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, 1999
___ 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. $12,538,462
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 March 13, 2000 as reported on the NASDAQ Small Cap Market, was
approximately $13,740,741. 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 March 13, 2000, Registrant had outstanding 5,747,940 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 that was
incorporated in 1992 to develop a hardware and software videoconferencing
solution. The Company has evolved to become a provider of collaboration products
and services. On August 3, 1999 the Company merged with Acoustic Communication
Systems, Inc. (see Note 3 to the Audited Financial Statements) a manufacturer of
products used in videoconferencing and a provider of multimedia communication
solutions, significantly expanding the scope of the services provided by the
Company.
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
The Company experienced steady growth through 1995 and reached
profitability due to the sale of the remaining investment in a 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 was taken at year-end 1996. At the same time, the
Company's founder and President retired. 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 with a former officer and director of
the Company relating to the discontinued product development of the UDCM.
In November 1996, the Company brought in a new President and Chief
Executive Officer. The Company's marketing and development efforts were
redirected away from the retail computer market and developed a new strategy to
develop or acquire image capture solutions for specific niche markets in
education, videoconferencing, audio visual, identification and medical
applications where it already had distribution resources and could 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.
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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. On February 28, 2000, the Company entered into
an agreement to sell certain assets acquired in the Video Dynamics, Inc.
acquisition, for $108,000, payable over three years. In addition, the remaining
related employment agreement obligations were terminated as was a $10,000 note
payable.
The Company believes that there are opportunities for growth in the
application of the Company's core technologies in several market segments. The
potential for increases in use of collaboration capture devices as computer
peripherals in videoconferencing, audio visual, education and computer markets
is increasing as computer processing power, speed and cost factors have improved
and as higher capacity transmission utilities become available. 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
1998, primarily due to the introduction of the first of the new products from
this effort, but with significant one-time increases in cost. This strategy was
carried forward through 1999 with four new product introductions.
On August 3, 1999 the Company acquired Acoustic Communications Systems,
Inc. ("ACS") located in Plymouth Minnesota. ACS is the leading independent
supplier of collaboration solutions involving data and video conferencing in the
Midwest and one of the largest value added resellers of Picturetel and PolyCom
communication products in the U.S. ACS was also a manufacturer of several
peripheral devices for video-based solutions and had developed an E-commerce
site, www.meetingroomtools.com.
The acquisition of ACS was accomplished through the merger of ACS into
a newly formed acquisition subsidiary of the Company. Through the merger, the
sole shareholder of ACS, Mr. Robin Sheeley, received $500,000 in cash and
1,209,678 shares of Company common stock. At the closing of the merger, Mr.
Sheeley entered into a Noncompetition Agreement providing for payment of
$750,000 in April 2000 and an Employment Agreement. The acquisition subsidiary
was merged into the Company on December 31, 1999.
ACS was a privately owned Minnesota corporation founded in 1987 with a
vision to apply digital technologies embracing all media, voice, data, video,
and graphics, to communication needs of customers. ACS's goal was to stay on the
crest of the technology wave, providing customers the best and most complete
solutions possible at any given time with a platform that would embrace new
technologies as they emerged.
ACS built strong distribution relationships with the best product
vendors in each communications technology segment. ACS is the authorized
distributor of more than 150 high technology vendors covering virtually every
component used in multimedia communication. Where available products were too
costly or not sufficiently functional to meet customer needs, ACS designed and
produced its own products under the ACS components label.
The Company continues to pursue other synergistic acquisitions in
multimedia communication services and audiovisual industry manufacturing
companies that can add to its core capabilities and improve earnings per share
and return on equity.
The Company has now been divided into three divisions within two
groups; Products and Services: VideoLabs Division ("VLAB"), Meeting Room Tools
Division ("MRT"), and Acoustic Communications Systems Division ("ACS") each of
which will be discussed below.
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VIDEOLABS DIVISION ("VLAB")
The VLAB Division carries on the original manufacturing business of the
Company and has absorbed the manufacturing components business of ACS.
The VLAB Division's strategic intent is to develop or acquire
collaborative tools for specific niche markets, or OEM customers, in education,
video conferencing, audio visual, identification and medical applications where
it already has distribution resources and can provide value-added solutions. The
Company's strategy is to utilize its core competencies in analog and digital
image capture, acoustical design and fixture development to be sold through
distribution in its core markets.
VLAB DIVISION CURRENT PRODUCTS
ELECTRONIC PRODUCT LINE
The FLEXCAM(TM) introduced in March 1993, was the Company's first
presentation and video solution. The FlexCam is an integrated color camera and
microphone designed for desktop video presentations and video conferencing. The
FlexCam connects to most television monitors, VCRs, LCD projectors and
computers. With a capture card installed in the computer's hard drive, the
FlexCam operates as an image capture device. The FlexCam's patented gooseneck
gives it a distinctive design that has given the Company global recognition in
the presentation and videoconferencing marketplace.
The STUDENTCAM(TM) has the capabilities of the FlexCam but also offers
higher-resolution and the ability to integrate with microscopes. With the
flexible gooseneck, the StudentCam was the first in the market. Variations have
been introduced by competing companies such as Ken-A-Vision in the United States
and Euromex and MADD in Europe. The StudentCam provides cost conscious consumers
more value with the quality they expect from VideoLabs. It is an affordable
option for educational applications including student presentations, attached to
a microscope for class viewing, recording lesson plans or experiments for later
use, as well as broadcasting announcements and videoconferencing over the
Internet.
The TEACHCAM(TM) is the next step up from the StudentCam and is the
Company's leading product for science classrooms and laboratory environments.
The package offers a 27" gooseneck for use with standard, stereo and florescent
microscopes, three microscope adapters, and extension cables for the instructors
to move the camera around the classroom. The IllumaBase(R) feature is a built-in
light source in the base of the camera. It acts as a self-contained petri dish,
allowing presenters to view pond specimens, water, minerals, insects and other
small objects without the use of a microscope. The TeachCam also ships in a
custom made Nordic Pine box for storage.
The IDCAM is the Company's solution for identification and security
applications. The IDCam is a full-motion, S-video, color camera designed to sit
on the desktop or roll about. Its flexible 18" gooseneck, 60 degree swivel head
and 16mm C-mount lens make it possible to precisely position the camera for
proper head and shoulder framing between four to eight feet. Additional lenses
are available for custom applications that require imaging from a range of three
to fifteen feet. The camera features a 2-button Iris Control System (ICS) that
adjusts to any lighting environment. The IDCam includes a 2-button iris control
system, which allows the user to adjust the brightness for virtually any
lighting condition.
The DOCCAM document camera also incorporates the Company's patented
gooseneck. It is a price competitive camera that offers basic document and
object capture for video collaboration during a videoconferencing call. The
DocCam's sharp 6mm inverted lens allows the users to focus on a full-page
document. The DocCam is a second step above the FlexCam in the Company's
document camera line.
The PROFCAM(TM) was introduced in 1998. The camera was the Company's
first step into the professional videoconferencing and presentation markets. The
ProfCam offers the customer a high- resolution presentation camera with a
built-in LCD screen for preview, detachable light base, Infra Red (IR) remote
control, 14X power zoom, auto focus, built-in top lighting, Windows(R)
compatibility, RS-232C interface and carrying case.
The DOCCAM PRO(TM) was introduced in fourth quarter of 1999. The DocCam
Pro was the first integrated document camera to offer a built-in scan converter.
The scan conversion feature enables the videoconferencing user to display
computer presentations during a videoconference call. This easy-to-use document
camera was designed to provide videoconferencing users with multiple functions
in one product. The versatile DocCam Pro features a 16X-
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power zoom lens, auto focus, telescoping neck and IR remote control. It also
features LED top lights to provide natural lighting and long-life,
maintenance-free use. In addition, the high-resolution DocCam pro is equipped
with a 180(degree) rotating camera head for use as a secondary
(auxiliary/presentation) room camera.
The PTZCAM(TM) provides the Company with a camera that has
pan/tilt/zoom capabilities. This camera is targeted at the presentation,
videoconferencing and security users. The color CCD PTZCam is equipped with 10x
power zoom lens, high performance pan/tilt mechanism, auto focus system, S-Video
and NTSC Composite out connections, 440-line resolution for sharp images and 11
preset positions. This camera comes complete with wireless remote, RS-232C port
and two separate IR frequencies for main and auxiliary camera applications.
The MEDCAM is an economic, color, 1/4" 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 one lux sensitivity. The MedCam is also
available in a 1/2" chip version called the MEDCAM PRO.
The MEDCAM PRO PLUS (non-soakable/soakable) is a bundled package
featuring the MedCam Pro integrated into 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 MedCam 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. A 510K
was filed with the FDA in January 2000.
The STINGER PRO II capture card is the Company's solution for image
capture applications. This capture card allows customers to turn their camera
into an image capture device. This product offers 30fps at 640 x 480 at 16.8M
colors and TWAIN drivers for use with scanned image-enabled applications. It is
plug and play compatible and supports VFW, Direct Show and Direct Draw software.
The VIDEOVIEW SCAN CONVERTER completes the Company's electronic product
line. It features true plug and play VGA (PC) to video format conversion (NTSC
composite and S-VHS). This inexpensive scan converter is a valuable tool for
displaying computer presentations during a videoconference. It automatically
detects scan rates and resolutions up to 1024 x 768 @ 75Hz (XGA).
FURNITURE PRODUCT LINE
In an effort to position the Company as a provider of presentation,
videoconferencing and distance learning peripherals, furniture was added to the
product line following the acquisition of ACS in 1999. The Company's standard
line of furniture is built with laminate and melamine with rubber edge molding
to resist scratching and damage from everyday use. Custom options are available
to customers at a nominal up-charge. Ship time on standard pieces is five days.
The VIDEOCONFERENCING CART is available in three different models. This
portable cart is built for maximum strength, durability and versatility. At 33
inches, these products are taller than most office furniture to allow easy
viewing in any presentation environment. The Company's carts roll effortlessly
on premium 5 1/4" casters. The rear vent panel allows for easy cable access and
ventilation.
The DOCUMENT CAMERA CART is often sold with the Company's line of
document cameras. This product is offered in two configurations. The first
Series is an open cart design with an adjustable shelf on 4 inch casters. The
Series 2 cart features 40" extendable leaves and skirted casters.
The EXECUTIVE CART was designed for the high-end meeting room where
distinctive detailing and impeccable finishes are important. These carts are
constructed from the finest wood solids and veneers.
The PROJECTOR CART provides the function and flexibility needed in all
meetings. These carts create accessibility to the technology being used today
while providing ample interior storage for peripheral electronics and supplies.
Adjustable shelves with space for clearance and cable runs in the back to allow
for a cable path and seamless set-up. Doors on the Series 2 cart use all metal
three-way adjustable door hinges. The cart is equipped with a standard pull out
peripheral shelf with an all metal slide.
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CREDENZAS AND PEDESTALS provide the stable surface needed for
electronic equipment in a meeting room. They are built using an integrated
framing technique that ensures maximum strength and stability. This product is
made of high-grade medium and high-density fiber board construction: all
surfaces are laminated for strength, stability and durability. A special
integrated framing technique ensures stability and rigidity. The height of the
credenzas and pedestals are taller than regular office furniture to allow for
easy viewing in any conferencing environment.
The shape, size and finish of MEETING ROOM TABLES determine how well
people are seen and heard and how well communication flows between meeting
participants. The Company offers three different configurations in various
sizes. This product is made of high-grade medium and high-density fiber board
construction: all surfaces are laminated for strength, stability and durability.
A special integrated framing technique ensures stability and rigidity.
ORIGINAL EQUIPMENT MANUFACTURER ("OEM") RELATIONSHIPS
The Company has entered into a co-development private label
relationship with a number of customers, including 3M Company (NYSE: MMM) and
PolyCom(R) (NASDAQ: PLCM). In partnership, the Company and 3M have designed a
document camera for use with their multimedia video projectors. 3M placed an
annual purchase commitment in 1998. 3M furthered their OEM relationship with a
version of the Company's DocCam Pro in 1999.
The Company also has entered into a private label relationship with
Polycom(R). The Company has worked together with Polycom to design a cart for
their ViewStation customers. The Company began supplying this product in October
1999.
3M and Polycom represent a large portion of the total OEM and private
label relationships with other resellers in the United States and Europe for
various products in the electronic and furniture lines. Although the revenues of
these two OEM's is significant to the Company, the net revenues for 1999 were
under 10% of total revenues. The Company continues to work with both customers
to expand the relationship.
MEETING ROOM TOOLS DIVISION ("MRT")
Meeting Room Tools (MRT) is the Company's Internet division. MRT is
responsible for two e-commerce sites: Meeting Room Tools
(www.meetingroomtools.com) and Digital Mall (www.cameranow.com) in addition to
the web development services for the various resource sites for VideoLabs and
ACS.
The Digital Mall online store features digital still, digital video,
security, and sports and leisure products. The site offers a variety of
VideoLabs proprietary and third party offerings from such manufactures including
Agfa, Canon, Kodak, Sony and Olympus. The Digital Mall Internet site is located
at www.cameranow.com.
The meetingroomtools.com site offers over 650 communication solutions
from a variety of top manufacturers. These manufacturers drop ship to MRT's
customer base. Customers can shop 24-hours a day, seven days a week. This online
store targets small- to mid-size companies that are looking for an efficient and
cost-saving way to purchase.
ACOUSTIC COMMUNICATIONS SYSTEMS DIVISION ("ACS")
On August 3, 1999 the Company acquired ACS headquartered in Plymouth,
Minnesota. ACS is the leading independent supplier of collaboration solutions
involving data and video conferencing in the Midwest and one of the largest
value added resellers of Picturetel and PolyCom communications in the United
States.
ACS was a privately owned Minnesota Corporation which was founded in
1987 with a vision to apply digital technologies embracing all media, voice,
data, video, and graphics, to the communication needs of its customers. The
Company's goal was to stay on the crest of the technology wave, providing
customers with the best and most complete solutions possible at any given time
with a platform that would embrace new technologies as they emerged and to
provide a level of service to support customers using the most recent
technologies.
ACS has built strong distribution relationships with the best product
vendors in each communications technology segment. ACS is the authorized
distributor of more than 150 high technology vendors covering virtually every
component used in multimedia communication.
ACS specializes in the design, installation, support and service of
multimedia systems from the smallest conference rooms, to the largest training
facilities, integrating communication technologies to specifically meet the
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needs of its customers. Since 1992, a steadily growing portion of acoustic
multimedia technology has been in the area of video conferencing. Representing
PictureTel(R), Intel(R) and Polycom(R), ACS has become the teleconferencing
leader in the Twin Cities and the Midwest.
ACS has been recognized as the largest provider of Picturetel products
in the fourteen-state Central Region, with sales and service offices in
Plymouth, Minnesota, Chicago, Illinois, Des Moines, Iowa and Omaha, Nebraska.
The Plymouth, Minnesota office has four fully integrated video conferencing
demonstration rooms. ACS is now able to offer videoconferencing rooms to be used
for public video conferencing, accommodating groups up to 30 people.
In addition to their video conferencing lines, ACS also provides a wide
variety of routing, bridging, network management tools, inverse multiplexers for
high bandwidth calls, and peripheral equipment to ensure a smooth video meeting.
To guide clients thought the maze of options and capabilities, ACS offers design
and engineering services. Equipment maintenance service and repair and help desk
services are also available to customers. ACS also provides complete project
management, from ordering to installation to follow-up, so that every detail of
the project is handled with the utmost professionalism.
When acquired, ACS was the dominant videoconferencing provider in the
Midwest and a manufacturer of products sold through dealers throughout the
United States.
ACS has sales offices in Plymouth, Minnesota; Omaha, Nebraska; Des
Moines, Iowa; and Chicago, Illinois each of which provides the Company with
sales representation, system maintenance and service, technical assistance to
customers, and installation services for products sold. ACS has developed a
nationwide network of alliances with suppliers of video conferencing equipment
that give ACS the ability to have video conferencing systems installed and
maintained anywhere in the United States and Canada without incurring travel
costs and expenses normally associated with national and international product
sales and services. It is the Company's intent to expand these after market
services it offers to its customers in the year 2000.
ACS DIVISION CURRENT PRODUCTS
Designing, installing and servicing electronic meeting room systems
that enhance customer's ability to communicate, educate and inform is the
primary business of this division.
ACS provides:
* Complete custom room integration services
* Multi-carrier network connectivity solutions
* After market support services.
Installation and Service Expertise - In the changing world of hardware
and software, ACS utilizes the most current technologies for network
integration. To date, the Company's staff of nine field engineers has a total of
more than 63 years of experience. Monthly training sessions and factory
certification programs ensure that each engineer is constantly upgrading his/her
skills.
Help Desk Support - Staffed by videoconference engineers provides:
* Remote diagnostics capability via modem or video connection
* Customer support for installations
* Video test center for our customers
Test Laboratory - ACS uses its test laboratory located at its Plymouth,
Minnesota facility to check new integration technologies before releasing them
to the field. The Company's lab is equipped with the latest test equipment -
including ISDN and network interface test apparatus - to provide the best
possible service.
Emergency Service - Doing business with people around the world
sometimes means videoconferences need to be scheduled during non-business hours.
The Company's technicians are on call 24 hours a day, seven days a week.
