $300,000 in net tangible
assets. These patents were granted in 1990, 1993, 1995 and 1998 and have
fourteen to seventeen year terms. The Company operates this division under the
VideoLabs' Healthcare Division.
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
videoconferencing, 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 availability. 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.
During the third quarter of 1998, the Company consciously adopted an
aggressive strategy to expand its sales force, increase research and development
expenditures beyond traditional levels and test several advertising media to
expand sales. The result was a small increase in sales in the fourth quarter,
primarily due to the introduction of the first of the new products from this
effort with significant one time increases in cost.
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 STRATEGY
The Company's business strategy is to utilize its core competencies in
analog and digital image capture development and distribution in its core
markets 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,
videoconferencing, 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 also began an Original Equipment
Manufacturer (OEM) strategy using its core competencies in 1998. One major
customer, Minnesota, Mining and Manufacturing (3M Company), was signed during
the calendar year. During 1999, the Company will seek to extend that
relationship and develop others that leverage the existing skills and
technologies.
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.
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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 has six major areas of focus for 1999. (1) Videoconferencing
(2) Education and Videomicroscopy (3) Audio Visual and Presentations (3) Photo
Identification (4) Medical (5) PC/Internet (6) OEM Customers. We continue to
evaluate various niche markets for the current products and new product
development.
THE VIDEOCONFERENCING CHANNEL'S PRODUCT LINE:
o ProfCam(TM)
o DocCam
o PLANETVIEW(TM) Package
The Company released the ProfCam in November 1998 for shipment. The camera
is the Company's first step into the Professional Videoconferencing market. The
ProfCam offers the customer a high resolution camera with a built in LCD screen
for preview, which is the only one on the market, remote control, power zoom,
auto focus, built in top lighting, removable light panel, RS232 interface,
carrying case and control software.
The DocCam is the price competitive camera with less features than the
ProfCam. It offers basic document and object capture for video collaboration
during a videoconferencing call. The DocCam's sharp 6mm lens allows the users to
focus on a full page document of focus close up for detail work.
The Company's Planetview is a product bundle, which includes the
ScholasticCam, Stinger Pro PC card (optional) and Enhanced CU-SeeMe software by
Whitepine Software. Planetview offers a complete package for high end Internet
Protocol Videoconferencing. The quality of the package is higher than most
offered on the market and therefore also has a higher price tag. Planetview
allows users to videoconference over the Internet at a frame rate of 2-5 frames
per second and over a local area network environment at roughly 10-12 frames per
second.
It is the Company's intention to continue to invest in and release at least
three new products for the fast growing market.
THE EDUCATION AND VIDEOMICROSCOPY PRODUCT LINE,
ALSO REFERRED TO AS THE "DIDACTA SERIES":
o TeachCam w/ IllumaBase(TM)
o StudentCam(TM)
o ScholasticCam(TM)
The TeachCam is the Company's leading product for science teachers. The
package offers a 27" gooseneck for use with tri-nocular microscopes, three
microscope adapters, and extension cables for the instructors to move the camera
around the classroom. The IllumaBase(TM) feature is a built in light source in
the base of the camera. It acts as a self contained petri dish, which allows the
teachers to view pond water, minerals, insects and other small objects. No other
competitor has this feature. The TeachCam also ships in a custom made Nordic
Pine box for storage.
The StudentCam is the Company's price competing product for the science
classrooms. The StudentCam offers the same microscope compatibility as the
TeachCam without the IllumaBase or Nordic Pine box. This camera was the first in
the market and since its inception, variations have been introduced by competing
companies such as Ken-A-Vision in the United States and Euromex and MADD in
Europe.
The ScholasticCam is the Company's product that competes with traditional
overhead projectors in the classroom. For roughly the same price, educators can
use the ScholasticCam along with traditional TV monitors to view full color
images and texts in books, 3D objects and transparencies and videotape
experiments. A transparency is the
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only thing a teacher can view when using a traditional overhead projector. The
ScholasticCam is carving out a "new" way to present in the classroom versus the
"old" traditional way, with an overhead projector.
The Company intends to release two new products for this market during 1999
along with several continuing engineering enhancements to existing products.
THE AUDIO VISUAL AND PRESENTATION PRODUCT LINES:
o ProfCam(TM)
o DocCam
The ProfCam is not only being sold in videoconferencing applications, but
also as a presentation tool. Presenters typically will use the ProfCam in
conjunction with a multimedia video projector. This allows the presenter,
whether in a lecture hall or corporate board room to present objects, paper
charts, graphs and any other three dimension object to their audience. With the
built in preview screen, the presenter can always be positioned viewing the
audience instead of turning their back to their audience to see if their image
is positioned correctly. The ProfCam has many built in features such as power
zoom, auto focus and software controls, which allows the presenter a seamless
interface for their presentations.
The DocCam is the Company's manual focus and zoom camera for the price
conscious presenters. With its compact design and weight of only five pounds it
is an ideal presentation tool for the traveling presenter. The DocCam's low
price makes it an affordable add-on to the multimedia video projectors and
allows the users to show objects to their audience that they normally would not
be able to present.
The Company intends to release one new product for this market during 1999.
THE PHOTO IDENTIFICATION PRODUCT LINE:
o IDCam(TM)
o Stinger Pro(TM) Capture Card
The IDCam is designed for taking a head to shoulder picture for an
identification application. Customers can just point and click the camera for
issuing ID cards for Immigration Control, Health Clubs, Memberships, Corporate
Security and University Cards. The IDCam includes a 2-button iris control
system, which allows the user to adjust the brightness for virtually any
lighting condition.
The Stinger Pro is a video capture card that converts an analog video
signal to digital for the computer to read and process the information. The
Stinger Pro Capture Card is a PCI card that is compatible with Windows 3.1,
Windows 3.11, Windows 95 and Windows NT 4. The card has many controls to capture
the best image quality such as hue, contrast, brightness, and is compatible with
either NTSC or PAL cameras.
THE MEDICAL PRODUCT LINE:
o MedCam
o MedCam Pro Plus (non-soakable)
o Medical products from various third party manufacturers
The MedCam is an economic, color, single chip CCD imaging product that
yields 270k pixel resolution. It has a c-mount lens and comes with a variety of
adapters for microscopes. Standard cable length is 8' and also has a 20' long
extension cable for remoting images to a monitor or recording device. The camera
has an electronic iris and a 1 lux sensitivity.
The MedCam Pro Plus (non soakable) is a combination single chip, 1/2 inch
CCD video system for surgical applications. The camera is integrated to a
"one-button" on/off halogen fiber optic light source and includes the necessary
fiber optic cables. The light source includes an S-VHS or a composite video
output. The Pro Plus also includes the Company's proprietary "universal"
endocoupler that is designed to accept nearly all of the surgical endoscopes on
the market. Production prototypes are currently in testing with several
potential OEM customers.
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In addition to the proprietary products, the medical product line also is
made up of various products from third party manufacturers such as Sony, Toshiba
and Panasonic. These products consist of soakable and non-soakable cameras,
video monitors, printers and VCRs. This non-proprietary line of products are
sold via the Company's Internet Web site.
THE PC/INTERNET PRODUCT LINE IS:
o PLANETVIEW(TM) Package
o Various digital and analog cameras from third party manufacturers
The Company's videoconferencing solution, PLANETVIEW, is an affordable
package for corporate and educational networks or home use. PLANETVIEW includes
the ScholasticCam, Enhanced CU-SeeMe videoconferencing software and the
StingerPro Capture Card (optional). The product is available for both Mac and PC
platforms.
The Company's new Digital Mall online store features the best in digital
still, digital video, security and sports and leisure products. The site offers
a variety of both proprietary and third party offerings from such manufacturers
including Agfa, Canon, Kodak, Sony and Olympus. The Company's Digital Mall
Internet site is located at www.flexcam.com.
The Company has announced that it intends to ship both a parallel and USB
version of the original "FlexCam" in 1999.
ORIGINAL EQUIPMENT MANUFACTURER (OEM) CUSTOMERS
o 3M's Document Camera
The Company has entered into a co-development private label relationship
with 3M Company. In partnership, the Company and 3M Company have designed a
document camera for use with their multimedia video projectors. 3M Company
placed an annual purchase commitment in September 1998. Because of a positive
market acceptance, 3M Company has taken receipt of the entire annual commitment
within the first 5 months and has placed their second annual commitment for the
upcoming year.
THE COMPANY'S PROPOSED PRODUCTS
The Company's engineering team is committed to the development of a minimum
of three new products for 1999. The commitment is part of the Company's eighteen
month engineering plan.
DOCCAM PRO
The DocCam Pro is a product that is specifically designed for the
Professional Videoconferencing market and will also be sold in the Audio Visual
Presentation channel and as an OEM product. This is a feature rich product with
features such as remote control, power zoom, auto focus, scan conversion and
manual camera settings. The scan conversion will enable the videoconference call
to be viewed on a large screen monitor. Today most of the systems are sold with
a scan converter for an additional $400-$2,000 dollars. The target price of the
DocCam Pro is roughly 25% of a professional videoconferencing system.
FLEXCAM DIGITAL & FLEXCAM USB
The FlexCam Digital & FlexCam USB are scheduled to ship in the second
quarter of 1999. The Company has delayed the scheduled release of this product
due to FCC and CE compliance issues. The FlexCam represents the next generation
of high-quality, easy-to-use desktop video products. With this camera, the user
can capture full color images directly to your desktop with full digital
quality. This product will be sold through the Internet and the Company's
reseller dealer base. The $199 price point of this product enables the Company
to return to the computer market that it had abandoned over two years ago with a
product for the low end videoconferencing enthusiast.
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VIDEO BAK-PAK
The Video BaK-PaK is a battery powered wireless product that is designed to
be used with the Didacta series of cameras in the classroom. The Video Bak-PaK
is designed to attach to the base of the cameras and a module that will reside
at the monitor, computer, multimedia video projector or any analog device. The
two devices utilize radio frequency technology to transmit and receive both an
audio and video signal. This will eliminate cables throughout the classroom.
MICROSCOPECAM
The MicroscopeCam is a 1/2" HAD technology CCD camera designed for
professional microscopy markets and higher education applications. This product
will be available in the MedCam or MicroscopeCam form factor depending on
customer requirements.
ORIGINAL EQUIPMENT MANUFACTURER (OEM) PRODUCTS
The Company will continue its current relationship with 3M Company and will
work on future projects in the same division as well as other divisions within
3M Company. The Company will also pursue other companies to manufacture products
to meet or exceed their specifications.
MARKETING AND DISTRIBUTION
The Company currently sells through its Business Partners, Resellers, OEM's
and Internet. All of these distribution levels are maintained and sold with a
combination of factory and independent sales and marketing employees.
The Company works with its Business Partners and OEM's to provide an annual
commitment in sales. This is an ongoing initiative for the Company that provides
a predictive forecast for the Company's purchasing and manufacturing. All of the
Company's Business Partner's and OEM's are required to sign 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
Supplies, System Integrators and Resellers of products. Our current Reseller
base is over 600 customers, which buy and resell our family of products direct
to the customer. This channel is supported through training, product
demonstrations and vertical advertising.
In the international markets, the Company sells its products though the
same Business Partner model as above. As of December 31, 1998, the Company's
products were being offered for sale by distributors in over fifty (50)
countries, including Canada, Brazil, Mexico, United Kingdom, Australia, Germany,
France, Italy, The Netherlands, Switzerland, Portugal, Singapore, Hong Kong,
Jamaica, Spain and The Scandinavian Countries. Through exposure of the products
at international trade shows, additional international resellers are being
actively solicited. In 1998, approximately 27% of the Company's sales were from
international markets, primarily in Europe.
MAJOR CUSTOMERS
During 1998 the Company did not have any one customer with sales over 10%.
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
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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. For OEM customers product warranty is generally negotiated
with each customer.
RESEARCH AND DEVELOPMENT
In 1998, the Company's expenses relating to research and development were
$643,643. During 1997, the Company's expenses relating to research and
development were $325,881. The Company expenses the related costs to research
and development as they are occurred. The Company's current engineering staff
consists of seven (7) full-time equivalent employees. The Company also contracts
services from mechanical, optical, electrical and software engineers as
required.
MANUFACTURING AND SUPPLIES
The Company assembles its products at its facility in Golden Valley,
Minnesota and Sunrise, Florida. 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 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 of the Company's products are available only from a
single source or a limited number of sources. All of the Company's products
utilize, and therefor all of its revenues are derived from, such components. The
Company does not have a long-term contract with such suppliers, but rather
obtains supplies on a purchase order basis. The Company attempts to keep a 3 to
4 month supply inventory of such components to minimize the impact of the loss
of a significant supplier. To date, there have been no significant interruptions
in the supply of key components to the Company. There can be no assurance,
however, that loss of a supplier would not result in a material adverse effect
on the Company's ability to meet its product shipment requirements.
COMPETITION
The electronic camera market is highly competitive. The Company competes
with a number of companies ranging from very small businesses to large
companies, some of which have substantially greater financial, manufacturing,
marketing and product development resources than the Company. Some of these
other companies manufacture and sell electronic cameras as well as video-capture
equipment, and some are distributors for these products. The Company believes
that it competes most directly with Sony, Toshiba, Panasonic, Ken A Vision,
Sharp Electronics, Elmo, Cannon, Euromex and MADD.
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. The Company also competes with regard to pricing. The
Company establishes a pricing model based upon several factors including
achieving established corporate margins. The pricing model reflects list price,
dealer and distributor pricing. The factors that determine the model are the
cost of the components, direct labor, manufacturing overhead and selling costs.
The Company compares the product in a
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competitive matrix against competing products from various manufacturers to see
if the established list price is appropriate.
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 several of its
healthcare products and intends to vigorously defend these patent in the
marketplace. The Company's patents were issued in 1990, 1993, 1995, 1996 and
1998, ranging from fourteen - seventeen year terms.
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, 1998, the Company had twenty-nine (29) full-time
employees, including seven (7) in manufacturing, seven (7) in engineering,
product development and warranty repair, ten (10) 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.
ENVIRONMENTAL COMPLIANCE
Compliance with federal, state and local laws regarding the discharge of
materials into the environment has no material effect upon capital expenditures,
earnings, competitive position or finances of the Company.
GOVERNMENT REGULATION
Products sold by the Company are subject to regulations of the 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 and has received the "CE" mark for sales in
Europe. The Company is in compliance with all applicable federal, state and
local regulations. The Company does not know of any pending regulations, which
would adversely affect its operations or products.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's main 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 on September 30, 2002. The
Company believes the facility is in excellent condition. The annual rent plus
estimated tax costs and estimated annual operating costs are approximately
$92,000. 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.
The Company also has operations in Sunrise, Florida, where the Company
purchased Video Dynamics, Inc. and has accepted transfer of their existing lease
of approximately 1,875 square feet of office and research and
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development lab space. This lease expires on January 31, 2000. The annual rent
plus estimated tax costs and estimated annual operating costs are approximately
$34,000. The Company operates its Healthcare Division from this location.
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, 1998.
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 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.
Low High
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FISCAL YEAR ENDED DECEMBER 31, 1997
- -----------------------------------
Quarter ended March 31, 1997 $0.6875 $0.8125
Quarter ended June 30, 1997 $1.2500 $1.5625
Quarter ended September 30, 1997 $2.0625 $2.3125
Quarter ended December 31, 1997 $1.9375 $1.9688
FISCAL YEAR ENDED DECEMBER 31, 1998
- -----------------------------------
Quarter ended March 31, 1998 $1.3130 $1.4380
Quarter ended June 30, 1998 $1.4380 $1.4380
Quarter ended September 30, 1998 $0.7810 $0.7810
Quarter ended December 31, 1998 $0.9060 $1.0000
b) Holders.
As of March 20, 1999 there were approximately 172 record holders of the
Company's Common Stock and approximately 1,750 beneficial shareholders.
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.
The Company's Common Stock is currently traded in the national
over-the-counter market and quoted on the National Association of Securities
Dealers Automated Quotation System ("Nasdaq") SmallCap Market System. Nasdaq
rules require that companies quoted on the Nasdaq SmallCap Market System have
total assets of at least $2,000,000 and net capital of at least $1,000,000. As
of December 31, 1998, the Company had total assets of $4,784,511 and net capital
of $3,964,276. Nasdaq also requires that the Company's minimum bid price not
drop below $1 for 30 consecutive business days. The Company's bid price did drop
below $1.00 in the fourth quarter of 1998 and the Company received notification
from Nasdaq that the Company had 90 calendar days to comply with the minimum bid
requirement. The Company did comply within the imposed 90 day term. If the
Company's Common Stock is not quoted by Nasdaq in the future, it will be quoted
in the local over-the-counter "pink sheets" and may also be reported on the
Nasdaq OTC Bulletin Board. However, in such event, the public trading market for
the Company's Common Stock could be adversely affected. Consequently, holders of
the Company's common stock might have difficulty selling their shares or
obtaining
10
<PAGE>
accurate price quotations. The trading price of the common stock would also
likely be materially adversely affected. There can be no assurance that the
Company will be able to meet the applicable requirements for maintaining its
Nasdaq SmallCap Market quotation in the future.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company recognizes revenue when it is both realized and earned
typically at the time of shipment. Net Sales decreased 11% from $6,949,652 in
1997 to $6,162,986 in 1998. This sales decrease was primarily due to the decline
in sales to foreign markets. Sales in Europe decreased from approximately
$2,055,000 in 1997 to $1,419,000 in 1998 and sales in Asia/Pacific decreased
from approximately $372,000 in 1997 to $96,000 in 1998 for a total decrease in
foreign sales of approximately $912,000. While sales in foreign markets
decreased, sales volume in the U.S. increased by 5%.
During 1998, sales in the U.S., Europe, South America and Asia/Pacific were
respectively 73%, 24%, 2% and 1% of total sales. During 1997, sales in the U.S.,
Europe, South America and Asia/Pacific were respectively 62%, 31%, 1% and 6% of
total sales. The decrease in sales volume in the Europe Region is primarily due
to an increase in competition from manufacturers within the Europe Region.
Because of the pressures of competition, the Company decreased its selling price
to remain competitive thus decreasing its total revenues for the Europe Region.
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 largest customer
purchased 7% of the total sales volume in 1998 and 6% in 1997 and is anticipated
to keep the same volumes for 1999, however, the loss of any significant order
could adversely affect the Company.
The Company has been focused on professional markets including education,
audio-visual, security and medical markets, while de-emphasizing sales to highly
competitive retail computer markets where the Company had experienced sales
declines and low margins. The Company has decided to selectively return to the
computer market with a new digital product called FlexCam Digital. The
production of the FlexCam Digital has been delayed and will be re-released in
the second quarter of 1999. The FlexCam Digital will retail for $199. The
Company is cautiously entering back into the computer market on a limited basis
due to a new low-cost design and the projected large increases in low cost
videoconferencing systems for desktop users.
The Company has also introduced a new product for the
audio-visual/presentation market called the ProfCam. The ProfCam is an
integrated presentation system that features a sleek, ergonomic gooseneck,
remote or keypad controlling, detachable light panel, LCD screen and Microsoft
Windows compatibility. The ProfCam retails for $3,995. The Company recorded its
first sales of the ProfCam in December 1998.
On April 6, 1998 the Company closed on an acquisition of assets and certain
intellectual property rights of Video Dynamics, Inc, a Florida Corporation.
Video Dynamics is located in Sunrise, Florida and operates as a division of the
Company called VideoLabs' Healthcare Products Division. The founders of Video
Dynamics are now both employees of the Company and have been leading designers
of video capture solutions for medical professionals, healthcare institutions
and other manufacturers for a combined total of over 50 years. Total sales for
the Healthcare Division in 1998 were approximately 8% of total sales of the
Company. The Company originally anticipated the Healthcare Division's total
sales to be approximately 20% of total combined sales for the Company. Shortly
after Video Dynamics was acquired, sales to the South American Region decreased
considerably due to economic turmoil in several countries. This coupled with the
loss of a significant customer attributes to the decrease from projected sales
to actual sales in 1998 for the Healthcare Division.
In September 1998, the Company entered into a private label OEM
relationship with 3M Company's Visual Systems Division. The Company manufactures
an optional gooseneck document camera for use with 3M's multimedia projectors
for world-wide markets. The Company expects to co-develop other document camera
systems with 3M Company over the next 12 months. 3M Company was 4% of total
sales in 1998 and the Company believes that they will continue to contribute to
the Company's 1999 revenues.
11
<PAGE>
In October 1998, the Company launched its new e-commerce Internet web site
with a unique video-based product line. The Digital Mall Web site features video
products offered by various manufacturers including the Company's proprietary
products. Internet sales for the Company in the last quarter of 1998 were
approximately 1% of total sales. The Company anticipates sales to increase over
the next year as new product offerings, such as the FlexCam Digital are placed
into production and product selection is expanded.
The Company anticipates that all of the above mentioned developments that
took place primarily in the fourth quarter of 1998 will have a positive affect
on the Company's sales performance in 1999. The Management is actively working
to return the Company to its former growth profile and continues to look at
acquisition opportunities in similar industries.
Gross profits for the period ending December 31, 1998 were $2,538,383,
which was 41% of total sales compared to $2,924,811, which was 42% of total
sales for year ending December 31, 1997. During 1998 the Company settled a
purchase commitment that had already been reserved for, thus bringing back
approximately $200,000 into gross profits for 1998 of which $150,000 was
recorded in the fourth quarter. Without this adjustment, gross profits would
have been approximately 38% of sales. This decrease in gross profit is
attributable to higher manufacturing costs due to lower production volumes and
an increase in low-margin private label sales. The Company has set goals for
1999 to reduce cost of materials used in manufacture and costs associated to
manufacturing overhead, but there is no assurance that the Company will be able
to attain these goals.
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.
Operating 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. Operating expenses increased 23% from $2,322,598
in 1997 to $2,849,068 in 1998. Selling expenses increased from $765,737 in 1997
to $1,058,180 in 1998. This increase in Selling expenses is attributable to
acquiring the Healthcare Division, adding 3 additional sales representatives,
and increasing the marketing efforts of the new product introductions and the
introduction of the Digital Mall Internet site. Research and Development
expenses increased from $325,881 in 1997 to $643,643 in 1998. This increase in
Research and Development expenses is attributable to acquiring the Healthcare
Division and the increase in new product development. General and administrative
expenses decreased from $1,230,980 in 1997 to $1,147,245 in 1998.
The Company's operating loss for the year ending December 31, 1998 was
$310,685 compared to operating income of $602,213 for the year ending December
31, 1997. The Company attributes the decrease to the decrease in total sales and
the increase in operating expenses mentioned above.
Other income for 1998 consisted of interest income of $94,004 compared to
interest income for 1997 of $75,089 and interest expense for 1998 of $4,417
compared to interest expense of $3,965 for 1997. The Company recorded a loss on
the sale of assets for 1997 of $19,913 consisting of the sale of computer
equipment.
For income tax purposes, the Company had a federal net operating loss carry
forward at December 31, 1998 of approximately $1,758,000 and a general business
credit carry forward of $92,000 available to be carried to future periods. The
loss carry forward and general business credit carryforwards expire in 2008
through 2018 if not used. In 1998 and 1997, the Company recorded a deferred tax
asset of $25,000 and $100,000 respectively, reflecting the partial benefit of
$1,758,000 in loss carryforwards. 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 $125,000 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 loss for the year ending December 31, 1998 was $196,098 compared to
net income for the year ending December 31, 1997 of $753,424. Basic earnings or
loss per common share were based on the weighted average number of shares
outstanding for 1998 and 1997 respectively of 3,912,319 and 3,168,480. Earnings
or loss per common share assuming dilution were based on the weighted average
number of shares for 1998 and 1997 respectively of 4,008,682
12
<PAGE>
and 4,086,558. The basic loss per common share for 1998 was $0.05 compared to
basic earnings per common share for 1997 of $0.24 per share. The loss per common
share assuming dilution for 1998 was $0.05 compared to earnings per common share
assuming dilution for 1997 of $0.18 per share.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital, consisting principally of cash, certificates of deposit,
receivables and inventories, was $3,339,933 at December 31, 1998 and $3,019,056
at December 31, 1997. The ratio of current assets to current liabilities was 5:1
at December 31, 1998 and 4:1 at December 31, 1997. Working Capital ratios have
continued to improve due to the Company's positive cash flow mainly due to the
capital raised from the exercised warrants.