ACS initially sets up, programs and tests systems that are sold in
their facility in Plymouth, Minnesota. Systems are then shipped to the
installation locations where they are installed by field technicians from their
own offices or from the network of video conferencing suppliers with whom they
have installation and service agreements.
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The technology in the conferencing marketplace is constantly changing
and growing. ACS has a goal of providing superior customer service and
additional conferencing services to its customer base. In the future these
services may include bridged video conferencing service, audio conferencing
services, video streaming services, event management, and other services based
on customer communication needs.
THE COMPANY'S PROPOSED PRODUCTS
The Company's engineering team is committed to the aggressive
development of new products during the year 2000. The commitment is part of the
Company's rolling eighteen-month engineering plan. The products developed will
enhance the current product lines, particularly in the education market, to
improve performance and make the products increasingly appealing as a digital
Internet appliance.
In addition the Company is completing manufacturing plans for several
acoustical, video and collaborative tools that were purchased as intellectual
property through the acquisition of ACS. In the year 2000 the Company will
continue to seek new applications in multi-media that enable the Company to
develop peripherals around new technology developments in out target markets.
The largest technology transition that is currently taking place is the
analog to digital revolution that is occurring within the multimedia platform.
This transition allows the Company to develop new digital devices that take
advantage of the new streaming media and media storage/retrieval emerging
marketplaces.
The Company maintains a corporate objective of 15% of sales coming
from new products introduced in the prior twelve months. That goal was achieved
in 1999.
MARKETING AND DISTRIBUTION
The Company markets its products to businesses and organizations of all
sizes through a reseller channel and its direct sales organizations. As of
December 31, 1999 the Company had approximately 550 active resellers in the
education, audio visual, identification, videoconferencing, computer and medical
markets. To compliment its sales efforts, the Company advertises in trade and
general business print media as well as participating in a wide array of
industry trade shows and public relations activities.
In the international markets, the Company sells its products though the
same channels described above. As of December 31, 1999, the Company's products
were being offered for sale by distributors in over Sixty (60) 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 1999, approximately 18% of the Company's total sales were from
international markets, primarily in Europe.
The Company runs two e-commerce sites that sell direct to the end user.
Those sites are marketed under the names "meetingroomtools.com" and "Digital
Mall."
MANUFACTURING AND SUPPLIES
The Company manufactures and provides final assembly services for its
products at its facilities in Golden Valley and Maple Grove, Minnesota. The
Company's manufacturing operations consist 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. During 1999 several products were completely built by
outside subcontractors. The Company intends to expand its outsourcing to meet
peek production demands. 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
limited number of sources. All of the Company's products utilize, and therefore
all of its revenues are derived from, such components. The Company does not
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have a long-term contract with such suppliers, but rather obtains supplies on a
purchase order basis. The Company attempts to keep a satisfactory supply of
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 electronics 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. Some of these other companies manufacture and
sell electronic cameras, scan converters, NT1's and multimedia furniture, and
some are distributors for these products. The Company believes that it competes
most directly with Sony, Panasonic, Toshiba, Ken-A-Vision, Sharp Electronics,
Elmo, Canon, Euromex, MADD, VFI and Focus Enhancements.
The Company competes for electronic product sales primarily on the
basis of 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 competitive matrix against competing
products from various manufacturers to see if the established list price is
appropriate.
THE COMPANY STRATEGY
The Company intends to grow both through internal growth of both its
product and service divisions and through acquisition or merger with other
companies that make strategic sense and earn an acceptable return on equity for
the Company's shareholders.
FOCUS ON GROWTH
The Company is focused on internal growth in profitable niches in video
conferencing and customer communications, professional image capture solutions
for audio-visual, education, identification and medical markets where it
currently has distribution capabilities. The Company intends to become a
multiple product and service supplier in these markets through internal product
development and through product or service 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 1998. During 1999, the Company has extended that
relationship and will continue to develop others that leverage the existing
skills and technologies.
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.
MAJOR CUSTOMERS
During 1999, no single customer's purchases exceeded 10% of the total
Company revenues.
BACKLOG
Historically the Company typically shipped product within one to two
weeks after receipt of an order, which is common in this industry. Accordingly,
backlog as of any particular date was not representative of actual sales for any
succeeding period. However, due to the Company's business partner program, sales
commitments for future sales always existed. With the acquisition of ACS the
Company now has a firm backlog of orders to be delivered in the future. At
December 31, 1999 the backlog for all divisions amounted to approximately $2.5
million.
9
<PAGE>
CUSTOMER SERVICE
The Company believes that customer service is a critical element in
maintaining strong customer relationships. Customer service includes timely
equipment maintenance, installation support, product training, technical
support, help desks, applications support, and effective operations manuals.
Repair of the Company's camera products is performed at the Company's
manufacturing facility in Golden Valley, Minnesota by trained technicians.
Repair of video conferencing products is performed at customer locations nation
wide.
The Company warrants its camera products for a period of one (1) to
five (5) years (limited) from the date of receipt by the end user or
installation of the systems. 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 camera customers product warranty is generally negotiated
with each customer.
The Company passes on the supplier warranties for products that it
purchases from third parties.
RESEARCH AND DEVELOPMENT
In 1999, the Company's expenses relating to research and development
were $1,083,249. During 1998, the Company's expenses relating to research and
development were $643,643. The Company expenses the related costs to research
and development as they are occurred. The Company's current engineering staff
consists of ten (10) full-time equivalent employees. The Company also contracts
services from mechanical, optical, electrical and software engineers as
required.
Product development efforts are designed to provide new products and
services that meet customer needs and generate revenues equal to 15% of prior
year sales. Additional objectives of product development are to continuously
enhance existing products to extend product life cycles, improve product
quality, reduce time to market of new products and reduce product costs without
cost to quality.
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. 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 patents in the
marketplace. The Company's patents were issued in 1990, 1993, 1995, 1996 and
1998, ranging from fourteen - seventeen year terms. The Company has several
patent applications that are currently pending.
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 product development and frequent product enhancements, and
the Company's name recognition and ongoing reliable product maintenance and
support and the addition of new customer services are believed to be key future
customer service requirements.
EMPLOYEES
As of December 31, 1999, the Company had seventy-seven (77) full-time
employees, including fourteen (14) in manufacturing, purchasing and warehouse,
sixteen (16) in operations, help-desk, and field technicians, twelve (12) in
engineering, product development and warranty repair, twenty-six (26) in sales
and marketing, and nine (9) 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.
10
<PAGE>
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 have 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 headquarters and camera manufacturing 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's ACS Division is located in Plymouth Minnesota. This
location consists of 6,535 square feet of office space, 4,885 square feet of
warehouse. The facility is leased at an annual operating cost of approximately
$134,000 consisting of rent and estimated taxes under a lease that expires on
January 31, 2002.
The Company also leases a manufacturing facility in Maple Grove,
Minnesota under a lease that expires on September 30, 2002. This facility
consists of 7,795 square feet of manufacturing space at an annual cost of
approximately $32,000 rent and estimated taxes.
Sales office leases have been executed for office space in Omaha,
Nebraska for 1,768 square feet expiring March 31, 2001 at an approximate annual
cost of $18,000, in Des Moines, Iowa for 600 square feet on a month-to-month
basis with an approximate annual cost of $10,000, and in Chicago, Illinois for
5,766 square feet expiring on July 31, 2001 at an approximate annual cost of
$49,000.
The Company also had operations in Sunrise, Florida, where the Company
purchased Video Dynamics, Inc. and accepted transfer of their existing lease of
approximately 1,875 square feet of office and research and development lab
space. This lease expired on January 31, 2000 and was not renewed. The annual
rent plus estimated tax costs and estimated annual operating costs were
approximately $34,000. The Company operated its Healthcare Division from this
location. This division has now been incorporated into the VideoLabs Division in
Golden Valley, Minnesota.
The Company's management believes that all properties are adequately
insured.
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, 1999.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
a) Market Information.
11
<PAGE>
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
--- ----
FISCAL YEAR ENDED DECEMBER 31, 1998
- -----------------------------------
Quarter ended March 31, 1998 $1.313 $1.438
Quarter ended June 30, 1998 $1.438 $1.438
Quarter ended September 30, 1998 $0.781 $0.781
Quarter ended December 31, 1998 $0.906 $1.000
FISCAL YEAR ENDED DECEMBER 31, 1999
- -----------------------------------
Quarter ended March 31, 1999 $0.938 $1.063
Quarter ended June 30, 1999 $1.125 $1.250
Quarter ended September 30, 1999 $1.063 $1.125
Quarter ended December 31, 1999 $2.688 $3.313
b) Holders.
As of March 24, 2000 there were approximately 160 record holders of the
Company's Common Stock and approximately 1,900 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, 1999, the Company had total assets of $10,256,755 and net
capital of $5,950,729. 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
not drop below $1.00 for more than 30 consecutive business days in 1999. If the
Company's Common Stock did, NASDAQ would not quote it in the future; it would 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 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.
12
<PAGE>
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 increased 103% from $6,162,986 in
1998 to $12,538,462 in 1999. This sales increase was primarily due to the
acquisition of ACS in August 1999 and growth in its core business. The ACS
Division represented approximately $4.8 million or 38% of the Company's total
sales. Secondly, the Company's sales in foreign markets increased approximately
$700,000, from $1.5 million in 1998 to $2.2 million in 1999. Finally, the
Company attributes the increase in sales to a relationship with certain Original
Equipment Manufacturer ("OEM") customers, including 3M Company. 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, in 1999 co-developed another document camera systems with
3M Company and started shipments in the fourth quarter of 1999. 3M Company was
4% of total sales in 1998 and 5% of total sales for 1999. The Company believes
that 3M Company will continue to contribute to the Company's 2000 revenues.
During 1999, sales in the U.S., Europe, South America and Asia/Pacific
were respectively 83%, 15%, 1% and 1% of total sales. During 1998, sales in the
U.S., Europe, South America and Asia/Pacific were respectively 73%, 24%, 2% and
1% of total sales. The decrease in sales volume in the European Region is
primarily due to an increase in overall sales, which was attributed to the ACS
Division. All of the ACS Division's sales are primarily within the U. S. and
thus increasing the percentage of U.S. sales. Sales in South America continue to
be stagnant, especially within our Healthcare market (see Footnote #15 to
Audited Financial Statements). The sales in the Asia Pacific Region have also
remained stagnant, but the Company has seen a renewed interest in its products
in this region.
The Company's core focus is selling its products through resellers and
distributors into professional markets including education, video conferencing,
audio-visual presentation, security and medical. VideoLabs, Inc. continues to do
business as the Company's VideoLabs Division ("VLAB"). The VLAB Division has
introduced several new products in 1999, including the DocCam Pro, the PTZCam,
the Video View Scan Converter, the MedCam Pro Plus and the acquired furniture
line from ACS. The VLAB Division represented $7.6 million or 60% of the
Company's total sales for 1999. This represents a 25% increase in the Company's
core business over 1998.
Cost of sales primarily consists of materials, direct labor, packaging,
contract manufacturing, tooling and equipment depreciation, and manufacturing
overhead. Cost of sales does not include royalty costs or commission costs
related to the sales of products. Gross profits for the year ending December 31,
1999 were $5,350,226, which was 43% of total sales compared to $2,538,383, which
was 41% of total sales for year ending December 31, 1998. This improvement in
gross margin is attributable to the efficiencies gained by the increase in sales
volume for the company along with a more favorable product mix. The Company has
set goals for 2000 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. The Company's goal is a gross profit margin
of 40%.
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 58% from
$2,849,068 in 1998 to $4,492,838 in 1999. Selling expenses increased from
$1,058,180 in 1998 to $1,373,275 in 1999. This increase in selling expenses is
attributable to acquiring ACS. Research and Development expenses increased from
$643,643 in 1998 to $1,083,249 in 1999. This increase in Research and
Development expenses is attributable to acquiring the ACS and the increase in
new product development. General and administrative expenses increased from
$1,147,245 in 1998 to $2,036,314 in 1999. This increase is attributable to the
acquisition of ACS.
The Company's operating income for the year ending December 31, 1999
was $857,388 compared to an operating loss of $310,685 for the year ending
December 31, 1998. The Company attributes this increase additional sales as a
result of the acquisition of ACS and the Company's core business.
Other income for 1999 consisted of interest income of $54,095 compared
to interest income for 1998 of $94,004 and interest expense for 1999 of $58,753
compared to interest expense of $4,417 for 1998. The interest income consists of
interest earned on the Company's cash and cash equivalents. The interest expense
is from the Company's line of credit that was initiated because of the
acquisition of ACS.
13
<PAGE>
For income tax purposes, the Company had a federal net operating loss
carryforward at December 31, 1999 and 1998 of approximately $496,000 and
$1,758,000, respectively. At December 31, 1999 and 1998, the Company also had a
general business and alternative minimum tax credit carryforward of
approximately $122,000 and $92,000, respectively, 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. In 1999 and 1998, the
Company recorded a deferred tax benefit of $95,000 and $25,000 respectively,
reflecting the partial benefit of $496,000 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 $220,000 of the deferred tax asset will be
realized. The amount of the deferred tax asset considered realizable, however,
could change in the near term if estimates of future taxable income during the
carryforward period change.
The net income for the year ending December 31, 1999 was $878,012
compared to a net loss for the year ending December 31, 1998 of $196,098. Basic
earnings or loss per common share were based on the weighted average number of
shares outstanding for 1999 and 1998 respectively of 4,969,244 and 3,912,319.
Earnings or loss per common share assuming dilution were based on the weighted
average number of shares for 1999 and 1998 respectively of 5,126,053 and
4,008,682. The basic earnings per common share for 1999 was $0.18 per share
compared to a basic loss per common share for 1998 of $0.05 per share. The
earnings per common share assuming dilution for 1999 was $0.17 per share
compared to a loss per common share assuming dilution for 1998 of $0.05 per
share.
LIQUIDITY AND CAPITAL RESOURCES
Working Capital, consisting principally of cash, certificates of
deposit, receivables and inventories, was $3,186,457 at December 31, 1999 and
$3,339,933 at December 31, 1998. The ratio of current assets to current
liabilities was 2:1 at December 31, 1999 and 5:1 at December 31, 1998. Working
Capital ratio decreased because of the liabilities that were acquired from ACS.
Additionally, the Company has available a $2,000,000 revolving note, with an
asset-based lender, secured by substantially all assets, that expires in
September 2001. Interest is computed on actual days elapsed, at an annual rate
equal to 1.5% per annum in excess of the Prime Rate at Norwest Bank of
Minnesota, NA. The note requires a minimum interest rate of 9% per annum, not
less than $7,900 per month. The note is payable on demand. The terms of the note
require the Company to maintain certain ratios with which the Company was in
compliance at December 31, 1999. The amount outstanding under the note was
$670,605 at December 31, 1999.
Inventories at December 31, 1999 were $3,707,528 compared to $1,616,990
for 1998. The Company's inventory level increased because of the initial
purchase of raw materials for one of the new products combined with the
inventory that was acquired from ACS. 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 may be 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. There can be no assurance that
current or future products of the Company will not become obsolete resulting in
inventory write-offs.
Net cash provided by operating activities totaled $244,450 for the year
ended December 31, 1999 compared to net cash used for operating activities
totaling $437,784 for the year ended December 31, 1998. The increase is due
primarily to a net income of $878,012 in 1999.
Net cash used for investing activities totaled $1,194,063 for the year
ending December 31, 1999 compared to cash used for investing activities of
$329,260 for the year ending December 31, 1998. The cash used for investing in
1999 was primarily due to the acquisition of ACS and capital expenditures.
Net cash used for financing activities for the year ending December 31,
1999 was $352,513 compared to net cash provided from financing activities of
$534,677 for the year ended December 31, 1998. The cash provided from financing
for 1998 was primarily the exercising of outstanding warrants less the
repurchase of the Company's common stock. The net cash used for financing
activities for 1999 was primarily attributable to the acquired debt from ACS
that was paid down through the end of the year and 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 1999, approximately 150,000 warrants expired during the year. During
1998, 1,328,501 shares under warrants were exercised raising
14
<PAGE>
approximately $913,000 of additional capital to the Company. During 1999 61,091
shares under warrants were exercised raising approximately 42,000. As of
December 31, 1999 approximately 7,273 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, respectively. During 1999, 62,800 shares at a cost of $64,391 were
purchased. During 1998, 287,731 shares at a cost of $349,567 were purchased.
During 1997, 30,000 shares at a cost of $35,625 were purchased.
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.
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 22-24
Notes to Financial Statements 25-37
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, 1999 and 1998, 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, 1999 and 1998, 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 16, 2000 (except for Note 15 as to which the date is
February 28, 2000)
17
<PAGE>
VIDEOLABS, INC.