Inventories at December 31, 1998 were $1,616,990 compared to $1,153,665 for
1997. The Company's inventory level increased because of the initial purchase of
raw materials for one of the new products. The Company purchases components four
months in advance because of lead-time. Therefore, if the Company's projections
and new product time-lines 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. The Company's products employ advanced technology. Such
technology is rapidly changing with a consequent risk of obsolescence of the
Company's products and inventories of components. In the fourth quarter of 1996,
the Company wrote down $1,390,000 to reflect the valuation of inventory that
became technological obsolete. There can be no assurance that current or future
products of the Company will not become obsolete resulting in further inventory
write-offs.
Net cash used for operating activities totaled $437,784 for the year ended
December 31, 1998 compared to net cash provided by operating activities totaling
$884,801 for the year ended December 31, 1997. The decrease is due primarily to
a net loss of $196,098 in 1998 and increases in inventories from 1997.
Net cash used for investing activities totaled $329,260 for the year ending
December 31, 1998 compared to cash provided by investing activities of $164,689
for the year ending December 31, 1997. The cash used for investing in 1998 was
primarily due to the acquisition of assets from Video Dynamics, Inc.
Net cash provided from financing activities for the year ending December
31, 1998 was $534,677 compared to $65,982 for the year ended December 31, 1997.
The cash provided from financing for 1998 was primarily the exercising of
outstanding warrants less the repurchase of the Company's common stock.
Prior to the Company's Initial Public Offering, the Company sold units in
private placement transactions consisting of one share of common stock and one
warrant to purchase one share of common stock. The warrants that were purchased
had expiration dates ranging from July 27, 1997 to November 2000. During 1998,
1,328,501 shares under warrants were exercised raising approximately $913,000 of
additional capital to the Company. Approximately 523,000 shares under warrant
were expired during the year. As of December 31, 1998 approximately 218,000
warrants were outstanding.
The Board of Directors of the Company authorized the redemption of up to
1,100,000 and 100,000 shares of the Company's common stock during 1998 and 1997,
respectfully. During 1998, 287,731 shares at a cost of $349,567 were redeemed
and retired. During 1997, 30,000 shares at a cost of $35,625 were redeemed and
retired.
The Company believes that it has sufficient liquidity to support its
anticipated growth during the next twelve months. In the event the Company's
liquidity is not adequate, the Company would seek additional financing or would
conserve cash by reducing administrative, product development and sales and
marketing expenses.
YEAR 2000 ISSUES
The Company is currently in the process of assessing Year 2000 issues
relative to its business. The following information outlines the current status
of the Company's understanding and plans regarding the Year 2000 problem.
13
<PAGE>
COMPANY'S STATE OF READINESS
The Company uses a widely used PC based information system to process
financial transactions and generate financial information. The Company also uses
various other PC based software packages to support its business. These systems
are linked by a network at the Company's headquarters in Golden Valley,
Minnesota. No significant information systems are located outside the Company's
headquarters, other than individual stand alone PC software packages used by
sales personnel. The Company's product lines do not perform any calculations or
manipulations of dates, and hence do not have year 2000 compliance issues. While
the Company is in the process of assessing Year 2000 issues relative to its
vendors, products and related components used in the product, the Company knows
that its products do not utilize time or dates to operate.
The Company has established the following phases for becoming ready for the
Year 2000:
Awareness Phase - The Company has researched the Year 2000 issue and is
communicating both internally and with outside parties including its independent
auditors, its bank, key suppliers and certain customers. The Company is aware of
the potential issues surrounding the Year 2000 problem and will continue
communicating the issues at hand.
Assessment Phase - This phase includes establishing a Year 2000 team and
investigating how Year 2000 issues may impact the Company, both in terms of the
specific aspects of the business which could be affected, and the consequences
to the Company if it is not prepared. The Company has completed the internal
systems assessment phase and has identified the systems that the Company
believes to be critical to the continued operations of the Company. The Company
will continue to assess the impact of year 2000 readiness from its suppliers and
customers over the next 6 months.
Renovation Phase - The renovation phase covers all Company actions to
correct systems which are not Year 2000 compliant, or develop alternate systems
in all areas which are determined to have a significant impact on the Company if
not corrected. The Company has updated its internal accounting system, local
area network and other non-critical systems to be year 2000 compliant.
Validation Phase - This phase will include all Company activities performed
to test any new or alternate systems for conducting its business, and taking
corrective actions in situations where new systems do not properly handle year
2000 problems.
Implementation Phase - In this phase, the Company has begun utilizing all
newly developed systems which are installed to correct Year 2000 problems as
they relate to the Company.
The Company has relationships with key suppliers to support its business.
While the Company believes alternate vendors could be utilized to provide
comparable products and services currently provided by its key vendors, the
Company currently relies on its relationships with its key vendors to conduct
its business, and changes in sources of key products and services could have a
material impact on the Company. The Company is currently in the process of
assessing the impact of these third party risks, and is expecting to complete
this process by July 31, 1999.
COSTS TO ADDRESS COMPANY'S YEAR 2000 ISSUES
Since the Company has not completed its assessment of the year 2000 issues
relative to its business, the costs of remediation cannot yet be reasonably
estimated. To date, the costs of assessing the year 2000 problem have been
insignificant, and based on its assessment so far, the Company does not believe
remediation costs will be material to the Company's financial condition or
operating results.
RISKS OF THE COMPANY'S YEAR 2000 ISSUES
A worst case scenario relative to the Year 2000 issue would be that the
Company needs to replace both its information technology and non-information
technology systems, and develop alternate sources of supply for its critical
components, third party software, and third party manufacturing. Because of its
current size, the Company believes replacement of its current information
systems would not result in costs material to the Company's financial condition
or results of operations. In the event the Company was forced to develop
alternate sources of supply in any key areas,
14
<PAGE>
significant costs could result, but amounts have not yet been estimated. The
Company expects to analyze these uncertainties as part of its Year 2000
assessment phase, and develop a plan of action to minimize the uncertainties and
mitigate the potential costs involved, should the worst case scenario occur.
CONTINGENCY PLANS
The Company does not currently have a contingency plan to handle the worst
case scenario above, but expects to develop one as part of its assessment phase
to be completed by July 31, 1999.
15
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
VIDEOLABS, INC.
C O N T E N T S
PAGE
REPORT OF INDEPENDENT AUDITORS 17
FINANCIAL STATEMENTS
Balance Sheet 18-19
Statement of Operations 20
Statement of Stockholders' Equity 21
Statement of Cash Flows 22-23
Notes to Financial Statements 24-32
16
<PAGE>
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, 1998 and 1997, 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, 1998 and 1997, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.
Certified Public Accountants
Minneapolis, Minnesota
February 5, 1999
17
<PAGE>
VIDEOLABS, INC.
Balance Sheet
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
December 31
ASSETS 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,514,561 $1,746,928
Certificates of deposit - restricted 158,000 275,833
Accounts receivable
Trade accounts, less allowance for doubtful accounts
of $30,000 in 1998 and $35,000 in 1997 664,172 626,320
Other receivables 6,688 9,228
Inventories 1,616,990 1,153,665
Deferred income taxes 125,000 100,000
Prepaid expenses 50,457 47,209
---------- ----------
Total current assets 4,135,868 3,959,183
PROPERTY AND EQUIPMENT
Office and computer equipment 446,832 367,874
Machinery and equipment 127,391 97,340
Tooling 488,225 278,733
Leasehold improvements 45,016 45,016
---------- -----------
1,107,464 788,963
Less accumulated depreciation 638,161 468,556
---------- ----------
Net property and equipment 469,303 320,407
OTHER ASSETS
Patents, net 179,340
---------- ----------
TOTAL ASSETS $4,784,511 $4,279,590
========== ==========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
18
<PAGE>
VIDEOLABS, INC.
Balance Sheet
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31
LIABILITIES AND STOCKHOLDERS' EQUITY 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable $ 658,089 $ 278,204
Current maturities of long-term debt 22,071 22,605
Customer deposits 6,114 9,080
Accrued compensation 28,358 264,221
Purchase commitments, reserves and other 81,303 366,017
---------- ----------
Total current liabilities 795,935 940,127
LONG-TERM DEBT, net of current maturities 24,300 36,134
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value;
Authorized, 20,000,000 shares
Issued and outstanding, 4,457,471 shares in 1998 and
3,215,283 in 1997 44,574 32,152
Preferred stock, $.01 par value;
Authorized, 5,000,000 shares
No shares issued and outstanding
Additional paid-in capital 6,398,176 5,553,553
Accumulated deficit (2,478,474) (2,282,376)
---------- ----------
Total stockholders' equity 3,964,276 3,303,329
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $4,784,511 $4,279,590
========== ==========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
19
<PAGE>
VIDEOLABS, INC.
Statement of Operations
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SALES $6,162,986 $6,949,652
COST OF SALES
Cost of goods sold 3,624,603 4,024,841
---------- ----------
GROSS PROFIT 2,538,383 2,924,811
OPERATING EXPENSES
Selling 1,058,180 765,737
General and administrative 1,147,245 1,230,980
Research and development 643,643 325,881
---------- ----------
Total operating expenses 2,849,068 2,322,598
---------- ----------
OPERATING INCOME (LOSS) (310,685) 602,213
OTHER INCOME (EXPENSE)
Interest income 94,004 75,089
Interest expense (4,417) (3,965)
Loss on sale of assets (19,913)
---------- ----------
Total other income, net 89,587 51,211
---------- ----------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (221,098) 653,424
INCOME TAX BENEFIT (25,000) (100,000)
---------- ----------
NET INCOME (LOSS) ($ 196,098) $ 753,424
========== ==========
EARNINGS (LOSS) PER COMMON SHARE ($ 0.05) $ 0.24
========== ==========
EARNINGS (LOSS) PER COMMON SHARE ASSUMING DILUTION ($ 0.05) $ 0.18
========== ==========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
20
<PAGE>
VIDEOLABS, INC.
Statement of Stockholders' Equity
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
Common Stock Additional
------------ Paid-In Accumulated
Shares Amount Capital Deficit
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 and retirement of stock (30,000) (300) (35,325)
---------- ------- ---------- ----------
BALANCES -
DECEMBER 31, 1997 3,215,283 32,152 5,553,553 (2,282,376)
Net loss (196,098)
Issuance of shares 201,418 2,014 297,985
Exercise of warrants 1,328,501 13,285 900,059
Purchase of warrants (6,731)
Purchase and retirement of stock (287,731) (2,877) (346,690)
--------- ------- ---------- ----------
BALANCES -
DECEMBER 31, 1998 4,457,471 $44,574 $6,398,176 ($2,478,474)
========== ======= ========== ==========
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
21
<PAGE>
VIDEOLABS, INC.
Statement of Cash Flows
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($196,098) $753,424
Adjustments to reconcile net income (loss) to net cash
from (used for) operations:
Depreciation 170,092 140,905
Amortization 20,660
Provision for losses on accounts receivable (4,791) 9,640
Loss on sale of assets 19,913
Deferred income taxes (25,000) (100,000)
Change in assets and liabilities
Accounts receivable 94,114 160,768
Inventories (328,337) 676,635
Prepaid expenses 6,864 107,540
Trade accounts payable 345,715 (779,665)
Customer deposits (2,966) (5,990)
Accrued compensation (235,863) 110,614
Purchase commitments, reserves and other (282,174) (208,983)
---------- ----------
Net cash from (used for) operating activities (437,784) 884,801
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures (317,803) (179,491)
Cash received in purchase of Video Dynamics 70,710
Proceeds from sale of assets 106,225
Purchase of certificates of deposit (280,500) (474,167)
Proceeds from maturities of certificates of deposit 398,333 712,122
Purchase of patents (200,000)
---------- ----------
Net cash from (used for) investing activities (329,260) 164,689
</TABLE>
- Continued -
Notes to Financial Statements are an integral part of this Statement.
22
<PAGE>
VIDEOLABS, INC.