Balance Sheet
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
December 31
ASSETS 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 212,435 $ 1,514,561
Certificates of deposit - restricted 158,000 158,000
Accounts receivable
Trade accounts, less allowance for doubtful accounts
of $100,000 in 1999 and $30,000 in 1998 2,894,495 664,172
Other receivables 22,114 6,688
Inventories 3,707,528 1,616,990
Deferred income taxes 220,000 125,000
Prepaid expenses 71,253 50,457
----------- -----------
Total current assets 7,285,825 4,135,868
PROPERTY AND EQUIPMENT
Office and computer equipment 673,749 446,832
Machinery and equipment 325,468 127,391
Tooling 703,541 488,225
Leasehold improvements 52,446 45,016
----------- -----------
1,755,204 1,107,464
Less accumulated depreciation 921,523 638,161
----------- -----------
Net property and equipment 833,681 469,303
OTHER ASSETS
Goodwill, net 1,262,522
Non-compete, net 723,958
Patents, net 150,769 179,340
----------- -----------
Total other assets 2,137,249 179,340
----------- -----------
TOTAL ASSETS $10,256,755 $ 4,784,511
=========== ===========
</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 1999 1998
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES
Non-compete obligation $ 750,000
Line of credit 670,605
Accounts payable 1,446,930 $ 658,089
Current maturities of long-term debt 35,854 22,071
Current maturities of unearned maintenance contracts 520,660
Customer deposits 22,248 6,114
Accrued liabilities
Compensation 411,493 28,358
Income taxes 70,000
Other 96,578 50,443
Warranty 75,000 30,860
------------ ------------
Total current liabilities 4,099,368 795,935
LONG-TERM DEBT, net of current maturities 98,418 24,300
UNEARNED MAINTENANCE CONTRACTS, net of current maturities 108,240
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $.01 par value;
Authorized, 20,000,000 shares
Issued and outstanding, 5,675,440 shares in 1999 and
4,457,471 in 1998 56,754 44,574
Preferred stock, $.01 par value;
Authorized, 5,000,000 shares
No shares issued and outstanding
Additional paid-in capital 7,494,437 6,398,176
Accumulated deficit (1,600,462) (2,478,474)
------------ ------------
Total stockholders' equity 5,950,729 3,964,276
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,256,755 $ 4,784,511
============ ============
</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
1999 1998
- -------------------------------------------------------------------------------------
<S> <C> <C>
SALES $ 12,538,462 $ 6,162,986
COST OF SALES 7,188,236 3,624,603
------------ ------------
GROSS PROFIT 5,350,226 2,538,383
OPERATING EXPENSES
Selling 1,373,275 1,058,180
General and administrative 2,036,314 1,147,245
Research and development 1,083,249 643,643
------------ ------------
Total operating expenses 4,492,838 2,849,068
------------ ------------
OPERATING INCOME (LOSS) 857,388 (310,685)
OTHER INCOME (EXPENSE)
Interest income 54,095 94,004
Interest expense (58,753) (4,417)
Gain on sale of assets 282
------------ ------------
Total other income (expense), net (4,376) 89,587
------------ ------------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT 853,012 (221,098)
INCOME TAX BENEFIT 25,000 25,000
------------ ------------
NET INCOME (LOSS) $ 878,012 $ (196,098)
============ ============
EARNINGS (LOSS) PER COMMON SHARE $ .18 $ (.05)
============ ============
EARNINGS (LOSS) PER COMMON SHARE ASSUMING DILUTION $ .17 $ (.05)
============ ============
</TABLE>
Notes to Financial Statements are an integral part of this Statement.
20
<PAGE>
VIDEOLABS, INC.
Statement of Stockholders' Equity
Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Common Stock Additional
--------------------------- Paid-In Accumulated
Shares Amount Capital Deficit
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
Net income 878,012
Issuance of shares 1,209,678 12,097 1,110,635
Exercise of warrants 61,091 611 41,389
Exercise of options 10,000 100 8,000
Purchase and retirement of stock (62,800) (628) (63,763)
--------- ----------- ----------- -----------
BALANCES - DECEMBER 31, 1999 5,675,440 $ 56,754 $ 7,494,437 $(1,600,462)
========= =========== =========== ===========
</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
1999 1998
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 878,012 $ (196,098)
Adjustments to reconcile net income (loss) to net cash
from (used for) operations:
Depreciation 283,362 170,092
Amortization 109,505 20,660
Provision for (recovery of) losses on accounts receivable 59,768 (4,791)
Gain on sale of assets (282)
Deferred income taxes (95,000) (25,000)
Change in assets and liabilities
Accounts receivable 112,546 94,114
Inventories (726,966) (328,337)
Prepaid expenses 32,405 6,864
Accounts payable (576,684) 345,715
Customer deposits (330,380) (2,966)
Accrued compensation 296,397 (235,863)
Accrued income taxes 70,000
Accrued other (11,329) (293,034)
Warranty 44,140 10,860
Unearned maintenance contracts 98,956
----------- -----------
Net cash from (used for) operating activities 244,450 (437,784)
CASH FLOWS FROM INVESTING ACTIVITIES
Payment for the net operating assets of Acoustic
Communications, Inc., upon merger (1,058,337)
Capital expenditures (440,573) (317,803)
Cash received in acquisitions 304,847 70,710
Purchase of certificates of deposit (158,000) (280,500)
Proceeds from maturities of certificates of deposit 158,000 398,333
Purchase of patents (200,000)
----------- -----------
Net cash used for investing activities (1,194,063) (329,260)
</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
1999 1998
- ------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock and warrants $ 50,100 $ 913,343
Payments on line of credit, net (423,221)
Payments of long-term debt (50,762) (22,368)
Proceeds from long-term debt 135,761
Repurchase of common stock and warrants (64,391) (356,298)
----------- -----------
Net cash from (used for) financing activities (352,513) 534,677
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,302,126) (232,367)
CASH AND CASH EQUIVALENTS - Beginning of Year 1,514,561 1,746,928
----------- -----------
CASH AND CASH EQUIVALENTS - End of Year $ 212,435 $ 1,514,561
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the year for interest $ 58,753 $ 4,417
=========== ===========
Cash paid during the year for taxes $ -- $ --
=========== ===========
</TABLE>
- Continued -
Notes to Financial Statements are an integral part of this Statement.
23
<PAGE>
VIDEOLABS, INC.
Statement of Cash Flows - Continued
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
Years Ended December 31
1999 1998
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Capital lease obligations incurred $ 135,759
Assets and liabilities acquired in exchange for 1,209,678
shares of common stock valued at $1,122,732
Cash $ 304,847
Accounts receivable 2,418,063
Inventories 1,363,572
Prepaid expenses 53,201
Property and equipment 206,885
Accounts payable (1,365,525)
Accrued liabilities (490,716)
Unearned maintenance contracts (529,944)
Debt (1,096,728)
-----------
Net assets acquired 863,655
Goodwill allocated 1,317,414
-----------
Total $ 2,181,069
===========
Assets and liabilities acquired in exchange for 201,418 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>
Notes to Financial Statements are an integral part of this Statement.
24
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS
VideoLabs, Inc. is a provider of products and services for collaboration-based
solutions.
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.
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, 1999 and 1998, the Company has reserves for future inventory
obsolescence due to the risk of technological changes in the industry (see Note
4); it is at least reasonably possible that this estimate could change in the
near term.
The Company has recorded a reserve for product warranties in the amount of
$75,000 and $30,000 in 1999 and 1998, 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 1999 and 1998, the Company recorded a deferred tax benefit of $95,000 and
$25,000, respectively, reflecting the partial benefit of $496,000 and $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.
25
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
REVENUE RECOGNITION
The Company recognizes revenue when it is both realized and earned. Typically,
these conditions are met at the time of product shipment or at the completion of
installation.
The Company recognizes revenue on maintenance contracts in equal amounts over
the life of the contract.
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. The Company's cash accounts are held at two
financial institutions. 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. Maintenance and repairs are expensed as incurred; major
improvements and betterments are capitalized. 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.
AMORTIZATION OF INTANGIBLE ASSETS
Patents are being amortized using the straight-line method over 7 years.
Non-compete agreements are being amortized using the straight-line method over
the life of the agreement. Goodwill, representing the excess cost over net book
value of acquired companies, is being amortized by means of the straight-line
method over 10 years.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to operations when incurred.
26
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
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 $63,400 and $135,800 in 1999 and 1998, 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:
1999 1998
---- ----
Weighted average number of shares used
in basic earnings per share 4,969,244 3,912,319
Effect of dilutive securities:
Stock options 152,869 85,383
Stock warrants 3,940 10,980
--------- ---------
Totals 5,126,053 4,008,682
========= =========
No adjustments were made to income (loss) in either year for the purpose of
calculating earnings (loss) per share.
27
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
2. CONCENTRATIONS
At December 31, 1999 and 1998, the Company has two customers who accounted for
approximately $592,000 and $160,000, respectively, of the outstanding trade
accounts receivable balance.
During 1999 and 1998, the Company had total sales outside the United States of
approximately $2,197,000 and $1,649,000, respectively. Of these amounts
approximately $1,804,000 and $1,419,000, respectively, were sales to customers
in Europe, and $165,000 and $96,000, respectively, were sales to customers in
the Asia/Pacific region, and $74,000 and $134,000, respectively, were sales to
customers in South America and $154,000 and $0, respectively, were sales to
customers in other foreign countries.
In 1999 and 1998, the Company had a supplier from which it made purchases of
approximately $1,229,000 and $1,032,000, respectively. Although no long-term
supply contract exists, the Company believes there are alternative suppliers of
this raw material.
At December 31, 1999 and 1998 the Company had purchase commitments with
suppliers in the amount of $1,032,000 and $605,000, respectively.
3. ACQUISITIONS
ACOUSTIC COMMUNICATION SYSTEMS, INC.
In August 1999, the Company merged with Acoustic Communication Systems, Inc.
(ACS) in exchange for $1,000,000 cash and 1,209,678 shares of restricted common
stock, with a total value of $1,122,732, net of a $377,268 discount, because of
the lack of marketability. Additionally, the Company executed a twelve-year
non-compete agreement for $750,000, with the sole shareholder of ACS. ACS is an
independent provider of collaboration solutions involving data and video
conferencing and a reseller of Picturtel and Polycom communication equipment.
ACS also manufactures several peripheral devices (carts, speakers, furniture,
microphone, etc.) for video based solutions. 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.
28
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
3. ACQUISITION - Continued
VIDEO DYNAMICS, INC.
In April 1998, the Company acquired substantially all the assets of Video
Dynamics, Inc. (VDI) in exchange for 201,418 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. (See Note
15).
The following summarized pro forma (unaudited) information assumes the
acquisitions had occurred on January 1, 1998.
1999 1998
---- ----
Sales $18,691,462 $15,310,428
=========== ===========
Net income (loss) $ 1,018,991 $ (289,256)
=========== ===========
Earnings (loss) per share:
Basic $ .22 $ (.06)
=========== ===========
Diluted $ .22 $ (.06)
=========== ===========
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,
1998, or of future results of operations.
29
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
4. INVENTORIES
Inventories consisted of the following at December 31:
1999 1998
---- ----
Materials $1,636,090 $1,584,447
Work-in-process 138,068
Finished goods, including demonstration units 2,616,078 501,591
---------- ----------
4,252,168 2,224,106
Reserves for inventory obsolescence (544,640) (607,116)
---------- ----------
$3,707,528 $1,616,990
========== ==========
5. NON-COMPETE OBLIGATION
The Company has a $750,000 obligation, which is due in April 2000, to a
shareholder for a twelve year non-compete agreement (See Note 3). The
shareholder has the option to defer payment in whole, or in part for up to
twelve one-year periods. Interest commences to accrue on this obligation upon
the shareholder's first deferral, at the Company's short-term cost of borrowing.
If the obligation is paid in April 2000, no interest is due.
6. LINE OF CREDIT
The Company has available a $2,000,000 revolving note, with an asset-based
lender, secured by substantially all assets, that expires in September 2001.
Interest is computed on actual days elapsed, at an annual rate equal to 1.5% per
annum in excess of the Prime Rate at Norwest Bank of Minnesota, NA. The note
requires a minimum interest rate of 9% per annum, not less than $7,900 per
month. At December 31, 1999 the interest rate was 10%. The note is payable on
demand. The terms of the note require the Company to maintain certain financial
ratios. The amount outstanding under the note was $670,605 at December 31, 1999.
At December 31, 1999 and 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.
30
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
7. LONG-TERM DEBT
Long-term debt consists of the following:
1999 1998
---- ----
Capital lease obligations, at implicit rates from 3% to
9%, payable in installments to 2004. $124,272 $ 4,693
Note payable to Video Dynamics, Inc., interest at New
York prime rate plus 1% (9.5% at December 31, 1999 and
1998), unsecured (Note 15) 10,000 10,000
Note payable to bank, interest at the bank's "index
rate" plus 1% (9.75% at December 31, 1998), secured by
substantially all corporate assets, paid in full during
1999. 31,678
-------- --------
Totals 134,272 46,371
Less amounts due within one year 35,854 22,071
-------- --------
Net long-term debt $ 98,418 $ 24,300
======== ========
Scheduled maturities of long-term debt are as follows at December 31, 1999:
2000 $ 35,854
2001 27,929
2002 28,214
2003 27,580
2004 14,695
--------
Total long-term debt $134,272
========
8. LEASE OBLIGATIONS
The Company leases various items of equipment and vehicles over terms of 3 to 5
years. Equipment and vehicle leases expire at varying dates over the next five
years. The Company also leases office and warehouse facilities in Minnesota,
Florida, Illinois, Nebraska and Iowa; the leases expire from March 2000 to
September 2002. The Company is obligated to pay costs of property taxes and
operating costs under the terms of the office and warehouse leases.
31
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
8. LEASE OBLIGATIONS - Continued
Property and equipment includes the following amounts for capital leases at
December 31:
1999 1998
---- ----
Machinery and equipment $163,085 $40,826
Vehicles 13,500
Accumulated amortization (58,588) (31,356)
-------- --------
Net equipment under capital leases $117,997 $ 9,470
======== ========
At December 31, 1999, 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
------ ------
2000 $279,836 $ 35,030
2001 191,623 35,030
2002 62,193 33,068
2003 30,126
2004 15,063
-------- --------
Total lease commitments $533,652 148,317
========
Less amount representing interest 24,045
--------
Present value of minimum lease payments
(included in long-term debt) $124,272
========
Rental expense for operating leases totaled $170,413 and $112,245 in 1999 and
1998, respectively.
9. STOCKHOLDERS' EQUITY
The Board of Directors has authorized the redemption of up to 1,200,000 shares
of the Company's common stock. During 1999, 62,800 shares at a cost of $64,391
were redeemed and retired. During 1998, 287,731 shares at a cost of $349,567
were redeemed and retired.
32
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
9. STOCKHOLDERS' EQUITY - Continued
The Company has outstanding warrants to issue common stock at $0.69 per share.
The warrants expire in November 2000. Following is a summary of transactions:
Shares Under Warrants
---------------------
1999 1998
---- ----
Outstanding, beginning of year 218,364 2,070,303
Exercised during the year (61,091) (1,328,501)
Expired during the year (150,000) (512,220)
Purchased and retired during the year -- (11,218)
Granted during the year -- --
--------- ----------
Outstanding, end of year 7,273 218,364
========= ==========
At December 31, 1999 and 1998, the Company has reserved 7,273 and 218,364
authorized shares for issuance as warrants are exercised, respectively.
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. In 1999 and 1998, the Plan had authorized 500,000
options for the purchase of Company stock.
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-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1999 and 1998, respectively; dividend yield of 0%
for all years; expected volatility of 87% and 91%; risk-free interest rates of
6.1 and 5.7 percent; and expected lives from three to ten years.
33
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
10. STOCK BASED COMPENSATION - Continued
A summary of the Company's stock option plans as of December 31, 1999 and 1998
and changes during the years ending on those dates is listed below:
<TABLE>
<CAPTION>
1999 1998
------------------------- -------------------------
Weighted- Weighted-
Average Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year 594,500 $1.45 511,000 $1.52
Granted 157,000 1.18 105,500 1.48
Exercised (10,000) .81
Expired -- --
Forfeited (78,500) 1.31 (22,000) 3.13
-------- ----- -------- -----
Outstanding at end of year 663,000 $1.42 594,500 $1.45
======== ===== ======== =====
Options exercisable at year end 470,375 472,720
======== ========
Weighted-average fair value of
options granted during the year $ .84 $ .99
======== ========
</TABLE>
The following table summarizes information about fixed stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
Weighted-Average Wght.-Avg.
Exercise Price Remaining
Number Options -------------------------- ----------------
Price Range Outstanding Exercisable Outstanding Exercisable Contractual Life
----------- ----------- ----------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ .51 - 1.00 403,500 $346,875 $ .88 $ .87 6.9 Years
1.01 - 1.50 190,500 54,500 1.32 1.33 5.2 Years
2.01 - 2.50 49,000 49,000 2.13 2.13 3.5 Years
2.51 - 3.00 20,000 20,000 2.65 2.65 .2 Years
- ------------ ------- -------- ----- ----- ---------
$ .51 - 3.00 663,000 $470,375 $1.15 $1.13 6.0 Years
============ ======= ======== ===== ===== =========
</TABLE>
34
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
10. STOCK BASED COMPENSATION - Continued
The Company has chosen to account for stock based compensation in accordance
with Accounting Principles Board Opinion No. 25. If compensation cost would have
been recognized in accordance with Statement of Financial Accounting Standards
No. 123, compensation cost would have been $48,415 and $38,310 for the years
ended December 31, 1999 and 1998, respectively. The compensation cost would have
decreased net income in 1999 by $31,954 and increased the net loss by $25,285 in
1998. Basic earnings per share would have decreased by $.01 in 1999 and 1998.
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>
1999 1998
----------------------- ------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
<S> <C> <C> <C> <C>
Cash $ 1,077 $ 1,077 $ 8,498 $ 8,498
Money market savings 211,358 211,358 1,506,063 1,506,063
---------- ---------- ---------- ----------
Total cash and
equivalents $ 212,435 $ 212,435 $1,514,561 $1,514,561
========== ========== ========== ==========
Certificates of deposit $ 158,000 $ 158,000 $ 158,000 $ 158,000
Line of credit $ 670,605 $ 670,605 -- --
Long-term debt, exclusive of
capital leases $ 10,000 $ 10,000 $ 41,678 $ 41,678
</TABLE>
The carrying values of cash and equivalents and certificates of deposit
approximate fair values. The fair value of the line of credit and long-term debt
is based on estimates of current rates at which the Company could borrow funds
with similar remaining maturities.