Statement of Cash Flows - Continued
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Years Ended December 31
1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock and warrants $ 913,343 $ 75,688
Payments of long-term debt (22,368) (14,081)
Proceeds of long-term debt 40,000
Repurchase of common stock and warrants (356,298) (35,625)
---------- ----------
Net cash from financing activities 534,677 65,982
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (232,367) 1,115,472
CASH AND CASH EQUIVALENTS - Beginning of Year 1,746,928 631,456
---------- ----------
CASH AND CASH EQUIVALENTS - End of Year $1,514,561 $1,746,928
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest $ 4,417 $ 3,965
========== ==========
Cash paid during the year for taxes $ - $ -
========== ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligations incurred $ 6,426
Assets and liabilities acquired in exchange for 201,478 shares
of common stock totaling $300,000:
Cash $ 70,710
Accounts receivable 127,175
Inventories 134,988
Prepaid expenses 10,599
Property and equipment 698
Accounts payable (34,170)
Debt (10,000)
----------
Net assets acquired $ 300,000
==========
</TABLE>
During 1997, the Company issued 244 shares of stock in a noncash
transaction.
Notes to Financial Statements are an integral part of this Statement.
23
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
VideoLabs, Inc. designs, manufactures and markets products for 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, 1998 and 1997, the Company has reserves for future inventory
obsolescence due to the risk of technological changes in the industry (see Note
4).
The Company has recorded a reserve for product warranties in the amount of
$30,000 and $20,000 in 1998 and 1997, respectively. This warranty accrual
pertains to all products. It is not possible to estimate additional product
warranty costs, if any, at this time. Actual warranty costs could differ from
amounts estimated.
In 1998 and 1997, the Company recorded a deferred tax benefit of $25,000 and
$100,000, respectively, reflecting the partial benefit of $1,758,000 in net
operating loss carryforwards, which expire in varying amounts between 2008 and
2018. 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 the deferred tax asset will
be realized, however, the estimated amount of the deferred tax asset considered
realizable could change in the near term if estimates of future taxable income
during the carryforward period change.
REVENUE RECOGNITION
The Company recognizes revenue when it is both realized and earned. Typically,
these conditions are met at the time of product shipment.
CASH AND CASH EQUIVALENTS
For purposes of the statement 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.
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.
PATENTS
Patents are being amortized using the straight-line method over 7 years.
24
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1998 and 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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 approximately $135,800 and $238,500 in 1998 and 1997, respectively.
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:
1998 1997
---- ----
Weighted average number of shares used
in basic earnings per share 3,912,319 3,168,480
Effect of dilutive securities:
Stock options 85,383 9,328
Stock warrants 10,980 908,750
--------- ---------
Totals 4,008,682 4,086,558
========= =========
No adjustments were made to income (loss) in either year for the purpose of
calculating earnings (loss) per share.
2. CONCENTRATIONS
The Company extends credit in the normal course of business to its customers who
are generally companies in the medical, educational and technological
industries. The Company performs credit evaluations of its customers' financial
condition and generally requires no collateral.
At December 31, 1998 and 1997, the Company has two customers who accounted for
approximately $160,000 and $117,000, respectively, of the outstanding trade
accounts receivable balance.
25
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1998 and 1997
2. CONCENTRATIONS - Continued
During 1998 and 1997, the Company had total sales outside the United States of
approximately $1,649,000 and $2,523,000, respectively. Of these amounts
approximately $1,419,000 and $2,055,000, respectively, were sales to customers
in Europe, and $96,000 and $372,000, respectively, were sales to customers in
the Asia/Pacific region, and $134,000 and $96,000, respectively, were sales to
customers in South America.
In 1998 and 1997, the Company had a supplier from which it made purchases of
approximately $1,032,000 and $1,500,000, respectively. Although no long-term
supply contract exists, the Company believes there are alternative suppliers of
this raw material.
At December 31, 1998 and 1997 the Company had purchase commitments with
suppliers in the amount of $605,000 and $818,000, respectively.
3. ACQUISITION - VIDEO DYNAMICS, INC.
In April 1998, the Company acquired substantially all the assets of Video
Dynamics, Inc. (VDI) in exchange for 201,478 shares of common stock, with a
total value of $300,000, which approximated the fair value of net assets
acquired. Additionally, certain intellectual property was purchased for
$200,000. VDI is a designer of video capture solutions for medical
professionals, healthcare institutions and other manufacturers. This acquisition
has been accounted for as a purchase, and the results of operations have been
included in the results of operations since the date of acquisition.
The following summarized pro forma (unaudited) information assumes the
acquisition had occurred on January 1, 1997.
1998 1997
---- ----
Sales $6,392,998 $9,570,428
========== ==========
Net income (loss) ($ 140,384) $ 686,822
========== ==========
Earnings (loss) per share:
Basic ($ 0.03) $ 0.19
========== ==========
Diluted ($ 0.03) $ 0.15
========== ==========
These unaudited pro forma results have been prepared for comparative purposes
only and do not purport to be indicative of the results of operations which
would have actually resulted had the combinations been in effect on January 1,
1997, or of future results of operations.
4. INVENTORIES
Inventories consisted of the
following at December 31: 1998 1997
---- ----
Materials $1,584,447 $1,227,508
Work-in-process 138,068 171,921
Finished goods 501,591 446,499
---------- ----------
2,224,106 1,845,928
Reserves for inventory write
down and obsolescence (607,116) (692,263)
---------- ----------
$1,616,990 $1,153,665
========== ==========
26
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1998 and 1997
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
At December 31, 1998, the Company had one letter of credit outstanding, which is
secured by restricted certificates of deposit of the same amount.
The Company had a discretionary line of credit with its bank of the lesser of
$500,000 or 75% of eligible accounts receivable (as defined), which matured
April 10, 1998. The available line of credit was reduced by an outstanding
irrevocable letter of credit, which totaled $200,000 at December 31, 1997. The
letter of credit also expired April 10, 1998. At December 31, 1997, restricted
certificates of deposit, served as collateral for two irrevocable letters of
credit. There were no borrowings outstanding under this line of credit at
December 31, 1997. Interest was charged at 1.5% over the bank's "index rate"
which was 10% at December 31, 1997. The terms of the note agreement with the
bank required the Company to maintain certain financial ratios with which the
Company was in compliance at December 31, 1997.
7. LONG-TERM DEBT
Long-term debt consists of the following:
1998 1997
---- ----
Capital lease obligations, at
implicit rates from 12% to 14%,
payable in installments to 1999 $ 4,693 $20,319
Note payable to Video Dynamics, Inc.,
interest at New York prime rate plus 1%
(9.5% at December 31, 1998), unsecured
and payable on demand. 10,000
Note payable to bank, interest at the
bank's "index rate" plus 1% (9.75% and
9.5% at December 31, 1998 and 1997,
respectively), secured by substantially
all corporate assets, payable in
installments to 2002 31,678 38,420
------ ------
Totals 46,371 58,739
Less amounts due within one year 22,071 22,605
------ ------
Net long-term debt $24,300 $36,134
====== ======
Scheduled maturities of long-term debt are as follows at December 31, 1998:
1999 $22,071
2000 8,114
2001 8,937
2002 7,249
-------
Total long-term debt $46,371
=======
27
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1998 and 1997
8. LEASE OBLIGATIONS
The Company leases various items of equipment over terms of 3 to 5 years.
Equipment leases expire at varying dates over the next three years. The Company
also leases office and warehouse facilities in Minnesota and Florida; the leases
expire in September 2002 and January 2000, respectively. The Company is
obligated to pay costs of property taxes and operating costs under the terms of
the office and warehouse leases.
Property and equipment includes the following amounts for capital leases at
December 31:
1998 1997
---- ----
Machinery and equipment $40,826 $40,826
Accumulated amortization 31,356 17,672
------- -------
Net equipment under capital leases $ 9,470 $23,154
======= =======
At December 31, 1998, the Company had the following minimum commitments for
payments of rentals under leases, which at inception had a non-cancelable term
of more than one year:
Operating Capital
Leases Leases
-------- ------
1999 $105,161 $4,844
2000 105,161
2001 73,258
2002 51,291
-------- ------
Total lease commitments $334,871 4,844
========
Less amount representing interest 151
------
Present value of minimum lease payments
(included in long-term debt) $4,693
======
Rental expense for operating leases totaled $112,245 and $69,734 in 1998 and
1997, respectively.
9. STOCKHOLDERS' EQUITY
The Board of Directors authorized the redemption from time to time of up to
1,100,000 and 100,000 shares of the Company's common stock during 1998 and 1997,
respectively. During 1998, 287,731 shares at a cost of $349,567 were redeemed
and retired. During 1997, 30,000 shares at a cost of $35,625 were redeemed and
retired.
28
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1998 and 1997
9. STOCKHOLDERS' EQUITY - Continued
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
---------------------
1998 1997
---- ----
Outstanding, beginning of year 2,070,303 819,264
Exercised during the year (1,328,501) (110,091)
Expired during the year (512,220)
Purchased and retired during the yea (11,218)
Granted during the year 1,361,130
---------- ---------
Outstanding, end of year 218,364 2,070,303
========== =========
The Company has reserved 218,364 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.
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 had authorized 300,000 options in 1997,
but was amended to authorized 500,000 options for the purchase of Company stock
in 1998.
The Company has a 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 1998 and 1997, respectively; dividend yield of 0%
for all years; expected volatility of 91% and 88%; risk-free interest rates of
5.7 and 6.5 percent; and expected lives of four years.
29
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1998 and 1997
10. STOCK BASED COMPENSATION - Continued
A summary of the Company's stock option plans as of December 31, 1998 and 1997
and changes during the years ending on those dates is listed below:
<TABLE>
<CAPTION>
1998 1997
---- ----
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 511,000 $1.52 405,000 $1.82
Granted 105,500 1.48 200,000 1.00
Expired - -
Forfeited (22,000) 3.13 (94,000) 2.22
------- ---- -------
Outstanding at end of year 594,500 1.45 511,000
======= ==== =======
Options exercisable at year end 472,720 422,250
======= =======
Weighted-average fair value of
options granted during the year $ .99 $ .67
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
Weighted-Average
Number Remaining Options
Price Outstanding Contractual Life Exercisable Vesting
----- ----------- ---------------- ----------- -------
<S> <C> <C> <C> <C>
$2.13 39,000 0.8 years 29,250 25% each year for four years.
.81 85,000 2.0 years 42,500 25% each year for four years.
.81 165,000 8.0 years 165,000 In whole or in part over ten years.
1.00 100,000 2.4 years 100,000 In whole or in part over ten years
1.00 40,000 8.4 years 40,000 In whole or in part over ten years.
2.13 20,000 1.2 years 20,000 In whole or in part over three years.
2.65 20,000 1.2 years 20,000 In whole or in part over three years.
.69 20,000 1.2 years 20,000 In whole or in part over three years.
1.50 90,000 9.0 years 29,970 33% each year for three years.
1.50 9,500 9.0 years - 100% in one year.
1.19 6,000 9.4 years 6,000 In whole or in part over ten years.
------- -------
594,500 472,720
======= =======
</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 $25,285 and $38,869 for the years ended
December 31, 1998 and 1997, respectively. The compensation cost would have
increased the net loss in 1998 and reduced net income in 1997 by the same
amounts. Basic earnings per share would have decreased by $0.01 in 1998 and
1997.
30
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1998 and 1997
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
Estimated fair values of the Company's financial instruments, none of which are
held for trading purposes, are as follows at December 31:
<TABLE>
<CAPTION>
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash $ 8,498 $ 8,498 $ 136,811 $ 136,811
Money market savings 1,506,063 1,506,063 1,610,117 1,610,117
---------- ---------- ---------- ----------
Total cash and
equivalents $1,514,561 $1,514,561 $1,746,928 $1,746,928
========== ========== ========== ==========
Certificates of deposit $ 158,000 $ 158,000 $ 275,833 $ 275,833
Long-term debt, exclusive of
capital leases $ 41,678 $ 41,678 $ 38,420 $ 38,420
</TABLE>
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.
12. INCOME TAXES
The income tax benefit consists of the following components:
1998 1997
---- ----
Current $ - $ -
Deferred (25,000) (100,000)
-------- ---------
Net income tax benefit ($25,000) ($100,000)
======== =========
The income tax benefit 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:
1998 1997
---- ----
Federal statutory income tax rate (34.0)% 34.0%
Tax credits (28.0) (16.5)
State tax rate, net (2.0) (2.0)
Permanent differences 2.0
Valuation allowance 46.0 (32.0)
Other items, net 4.7 1.2
----- -----
Effective tax benefit rate (11.3)% (15.3)%
==== ====
31
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1998 and 1997
12. INCOME TAXES - Continued
The total deferred tax assets and liabilities included in the net deferred tax
asset are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets (net operating loss and tax
credit carryforwards) $722,000 $506,000
Deferred tax assets (primarily inventory and
litigation reserves) 346,000 440,000
Deferred tax liabilities (property and equipment) (6,000) (4,000)
Deferred tax asset valuation allowance (937,000) (842,000)
------- -------
Net deferred tax asset $125,000 $100,000
======= =======
</TABLE>
The net increase in the valuation allowance was $95,000 in 1998, and a decrease
of $208,000 in 1997.
For income tax purposes, the Company had a federal net operating loss
carryforward at December 31, 1998 of approximately $1,758,000. At December 31,
1998, the Company also had a general business credit carryforward of
approximately $92,000, available to be carried to future periods. The net
operating loss carryforward and general business credit carryforward expire in
2008 through 2018 if not used.
13. COMMITMENTS AND CONTINGENCIES
At December 31, 1996 the Company accrued a loss on purchase commitments and
established a reserve for pending litigation. In 1997, the litigation was
settled. The Company had purchase commitments related to raw materials for a
product the Company will not be able to bring to market. In the fourth quarter
of 1998, the Company paid $50,000 to settle a purchase commitment and the
remaining estimated reserve of $150,000 was reversed.
In 1998 the Company executed five year employment agreements totaling $150,000
per year.
14. EMPLOYEE BENEFIT PLAN
Effective October 1, 1998, the Company adopted the VideoLabs, Inc. Employee
Stock Purchase Plan. All full-time employees are eligible to participate in the
Plan, effective upon their date of hire. The Plan allows eligible employees to
purchase shares of common stock on a quarterly basis at the lesser of 85% of the
fair market value on the beginning or ending dates of the period. During 1998,
no shares were issued under the 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 1998 and 1997.
32
<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, 1998 and 1997.
Statement of Operations - Years Ended December 31, 1998 and 1997.
Statement of Stockholders' Equity - Years Ended December 31,
1998 and 1997.
Statement of Cash Flows - Years ended December 31, 1998 and 1997.
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, 1998 are filed
as part of this Report and should be read in conjunction with the Financial
Statements of the Company.
None
33
<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
(10) Material contracts.
(10) (xxiii) Video Dynamics, Inc. Asset Purchase Agreement
- 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
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Registrant caused this Report to be signed on its behalf
by the undersigned, thereunto duly authorized.
VIDEOLABS, INC.
By: /s/ James W. Hansen
-----------------------
James W. Hansen
President and CEO
Dated: March 31, 1999
34
<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.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/James W. Hansen
- ------------------
James W. Hansen President, Treasurer March 31, 1999
Chief Executive Officer, Director
and Chairman of the Board of Directors
/s/ Ward C. Johnson
- -------------------
Ward C. Johnson Director March 31, 1999
/s/ Richard F. Craven
- ---------------------
Richard F. Craven Director March 31, 1999
/s/ John A. Collins
- -------------------
John A. Collins Director March 31, 1999
</TABLE>
35
EXHIBIT 10
ASSET PURCHASE AGREEMENT
BY AND BETWEEN
VIDEOLABS, INC. A DELAWARE CORPORATION
AND
VIDEO DYNAMICS, INC., A FLORIDA CORPORATION,
MR. RICHARD CANE, AND
MR. WAYNE BYARD
Dated:
April 6, 1998
<PAGE>
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT ("AGREEMENT") is entered into April 6, 1998,
by and between VideoLabs, Inc., a Delaware corporation ("BUYER"), Video
Dynamics, Inc., a Florida corporation ("SELLER"), and Mr. Richard Cane and Mr.
Wayne Byard (collectively, the "SHAREHOLDERS"). Buyer, Seller, and Shareholders
are referred to collectively as the "PARTIES."
RECITALS:
A. Seller is engaged in the design, manufacture and distribution of image
capture, transmission and manipulation devices, including video cameras and
accessory components, designed primarily for use in the medical industry (the
"BUSINESS"). The Business is conducted from 13790 N.W. 4th St., Suite 112,
Sunrise Florida 33325 (the "PREMISES").
B. Shareholders together own 100% of the voting and equity interest of
Seller. In addition to this interest, Shareholders also individually or
collectively own certain patents, trademarks, trade secrets, and other
intellectual property rights (both registered, nonregistered, pending, etc.)
which are or have been used by the Seller in conducting the Business
(collectively, the "SHAREHOLDERS' INTELLECTUAL PROPERTY").
C. Buyer desires to purchase and Seller desires to sell all of the assets
related to the Business upon the terms and conditions as set forth in this
Agreement. In addition, Buyer desires to purchase and the Shareholders desire to
sell the Shareholders' Intellectual Property upon the terms and conditions set
forth in this Agreement.
AGREEMENTS:
NOW THEREFORE, in consideration of the foregoing Recitals and the mutual
covenants, representations and warranties contained in this Agreement, the
receipt and sufficiency of which are acknowledged, the Parties agree as follows:
ARTICLE 1
PURCHASE AND SALE OF ASSETS
1.1 PURCHASE AND SALE OF ASSETS. On the terms and subject to the conditions
of this Agreement, Buyer shall purchase from Seller, and Seller shall sell,
assign, transfer, convey and deliver to Buyer, on the Closing Date, all of the
assets of the Business as of the Closing Date, wherever located (the "ASSETS"),
including, but not limited to, the following:
(a) All cash on hand and all amounts in any checking,
savings or investment accounts including, without limitation, all
amounts in the checking, savings and investment accounts listed on
Schedule 1.1(a);
-1-
<PAGE>
(b) All accounts receivable, other receivables, prepaid
assets and intangible assets owned by the Seller including, without
limitation, the other receivables, prepaid assets and intangible
assets listed on Schedule 1.1(b);
(c) All inventory, work in process, raw materials and
component parts of the Seller;
(d) All manufacturing, shop and office equipment used by
the Seller including, without limitation, the equipment listed on
Schedule 1.1(d);
(e) All customer lists, contracts, sales orders in
process, business records, advertising pieces and materials,
licenses, trade names, trademarks, service marks, assumed or
fictitious names, the name "Video Dynamics", trade secrets, shop
rights, and all vendor and supplier lists owned by Seller;
(f) All plans, specifications, drawings, schematics,
designs, prototypes, procedures, creations, methods and related
materials owned by Seller, regardless of their stage of completion;
(g) All business telephone numbers (to be reassigned by
Seller to Buyer at Closing); and
(h) Patent No. 4,963,903 (Camera Positioning System)
dated October 16, 1990.
The sale and delivery of all cash and accounts receivable is subject to
adjustment and limitation pursuant to the provisions of Section 1.4 below. The
corporate entity, Video Dynamics, Inc., a Florida corporation, its books and
records, are not included in this sale.
1.2 PURCHASE AND SALE OF SHAREHOLDERS' INTELLECTUAL PROPERTY. On the terms
and subject to the conditions of this Agreement, Buyer shall purchase from
Shareholders, and Shareholders shall sell, assign, transfer, convey and deliver
to Buyer, on the Closing Date, all of their interests in the Shareholders'
Intellectual Property, which includes, but is not limited to, all of their
respective rights, privileges and goodwill worldwide associated with the
following:
(a) Trademark Reg. No. 1,573,105 (Flexi-Cam) Registered
December 26, 1989;
(b) Trademark Reg. No. 1,551,762 (Flexi-Mount)
Registered August 15, 1989;
(c) Patent No. 5,239,984 (Hand-Held Opto-Diagnostic
Instrument System) dated August 31, 1993;
(d) Patent No. Des. 363,778 (Coupler for Adapting a Beam
Splitter to an Otoscope) dated October 31, 1995; and
-2-
<PAGE>
(e) Pending Application No. 08/565,176 (Ergonomic
Hand-Held Optical Diagnostic Instrument) filed November 30, 1995.
1.3 ASSUMPTION OF SPECIFIC LIABILITIES BY BUYER. Subject to adjustment
pursuant to the provisions of Section 1.4 below, Buyer shall assume as of the
Closing Date the following, but only the following, liabilities of the Seller as
of the Closing Date (collectively the "Assumed Liabilities):
(a) all unpaid trade payables incurred by Seller in the
ordinary course of the Business prior to Closing;
(b) all unpaid accrued payroll liabilities of the Seller
incurred in the ordinary course of the Business prior to the
Closing;
(c) all unpaid other ordinary and necessary business
liabilities of the Seller as of the Closing of the types listed on
Schedule 1.3(c); and
(d) Seller's obligations under the Standard Office
Building Net Lease dated January 15, 1998 between Seller and Coral
Sawgrass Associates relating to Suite 112, 13790 N.W. 4th Street,
Sunrise, Florida 33325 (the "Lease"), which has been provided to and
approved by Buyer.
Excepting only those debts, liabilities and other obligations of the Seller set
out above, the Buyer is not, and shall not assume or be responsible for, any
debts, liabilities or other obligations of the Seller, the Shareholders, or the
Business. Seller and Shareholders shall be solely liable for and shall indemnify
and hold Buyer harmless against all such other debts, liabilities and
obligations arising from the ownership, use and operation of the Business, the
Assets and/or the Shareholders' Intellectual Property prior to the Closing Date,
whether contingent or fixed, and whether or not reflected on the books and
records of Seller or Shareholders. Likewise, Buyer shall be solely liable for
and shall indemnify and hold Seller and Shareholders harmless from and against
all such other debts, liabilities and obligations arising from the ownership,
use and operation of the Business, the Assets and/or the Shareholders'
Intellectual Property beginning after the Closing Date.
1.4 CLOSING ADJUSTMENTS TO ASSETS OR ASSUMED LIABILITIES.
(a) Five (5) days prior to the Closing, the Seller shall
prepare and deliver to Buyer a projected balance sheet estimated as
of the Closing Date (the "CLOSING BALANCE SHEET"), which shall
include the Assets, at their respective book value as of the
Closing, and the Assumed Liabilities in the amounts to be assumed by
Buyer at the Closing. The Closing Balance Sheet shall, with respect
to the items to be included thereon, be prepared in accordance with
generally accepted accounting principles, consistently applied
("GAAP"). During the five (5) days preceding the Closing, the Seller
shall permit the Buyer full and complete access to the Business and
the books and records of the Seller to verify the Closing Balance
Sheet. Up to and at the Closing, Seller shall adjust the Closing
Balance Sheet for any errors discovered by Buyer prior to the
Closing and for any changes in the balances
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thereof to the Closing Date. At the Closing, the Seller shall
represent and certify to the Buyer that the Closing Balance Sheet
is true, correct and complete as of the Closing Date, and has
been prepared in accordance with this Section 1.4.
(b) If, as reflected on the Closing Balance Sheet as of
the Closing Date, the book value of the Assets less the amount of
the Assumed Liabilities (the "NET EQUITY") exceeds $365,000, then
effective as of the Closing Date the Seller will be entitled to
retain (and the Assets shall exclude) first cash, and then accounts
receivable to the extent there is insufficient cash, in an amount
that will reduce the Net Equity as assigned to the Buyer to
$365,000.
(c) If, as reflected on the Preliminary Closing Balance
Sheet as of the Closing Date, the Net Equity is less than $335,000,
then effective as of the Closing Date the Buyer will have the
following options, one of which shall be selected by the Buyer at or
prior to the Closing:
(i) the Seller's Assumed Liabilities shall
be reduced (and among them as the Buyer shall
determine), and the Seller shall retain a sufficient
amount of the Seller's liabilities to increase the Net
Equity to $335,000; or
(ii) the Buyer may terminate the purchase
and sale and this Agreement, without liability or
penalty to the Buyer.
1.5 ASSET PURCHASE PRICE. Subject to the terms and conditions of this
Agreement, the total consideration to be paid by Buyer to Seller at the Closing
for the Assets shall be $300,000 (the "ASSET PURCHASE PRICE"), payable in
capital stock of the Buyer pursuant to Section 1.6 below.