35
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
12. INCOME TAXES
The income tax benefit consists of the following components:
1999 1998
---- ----
Current $ 70,000 $ --
Deferred (95,000) (25,000)
-------- --------
Net income tax benefit $(25,000) $(25,000)
======== ========
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:
1999 1998
---- ----
Federal statutory income tax rate 34.0% (34.0%)
Tax credits (.1) (28.0)
State tax rate 6.6 (2.0)
Permanent differences 2.6 2.0
Valuation allowance (49.9) 46.0
Other items, net 3.9 4.7
----- -----
Effective tax benefit rate (2.9%) (11.3%)
===== =====
The total deferred tax assets and liabilities included in the net deferred tax
asset are as follows:
1999 1998
---- ----
Deferred tax assets (net operating loss and tax
credit carryforwards) $311,000 $722,000
Deferred tax assets (primarily inventory and
unearned maintenance contracts) 480,000 346,000
Deferred tax liabilities (property and equipment) (59,000) (6,000)
Deferred tax asset valuation allowance (512,000) (937,000)
-------- --------
Net deferred tax asset $220,000 $125,000
======== ========
The net decrease in the valuation allowance was $425,000 in 1999, and a net
increase of $95,000 in 1998.
36
<PAGE>
VIDEOLABS, INC.
Notes to Financial Statements
December 31, 1999 and 1998
12. INCOME TAXES - Continued
For income tax purposes, the Company had a federal net operating loss
carryforward at December 31, 1999 and 1998 of approximately $496,000 and
$1,758,000, respectively. At December 31, 1999 and 1998, the Company also had a
general business and alternative minimum tax credit carryforward of
approximately $122,000 and $92,000, respectively, 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
In 1999 the Company executed a three-year employment agreement with an employee
totaling approximately $130,000 per year.
In 1998 the Company executed five-year employment agreements totaling $150,000
per year. (See Note 15)
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 through the open market on a quarterly basis at
the lesser of 85% of the fair market value on the beginning or ending dates of
the period, with the remaining 15% paid for by the Company. During 1999, 18,303
shares were purchased by the Plan. During 1998, no shares were purchased 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 30 and 90
days of service in 1999 and 1998, respectively. The Company contributed $27,586
to the Plan in 1999 and made no contributions in 1998.
15. SUBSEQUENT EVENT
On February 28, 2000, the Company entered into an agreement to sell certain
assets acquired in the Video Dynamics, Inc. (VDI) acquisition, for $108,000,
payable over three years. In addition, the remaining related employment
agreement obligations were terminated as was a $10,000 note payable.
As part of the agreement, the Company will invest $150,000, for a 20% ownership,
in MedCam Technology, Inc., a new company begun by the VDI founders. In
addition, a three-year reseller agreement was executed with MedCam Technology,
Inc., which entitles the Company to a 5% royalty on non-intercompany sales of
the MedCam Pro and MedCam Pro Plus products.
37
<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.
Report of Independent Auditors.
Balance Sheet - December 31, 1999 and 1998.
Statement of Operations - Years Ended December 31, 1999 and 1998.
Statement of Stockholders' Equity - Years Ended December 31, 1999
and 1998.
Statement of Cash Flows - Years ended December 31, 1999 and 1998.
Notes to Financial Statements.
Financial Data Schedule.
2. Financial Statement Schedules: The following financial statement
schedules of the Company for the fiscal year ended December 31, 1999 are filed
as part of this Report and should be read in conjunction with the Financial
Statements of the Company.
None
38
<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
(10)(xxiv) Acoustic Communication Systems, Inc.
Agreement and Plan of Merger - filed
herewith
(10)(xxv) Robin Sheeley Employment Agreement - filed
herewith
(10)(xxvi) Robin Sheeley Noncompetition Agreement
- filed herewith
(10)(xxvii) Registration 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 24, 2000
39
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints James W. Hansen and Jill R. Larson,
jointly and severally, attorneys-in-fact, each with the power of substitution,
for any and all capacities, to sign any amendments to this Report on Form
10-KSB, and to file the same, with exhibits thereto and all documents in
connection therewith, with the Securities and Exchange Commission, hereby
ratifying and confirming all that each said attorneys-in-fact, or his substitute
or substitutes, may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/James W. Hansen
- -----------------------
James W. Hansen President, Treasurer March 24, 2000
Chief Executive Officer, Director
and Chairman of the Board of Directors
/s/ Robin Sheeley
- -----------------------
Robin Sheeley Chief Technical Officer and Director March 24, 2000
/s/ Richard F. Craven
- -----------------------
Richard F. Craven Director March 24, 2000
/s/ Peter McDonnell
- -----------------------
Peter McDonnell Director March 24, 2000
40
EXHIBIT 10.24
AGREEMENT AND
PLAN OF MERGER
OF
ACOUSTIC COMMUNICATION SYSTEMS, INC.
A CORPORATION OWNED BY ROBERT SHEELEY
INTO
VL ACQUISITION CO.
A CORPORATION OWNED BY VIDEOLABS, INC.
DATED: MAY 17, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1 THE MERGER.................................................................................. 1
1.1 The Merger.................................................................................. 1
1.2 Effective Time; Effect of the Merger........................................................ 1
1.3 Articles of Incorporation; Bylaws........................................................... 2
1.4 Directors and Officers...................................................................... 2
1.5 Conversion of Securities.................................................................... 2
1.6 Stock Transfer Records...................................................................... 3
1.7 Merger Consideration........................................................................ 3
1.8 Required Net Equity......................................................................... 3
1.9 Surrender of Certificates................................................................... 4
ARTICLE 2 THE CLOSING................................................................................. 4
2.1 Time and Place of the Closing............................................................... 4
2.2 Deliveries by the Seller.................................................................... 5
2.3 Deliveries by the Buyer..................................................................... 5
ARTICLE 3 REPRESENTATIONS AND WARRANTIES CONCERNING THE
SELLER...................................................................................... 6
3.1 Capacity of the Seller...................................................................... 6
3.2 Enforceability.............................................................................. 6
3.3 Noncontravention............................................................................ 6
3.4 Brokers' Fees............................................................................... 7
3.5 Shares...................................................................................... 7
3.6 Investment Intent........................................................................... 7
ARTICLE 4 REPRESENTATIONS AND WARRANTIES CONCERNING THE
COMPANY..................................................................................... 7
4.1 Organization, Qualification, and Authorization.............................................. 8
4.2 Capitalization; Investments................................................................. 8
4.3 Noncontravention............................................................................ 9
4.4 Brokers' Fees............................................................................... 9
4.5 Title to Assets............................................................................. 9
4.6 Financial Statements........................................................................ 9
4.7 Subsequent Events........................................................................... 10
4.8. Legal Compliance............................................................................ 12
4.9 Tax Matters................................................................................. 12
4.10 Real Property............................................................................... 12
4.11 Intellectual Property....................................................................... 13
4.12 Tangible Assets............................................................................. 14
4.13 Contracts................................................................................... 14
4.14 Notes and Accounts Receivable............................................................... 15
</TABLE>
i
<PAGE>
<TABLE>
<S> <C> <C>
4.15 Powers of Attorney.......................................................................... 15
4.16 Litigation.................................................................................. 15
4.17 Employees................................................................................... 15
4.18 Employee Benefit Plans...................................................................... 15
4.19 Guaranties and Warranties................................................................... 18
4.20 Permits..................................................................................... 18
4.21 Environmental Compliance.................................................................... 18
4.22 Customers................................................................................... 19
4.23 Insurance................................................................................... 19
4.24 Transactions with Affiliates................................................................ 19
4.25 No Undisclosed Liabilities.................................................................. 19
4.26 Interest in Similar Businesses.............................................................. 19
4.27 Year 2000 Compliance........................................................................ 19
4.28 Disclosure.................................................................................. 20
ARTICLE 5 REPRESENTATIONS AND WARRANTIES CONCERNING THE
BUYER....................................................................................... 20
5.1 Organization, Qualification, and Authorization.............................................. 20
5.2 Capitalization.............................................................................. 20
5.3 Authorization and Enforceability............................................................ 21
5.4 Noncontravention............................................................................ 21
5.5 Brokers' Fees............................................................................... 21
5.6 Reports and Financial Statements............................................................ 21
ARTICLE 6 COVENANTS................................................................................... 22
6.1 General..................................................................................... 22
6.2 Transition.................................................................................. 23
6.3 Confidentiality............................................................................. 23
6.4 Conduct of Business......................................................................... 23
6.5 Reasonable Efforts.......................................................................... 24
6.6 Exclusive Dealing........................................................................... 24
6.7 Access to Records........................................................................... 24
6.8 Notice of Events............................................................................ 25
6.9 Shareholder Approval........................................................................ 25
6.10 Dissolution of Components................................................................... 25
6.11 Tax Matters................................................................................. 25
ARTICLE 7 CONDITIONS TO OBLIGATION TO CLOSE........................................................... 26
7.1 Conditions to Obligation of the Buyer....................................................... 26
7.2 Conditions to Obligation of the Seller...................................................... 27
ARTICLE 8 TERMINATION................................................................................. 28
8.1 Termination Rights.......................................................................... 28
8.2 Effect of Termination....................................................................... 28
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE 9 REMEDIES.................................................................................... 29
9.1 Survival of Representations, Warranties and Covenants....................................... 29
9.2 Indemnification Provisions for benefit of the Buyer......................................... 29
9.3 Indemnification Provisions for Benefit of the Seller........................................ 29
9.4 Matters Involving Third Parties............................................................. 29
9.5 Other Indemnification Limitations........................................................... 30
9.6 Indemnification Holdback Escrow............................................................. 31
9.7 Dispute Resolution.......................................................................... 31
ARTICLE 10 GENERAL PROVISIONS.......................................................................... 32
10.1 Press Releases and Public Announcements..................................................... 32
10.2 No Third-Party Beneficiaries................................................................ 32
10.3 Entire Agreement............................................................................ 32
10.4 Succession and Assignment................................................................... 32
10.5 Counterparts and Facsimile Delivery......................................................... 32
10.6 Headings.................................................................................... 32
10.7 Notices..................................................................................... 32
10.8 Governing Law............................................................................... 34
10.9 Amendments and Waivers...................................................................... 34
10.10 Severability................................................................................ 34
10.11 Expenses.................................................................................... 34
10.12 Construction................................................................................ 34
</TABLE>
iii
<PAGE>
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER ("Agreement") is made and
entered into effective as of this 17th day of May, 1999, by and among
VideoLabs, Inc., a Delaware corporation (the "Buyer"), VL Acquisition Co., a
Delaware corporation formed by Buyer ("Merger Subsidiary"), Robin Sheeley, a
resident of Minnesota (the "Seller"), and Acoustic Communication Systems, Inc.,
a Minnesota corporation (the "Company"). All of the parties to this Agreement
are sometimes individually referred to as a "Party" and collectively as the
"Parties".
WHEREAS, the Company is in the business of providing equipment,
software or services that meet the data, voice or video communications
requirements of customers in Minnesota, Iowa, Nebraska, North Dakota, South
Dakota and Wisconsin (the "Business"); and
WHEREAS, the Seller owns one hundred percent (100%) of the issued and
outstanding shares of stock of the Company; and
WHEREAS, the Parties desire to enter into this Agreement pursuant to
which the Company will merge with and into the Merger Subsidiary and the Company
shall become a wholly owned subsidiary of the Buyer all upon the terms and
conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants, conditions, representations and warranties set forth in this
Agreement, and for other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
ARTICLE 1
THE MERGER
1.1 THE MERGER. Upon and subject to the terms and conditions of this
Agreement, and in accordance with the corporate laws of the States of Delaware
and Minnesota ("Corporate Law"), at the Effective Time (as hereinafter defined),
the Company shall be merged with and into the Merger Subsidiary (the "Merger").
As a result of the Merger, the separate corporate existence of the Company shall
cease and the Merger Subsidiary shall continue after the Merger as the surviving
corporation (the "Surviving Corporation").
1.2 EFFECTIVE TIME; EFFECT OF THE MERGER. The Merger shall become
effective immediately upon the filing of the Certificate of Merger (as defined
in Section 2.3(d) hereof) with the Secretary of State of the State of Delaware
in accordance with Corporate Law or such later effective time as the Parties may
agree to specify in the Certificate of Merger (the "Effective Time"). At the
Effective Time, the effect of the Merger shall be as provided in the applicable
provisions of Corporate Law. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time all the property, rights, privileges,
powers and
<PAGE>
franchises of the Company and Merger Subsidiary shall vest in the Surviving
Corporation, and all debts, liabilities, obligations, restrictions, disabilities
and duties of each of the Company and Merger Subsidiary shall become the debts,
liabilities, obligations, restrictions, disabilities and duties of the Surviving
Corporation.
1.3 ARTICLES OF INCORPORATION; BYLAWS.
(a) At the Effective Time, the Articles of Incorporation of
Merger Subsidiary, as in effect immediately prior to the Effective
Time, shall be the Articles of Incorporation of the Surviving
Corporation until thereafter amended as provided by law and such
Articles of Incorporation; provided, however, that, at the Effective
Time, Article 1 of the Articles of Incorporation of the Surviving
Corporation shall be amended to read as follows: "The name of the
corporation is Acoustic Communication Systems, Inc."
(b) At the Effective Time, the Bylaws of Merger Subsidiary,
as in effect immediately prior to the Effective Time, shall be the
Bylaws of the Surviving Corporation until thereafter amended as
provided by law, the Articles of Incorporation of the Surviving
Corporation or such Bylaws.
1.4 DIRECTORS AND OFFICERS. The directors of Merger Subsidiary
immediately prior to the Effective Time shall be the initial directors of the
Surviving Corporation, each to hold office in accordance with the Articles of
Incorporation and Bylaws of the Surviving Corporation, and the officers of the
Company immediately prior to the Effective Time shall be the initial officers of
the Surviving Corporation, in each case until their respective successors are
duly elected or appointed and qualified.
1.5 CONVERSION OF SECURITIES. At the Effective Time, by virtue of the
Merger and without any action on the part of Buyer, Merger Subsidiary, the
Company, the Seller or the holders of any of the following securities:
(a) Each share of Common Stock of Merger Subsidiary issued
and outstanding immediately prior to the Effective Time shall not be
affected and shall remain as a validly issued, fully paid and
nonassessable share of Common Stock of the Surviving Corporation.
(b) Each share of Company stock issued and outstanding
immediately prior to the Effective Time (all such issued and
outstanding stock of the Company being hereinafter referred to
collectively as the "Converted Shares" and individually as a "Converted
Share") shall be canceled and shall be converted automatically into the
right to receive a portion of the Merger Consideration, which shall be
payable to the holder of such Converted Share upon surrender of the
certificate that formerly evidenced such Converted Share in the manner
provided in Section 1.9.
2
<PAGE>
(c) Each share of Company stock held in the treasury of the
Company immediately prior to the Effective Time shall be cancelled and
extinguished without any conversion thereof and no payment shall be
made with respect thereto.
(d) Each share of common stock held in the treasury of
Merger Subsidiary immediately prior to the Effective Time shall be
cancelled and extinguished without any conversion thereof and no
payment shall be made with respect thereto.
(e) From and after the Effective Time, the holders of
certificates representing shares of Company stock outstanding
immediately prior to the Effective Time shall cease to have any rights
with respect to such shares except as otherwise provided herein or by
Corporate Law.
1.6 STOCK TRANSFER RECORDS. The Parties acknowledge and agree that the
Company shall establish the date of this Agreement as the record date (the
"Record Date") and shall close the stock transfer books of the Company as of
such date. Between the Record Date and the Effective Time, there shall be no
further registration of transfers of Company Stock on the records of the
Company. The holders of Converted Shares registered on the stock records as of
the Record Date (which is the Seller) shall be the holders entitled to receive
the Merger Consideration under this Agreement.
1.7 MERGER CONSIDERATION. Subject to reduction as hereinafter provided,
the aggregate consideration payable for all Converted Shares (collectively, the
"Merger Consideration") shall be equal to the sum of the following:
(a) an amount of cash equal to One Million Dollars
($1,000,000); PLUS
(b) delivery of that number of shares of fully paid,
nonassessable, common stock, par value $.01 per share, of the Buyer
("the "Buyer's Stock"), which equals, in the aggregate, $1,500,000,
based on a price per share equal to the average of the closing bid and
asked prices of the Buyer's common stock as reported on the National
Association of Securities Dealers Automated Quotation ("NASDAQ") System
Small Cap Market, during the ten trading days ending on the trading day
immediately preceding the Closing Date.
1.8 REQUIRED NET EQUITY.
(a) The Seller acknowledges that the Merger Consideration
has been determined assuming a net equity level of the Company as of
the Closing Date at least equal to the Company's net equity level as of
December 31, 1998 (the "Minimum Equity Level") as reflected on the
audited Financial Statements (as hereafter defined). Not less than two
(2) business days prior to the Closing Date, Seller shall deliver to
Buyer a balance sheet of the Company, dated as of the Closing Date (the
"Pre-Closing Balance Sheet"), prepared in accordance with GAAP (as
hereafter defined), consistently applied, projecting the net equity of
the Company as of the Closing Date.
3
<PAGE>
The Pre-Closing Balance Sheet shall be certified by the Seller to be
true, correct and complete in all respects to the best of Seller's
knowledge and belief, and shall be accompanied by sufficient detail to
enable the Buyer to verify the account balances. During such two (2)
day period, the Buyer shall have the opportunity (but shall not be
required) to audit or otherwise verify the information on the
Pre-Closing Balance Sheet, and the same shall be adjusted for any
errors therein determined by the Buyer.
(b) In the event the net equity reflected on the Pre-Closing
Balance Sheet is less than the Minimum Equity Level as of the Closing
Date (an "Equity Deficiency"), the cash portion of the Merger
Consideration shall be reduced, dollar-for-dollar, by the amount of the
Equity Deficiency. In the event the net equity reflected on the Pre-
Closing Balance Sheet is more than the Minimum Equity Level as of the
Closing Date (an "Equity Surplus"), the Merger Consideration will not
be increased.
(c) During the nine (9) months following the Closing Date,
the Buyer may audit and otherwise verify the accuracy of the
Pre-Closing Balance Sheet. Any errors (failure to be in accordance with
GAAP) in the Pre-Closing Balance Sheet determined by Buyer shall be
reconciled between the Parties pursuant to the provisions of Article 9.
After such nine (9) month period, neither party may seek
indemnification for additional errors under Article 9.
(d) As security for the repayment of any additional Equity
Deficiency, Buyer shall be able to offset the deficiency against any
payments required under the Noncompetition Agreement.
1.9 SURRENDER OF CERTIFICATES. Promptly after the Effective Time, the
Seller shall surrender to the Surviving Corporation one or more stock
certificates representing all of the Converted Shares (the "Certificate"),
together with any reasonably requested letter of transmittal (consistent with
this Agreement), duly completed and validly executed in accordance with the
instructions thereto, and such other documents as may be reasonably required
pursuant to such instructions, which Certificate shall then be canceled by the
Surviving Corporation and the Seller shall be entitled to receive the Merger
Consideration.
ARTICLE 2
THE CLOSING
2.1 TIME AND PLACE OF THE CLOSING. Upon the terms and subject to the
conditions contained in this Agreement, the closing of the Merger contemplated
by this Agreement shall occur at a closing (the "Closing") to take place at the
offices of Hinshaw & Culbertson, Suite 3100, 222 South Ninth Street,
Minneapolis, MN 55402, commencing at 9:00 a.m. local time, on the first business
day following the satisfaction or waiver of all conditions to the obligations of
the Parties to consummate the transactions contemplated herein (other than
conditions with respect to actions the respective Parties will take at the
Closing itself) or such other time and date as the Buyer and the Seller may
mutually determine (the "Closing Date").
4
<PAGE>
2.2 DELIVERIES BY THE SELLER. Upon the terms and subject to the
conditions contained in this Agreement, the Seller shall make, or cause to be
made, the following deliveries to the Buyer at the Closing:
(a) Certificate(s) representing the Converted Shares owned
by Seller, tendered for cancellation as of the Effective Time as
provided herein;
(b) Releases, in favor of Company, from Seller and in form
and substance acceptable to the Buyer;
(c) All stock record books, minute books and corporate
seals, if any, of Company;
(d) All files, books, records and correspondence of Company
in the possession of Seller;
(e) The Seller's Certificate pursuant to Section 7.1(e) of
this Agreement, duly executed by the Seller;
(f) An opinion of counsel to the Seller, dated the Closing
Date, and substantially in the form attached hereto as Exhibit 2.2(f);
(g) The Articles of Merger, in substantially the form
attached hereto as Exhibit 2.2(g), duly executed by the Company;
(h) The Seller's Employment Agreement and the Seller's
Noncompetition Agreement, in substantially the forms attached hereto as
Exhibit 2.2(h), in each case duly executed by the Seller; and
(i) Such other documents, opinions and certificates as may
be required under this Agreement or reasonably requested by the Buyer.
2.3 DELIVERIES BY THE BUYER. Upon the terms and subject to the
conditions contained in this Agreement, the Buyer shall make, or cause to be
made, the following deliveries to the Seller at the Closing:
(a) The Merger Consideration due from Buyer to the Seller
pursuant to Section 1.7 hereunder shall be delivered to the Seller at
the Closing;
(b) The Buyer's Certificate pursuant to Section 7.2(d) of
this Agreement, duly executed by the appropriate officer of Buyer;
(c) An opinion of counsel to the Buyer, dated the Closing
Date, and substantially in the form attached hereto as Exhibit 2.3(c);
5
<PAGE>
(d) The Articles of Merger, in substantially the form
attached hereto as Exhibit 2.2(g), and the Certificate of Merger, in
substantially the form attached hereto as Exhibit 2.3(d), each duly
executed by the Merger Subsidiary;
(e) The Seller's Employment Agreement and the Seller's
Noncompetition Agreement, in substantially the forms attached hereto as
Exhibit 2.2(h), in each case duly executed by the Buyer;
(f) The Registration Agreement, in substantially the form
attached hereto as Exhibit 2.3(f), duly executed by the Buyer; and
(g) Such other documents, opinions and certificates as may
be required under this Agreement or reasonably requested by the Seller.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES
CONCERNING THE SELLER
As a material inducement to the Buyer entering into this Agreement, the
Seller hereby represents and warrants to the Buyer and the Merger Subsidiary the
following, in each case as of the date of this Agreement and the Closing Date,
unless otherwise specifically provided:
3.1 CAPACITY OF THE SELLER. The Seller is a Minnesota resident, and has
the full legal right, power, capacity and authority to execute and deliver this
Agreement and to perform the Seller's respective obligations hereunder.
3.2 ENFORCEABILITY. This Agreement constitutes the valid and legally
binding obligation of the Seller, enforceable against the Seller in accordance
with its terms, except as enforcement may be limited by bankruptcy, insolvency,
moratorium and other similar laws affecting the rights of creditors generally
and except for limitations imposed by general principles of equity. The Seller
need not give any notice to, make any filing with, or obtain any authorization,
consent, or approval of any government or governmental agency in order to
consummate the transactions contemplated by this Agreement.
3.3 NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, directive or ruling of any government, government agency, or
court to which the Seller is subject; or (ii) conflict with, result in a breach
of, constitute a default under, result in the acceleration of, create in any
party the right to accelerate, terminate, modify, or cancel, or require any
notice under any agreement, contract, lease, license, permit, instrument, or
other arrangement to which the Seller is a party or by which he is bound or to
which any of his assets is subject.
6
<PAGE>
3.4 BROKERS' FEES. The Seller has no liability or obligation to pay any
fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement for which the Buyer or the Company
could become liable or obligated.
3.5 SHARES. The Seller holds of record and owns beneficially the number
of shares set forth on Schedule 3.5 of the Disclosure Schedule heretofore
delivered to the Buyer (the "Disclosure Schedule") hereto constituting one
hundred percent (100%) of the issued and outstanding equity securities of the
Company and the voting and investment power of the Company, free and clear of
any restrictions on transfer, liens, pledges, security interests, options,
warrants, purchase rights, contracts, commitments, equities, claims, and demands
of any kind, nature or description, whatsoever. The Seller is not a party to any
option, warrant, purchase right, or other contract or commitment that could
require the Seller to sell, transfer, or otherwise dispose of any capital stock
of the Company (other than this Agreement). The Seller is not a party to any
voting trust, proxy, or other agreement or understanding with respect to the
voting of any capital stock of the Company.
3.6 INVESTMENT INTENT. The Seller acknowledges that the Buyer's Stock
has not been registered under the Securities Act of 1933, as amended (the
"Securities Act") or any state securities laws, and is being offered and sold in
reliance upon federal and state exemptions for transactions from such
registration. The Seller has such knowledge and experience in financial and
business matters that the Seller is capable of evaluating the merits and risks
of the Buyer's Stock in connection with this Agreement. The Seller has received
information concerning the Buyer and has had the opportunity to obtain
additional information as desired by Seller in order to evaluate the merits and
the risks inherent in holding the Buyer's Stock. The Seller is able to bear the
economic risk and lack of liquidity inherent in holding the Buyer's Stock for an
indefinite period. The Seller is acquiring the Buyer's Stock for investment and
not with a view toward or for sale or distribution thereof within the meaning of
the Securities Act, or with any intention of distributing or selling the Buyer's
Stock within the meaning of the Securities Act. The Seller acknowledges and
agrees that after the Closing, the Buyer's Stock may be not sold, transferred,
offered for sale, pledged, hypothecated or otherwise disposed of without
registration under the Securities Act and any applicable state securities laws,
except pursuant to an exemption from such registration available under the
Securities Act or such state securities laws. Seller acknowledges that legends
will be place on the certificates evidencing the Buyer's Stock referring to the
applicable restrictions on transferability of the Buyer's Stock. Seller
represents that he is a bona fide resident of the State of Minnesota.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
CONCERNING THE COMPANY
As a material inducement to the Buyer entering into this Agreement,
each of the Seller and the Company, jointly and severally, hereby represents and
warrants to the Buyer and the Merger Subsidiary the following (except as may be
otherwise disclosed on the Disclosure
7
<PAGE>
Schedule), in each case as of the date of this Agreement and the Closing Date,
unless otherwise specifically provided:
4.1 ORGANIZATION, QUALIFICATION, AND AUTHORIZATION. The Company is a
corporation duly organized, validly existing, and in good standing under the
laws of the State of Minnesota. The Company is duly authorized to conduct
business and is in good standing under the laws of each jurisdiction where such
qualification is required except where any failure to be so qualified would not
have a material adverse effect on the business or the assets or the financial
condition or the results of operations of the Company, in each case taken as a
whole (a "Material Adverse Effect"). The Company has full corporate power and
authority and all licenses, permits, and authorizations necessary to carry on
its business as currently conducted by it and to own and use the properties
owned and used by it. The Company has taken all corporate action which is
necessary to authorize the execution and delivery of this Agreement and the
consummation by the Company of the transactions contemplated herein. The Seller
has delivered to the Buyer correct and complete copies of the articles of
incorporation and bylaws of the Company (as amended to date). The minute books
(containing the records of meetings of the stockholders, the board of directors,
and any committees of the board of directors), the stock certificate books, and
the stock record books of the Company are correct and complete in all material
respects. Schedule 4.1 of the Disclosure Schedule lists all of the officers and
directors of the Company. The Company is not in violation of any provision of
its articles of incorporation or bylaws.
4.2 CAPITALIZATION; INVESTMENTS.
(a) The authorized capital stock of the Company, the total
number of shares of each class issued and outstanding, the record owner
of all such shares and the number of shares held in the treasury of the
Company, are each set forth on Schedule 4.2 of the Disclosure Schedule.
All of the issued and outstanding shares of capital stock of the
Company have been duly authorized, are validly issued, fully paid, and
nonassessable, and were not issued in violation of any preemptive
rights. There are no outstanding or authorized options or option plans,
warrants, purchase rights, subscription rights, conversion rights,
exchange rights, or other contracts or commitments that could require
the Company to issue, sell, or otherwise cause to become outstanding
any additional shares of its capital stock. There are no outstanding or
authorized stock appreciation, phantom stock, profit participation, or
similar rights with respect to the capital stock of the Company. There
are no voting trusts, proxies, or other agreement or understandings
with respect to the voting of the capital stock of the Company owned by
Seller.
(b) The Company does not, directly or indirectly, own any
shares or have any other equity interest or option or other contractual
right to acquire the same in any other person or entity or is a member,
partner or joint venturer with any other such person or entity.
8
<PAGE>
(c) Acoustic Components, Inc. ("Components") is a Minnesota
corporation formed by Seller. Components currently has no assets or
property of any kind, and has never had any assets or property or
conducted any business or operations.
4.3 NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, directive or ruling of any government, governmental agency, or
court to which the Company is subject, or any provision of the articles of
incorporation or bylaws of the Company; or (ii) conflict with, result in a
breach of, constitute a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify, or cancel, or require any
notice under any agreement, contract, lease, license, permit, instrument, or
other arrangement to which the Company is a party or by which it is bound or to
which any of its assets is subject (or result in the imposition of any security
interest or similar lien upon any of its assets). Except as set forth on
Schedule 4.3 of the Disclosure Schedule the Company is not required to give any
notice to, make any filing with, or obtain any authorization, consent, or
approval of any government, governmental agency or party to any material
contract to which the Company is a party or by which its assets are bound, in
order to consummate the transactions contemplated by this Agreement.
4.4 BROKERS' FEES. The Company has no liability or obligation to pay
any fees or commissions to any broker, finder, or agent with respect to the
transactions contemplated by this Agreement and has entered into no agreement to
become so liable or obligated.
4.5 TITLE TO ASSETS. Except as disclosed in Schedule 4.5 of the
Disclosure Schedule, the Company has good title to, or a valid leasehold or
license interest in, the properties and assets used by it in the conduct of its
business as currently conducted, and/or shown on the Balance Sheet of the
Company dated as of March 31, 1999 (the "Most Recent Balance Sheet") or acquired
after the date thereof, free and clear of all security interests, mortgages,
liens, or similar encumbrances ("Security Interests") of any kind, except for
properties and assets disposed of in the ordinary course of business since the
date of the Most Recent Balance Sheet.
4.6 FINANCIAL STATEMENTS. Included in Schedule 4.6 of the Disclosure
Schedule are the following financial statements for the Company (collectively
the "Financial Statements"): (a) an audited Balance Sheet and Statement of
Income and Cash Flow as of and for the fiscal years ended December 31, 1998,
1997 and 1996; and (b) an unaudited Balance Sheet and Statement of Income for
the interim three months ended March 31, 1999. Except as set forth in Schedule
4.6 of the Disclosure Schedule, the Financial Statements have been prepared in
accordance with generally accepted accounting principles ("GAAP") consistently
applied, present fairly in all material respects the financial condition of the
Company as of
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such dates and the results of its operations and cash flows for such periods,
and are consistent with the books and records of the Company; provided, however,
that the interim financial statements are subject to normal year-end adjustments
(which will not be material individually or in the aggregate) and the lack of
footnotes and other presentation items. No event has occurred since the date of
the Most Recent Financial Statement that would adversely affect the previous
sentence.
4.7 SUBSEQUENT EVENTS. Except as disclosed in Schedule 4.7 of the
Disclosure Schedule, since the date of the Most Recent Balance Sheet, there has
not been any change affecting the business, operations, financial condition,
results of operations or assets of the Company that has had a Material Adverse
Effect on the Company. Without limiting the generality of the foregoing, since
that date, except as disclosed in Schedule 4.7 of the Disclosure Schedule or
otherwise permitted in this Agreement:
(a) the Company has not sold, leased, transferred, disposed,
or assigned any of its material assets, tangible or intangible, other
than for a fair consideration in the ordinary course of business;
(b) the Company has not entered into any agreement,
contract, lease, or license which is currently in effect (or series of
related agreements, contracts, leases, and licenses which are currently
in effect) outside the ordinary course of business;
(c) no party (including the Company) has accelerated,
terminated, modified, or canceled any material agreement, material
contract, material lease, or material license (or series of related
material agreements, material contracts, material leases, and material
licenses) to which the Company is a party or by which it is bound;
(d) the Company has not imposed any Security Interest upon
any of its assets, tangible or intangible;
(e) the Company has not made any capital expenditure (or
series of related capital expenditures) in excess of $50,000 outside
the ordinary course of business;
(f) the Company has not made any capital investment in, any
loan to, or any acquisition of the securities or assets of, any other
person (or series of related capital investments, loans, and
acquisitions) outside the ordinary course of business;
(g) the Company has not issued any note, bond, or other debt
security or created, incurred, assumed, or guaranteed any indebtedness
for borrowed money or capitalized lease obligation, and the Company has
not incurred any material obligation or liability, absolute, accrued,
contingent or otherwise, whether or not due or to become due, except in
the ordinary course of business, or incurred any liability or
obligation to the Seller other than for normal compensation in
accordance with past practices;
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(h) the Company has not delayed or postponed the payment of
accounts payable or other liabilities outside the ordinary course of
business or written off as uncollectible, compromised, canceled or
waived or released any claim of the Company to, any debt, note or
account receivable, except write-offs in the ordinary course of
business and consistent with the Company's past practices;
(i) there has been no change made or authorized to the
articles of incorporation or bylaws of the Company;
(j) the Company has not issued, sold, or otherwise disposed
of any of its capital stock, or granted any options, warrants, or other
rights to purchase or obtain (including upon conversion, exchange, or
exercise) any of its capital stock, purchased or redeemed any shares of
its capital stock or made any distributions to the Seller with respect
to its capital stock;
(k) the Company has not experienced any material damage,
destruction, or loss (whether or not covered by insurance) to its
property except for ordinary wear and tear;
(l) the Company has not made any loan to, or entered into
any other transaction with, any of its directors, officers, and
employees outside the ordinary course of business;
(m) the Company has not entered into any employment contract
or collective bargaining agreement, written or oral, or modified the
terms of any existing such contract or agreement, other than at-will
retention or termination of non-executive employees in the ordinary
course of business;
(n) the Company has not granted any increase in the base
compensation of any of, nor made any other changes in the terms of
employment of, its officers or employees outside the ordinary course of
business;
(o) the Company has not adopted, amended, modified, or
terminated any bonus, profit-sharing incentive, severance, or other
plan, contract, or commitment for the benefit of any of its directors,
officers, and employees (or taken any such action with respect to any
other benefit plan);
(p) the Company has not received any written or oral
communication terminating or threatening the termination of or
otherwise materially modifying any material business relationships or
material written agreements between the Company and any of its
customers or suppliers; and
(q) the Company has not agreed or promised to do any of the
foregoing.