1.6 PAYMENT OF ASSET PURCHASE PRICE. The Asset Purchase Price shall be paid
in Buyer's common stock, par value $.01 per share (the "Common Stock"), by
delivery at closing of an equivalent number of shares of Common Stock, valued as
the average of the closing bid and asked prices of the Common Stock over the
twenty (20) trading days preceding the Closing Date (the "SHARES"). Such Shares
shall not be registered Shares, will be restricted Shares within the meaning of
the Securities Act of 1933, as amended, and any applicable state blue sky laws
(collectively, the "SECURITIES ACT"), and will be imprinted with a restrictive
legend which declares the unregistered nature of the Shares, consistent with the
attached Exhibit A. The Buyer agrees to cause the Shares to be registered under
the Securities Act within one (1) year after the Closing. Notwithstanding
Article 10 of this Agreement, in the event the Buyer does not so register the
Shares within such time period, the Shareholders may pursue their rights and
remedies in a court of competent jurisdiction in the State of Florida or Federal
court sitting in Florida.
1.7 SHAREHOLDERS' INTELLECTUAL PROPERTY PURCHASE PRICE. Subject to
the terms and conditions of this Agreement, the total consideration to be paid
by Buyer to Shareholders at the Closing for the Shareholders' Intellectual
Property Rights shall be $200,000 (the "INTELLECTUAL
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PROPERTY PURCHASE PRICE"), to be allocated between them as they shall request in
writing to Buyer prior to the Closing, or one-half to each if no such notice is
provided.
1.8 PAYMENT OF THE INTELLECTUAL PROPERTY PURCHASE PRICE. Payment of the
Intellectual Property Purchase Price shall be made at Closing by cashiers or
certified check, or by wire transfer in immediately available funds to such
accounts as are specified by the Shareholders to Buyer prior to Closing.
ARTICLE 2
TAXES
Seller or Shareholders, as applicable, shall pay any sales, use, excise or
similar taxes or governmental charges, if any, with respect to the transfer of
the Assets or Shareholders' Intellectual Property under this Agreement. Buyer
agrees to execute and deliver to Seller any certificates reasonably requested by
Seller relating to sales and use tax exemptions.
ARTICLE 3
CLOSING
Subject to the terms and conditions contained in this Agreement, including
the satisfaction or waiver of the conditions to Closing set forth in Section 7
hereof, the closing of the transactions to be effected hereunder (the "CLOSING")
shall be held at the offices of Hinshaw & Culbertson, One East Broward
Boulevard, Suite 1010, Fort Lauderdale, Florida 33301 at 10:00 a.m. on April 6,
1998, or at such other time and place or on such other date as shall be mutually
agreed upon in writing by Buyer and Seller (the actual date of such Closing is
herein called the "CLOSING DATE"). Time is of the essence, however, and Buyer,
Seller, and Shareholders agree that if all conditions to Closing cannot be
satisfied by the targeted Closing Date of April 6, 1998, they will each consent
to a reasonable extension of such date to allow necessary conditions to be
satisfied. If all conditions to Closing cannot be satisfied or are not waived
prior to April 15, 1998, neither Seller, Buyer, nor Shareholders shall have any
obligation to proceed with Closing; provided that the foregoing shall not
terminate, release or be deemed a waiver of any right or remedy a party may have
as a result of a breach of this Agreement by the other.
ARTICLE 4
ADDITIONAL COVENANTS
4.1 PRE-CLOSING COVENANTS. Buyer, Seller, and Shareholders each agree as
follows with respect to the period between execution of this Agreement and the
Closing:
(a) General. Each of the Parties will use all reasonable
commercial efforts to take all actions, and to do all things
necessary, proper, or advisable, to consummate and make effective
the transactions contemplated by this Agreement (including, without
limitation, satisfying the conditions precedent to Closing).
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(b) Buyer's Access to Records and Employees. Seller
shall allow Buyer and its representatives full and complete access
to the books and records and business premises of Seller related to
the Business for purposes of conducting a due diligence
investigation, as determined to be necessary by Buyer, and shall
allow Buyer full access to interviewing, discussing and offering
employment possibilities to Seller's employees employed exclusively
in the Business. All employment decisions, as well as the terms and
conditions of employment, shall be solely within the discretion of
the Buyer. The Seller shall not hinder the efforts of the Buyer in
employing any such personnel.
(c) Maintenance of Assets and Continued Operations.
Seller shall maintain the Assets in good repair, order and
condition, reasonable wear and use excepted. Seller shall continue
to operate the Business to the best of its abilities, but only in
the ordinary course of business and in a manner consistent with the
operations of the Business during the twelve month period prior to
the date of this Agreement. Seller shall take no action which would
or could be detrimental to the Assets or the Business, except in the
ordinary course of business and in furtherance of Seller's
obligations under this Agreement. Seller shall maintain the books
and records of the Business in the usual, regular and ordinary
manner on the basis consistent with prior periods.
(d) Protection of Shareholders' Intellectual Property.
Shareholders shall maintain and protect the rights and security of
the Shareholders' Intellectual Property to the best of their ability
and in a manner consistent with their past conduct. Shareholders
shall take no action which would or could be detrimental to the
Shareholders' Intellectual Property, or the rights to be acquired by
Buyer thereunder as contemplated in this Agreement.
(e) Notice of Developments/Risk of Loss. Seller and
Shareholders shall give prompt written notice to Buyer of any
material developments affecting the Business, Assets, or the
Shareholders' Intellectual Property prior to Closing. Seller and
Shareholders, as applicable, shall bear the risk of loss as to any
or all of the Assets and Shareholders' Intellectual property prior
to Closing.
4.2 CONFIDENTIALITY AND NONDISCLOSURE. From and after the Closing, Seller
and Shareholders each agree to maintain the confidentiality of all information
concerning the Business, the Assets, the Shareholders' Intellectual Property,
and the Assumed Liabilities. Except as required by law or legal or
administrative process, Seller and Shareholders shall not disclose any such
information to any third party and shall not permit any such information to be
used by them other than in connection with the transactions contemplated by this
Agreement, the operation of the Business up to the Closing, and the preparation
of financial statements and tax returns for such parties. The Seller and each of
the Shareholders shall cooperate with the Buyer's disclosure requirements by
reasonably and timely approving any press releases or other disclosures to be
made by Buyer. While this Agreement remains in effect, Seller and Shareholders
shall not negotiate for the sale of the Business or any substantial portion of
the Assets of the Business, or the Shareholders' Intellectual Property, with any
other party, and each of Seller or the Shareholders, as applicable, shall
promptly notify Buyer of any offers or inquiries received by them prior to the
Closing.
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4.3 NONCOMPETITION AGREEMENT. As additional consideration for the payment
of the Asset Purchase Price and the Intellectual Property Purchase Price
hereunder, and as an inducement to the Buyer to enter into this Agreement, the
Seller hereby agrees that for a period of six (6) years after the Closing Date,
and each of the Shareholders, jointly and severally, hereby covenants and agrees
that for a period equal to the lesser of (i) six (6) years from the Closing
Date, or (ii) one (1) year after the expiration or earlier termination
(regardless of fault or the reason for such termination) of their respective
Employment Agreement (as applicable, the "RESTRICTED TERM"), the Seller and the
Shareholders will not, directly or indirectly, own, manage, operate, control, be
employed by, act as an advisor or consultant to, or participate in, the
ownership, management, operation, or control of any business involving image
capture solutions or image capture, transmission and/or manipulation devices, or
any other business similar to that heretofore conducted by the Seller in the
United States of America; provided, however, that any services provided by the
Shareholders to Buyer shall not be subject to the restrictions of this Section
4.3; and provided further that the foregoing shall not prevent the Shareholders
(a) from owning the Shares; or (b) from owning not more than a one percent (1%)
interest in any entity engaged in the foregoing restricted businesses whose
securities are traded on any securities exchange or in the over-the-counter
markets. Seller, Shareholders, and Buyer agree that in the event the above
covenant against competition shall be construed by any court of competent
jurisdiction to be too broad in time or area or both or otherwise to be
enforceable, or any portion thereof is otherwise held invalid, then to the
extent that the same is valid and enforceable it shall remain in full force and
effect, and to the extent any provision or portion is unenforceable or invalid,
the same shall be deemed modified and limited to the extent necessary to make
the same enforceable and valid and to give effect to the expressed intent of the
parties to the maximum extent possible.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
OF SELLER AND SHAREHOLDERS
Seller and Shareholders, individually and collectively, represent, warrant,
covenant and agree with Buyer that the following representations and warranties
are true, correct and complete as of the date hereof and will be true, correct
and complete as of the Closing Date:
5.1 ORGANIZATION OF SELLER; AUTHORITY OF SELLER. Seller is a corporation
duly organized, validly existing and in good standing under the laws of the
state of Florida. Seller has all requisite power and authority, licenses and
permits, to own and operate the Assets and to carry on the Business as currently
conducted. Seller has full corporate power and authority to make the
representations, warranties and agreements made in this Agreement, to execute
and deliver this Agreement and the other documents delivered by Seller in
connection with this Agreement at or prior to Closing (the "ANCILLARY
DOCUMENTS"), and to perform its obligations under this Agreement and the
Ancillary Documents.
5.2 AUTHORIZATION OF AGREEMENT AND ENFORCEABILITY. This Agreement has been,
and the Ancillary Documents will be, duly and validly authorized, executed and
delivered by Seller and
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Shareholders, and constitute legal, valid and binding obligations of Seller and
Shareholders, enforceable against Seller and Shareholders in accordance with
their respective terms.
5.3 EFFECT OF AGREEMENT. Neither the execution, delivery and performance of
this Agreement or the Ancillary Documents by Seller or Shareholders, nor the
consummation by Seller or Shareholders of the transactions contemplated herein
or therein, will (a) conflict with or result in a breach of any provision of the
articles of incorporation or bylaws of Seller, (b) constitute or result in the
breach of, conflict with or give rise to a right of forfeiture, termination,
cancellation or acceleration with respect to, any term, condition or provision
of any note, bond, mortgage, indenture, license or other contract or obligation
to which Seller or either Shareholder is a party or by which Seller or either
Shareholder or any of their respective assets may be bound, or (c) violate any
law, statute, regulation, judgment, order, writ, injunction, or decree
applicable to Seller, Shareholders, any of the Assets or any of the
Shareholders' Intellectual Property.
5.4 FINANCIAL STATEMENTS AND FINANCIAL PERFORMANCE. Seller has provided
Buyer with copies of balance sheets and statements of income for the Business
for the fiscal years ended September 30, 1997 and 1996. The foregoing financial
statements ("FINANCIAL STATEMENTS") have been prepared on a basis consistent
with that of prior years or periods, are correct and complete, and fairly
present the financial position and results of operations of the Business as of
the dates and for the periods indicated.
5.5 TITLE TO ASSETS; ABSENCE OF LIENS AND ENCUMBRANCES. Seller and
Shareholders have good and marketable title to the Assets and Shareholders'
Intellectual Property, as applicable, free and clear of all security interests,
claims, liens, mortgages, charges and encumbrances, excepting only the interests
listed on Schedule 5.5, which will be released in full at the Closing. All
Assets and physical representations and records of the Shareholders'
Intellectual Property are located at the Premises.
5.6 CONDITION OF ASSETS. All Assets which are inventory are in good and
merchantable condition, and were purchased by Seller for manufacture and resale
to customers in the ordinary course of its Business. All Assets which are
tangible personal property other than inventory were properly maintained in
accordance with normal and customary business practice and are in good working
order and condition, ordinary wear and tear excepted. All accounts receivable
included in the Assets arose from bona fide transactions in the ordinary course
of conducting the Business and are, to the best knowledge of the Seller and the
Shareholders, fully collectible at their respective face value without offset or
deduction.
5.7 INTELLECTUAL PROPERTY. The Shareholders are the sole owners of all of
the Shareholders' Intellectual Property, in all cases free and clear of any
license or other right of any other party to use the same. The Seller and the
Shareholders, as applicable, have taken all action necessary to protect each
material items of intellectual property included in the Assets or the
Shareholders' Intellectual Property. Neither the Seller nor the Shareholders
have been sued or charged in writing with or been a defendant in any claim,
action or proceeding relating to the
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Business or any intellectual property used in the Business which has not been
finally terminated prior to the date of this Agreement and which involves a
claim of interference, infringement, misappropriation, or violation of
intellectual property rights of third parties. To the best knowledge of Seller
and the Shareholders, no third party has a claim to, interest in, interfered
with, infringed upon or misappropriated any intellectual property rights of the
Seller or the Shareholders with respect to any intellectual property being
purchased by the Buyer hereunder. The intellectual property included in either
the Assets or the Shareholders' Intellectual Property collectively constitute
all of the intellectual property necessary to operate the Business as currently
or heretofore conducted, and to the best of Seller's and Shareholders' knowledge
the Shareholders' Intellectual Property is the only intellectual property used
by the Seller which is not owned by the Seller.