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4.8. LEGAL COMPLIANCE. The Company is in material compliance with, has
not violated and is not in violation of, any and all laws, rules and regulations
of federal, state, local and foreign governments (and all agencies thereof)
applicable to the Company or its businesses, and with all judgments, orders,
injunctions and decrees applicable to the Company or its properties.
4.9 TAX MATTERS.
(a) The Company has filed or caused to be filed all tax
returns that are required to be filed by or that include the Company,
and has made all such filings on a timely basis. All such tax returns
were prepared in accordance with applicable laws and regulations. All
taxes owed (whether by Seller or the Company) with respect to the
Company (whether or not shown on any tax return) and which are or were
due and payable have been paid.
(b) The Company has withheld and paid all taxes required to
have been withheld and paid in connection with amounts paid or owing to
any employee, independent contractor, creditor, stockholder, or other
third party.
(c) The Company is not, and has not been, a member of an
affiliated group filing a consolidated, combined or unitary tax return,
or is a party to any tax sharing, allocation, indemnification or
similar agreement under which the Buyer or the Company could be liable
for any taxes or other claims of any person after the Closing Date.
(d) There is no action, suit, proceeding, investigation,
audit, or claim now pending or, to the knowledge of the Seller,
threatened by any governmental authority regarding any taxes relating
to the Company.
(e) Neither the Seller nor the Company has, as of the
Closing Date, (A) entered into an agreement or waiver or been requested
to enter into any agreement or waiver extending any statute of
limitations relating to the payment or collection of any taxes with
respect to the Company, or (B) applied for and not yet received a
ruling or determination from a taxing authority regarding a past or
prospective transaction of the Company.
(f) Neither the Seller nor the Company has received notice
that any jurisdiction has asserted that any tax return currently is
required to be filed by or with respect to the Company in any
jurisdiction where any such tax return is not currently being filed.
4.10 REAL PROPERTY. Schedule 4.10 of the Disclosure Schedule contains a
complete list of all real property in which the Company may claim an ownership
or leasehold interest as of the date of this Agreement (collectively, the "Real
Property"). Except as disclosed in Schedule 4.10 of the Disclosure Schedule, the
Company has not encumbered or
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disposed of its ownership or leasehold interests in the Real Property since the
date of the Most Recent Balance Sheet. Schedule 4.10 of the Disclosure Schedule
lists all real estate leased as of the date of this Agreement by the Company as
lessee (the "Leased Premises"). Each lease (collectively, the "Leases") with
respect to a Leased Premise (i) is legal, valid, binding, enforceable, and in
full force and effect; (ii) will continue to be legal, valid, binding,
enforceable, and in full force and effect on identical terms upon consummation
of the transactions contemplated hereby; (iii) all rents and additional rents
due to date on each Lease have been paid; (iv) in each case the Company is in
peaceable possession and no waiver, indulgence or postponement of the Company's
material obligations thereunder has been granted by the lessor; (v) neither the
Company nor, to the Seller's knowledge, any other party thereto, is in breach or
default under any of the material terms thereof and no event has occurred which
with notice or lapse of time or both, would constitute a breach or default, or
permit termination, modification, or acceleration thereunder; and the Seller has
delivered to the Buyer true, correct and complete copies of each Lease
(including all amendments thereto).
4.11 INTELLECTUAL PROPERTY. For purposes of this Section 4.11,
"Intellectual Property" shall mean (i) all inventions, whether patentable or
unpatentable and whether or not reduced to practice, all improvements thereto,
and all patents, patent applications, and patent disclosures, together with all
reissuances, continuations, continuations-in-part, revisions, extensions, and
reexaminations thereof; (ii) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations, adaptations,
derivations, and combinations thereof and including all goodwill associated
therewith, and all applications, registrations, and renewals in connection
therewith; (iii) all copyrightable works, all copyrights, and all applications,
registrations, and renewals in connection therewith; (iv) all trade secrets and
confidential business information (including ideas, research and development,
know-how, formulas, compositions, manufacturing and production processes and
techniques, technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and business and marketing plans
and proposals); (v) all computer software (including data and related
documentation); (vi) all other proprietary rights; and (vii) all copies and
tangible embodiments thereof (in whatever form or medium). With respect to
Intellectual Property:
(a) The Company owns or has the right to use pursuant to
license, sublicense, agreement, or permission all Intellectual Property
used in the conduct of the businesses of the Company as presently
conducted. Each item of Intellectual Property owned or used by the
Company immediately prior to the Closing hereunder will be owned or
available for use by it on identical terms and conditions upon the
Closing hereunder. The Company has taken all necessary action to
maintain and protect each material item of Intellectual Property that
it owns or uses.
(b) The Company has not been sued or charged in writing with
(or to the knowledge of the Seller, threatened with) or been a
defendant in any claim suit, action or proceeding relating to its
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 (including
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any claim that the Company must license or refrain from using any
Intellectual Property rights of any third party). To the knowledge of
the Seller, no third party has interfered with, infringed upon or
misappropriated any Intellectual Property rights of the Company.
(c) Schedule 4.11 of the Disclosure Schedule identifies each
material item of Intellectual Property owned by the Company or which
the Company has the right to use pursuant to license, sublicense,
agreement or permission. The Seller has delivered to the Buyer correct
and complete copies of or has made available for inspection by the
Buyer all patents, registrations, applications, licenses, agreements,
and permission (as amended to date) and all other written documentation
evidencing ownership and prosecution (if applicable) of each item of
Intellectual Property identified in Schedule 4.11 of the Disclosure
Schedule.
(d) To the best of Seller's knowledge, the operation of the
businesses of the Company as presently conducted does not interfere
with, infringe upon, misappropriate, or otherwise come into conflict
with, any Intellectual Property rights of third parties, and neither
Seller nor the Company has received any notice of any claim to the
contrary.
4.12 TANGIBLE ASSETS. The Company owns or leases all buildings,
machinery, equipment, and other tangible assets used or held for use in the
conduct of its businesses as presently conducted. Each such tangible asset has
been maintained in accordance with normal industry practice, is free from
material defects, is in good condition and repair (normal wear and tear
excepted), and is suitable for the purposes for which it presently is used. All
inventory of the Company is in good and merchantable condition and is not
obsolete, is in normal quantities for the business of the Company, and was
purchased by the Company for resale to customers in the ordinary course of
business.
4.13 CONTRACTS. Listed on Schedule 4.13 of the Disclosure Schedule are
all written (and a summary of any oral) agreements to which the Company is a
party and which is material to the conduct of the business of the Company,
including all distribution agreements and customer contracts. With respect to
each such agreement, except as set forth in Schedule 4.13 of the Disclosure
Schedule, (i) the agreement is legal, valid, binding, enforceable, and in full
force and effect; (ii) the agreement will continue to be legal, valid, binding,
enforceable, and in full force and effect on identical terms upon consummation
of the transactions contemplated hereby; (iii) neither the Company nor, to the
Seller's knowledge, any other party thereto, is in breach or default under any
of the material terms thereof and no event has occurred which with notice or
lapse of time would constitute a breach or default, or permit termination,
modification, or acceleration, under any such agreement, except where any such
default or breach would not have a Material Adverse Effect; and (iv) the Seller
has delivered to the Buyer true, correct and complete copies of each such
agreement.
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4.14 NOTES AND ACCOUNTS RECEIVABLE. All notes and accounts receivable
of the Company are reflected properly on the Company's books and records,
subject to normal allowances for doubtful accounts and customer claims, arose
from bona fide transactions in the ordinary course of business, are legal, valid
and binding obligations of the debtor thereof and, to the Seller's knowledge,
are subject to no additional setoffs or counterclaims in excess of the allowance
for doubtful accounts reflected in the Most Recent Balance Sheet.
4.15 POWERS OF ATTORNEY. There are no outstanding powers of attorney
executed on behalf of the Company.
4.16 LITIGATION. Schedule 4.16 of the Disclosure Schedule sets forth
each instance in which the Company (i) is subject to any outstanding injunction,
judgment, order, decree or ruling; or (ii) is a party or, to the knowledge of
the Seller, is threatened to be made a party to, any action, suit, proceeding,
hearing, or investigation of, in, or before any court or quasi- judicial or
administrative agency of any federal, provincial, state, local, or foreign
jurisdiction or before any arbitrator.
4.17 EMPLOYEES.
(a) The Company is not a party to or bound by any collective
bargaining agreement, nor has the Company experienced any strikes,
grievances, claims of unfair labor practices, or other collective
bargaining disputes. To the Seller's knowledge, the Company has not
committed any unfair labor practice, and there is no organizational
effort presently being made or threatened by or on behalf of any labor
union with respect to employees of the Company. No employee, past or
present, of the Company has pending or, to the Seller's knowledge,
threatened to bring any claim against the Company of unjust dismissal
or a violation of the employee's civil or employment rights except as
set forth in Schedule 4.16. To the Seller's knowledge, no executive
officer, key employee or significant group of employees plans to
terminate employment with the Company during the next twelve months.
(b) The agreements as set forth in Schedule 4.17 of the
Disclosure Schedule constitute the only written employment,
compensation, deferred compensation, bonus, termination, and severance
agreements which exist with respect to the Company (collectively, the
"Employment Agreements").
4.18 EMPLOYEE BENEFIT PLANS.
(a) Identification of Plans. Schedule 4.18 of the Disclosure
Schedule (the "Employee Benefit Plan List") lists each and every
compensation, consulting, employment, employment termination or
collective bargaining agreement, and each stock option, stock purchase,
stock appreciation right, life, health, accident or other benefit
insurance, bonus, deferred or incentive compensation, severance or
separation (or any agreement providing any compensatory payment or
benefit resulting from a change in control), vacation, disability,
profit sharing, retirement, or other employment
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or employee benefit plan, policy or arrangement of any kind, oral or
written, covering directors, officers, employees, former directors or
former employees of the Company or any ERISA Affiliate (as defined
below) or its respective beneficiaries, including, but not limited to,
any employee benefit plans within the meaning of Section 3(3) of the
Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
which the Company or any ERISA Affiliate maintains, to which the
Company or any ERISA Affiliate contributes, or under which any present
or former director, officer or employee of the Company or any ERISA
Affiliate is covered or has benefit rights and with respect to which
any liability of the Company or any ERISA Affiliate exists or is
reasonably likely to occur (collectively, "Benefit Plans"). The
Employee Benefit Plan List also sets forth a list which identifies each
and every provision in the Benefit Plans which specifically reference a
change of control as causing an increase or acceleration of benefits to
present or former directors, officers or employees of the Company or
any ERISA Affiliate or their respective beneficiaries, and any other
similar provisions which would cause an increase in liability to any
such person (in their capacity as a present or former director, officer
or employee of the Company or any ERISA Affiliate or their respective
beneficiaries) as a result of the transaction contemplated by this
Agreement ("Change of Control Benefit"), together with the name of each
person entitled or potentially entitled to receive a Change in Control
Benefit and the amount thereof. The term "Benefit Plans" does not
constitute an acknowledgment that a particular arrangement is an
employee benefit plan within the meaning of Section 3(3) of ERISA.
Without limitation of the foregoing, except as separately set forth on
the Employee Benefit Plan List, (i) no Benefit Plan is a multiemployer
plan within the meaning of Section 3(37) of ERISA, (ii) no Benefit Plan
is an employee pension benefit plan (as defined in Section 3(2) of
ERISA) subject to Title IV of ERISA, and (iii) neither the Company nor
any ERISA Affiliate maintains, sponsors or has an obligation to
contribute to (or has ever maintained, sponsored or had an obligation
to contribute to within the preceding six years) any such
multi-employer plan or employee pension benefit plan subject to Title
IV of ERISA or has any liability with respect to any such
multi-employer plan or employee pension benefit plan subject to Title
IV of ERISA. For the purposes of this Section 4.18, the terms "Company"
and "ERISA Affiliate" shall be deemed to include predecessors thereof.
(b) Status of Benefit Plans. Except as provided in Schedule
4.18 of the Disclosure Schedule, each of the Benefit Plans that is
intended to be a pension, profit sharing, stock bonus, thrift, savings
or employee stock ownership plan that is intended to be qualified under
Section 401(a) of the Internal Revenue Code of 1986, as amended (the
"Code") has been determined by the Internal Revenue Service ("IRS") to
qualify under Section 401(a) of the Code, and, to the best of the
Seller's and the Company's knowledge, there exist no circumstances
likely to materially adversely affect the qualified status of any such
Benefit Plan. No Benefit Plan is currently under audit by the United
States Department of Labor, the Pension Benefit Guaranty Corporation or
the IRS, and neither the Company nor any ERISA Affiliate has received
either written or oral notification by one or more of such federal
regulatory agencies of their intention to audit a Benefit Plan.
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(c) Payment of Contributions. All accrued contributions and
other payments to be made by the Company or any ERISA Affiliate to any
Benefit Plan through the date of the Most Recent Balance Sheet have
been made or reserves adequate for such purposes have been reflected
therein. Neither the Company nor any ERISA Affiliate is in material
default in performing any of its respective contractual obligations
under any of the Benefit Plans or any related trust agreement or
insurance contract. There are no outstanding material liabilities of
any Benefit Plan other than liabilities for benefits to be paid to
participants in such plan and their beneficiaries in accordance with
the terms of such plan.
(d) Pending Litigation. There is no pending litigation or to
the best knowledge of Seller, the Company and any ERISA Affiliate, any
overtly threatened litigation or pending claim (other than benefit
claims made in the ordinary course) by or on behalf of or against any
of the Benefit Plans (or with respect to the administration of any of
the Benefit Plans) now or heretofore maintained by the Company or any
ERISA Affiliate which allege violations of applicable state or federal
law and which has a reasonable probability of being determined
adversely to the Company or any ERISA Affiliate.
(e) Fiduciary Compliance. The Company and each ERISA
Affiliate and all other persons having fiduciary or other
responsibilities or duties with respect to any Benefit Plan, are and
have since the inception of each such Benefit Plan been in compliance
in all material respects with, and each such Plan is and has been
operated in all material respects substantially in accordance with, its
provisions and in compliance in all respects with the applicable laws,
rules and regulations governing such Plan, including the rules and
regulations promulgated by the Department of Labor, the Pension Benefit
Guaranty Corporation ("PBGC") and the IRS under ERISA, the Code or any
other applicable law. No Benefit Plan has engaged in or been a party to
a non-exempt "prohibited transaction" (as defined in Section 406 of the
ERISA or 4975(c) of the Code). All Benefit Plans which are group health
plans have been operated in compliance with the group health plan
continuation coverage requirements of Section 4980B of the Code and
Section 601 of ERISA.
(f) ERISA Compliance. No Benefit Plan is subject to the
provisions of Part 3 of Title I of ERISA, Section 412 of the Code or
the provisions of Title IV of ERISA. Neither the Company nor any ERISA
Affiliate has incurred, nor is there a basis for believing that either
the Company or any ERISA Affiliate may incur, any material liability
under Title IV of ERISA in connection with any plan subject to the
provisions of Title IV of ERISA now or heretofore maintained or
contributed to by it or by any ERISA Affiliate (as that term is defined
in the next sentence) of the Company. The term "ERISA Affiliate" shall
mean any person which is or was a member of the same controlled group
of corporations (within the meaning of Section 414(b) of the Code) as
the Company or is or was under common control (within the meaning of
Section 414(c) of the Code) with the Company.
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(g) Change in Control Benefits. Schedule 4.18 of the
Disclosure Schedule lists: (A) each executive officer and director of
the Company or any ERISA Affiliates who is eligible to receive a Change
of Control Benefit, (B) the amount of each such Change of Control
Benefit calculated as if a change of control occurred, and such benefit
payment became due, on the date hereof, (C) each such individual's base
rate of compensation in effect as of the date of this Agreement, (D)
such individual's compensation from the Company and any ERISA Affiliate
for each of the calendar years 1994 through 1998, as reported by the
Company and any ERISA Affiliate on Form W-2 or Form 1099, and (E) any
other amounts, identified by type, necessary to calculate such
benefits. Neither the Company nor any ERISA Affiliate has made any
payments or provided any compensation or benefits nor is a party to any
agreement or any Benefit Plan that could obligate it or any successor
thereto to make any payments or provide any compensation or benefits,
the deductibility of which is limited by Section 280G of the Code.
4.19 GUARANTIES AND WARRANTIES. Other than endorsements of negotiable
instruments in the ordinary course of business, the Company is not a guarantor
or otherwise is liable for any material liability or material obligation
(including indebtedness) of any other person. Except as otherwise required under
applicable state and federal law, the Company has not made or given any
warranties with respect to any of the products distributed by the Company.