5.8 ASSUMED LIABILITIES; CONTRACTS. All Assumed Liabilities arose from bona
fide transactions conducted in the ordinary course of the Business prior to the
Closing. Other than the Lease, there are no written contracts or agreements to
which Seller is a party and which are necessary to the operation of the Business
as conducted by Seller since September 30, 1997. The Lease is in full force and
effect, and the Seller is not in default (and there has not occurred any event
which with the passage of time, the giving of notice, or both, which would
constitute a default by Seller) thereunder. To the best knowledge of the Seller
and the Shareholders, the Lease is the valid and binding obligation of the
landlord thereunder, enforceable against the landlord in accordance with its
terms, and the landlord thereunder is not in default (and there has not occurred
any event which with the passage of time, the giving of notice, or both, which
would constitute a default by the landlord) thereunder.
5.9 TAX MATTERS. Seller and Shareholders have each accurately completed and
timely filed all federal, state, local and other tax and information returns as
required by law, and have paid all amounts for income, sales, use, gross
receipts, property, employment and any other taxes, charges, levies or other
assessments (collectively, "TAXES") shown as due on such returns.
5.10 INSURANCE. Seller carries business casualty and general liability
insurance in amounts commercially reasonable for a business engaged in the
operation of the Business. To the extent required by law, Seller carries
worker's compensation insurance in at least the amount required. The premiums on
all such insurance policies have been paid and such policies shall remain in
full force and effect through the Closing Date.
5.11 PERMITS, LICENSES, COMPLIANCE WITH LAWS. Seller has all material
permits, licenses, orders, consents and approvals of federal, state, local or
foreign governmental or regulatory bodies that are required in order to permit
Seller to carry on the Business as currently conducted, all of which are listed
on Schedule 5.11 hereto. To the best knowledge of Seller, the Business has been
and is being conducted in accordance and in material compliance with all
applicable federal, state, local or foreign laws, codes and ordinances (and all
rules and regulations of agencies thereof), including, without limitation, all
environmental, health, safety and employment laws.
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5.12 LITIGATION. There is no claim, action, suit, proceeding, arbitration,
investigation or inquiry pending before any federal, state, local, or other
court or governmental, administrative, or self-regulatory body or agency, or any
private arbitration tribunal, or to the knowledge of Seller or Shareholders
threatened against, Seller, Shareholders, relating to the Business, any of the
Assets, any of the Shareholders' Intellectual Property, or the transactions
contemplated by this Agreement.
5.13 EMPLOYEES. Seller has made all required payments for Social Security
and other payroll withholding taxes and unemployment compensation insurance and
all required contributions or premium payments related to all employment related
benefit plans. No employees of Seller are subject to a collective bargaining
agreement.
5.14 BOOKS AND RECORDS. To the best of Seller's and Shareholders'
knowledge, all of the books of account and other financial records of Seller
and/or Shareholders related to the Business, the Assets, and the Shareholders'
Intellectual Property have been made available to Buyer and its representatives
and are, in all material respects, complete and correct, are maintained in
accordance with good business practices, and are accurately reflected in
Seller's Financial Statements.
5.15 SUBSEQUENT EVENTS. Since September 30, 1997, there has not been any
change in the operations, financial condition, results of operations or assets
of the Seller or Shareholders' Intellectual Property that has had a material
adverse effect on the Assets or the Business. In addition, and not in
limitation, since that date:
(a) the Seller has not sold, leased, transferred or
assigned any of the assets of the Business other than for fair value
in the ordinary course of business;
(b) no party has accelerated, terminated, modified, or
canceled any material agreement to which Seller is a party or by
which it is bound relating to the Business;
(c) the Seller has not made any investment in or loan to
any person involved in the Business and outside of the ordinary
course of business; and
(d) except as provided in Section 5.17 below, the Seller
has not received from a customer or supplier any notice or other
communication terminating or threatening to terminate any material
business relationships or agreements between Seller and any of its
customers or suppliers and with respect to the Business.
5.16 ENVIRONMENTAL COMPLIANCE. The Business and its operations and
properties are in compliance with all environmental laws. No government agency
or third party has submitted to the Seller any notification, demand, request for
information, citation, summons, or complaint, and no order has been issued, no
complaint has been filed, no penalty has been assessed and no investigation or
review is pending or threatened, relating to any environmental law. Except in
substantial compliance with applicable environmental laws, hazardous materials
have not been generated, used, treated or stored on, transported to or from,
disposed of or released on any property owned or operated at any time by the
Company.
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5.17 CUSTOMERS. Schedule 5.17 sets forth the 10 largest customers of the
Business as of the date hereof based on revenues generated during the 12 months
ended September 30, 1997. The relationships of the Seller with each of such
customers are satisfactory commercial working relationships, and no such
customer has cancelled or otherwise terminated, or threatened in writing, or to
Seller's knowledge, threatened orally, to cancel or otherwise terminate, its
relationship with the Business, except that Buyer acknowledges that Seller's
former business relationship with Snowden Pencer has been substantially reduced.
Seller does not in its ordinary course of business maintain written contracts
with its customers and, indeed, has none.
5.18 OTHER INFORMATION. To the best of Seller's and Shareholders'
knowledge, none of the information and documents which have been or may be
furnished by Seller, Shareholders, or either of their representatives to Buyer,
or to any of its representatives, in connection with the transactions
contemplated by this Agreement, is or will be materially false or misleading or
contains or will contain any material misstatements of fact or omits or will
omit any material fact necessary to be stated in order to make the statements
therein not misleading, nor has Seller or Shareholders withheld from Buyer any
material facts relating to the Assets or the Business as conducted by the
Seller, or the Shareholders' Intellectual Property.
5.19 BROKERS. Neither Seller nor Shareholders have engaged any broker,
investment banker or other finder who may be entitled to a fee as a result of
the transactions contemplated in this Agreement.
5.20 INVESTMENT INTENT. The Seller acknowledges that the Shares have not
been registered under the Securities Act. The Shares may not be sold or
otherwise transferred unless registered under the Securities Act and any
applicable state securities laws or unless an exemption from such registration
is available. The Seller has such knowledge and experience in financial and
business matters that it is capable of evaluating the merits and risks of the
Shares in connection with this Agreement, and has been given the opportunity to
inspect such books and records, and to ask such questions, as the Seller has
determined appropriate in connection with acquiring the Shares. The Seller is
acquiring the Shares for investment and not with a view toward or for sale or
distribution thereof within the meaning of the Securities Act, or with any
present intention of distributing or selling the Shares within the meaning of
the Securities Act. The Seller acknowledges and agrees that the Shares may be
not sold, transferred, offered for sale, pledged, hypothecated or otherwise
disposed of without registration under the Securities Act, except pursuant to an
exemption from such registration available under the Securities Act.
ARTICLE 6
REPRESENTATIONS AND WARRANTIES OF BUYER
Buyer represents, warrants, covenants and agrees with Seller and each of
the Shareholders that the following representations and warranties are true,
correct and complete as of the date hereof and will be true, correct and
complete as of the Closing Date:
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6.1 ORGANIZATION AND GOOD STANDING OF BUYER. Buyer is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and has all requisite corporate power and authority to make the
representations, warranties and agreements made hereunder, to execute and
deliver this Agreement and the other documents delivered by Buyer in connection
with this Agreement or prior to closing (the "BUYER'S ANCILLARY DOCUMENTS") and
to perform its obligations under this Agreement and the Buyer's Ancillary
Documents.
6.2 AUTHORIZATION OF AGREEMENT AND ENFORCEABILITY. This Agreement has been,
and the Buyer's Ancillary Documents will be, duly and validly authorized,
executed and delivered by Buyer and constitute the valid and legally binding
obligation of Buyer enforceable against Buyer in accordance with their
respective terms.
6.3 EFFECT OF AGREEMENT. Neither the execution, delivery, and performance
of this Agreement or the Buyer's Ancillary Documents nor the consummation of the
transactions contemplated hereby or thereby by Buyer will (a) conflict with or
result in a breach of any provision of the articles of incorporation or bylaws
of Buyer or (b) constitute or result in the breach of, conflict with or give
rise to a right of forfeiture, termination, cancellation or acceleration with
respect to, any term, condition or provision of, any note, bond, mortgage,
indenture, license or other contract or obligation to which Buyer is a party or
by which Buyer or any of its properties or assets may be bound, except for such
conflicts, breaches or defaults as to which written waivers or consents shall
have been obtained on or prior to the Closing Date, or (c) violate any law,
statute, regulation, judgment, order, writ, injunction, or decree applicable to
Buyer or any of its properties or assets.
6.4 LITIGATION. There is no claim, action, suit, proceeding, arbitration,
investigation or inquiry pending before any federal, state, local, or other
court or governmental, administrative, or self-regulatory body or agency, or any
private arbitration tribunal, or to the knowledge of Buyer threatened against,
Buyer, relating to the transactions contemplated by this Agreement.
6.5 BROKERS. Buyer has not engaged any broker, investment banker or other
finder who may be entitled to a fee as a result of the transactions contemplated
in this Agreement.
ARTICLE 7
CONDITIONS PRECEDENT TO CLOSING
7.1 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF BUYER TO PROCEED WITH
CLOSING. The obligations of Buyer under this Agreement are subject to the
fulfillment at or prior to Closing of each of the following conditions to the
reasonable satisfaction of Buyer; provided that Buyer, in its discretion, may
waive any one or more of such conditions in writing:
(a) Accuracy of Representations and Warranties. The
representations and warranties of Seller and Shareholders contained
in this Agreement or any Ancillary Documents shall be true in all
material respects on and as of the Closing Date.
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(b) Performance of Agreements. Seller and Shareholders
shall have performed all obligations and agreements and complied in
all material respects with all covenants and conditions contained in
this Agreement to be performed or complied with by Seller or
Shareholders at or prior to the Closing.
(c) Deliveries. Seller and Shareholders shall have
delivered or caused to be delivered to Buyer at or prior to Closing
all of the following:
(i) a certified copy of the Articles of
Incorporation of Seller and a certificate of good
standing of Seller issued by the Florida Secretary of
State dated within five (5) days of Closing;
(ii) one or more bills of sale and all other
necessary instruments of transfer conveying good and
marketable title to the Assets and the Shareholders'
Intellectual Property to Buyer, in the form attached as
Exhibits B and C;
(iii) a properly authorized and executed
Assignment and Assumption Agreement between Seller and
Buyer, in the form attached as Exhibit D;
(iv) such Patent and trademark
assignment/transfer documents as are prepared by the
Buyer;
(v) The written consent of the landlord to
the assignment of the Lease, in form and substance
reasonably acceptable to Buyer; and
(vi) such other documents and certificates
as may be required under this Agreement or reasonably
requested by Buyer.
7.2 CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE SELLER AND SHAREHOLDERS
TO PROCEED WITH CLOSING. The obligations of Seller and Shareholders under this
Agreement are subject to the fulfillment at or prior to the Closing of each of
the following conditions to the reasonable satisfaction of Seller and
Shareholders; provided that both, in their independent discretion, may jointly
waive any one or more of such conditions in writing:
(a) Accuracy of Representations and Warranties. The
representations and warranties of Buyer contained in this Agreement
or in any Buyer's Ancillary Document shall be true in all material
respects on and as of the Closing.
(b) Performance of Agreement. Buyer shall have performed
all obligations and agreements and complied in all material respects
with all covenants and conditions contained in this Agreement to be
performed or complied with by Buyer at or prior to the Closing Date.
(c) Deliveries by Buyer. Buyer shall have delivered to
Seller at or prior to the Closing the following:
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(i) a certified copy of the Articles of
Incorporation of Buyer and a certificate of good
standing of Buyer issued by the Delaware Secretary of
State dated within five (5) days of Closing; and
(ii) payment of the Asset Purchase Price by
delivery of the unregistered Shares in accordance with
Section 1.6;
(iii) payment of the Intellectual Property
Purchase Price in accordance with Sections 1.7 and 1.8;
(iv) a properly authorized and executed
Assignment and Assumption Agreement between Seller and
Buyer, in the form attached as Exhibit D; and
(v) such other documents and certificates as
may be required under this Agreement or reasonably
requested by Seller or Shareholders.