4.20 PERMITS. The Company holds all environmental permits and other
material permits, licenses or franchises of governmental authorities required
under any environmental law or other law, regulation, order or decree, in
connection with the ownership and/or operation of the business and assets of the
Company, all such permits, licenses and franchises are listed in Schedule 4.20
of the Disclosure Schedule, and the Company is in compliance with such permits,
licenses and franchises in all material respects. All such permits, licenses and
franchises are in full force and effect and the Company has not received any
notification pursuant to any law relating to the business of the Company that
any currently held material permit, license or franchise relating to the
operation of the business and/or assets of the Company has been or is about to
be made subject to materially different limitations or conditions, or has been
or is about to be revoked, withdrawn or terminated.
4.21 ENVIRONMENTAL COMPLIANCE. The Company and its operations and
properties are in compliance with all environmental laws in all material
respects. No government agency or third party has submitted to the Company any
notification, demand, request for information, citation, summons, or compliant,
and no order has been issued, no compliant 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. Except as set forth in Schedule
4.21 of the Disclosure Schedule, to the Seller's knowledge, there are not now
and never have been any underground storage tanks located on any property owned
or operated by the Company.
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4.22 CUSTOMERS. The Seller has heretofore delivered to the Buyer a true
and correct list of the 20 largest customers of the Company as of the date
hereof based on revenues generated during the twelve (12) months ended December
31, 1998. The relationships of the Company 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 the Seller's
knowledge, threatened orally, to cancel or otherwise terminate, its relationship
with the Company.
4.23 INSURANCE. The Seller has heretofore delivered to the Buyer a true
and correct list of all policies of insurance maintained by or on behalf of the
Company with respect to its business or operations and which are in effect as of
the date of this Agreement. As of the date of this Agreement, all such policies
are in full force and effect, all premiums due thereon have been paid and the
Company has complied in all material respects with the provisions thereof. To
Seller's and Company's knowledge, no event has occurred which is reasonably
likely to give rise to a material claim relating to the Company under such
insurance policies.
4.24 TRANSACTIONS WITH AFFILIATES. Schedule 4.24 of the Disclosure
Schedule lists all agreements and other arrangements and transactions in effect
and entered into between the Seller or an affiliate of the Seller, on the one
hand, and the Company, on the other hand. For purposes of this Agreement,
"affiliate" shall mean any person or entity (i) which directly or indirectly
through one or more intermediaries, controls, is controlled by or is under
common control with such person or entity, (ii) any officer, director, partner,
employer, or direct or indirect beneficial owner of any 10% or greater equity or
voting interest of such person or entity, or (iii) any other person or entity
for which a person described in clause (ii) acts in such capacity.
4.25 NO UNDISCLOSED LIABILITIES. Except for (a) liabilities for future
performance pursuant to any agreement listed in Schedules 4.10, 4.11 or 4.13 of
the Disclosure Schedule; (b) liabilities disclosed, reserved for or otherwise
reflected in the Most Recent Balance Sheet and the notes thereto; and (c)
liabilities incurred in the ordinary course of business by the Company after the
date of the Most Recent Balance Sheet which will not, individually or in the
aggregate, have a Material Adverse Effect, the Company has not incurred any
liability (contingent or otherwise) that would be required to be disclosed in
financial statements under GAAP, consistently applied. The Company is not
indebted to the Seller for any amounts other than normal compensation as
disclosed to the Buyer for not more than one partial payroll period.
4.26 INTEREST IN SIMILAR BUSINESSES. The Seller does not have any
financial interest in any person, firm, corporation or other entity which is, or
during the past five years was, directly or indirectly, engaged in a business
substantially similar to the Business.
4.27 YEAR 2000 COMPLIANCE. The Company has (i) initiated a review and
assessment of all areas within its business and operations (including those
affected by suppliers, vendors and customers) that could be adversely affected
by the "Year 2000
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Problem" (being the risk that computer applications used by the Company (or its
suppliers, vendors and customers) may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior to and any date
after December 31, 1999), (ii) developed a plan and timeline (a true, correct
and complete copy of which have been provided to Buyer) for addressing the Year
2000 Problem on a timely basis, and (iii) to date, implemented that plan in
accordance with the timetable. Based on the foregoing, the Seller and the
Company believe that all computer applications (including those of its
suppliers, vendors and customers to the extent that they may affect the Company)
that are material to its business and operations (including computer
applications that are imbedded in machinery and other equipment of the Company)
are reasonably expected on a timely basis to be able to perform properly all
date-sensitive functions for all dates before and after January 1, 2000 (that
is, to be "Year 2000 Compliant"), except to the extent that a failure to do so
could not reasonably be expected to have a Material Adverse Effect.
4.28 DISCLOSURE. No representation or warranty by the Seller contained
in this Agreement or Exhibit hereto or in the Disclosure Schedules, and no
information heretofore provided by the Seller or the Company to the Buyer, or
contained in the Financial Statements, contains any untrue statement of a
material fact or omits to state a material fact necessary in order to make the
statements made therein not misleading.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES
CONCERNING THE BUYER
As a material inducement to the Seller entering into this Agreement,
the Buyer hereby represents and warrants to the Seller the following, in each
case as of the date of this Agreement and the Closing Date, unless otherwise
specifically provided:
5.1 ORGANIZATION, QUALIFICATION, AND AUTHORIZATION. Each of the Buyer
and the Merger Subsidiary is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Delaware. The Buyer and the
Merger Subsidiary each has full corporate power and authority to carry on its
business as currently conducted by it and to own and use the properties owned
and used by it. The Buyer has delivered to the Seller correct and complete
copies of the articles of incorporation and bylaws of the Buyer (as amended to
date).
5.2 CAPITALIZATION. The authorized capital stock of the Buyer, the
total number of shares of each class issued and outstanding, and the number of
shares held in the treasury of the Buyer, are each set forth on Schedule 5.2 of
the Buyer's Disclosure Schedule provided to Seller. As of the Closing and the
issuance thereof, the Buyer's Stock to be issued to the Seller under this
Agreement will be duly authorized, validly issued, fully paid, and
nonassessable.
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5.3 AUTHORIZATION AND ENFORCEABILITY. The Buyer and the Merger
Subsidiary each has full corporate power and authority to execute and deliver
this Agreement and to perform their respective obligations hereunder. Except as
provided in Section 6.9 hereof, the Buyer and the Merger Subsidiary each has
taken all corporate action which is necessary to authorize the execution and
delivery of this Agreement and the consummation by them of the transactions
contemplated herein, including the approval of their respective board of
directors and the approval of Merger Subsidiary's sole shareholder. This
Agreement constitutes the valid and legally binding obligation of each of the
Buyer and the Merger Subsidiary, enforceable in accordance with its terms,
except as enforcement may be limited by bankruptcy, insolvency, moratorium or
other similar laws affecting the rights of creditors generally and except for
limitations imposed by general principles of equity. Except with respect to
shareholder consent of the Buyer pursuant to Section 6.10 hereof, the Buyer and
the Merger Subsidiary need not give any notice to, make any filing with, or
obtain any authorization, consent, or approval of any government, governmental
agency or party to any material agreement to which they are a party or by which
its assets is bound, in order to consummate the transactions contemplated by
this Agreement.
5.4 NONCONTRAVENTION. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, directive or ruling of any government, governmental agency, or
court to which the Buyer or Merger Subsidiary is subject, or any provision of
the Buyer's or Merger Subsidiary's articles of incorporation or bylaws; or (ii)
conflict with, result in a breach of, constitute a default under, result in the
acceleration of, create in any party the right to accelerate, terminate, modify,
or cancel, or require any notice under any agreement, contract, lease, license,
permit, instrument, or other arrangement to which the Buyer or Merger Subsidiary
is a party or by which the Buyer or Merger Subsidiary is bound or to which any
of their assets is subject.
5.5 BROKERS' FEES. The Buyer and Merger Subsidiary has no liability or
obligation to pay any fees or commission to any broker, finder, or agent with
respect to the transactions contemplated by this Agreement for which the Seller
could become liable or obligated.
5.6 REPORTS AND FINANCIAL STATEMENTS.
(a) The Buyer has previously furnished or made available to
the Seller and the Company true and complete copies of (i) its Annual
Reports on Form 10-K for each of the three fiscal years ended December
31, 1998, as filed with the Securities and Exchange Commission, (ii)
its Quarterly Reports on Form 10-Q for the quarter ended March 31,
1999, and (iii) all other reports or registration statements filed by
the Buyer with the Securities and Exchange Commission since December
31, 1998. As of their respective dates, such reports, proxy statements
and registration statements did not contain, and the proxy statement to
be distributed to shareholders of Buyer in connection with the
shareholder meeting required for approval of this merger will not
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contain, any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading.
(b) The audited consolidated financial statements and
unaudited interim financial statements included in the reports or other
filings referred to in Section 5.5(a) have been prepared in accordance
with generally accepted accounting principles consistently applied
throughout the periods (except (i) as may be indicated therein or in
the notes or schedules thereto and (ii) with respect to unaudited
interim financial statements, the absence of notes which, if presented,
would not differ materially from those included in the consolidated
balance sheet of the Buyer as of December 31, 1998). These statements
fairly present the consolidated financial position of the Buyer as of
the respective dates thereof and the consolidated results of operations
and changes in financial position (or statements of cash flow) of the
Buyer for each of the periods then ended, subject, in the case of
unaudited interim financial statements, to normal year-end adjustments
and any other adjustments described therein and the absence of notes
(which, if presented, would not differ materially from those included
in the consolidated balance sheet of the Buyer as of December 31,
1998).
(c) Except as disclosed in any reports or registration
statements filed by the Buyer with the Securities and Exchange
Commission since December 31, 1998, the information and disclosures
contained in the Buyer's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998 remain complete and correct in all material
respects as of its date as if such disclosures were made on and as of
the date hereof and do not omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading.
ARTICLE 6
COVENANTS
The parties agree as follows with respect to the periods indicated:
6.1 GENERAL. In case at any time after the Closing any further action
is necessary or desirable to carry out the purposes of this Agreement, each of
the Parties will take such further action (including the execution and delivery
of such further instruments and documents) as any other Party reasonably may
request, all at the sole cost and expense of the requesting Party (unless the
requesting Party is entitled to indemnification therefor under Article 9 below).
The Seller acknowledges and agrees that from and after the Closing, the
Surviving Corporation shall be entitled to sole possession of all documents,
books, records, agreements, and financial data of any sort relating to the
Company, provided the Seller shall have access to such documents, books,
records, agreements and financial data after the Closing for any proper purpose
(eg. tax reporting and audits).
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6.2 TRANSITION. From and after the date of this Agreement, the Seller
will not take any action that is designed or intended to have the effect of
discouraging any lessor, licensor, customer, supplier, or other business
associate of the Company from maintaining the same business relationships with
it after the Closing as it maintained with it prior to the Closing.
6.3 CONFIDENTIALITY. From and after the date of this Agreement, the
Seller will treat and hold as such all of the information concerning the
Company, and its business and affairs, that is not already generally available
to the public ("Confidential Information") and refrain from using any of the
Confidential Information except in connection with this Agreement.
6.4 CONDUCT OF BUSINESS. From the date hereof until the Closing, except
with the Buyer's prior written consent, the Seller shall cause the Company to
carry on its business in the ordinary course of business consistent with past
practice and to use its reasonable commercial efforts to preserve intact its
business organization and relationships with third parties and, without limiting
the generality of the foregoing, the Seller shall not:
(a) do or omit to do any act or thing which would cause any
of the representations and warranties set out in Section 3 or Section 4
to be untrue at the Closing Date;
(b) permit the Company to:
(i) do or omit to do any act or thing which
would cause any of the representations and
warranties set out in Section 4 to be untrue
if made at the Closing Date;
(ii) make or authorize any material capital
expenditures;
(iii) enter into any material contract outside the
ordinary course of business or amend or
terminate any material contract to which it
is a party or exercise any renewal,
expansion or other options relating thereto,
other than in the ordinary course of
business;
(iv) dispose, or agree or commit to dispose, of
any material assets out of the ordinary
course of business;
(v) make any material change in federal, state
or local tax elections, or accounting
methods, principles or practices, unless
required by law or by changes in GAAP; or
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(vi) merge or consolidate with any person,
acquire any stock or other ownership
interest in any person or the assets of any
business as an entirety, or liquidate,
dissolve or otherwise reorganize or seek
protection from creditors; or
(c) cause or permit the Company, directly or indirectly, to
adopt, amend, modify, spin-off, transfer or assume any of the assets or
liabilities of, terminate or partially terminate, any Benefit Plan; or
(d) amend, or permit the amendment of the articles of
incorporation, by-laws or other organizational documents of the
Company, make any changes in the capital structure of the Company, or
issue or sell, or purchase, or agree to issue, sell or purchase, any
capital stock or securities of the Company, or declare or pay any
dividend or other distribution out of the Company. During the period
from the date of this Agreement to the Closing Date, the Seller shall
cause the Company to confer on a regular basis with the Buyer as to the
business of the Company, and to report periodically on the general
status of ongoing operations of the Company.
6.5 REASONABLE EFFORTS. Each Party agrees to use with all due dispatch
its commercially reasonable best efforts to take, or cause to be taken, all
actions and to do, or cause to be done, all things necessary or advisable to
consummate and make effective as promptly as practicable the transactions
contemplated by this Agreement and to cooperate with the other Parties in
connection with the foregoing. Each Party further agrees not to undertake any
course of action inconsistent with the satisfaction of the conditions to Closing
set forth herein, and to do all such acts and take all such measures as may be
commercially reasonable to comply, and be in compliance, with the
representations, warranties, covenants and agreements contained in this
Agreement.
6.6 EXCLUSIVE DEALING. During the period from the date of this
Agreement to the earlier of the Closing Date or the termination of this
Agreement, the Seller shall not initiate or engage in discussions or
negotiations with, or provide any information to, any person other than the
Buyer, Seller's attorneys, accountants or advisors, concerning any sale of the
Company or any material part thereof or any similar transaction. In the event
this Agreement is terminated by either party for any reason, each of the Buyer
and the Seller agree that in the further event that Buyer, on the one hand, or
Seller or Company on the other hand, agree or commit to agree to consummate a
transaction similar to the transaction contemplated in this Agreement (whether
by stock purchase, asset purchase or merger) before December 31, 1999, then in
such event the party terminating this Agreement shall pay to the other a break
up fee of $100,000 in cash on demand. The foregoing breakup fee is intended to
compensate as liquidated damages the receiving party for expenses incurred in
furtherance of this transaction, and not as a penalty.
6.7 ACCESS TO RECORDS. Between the date of this Agreement and the
Closing Date, the Company shall allow the Buyer, its representatives and
potential lenders, full and complete access to the books, records and business
premises and properties of the Company,
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and furnish to the Buyer all such information concerning the Company and its
businesses and affairs as the Buyer may reasonably request, for purposes of
conducting a due diligence investigation; provided, however, that any such
investigation shall be conducted during normal business hours and shall not
unreasonably interfere with the operations of the Company. No such investigation
shall affect any of the representations and warranties of the Seller hereunder.
6.8 NOTICE OF EVENTS. From the date of this Agreement to the Closing
Date, the Company shall promptly notify in writing the Buyer of any fact which,
if known at the date of this Agreement, would have been required to be set forth
or disclosed in or pursuant to this Agreement, or which would or could result in
the breach by the Seller of any representation or warranty or a breach of any
covenant or agreement in this Agreement.
6.9 SHAREHOLDER APPROVAL. As soon as practicable after the execution of
this Agreement (but not earlier than June 29, 1999), the Buyer shall duly call
and notice a special or annual meeting of the Shareholders of the Company, and
include in the purposes of which the review and approval of the Merger and the
issuance of the Buyer's Stock as provided herein (the "Shareholder Meeting").
The proxy materials disseminated by the Buyer shall include a recommendation of
the board of directors that the shareholders approve the Merger and the issuance
of the Buyer's Stock; provided, however, that the foregoing covenant shall be
subject, in all respects, to the fiduciary obligations of the board of directors
to the Buyer and its shareholders under applicable law as advised by legal
counsel to the Buyer. The Shareholder Meeting shall be noticed and held
according to the Bylaws of the Buyer, Delaware corporate law and the rules of
any applicable securities exchange. The Seller hereby irrevocably confirms that
the Seller has already approved, as the sole shareholder of the Company, the
Merger.
6.10 DISSOLUTION OF COMPONENTS. Within ten (10) of the Closing, the
Seller agrees to take all action necessary to dissolve Components.
6.11 TAX MATTERS. The Parties acknowledge that the Company currently
has in effect an election to be taxed as a Subchapter S Corporation under the
Code (the "Election"). Without the consent of the other, neither the Company nor
the Buyer shall make any election under Section 338(h)(10) of the Code. Neither
the Seller nor the Company shall revoke or otherwise terminate the Election
prior to the Closing. From and after the Closing, the Election shall terminate,
effective as of the Closing. The Seller acknowledges and agrees that the Seller
shall prepare, at Seller's cost, the Company's final S-corporation tax return,
which return shall be subject to the review and approval of Buyer prior to
filing. Seller shall include any income, gain, loss, deduction or other tax
items for the periods up to and including the Closing on Seller's tax return in
a manner consistent with such final tax return for such periods.