ARTICLE 8
TERMINATION
8.1 TERMINATION PRIOR TO CLOSING. This Agreement may be terminated prior to
Closing as follows:
(a) By mutual written consent of the Parties.
(b) By Buyer (i) pursuant to Section 1.4(c)(ii) above
(relating to inadequate Net Equity), and (ii) if any of the
conditions set forth in Section 7.1 of this Agreement have not been
met and have not been waived in writing by Buyer.
(c) By Seller if any of the conditions set forth in
Section 7.2 of this Agreement have not been met and have not been
waived in writing by Seller.
ARTICLE 9
INDEMNIFICATION
9.1 INDEMNIFICATION BY SELLER OR SHAREHOLDERS. Seller, on the one hand, and
Shareholders on the other hand, severally but not jointly, shall indemnify,
defend and hold harmless Buyer from, against and in respect of, any and all
costs, losses, claims, liabilities, fines, penalties, damages and expenses
(including without limitation interest which may be imposed in connection
therewith, and court costs and reasonable fees and disbursements of counsel)
resulting from, arising out of or incurred by Buyer in connection with either of
the following:
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(a) any breach of any of their respective
representations or warranties made in this Agreement, or their
respective breach, failure or default under any of their respective
covenants or agreements in this Agreement; or
(b) their respective debts, obligations, liabilities,
claims, penalties, fines or damages pertaining to the Assets, the
Shareholders' Intellectual Property, or the Business arising before
the Closing Date or related to incidents and occurrences prior to
the Closing Date, whether or not known to Seller or disclosed to
Buyer, and their respective liabilities arising after the Closing,
in each case excluding only the Assumed Liabilities.
9.2 INDEMNIFICATION BY BUYER. Buyer shall indemnify, defend and hold
harmless Seller and Shareholders, and each of them, from, against and in respect
of, any and all costs, losses, claims, liabilities, fines, penalties, damages
and expenses (including without limitation interest which may be imposed in
connection therewith, and court costs and reasonable fees and disbursements of
counsel) resulting from, arising out of or incurred by Seller or Shareholders in
connection with either of the following:
(a) any breach of any of the representations or
warranties made by Buyer in this Agreement, or breach, failure or
default by Buyer in respect of any of the covenants or agreements
made by Buyer in this Agreement; or
(b) the Assumed Liabilities and any debts, obligations,
liabilities, claims, penalties, fines or damages pertaining to Buyer
or the Business as operated by Buyer after the Closing Date.
9.3 REMEDIES; NO WAIVER. In addition to all other rights and remedies
available to the parties at law, in equity or under this Agreement, each party
shall have a right to seek injunctive relief or specific performance for a
violation by the other of its obligations under this Agreement. Each of the
Parties acknowledges and agrees that the rights being transferred by both Seller
and Shareholders are special, valuable, and unique assets of the Business.
Seller, Shareholders, and Buyer agree that it would be difficult to measure the
damage to the Business from any improper disclosure or from any breach of this
Agreement, that injury to the Business from any such breach would be impossible
to calculate, and that money damage would therefore be an inadequate remedy for
any such breach. Accordingly, the parties agree that in the event of any breach
of this Agreement, the damaged party shall be entitled, in addition to all other
remedies it may have including money damages, to such full and complete remedies
as a court of equity can provide including the remedies of specific performance
and an injunction or other appropriate order to restrain any such breach without
showing or proving any actual damage to the Business. No failure or delay on the
part of any party in exercising any right, power or remedy under this Agreement,
or available to such party at law or in equity, shall operate as a waiver of
such right, power or remedy, nor shall any single or partial exercise of any
such right, power or remedy preclude any or further exercise thereof or the
exercise of any other right, power or remedy available to such party. The
remedies provided in this Agreement are cumulative and not exclusive of any
remedies available at law or equity.
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<PAGE>
9.4 THIRD PARTY CLAIMS. If a claim by a third party is made against Buyer,
Seller or Shareholders (the "INDEMNIFIED PARTY"), and the Indemnified Party
intends to seek indemnity against the other party (the "INDEMNIFYING PARTY")
under this Article 9, the Indemnified Party shall promptly notify the
Indemnifying Party of such claim. The Indemnifying Party shall have thirty (30)
days after receipt of the above-mentioned notice to undertake, conduct and
control, through counsel chosen by the Indemnifying Party or its insurer
(subject to the consent of the Indemnified Party, such consent not to be
unreasonably withheld) and at the Indemnifying Party's expense, the settlement
or defense of the claim, and the Indemnified Party shall reasonably cooperate
with the Indemnifying Party in connection with such efforts. The Indemnifying
Party shall permit the Indemnified Party to participate in such settlement or
defense through counsel chosen by the Indemnified Party, provided that the fees
and expenses of such counsel shall be borne by the Indemnified Party. The
Indemnifying Party shall not settle or compromise any such claim unless it shall
have given the Indemnified Party not less than fifteen (15) days' prior written
notice of the proposed settlement or compromise and afforded the Indemnified
Party an opportunity to consult with the Indemnifying Party regarding the
proposed settlement or compromise. If the Indemnifying Party does not notify the
Indemnified Party within thirty (30) days after receipt of the Indemnified
Party's notice of a third party claim that the Indemnifying Party elects to
undertake the defense of such claim, the Indemnified Party shall have the right
to contest, settle or compromise the claim in the exercise of the Indemnified
Party's exclusive discretion, but exercising reasonable business judgment, at
the expense of the Indemnifying Party.
ARTICLE 10
DISPUTE RESOLUTION
10.1 MANDATORY ARBITRATION. Except as set forth in Section 1.6 of this
Agreement, in the event any dispute arises out of or in relation to this
Agreement, or a breach hereof, including any dispute regarding the existence,
validity, interpretation, scope or termination of this Agreement, and if such
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 Broward County,
Florida, in accordance with the then-current Commercial Rules of the American
Arbitration Association ("AAA"). Any arbitration hereunder shall be conducted by
a panel of arbitrators consisting of three members constituted with the
assistance of the AAA, one of whom shall be a senior or retired judge of the
Florida State or Federal court system, one of whom shall be a mutually
acceptable member of the image capture solutions industry, and one of whom shall
be a mutually acceptable member of the accounting industry. 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 between the Buyer, on
the one hand, and the Seller and the Shareholders, on the other hand. 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
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<PAGE>
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.
ARTICLE 11
GENERAL
11.1 EXPENSES, ETC. Buyer on the one hand, and Shareholders on the other
hand, shall each pay their respective fees and expenses and the fees and
expenses of their own respective counsel, accountants and other advisors or
agents arising in connection with the negotiation and preparation of this
Agreement and the Ancillary Documents and the consummation of the transactions
contemplated.
11.2 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Each of the Parties
covenants and agrees that all of the representations, warranties, covenants, and
agreements set forth in this Agreement and in any Ancillary Document shall
survive the Closing and shall not be merged into any instruments of transfer or
other Ancillary Documents delivered by any of the Parties at Closing or at any
other time.
11.3 NO THIRD PARTY BENEFICIARIES. Nothing in this Agreement, expressed or
implied, is intended to confer on any person other than the Parties or their
respective heirs, successors and assigns any rights, remedies, obligations, or
other liabilities under or by reason of this Agreement.
11.4 NOTICES. All notices, requests, demands and other communications which
are required to be or may be given under this Agreement shall be in writing and
shall be deemed to have been duly delivered (a) on the date of delivery if by
personal delivery or by confirmed facsimile transmission; or (b) on the date on
which return receipt is signed or delivery is refused if dispatched by certified
or registered first class mail, Federal Express or similar service, postage
prepaid, return receipt requested, to the party to whom the same is so given or
made:
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<PAGE>
If to Seller or Shareholders to: If to Buyer, to:
Richard Cane VideoLabs, Inc.
Wayne Byard 5960 Golden Hills Drive
Video Dynamics, Inc. Golden Valley, Minnesota 55416
13790 N.W. 4th St., Suite 112 Attn: James W. Hansen
Sunrise, FL 33325 Telephone: (612) 542-0061
Telephone: (305) 846-1490 Telecopier: (612) 542-0069
Telecopier: (305) 846-1949
With a copy to: With a copy to:
Kaplan Jaffe & Gates Hinshaw & Culbertson
2435 Hollywood Boulevard 3200 Piper Jaffray Tower
Hollywood, FL 33020 222 South Ninth Street
Attn: Douglas Kaplan Minneapolis, MN 55402
Telephone: (954) 920-9150 Attn: Shane R. Kelley
Telecopier: (954) 920-9144 Telephone: (612) 334-2610
Telecopier: (612) 334-8888
or to such other address as such party shall have specified by notice to the
other party.
11.5 FURTHER ASSURANCES. After the Closing, Seller or Shareholders shall,
at Buyer's request, execute and deliver to Buyer without further consideration,
all such further assignments, conveyances, endorsements, deeds, special powers
of attorney, consents and other documents, and take such other action, as Buyer
may reasonably request (a) to transfer to, vest and protect in Buyer its right,
title and interest in the Assets, and (b) otherwise to consummate or effectuate
the transactions contemplated by this Agreement.
11.6 ENTIRE AGREEMENT. This Agreement (including the Schedules and Exhibits
hereto, if any, all of which are incorporated into this Agreement by this
reference) supersedes all prior agreements and understandings, oral and written,
between the parties hereto with respect to the subject matter hereof and
thereof, and this Agreement, together with the Ancillary Documents, constitutes
the entire agreement of the parties as to the matters set forth herein and
therein.
11.7 HEADINGS. The article and section and other headings contained in this
Agreement are for reference purposes only and shall not be deemed to be a part
of this Agreement or to affect the meaning or interpretation of this Agreement.
11.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on different counterparts, each of which,
when executed, shall be deemed to be an original, and all of which together
shall be deemed to be one and the same instrument. This Agreement shall be
effective once one or more counterparts hereof have been executed by all parties
hereto.
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<PAGE>
11.9 GOVERNING LAW. This Agreement shall be construed as to both validity
and performance and governed by and enforced in accordance with the laws of the
State of Minnesota, without giving effect to the choice of law principles
thereof; provided, however, that in the event of any action concerning this
Agreement, such action shall only be commenced in the State or Federal courts
sitting in the State of Florida.
11.10 SEVERABILITY. If any term, covenant, condition, or provision of this
Agreement or the application thereof to any circumstance shall be invalid or
unenforceable to any extent, the remaining terms, covenants, conditions, and
provisions of this Agreement shall not be affected thereby and each remaining
term, covenant, condition, and provision of this Agreement shall be valid and
shall be enforceable to the fullest extent permitted by law. If any provision of
this Agreement is so broad as to be unenforceable, such provision shall be
interpreted to be only as broad as is enforceable.
11.11 AMENDMENTS. This Agreement may not be modified or changed except by
an instrument or instruments in writing signed by all Parties.
11.12 ASSIGNMENT. Neither the Seller nor the Shareholders may assign their
respective rights or obligations under this Agreement without the prior written
consent of the Buyer.
11.13 SUCCESSORS AND ASSIGNS. Subject to the provisions of Section 10.12
hereof, the covenants, agreements, and conditions contained or granted shall be
binding upon and shall inure to the benefit of the Parties and their respective
heirs, estates, successors, and permitted assigns.
11.14 CONSTRUCTION OF AGREEMENT. This Agreement and the Ancillary Documents
are the results of arm's-length negotiation between the Parties and their
respective advisors. Neither this Agreement or any of the Ancillary Documents
shall be construed as having been "drafted" by any one Party and shall not be
construed against any Party as a drafting party.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as
of the date first above written.
BUYER: SELLER:
VIDEOLABS, INC. VIDEO DYNAMICS, INC.
By ____________/s/__________________ By ____________/s/__________________
James W. Hansen Richard M. Cane
Its President Its President
SHAREHOLDER: SHAREHOLDER:
RICHARD CANE WAYNE BYARD
By __________/s/____________________ By ________/s/______________________
Richard M. Cane Wayne R. Byard
-20-
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