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ARTICLE 7
CONDITIONS TO OBLIGATION TO CLOSE
7.1 CONDITIONS TO OBLIGATION OF THE BUYER. The obligation of the Buyer
to consummate the transactions to be performed by it in connection with the
Closing is subject to satisfaction of the following conditions:
(a) The representations and warranties set forth in Section
3 and Section 4 above shall be true, correct and complete in all
material respects at and as of the Closing Date (and any representation
or warranty that is qualified as to materiality in Sections 3 or 4
shall be deemed to be without such qualification for purposes of the
foregoing);
(b) The Seller shall have performed and complied with all of
the Seller's covenants hereunder in all material respects through the
Closing;
(c) The Company shall have procured all of the third party
authorizations, approvals and consents referred to in Section 4.3
above;
(d) No action, suit, or proceeding shall be pending or
threatened before any court or quasi-judicial or administrative agency
of any federal, state, local, or foreign jurisdiction or before any
arbitrator wherein an unfavorable injunction, judgment, order, decree,
ruling, or charge would (i) prevent consummation of any of the
transactions contemplated by this Agreement; (ii) cause any of the
transactions contemplated by this Agreement to be rescinded following
consummation; (iii) affect adversely following consummation of the
right of the Buyer to own stock in the Merger Subsidiary and to control
the Company; or (iv) materially and adversely affect the right of the
Company to own its assets and to operate its businesses (and no such
injunction, judgment, order, decree, ruling, or charge shall be in
effect);
(e) The Seller shall have delivered to the Buyer a Seller's
Certificate to the effect that each of the conditions specified above
in Section 7.1(a)-(d) is satisfied;
(f) Shareholders of the Buyer shall have approved by the
requisite majority vote (as required by the Bylaws of the Buyer,
Delaware corporate law and the rules of any applicable securities
exchanges) the Merger and the issuance of the Buyer's Stock at the
Shareholder Meeting as provided herein;
(g) The Seller shall have delivered to the Buyer the
resignations of all directors and officers of the Company, all to be
effective as of the Closing;
(h) All certificates, opinions, instruments, and other
documents required to effect the transactions contemplated hereby will
be reasonably satisfactory in form and substance to counsel to the
Buyer;
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(i) There shall have been delivered to the Buyer an opinion
of counsel to the Seller, dated the Closing Date, in substantially the
form of Exhibit 2.2(f) hereof;
(j) The Seller shall deliver to the Buyer all stock record
books, minute books and corporate seals, if any, of the Company;
(k) The Company shall have executed and delivered to the
Buyer the Articles of Merger in substantially the form of Exhibit
2.2(g) hereof;
(l) The Seller shall have executed and delivered to the
Buyer the Employment Agreement and the Noncompetition Agreement in
substantially the forms of Exhibit 2.2(h) hereof;
(m) There shall have been no material damage, dilution,
diminution, or destruction to any of the Company's assets, properties
or businesses, or any material adverse change affecting the assets,
properties, business or condition, financial or otherwise, of the
Company; and
(n) The Seller shall have executed and delivered such other
instruments and agreements as have been reasonably requested by the
Buyer.
The Buyer may waive any condition specified in this Section 7.1, if it executes
a writing so stating at or prior to the Closing.
7.2 CONDITIONS TO OBLIGATION OF THE SELLER. The obligation of the
Seller to consummate the transactions to be performed by him in connection with
the Closing is subject to satisfaction of the following conditions:
(a) The representations and warranties set forth in Section
5 above shall be true, correct and complete in all material respects at
and as of the Closing date (and any representation or warranty that is
qualified as to materiality in Section 5 shall be deemed to be without
such qualification for purposes of the foregoing);
(b) The Buyer shall have performed and complied with all of
its covenants hereunder in all material respects through the Closing;
(c) No action, suit, or proceeding shall be pending before
any court or quasi-judicial or administrative agency of any federal,
state, local, or foreign jurisdiction or before any arbitrator wherein
an unfavorable injunction, judgment, order, decree, ruling, or charge
would (i) prevent consummation of any of the transactions contemplated
by this Agreement; (ii) cause any of the transactions contemplated by
this Agreement to be rescinded following consummation; or (iii) affect
adversely following consummation of the right of the Seller to own the
Buyer's Shares , and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect);
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(d) The Buyer shall have delivered to the Seller a Buyer's
Certificate to the effect that each of the conditions specified above
in Section 7.2(a)-(c) is satisfied;
(e) All certificates, opinions, instruments, and other
documents required to effect the transactions contemplated hereby will
be reasonably satisfactory in form and substance to counsel to the
Seller;
(f) There shall have been delivered to the Seller an opinion
of counsel to the Buyer, dated the Closing Date, in substantially the
form of Exhibit 2.3(c) hereof;
(g) The Merger Subsidiary shall have executed and delivered
to the Company the Certificate of Merger in substantially the form of
Exhibit 2.3(d) hereof and the Articles of Merger, in substantially the
form of Exhibit 2.2(g) hereof;
(h) The Buyer shall have executed and delivered to Seller
the Employment Agreement and the Noncompetition Agreement in
substantially the forms of Exhibit 2.2(h) hereof;
(i) The Buyer shall have executed and delivered to Seller
the Registration Agreement in substantially the form of Exhibit 2.3(f)
hereof; and
(j) The Buyer shall have executed and delivered such other
instruments and agreements as the Seller shall have reasonably
requested.
The Seller may waive any condition specified in this Section 7.2 if it executes
a writing so stating at or prior to the Closing.
ARTICLE 8
TERMINATION
8.1 TERMINATION RIGHTS. This Agreement may be terminated at any time
prior to the Closing:
(a) By the mutual consent of the Seller and the Buyer; or
(b) By either the Seller or the Buyer by a written notice to
the other if the Closing Date has not occurred on or prior to September
1, 1999 and the failure to complete the purchase and sale of the Shares
herein provided for on or before such date did not result from any
breach of this Agreement by the party seeking to terminate this
Agreement.
8.2 EFFECT OF TERMINATION. In the event of termination of this
Agreement pursuant to Section 8.1, this Agreement shall terminate, and have no
further force or effect (except for this Section 8.2 and Section 6.6 hereof) and
the transactions contemplated hereby
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shall be abandoned without further action by the parties. Except as otherwise
provided herein, any such termination shall not, however, relieve any party of
any liability for breach of any covenant or obligation under this Agreement.
ARTICLE 9
REMEDIES
9.1 SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations, warranties, covenants and indemnities contained in this
Agreement shall survive the Closing until the expiration of the applicable
statute of limitation.
9.2 INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE BUYER. In the event
that any of the representations or warranties of the Seller contained herein
shall be untrue or incorrect at the Closing (without regard to any "materiality"
or "Material Adverse Effect" exception contained therein), or in the event of a
breach of any covenants of the Seller contained herein, or in the event the
Equity Deficiency determined from the Pre-Closing Balance Sheet is determined to
have been understated, then the Seller agrees to indemnify, defend and hold
harmless the Buyer, together with the Surviving Corporation, and their
respective officers, directors, employees, successors and assigns (collectively,
the" Buyer Indemnified Parties") from and against the entirety of any judgments,
actions, suits, proceedings, investigations, claims, demands, costs, losses,
liabilities, fines, penalties, damages and expenses (including interest which
may be imposed in connection therewith and court costs and reasonable fees and
disbursements of counsel) (collectively, "Adverse Consequences") any of the
Buyer Indemnified Parties may suffer through and after the date of the claim for
indemnification resulting from, arising out of, relating to, in the nature of,
or caused by such failure of such representation and warranty to be true and
correct or by such breach or understatement.
9.3 INDEMNIFICATION PROVISIONS FOR BENEFIT OF THE SELLER. In the event
that any of the representations or warranties of Buyer contained herein shall be
untrue or incorrect at the Closing (without regard to any "materiality" or
"Material Adverse Effect" exception contained therein), or in the event of a
breach of any of the covenants of the Buyer contained herein, then the Buyer
agrees to indemnify and hold harmless the Seller, and his heirs, legal
representatives, successors or permitted assigns (collectively, the" Seller
Indemnified Parties") from and against the entirety of any Adverse Consequences
any of the Seller Indemnified Parties may suffer through and after the date of
the claim for indemnification resulting from, arising out of, relating to, in
the nature of, or caused by such failure of such representation and warranty to
be true and correct or by such breach.
9.4 MATTERS INVOLVING THIRD PARTIES.
(a) If any third party shall notify any Party (the
"Indemnified Party") with respect to any matter (a "Third-Party Claim")
which may give rise to a claim for indemnification against any other
Party (the "Indemnifying Party") under this Article 9, then the
Indemnified Party shall promptly notify the Indemnifying Party thereof
in writing; provided, however, that no delay on the part of the
Indemnified
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Party in notifying the Indemnifying Party shall relieve the
Indemnifying Party from any obligation hereunder unless (and then
solely to the extent) the Indemnifying Party is materially prejudiced
by such delay.
(b) An Indemnifying Party will have the right to defend the
Indemnified Party against the Third-Party Claim with counsel of its
choice reasonably satisfactory to the Indemnified Party so long as (i)
the Indemnifying Party notifies the Indemnified Party in writing within
thirty (30) days after the Indemnified Party has given notice of the
Third-Party Claim that the Indemnifying Party will indemnify the
Indemnified Party from and against the entirety of any Adverse
Consequences the Indemnified Party may suffer resulting from, arising
out of, relating to, in the nature of, or caused by the Third-Party
Claim; (ii) the Indemnifying Party provides the Indemnified Party with
evidence reasonably acceptable to the Indemnified Party that the
Indemnifying Party will have the financial resources to defend against
the Third-Party Claim and fulfill its indemnification obligations
hereunder; and (iii) the Indemnifying Party conducts the defense of the
Third-Party Claim actively and diligently. Unless and until the
Indemnifying Party makes an election in accordance with this Section
9.4(b), all of the Indemnified Party's reasonable costs and expenses
arising out of the defense, settlement or compromise of any such action
or claim shall be Adverse Consequences subject to indemnification
hereunder to the extent provided herein.
(c) So long as the Indemnifying Party is conducting the
defense of the Third-Party Claim in accordance with Section 9.4(b)
above, (i) the Indemnified Party may retain separate co-counsel at its
sole cost and expense and participate in the defense of the Third-Party
Claim, (provided that the costs and expense of such co-counsel shall be
for the account of the Indemnifying Party if the named parties to any
such action (including any impleaded parties) include both such
Indemnified Party and the Indemnifying Party and such Indemnified Party
shall have been advised in writing by such co-counsel that there may be
one or more legal defenses available to the Indemnifying Party which
are not available to, or the assertion of which would be adverse to the
interests of, the Indemnified Party); (ii) the Indemnified Party will
not consent to the entry of any judgment or enter into any settlement
with respect to the Third-Party Claim without the prior written consent
of the Indemnifying Party (not to be withheld unreasonably); and (iii)
the Indemnifying Party will not consent to the entry of any judgment or
enter into any settlement with respect to the Third-Party Claim without
the prior written consent of the Indemnified Party (not to be withheld
unreasonably).
9.5 OTHER INDEMNIFICATION LIMITATIONS. Notwithstanding anything
contained in this Article 9 to the contrary, the Seller shall have no liability
under Section 9.2 unless and until all such Adverse Consequences exceed in the
aggregate the Equity Surplus, if any; provided, however, that in the event the
Buyer's Adverse Consequences exceed such deductible amount, then Buyer shall be
entitled to recover only the excess of such Adverse Consequences, and not the
deductible amount.
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9.6 INDEMNIFICATION HOLDBACK ESCROW. In order to facilitate the payment
of any of Seller's indemnification obligations hereunder, the Buyer shall
holdback $100,000 of the cash portion of the Merger Consideration payable to the
Seller at the Closing (the "Holdback"), which amount shall be held by Buyer in
escrow pursuant to this Section 9.6. The Holdback shall be increased by the
amount, if any, of the overstatement in the event the Equity Deficiency as
determined from the Pre-Closing Balance Sheet is thereafter determined to have
been overstated, but in no event shall the Holdback be increased by more than
the amount of the reduction to the cash portion of the Merger Consideration made
at Closing pursuant to Section 1.8(b) hereof. If requested by the Seller, the
Holdback shall be deposited with a mutually acceptable financial institution,
provided that the Seller pays all costs associated with such third party escrow
agent. Upon notice of an indemnification claim by the Buyer Indemnified Parties
hereunder, the Buyer may deduct and retain from the Holdback the amount of the
Adverse Consequences therefor. In the event of a dispute over whether the Buyer
is entitled to Indemnification hereunder, the Buyer shall not deduct and retain
amounts from the Holdback unless and until the dispute is resolved. The then
remaining portion of the Holdback, if any, on the first annual anniversary of
the Closing shall be paid to the Seller in cash (net of any pending claims which
shall be resolved before any payment therefor is remitted to the Seller). The
Parties acknowledge and agree that notwithstanding the foregoing, the Buyer is
not limited to the Holdback with respect to its indemnification claims and
rights hereunder, and that the Buyer shall be entitled to offset any further
indemnification amounts hereunder against any other funds due from the Buyer to
the Seller, including any amounts under the Noncompetition Agreement.
9.7 DISPUTE RESOLUTION. 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
Hennepin, Minnesota, 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
Minnesota State or Federal court system, one of whom shall be a mutually
acceptable member of the video conferencing 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, 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, except as provided under the Uniform
Arbitration Act, Minn. Stat. ss.572.08 et. seq. The arbitrators shall have full
power to make any award (including the award of equitable remedies) that shall
under the circumstances presented to them be deemed to be proper; provided that
the arbitrators shall not have the power to award punitive damages
31
<PAGE>
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 10
GENERAL PROVISIONS
10.1 PRESS RELEASES AND PUBLIC ANNOUNCEMENTS. No Party shall issue any
press release or make any public announcement relating to the subject matter of
this Agreement prior to the Closing without the prior written approval of the
Buyer and the Seller, except to the extent required by law or the rules of any
applicable securities exchange, and except as may be necessary in connection
with the solicitation of Buyer's shareholder approval at the Shareholder's
Meeting.
10.2 NO THIRD-PARTY BENEFICIARIES. This Agreement shall not confer any
rights or remedies upon any person or entity other than the Parties and their
respective heirs, legal representatives, successors and permitted assigns.
10.3 ENTIRE AGREEMENT. This Agreement (including the Disclosure
Schedules and Exhibits referred to herein) constitutes the entire agreement
among the Parties with respect to matters coming within the scope of the
provisions of this Agreement and supersedes any prior understandings,
agreements, or representations by or among the Parties, written or oral, to the
extent they related in any way to the subject matter hereof.
10.4 SUCCESSION AND ASSIGNMENT. This Agreement shall be binding upon
and inure to the benefit of the Parties named herein and their respective heirs,
legal representatives, successors and permitted assigns. No Party may assign
either this Agreement or any of its rights, interests, or obligations hereunder
without the prior written approval of the Buyer and the Seller.
10.5 COUNTERPARTS AND FACSIMILE DELIVERY. This Agreement may be
executed in one or more counterparts, and by different Parties on different
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument. This Agreement shall be
effective once one or more counterparts hereof has been executed by each Party
hereto, whether or not all such signatures are on the same counterpart. Either
Party may deliver an executed counterpart of this Agreement by facsimile
transmission, provided the original executed counterpart is thereafter promptly
delivered to the other Party.
10.6 HEADINGS. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
10.7 NOTICES. All notices, requests, demands, claims and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly given if (and then
two business days after) it is sent by
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<PAGE>
registered or certified mail, return receipt requested, postage prepaid, and
addressed to the intended recipient as set forth below:
If to the Seller
or the Company: Acoustic Communication Systems, Inc.
13705 26th Avenue North
Suite 110
Plymouth, MN 55441
Attn: Robin Sheeley
Telephone: (612) 550-2300
Facsimile: (612) 550-2301
Copy to: Best & Flanagan LLP
4000 US Bank Place
601 Second Avenue South
Minneapolis, MN 55402
Attn: James Michels
Telephone: (612) 341-9706
Facsimile: (612) 339-5897
If to the Buyer: VideoLabs, Inc.
5960 Golden Hill Drive
Golden Valley, MN 55416
Attn: James Hansen
Telephone: (612) 542-0061
Facsimile: (612) 542-0069
Copy to: Hinshaw & Culbertson
Suite 3100
222 South Ninth Street
Minneapolis, MN 55402
Attn: Shane R. Kelley, Esq.
Telephone: (612) 333-3434
Facsimile: (612) 334-8888
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means, (including personal delivery, expedited courier, messenger service,
telecopy, telex, ordinary mail, or electronic mail), but no such notice,
request, demand, claim, or other communication shall be deemed to have been duly
given unless and until it actually is received by the intended recipient. Any
Party may change the address to which notices, requests, demands, claims, and
other communications hereunder are to be delivered by giving the other parties
notice in the manner herein set forth.
33
<PAGE>
10.8 GOVERNING LAW. Except to the extent of the Merger, which shall be
governed by the laws of the States of Delaware and Minnesota, as applicable,
this Agreement shall be governed by and construed in accordance with the
domestic laws of the State of Minnesota without giving effect to any choice or
conflict of law provision or rule (whether of the State of Minnesota or any
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Minnesota.
10.9 AMENDMENTS AND WAIVERS. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Buyer and the Seller. No waiver by any Party of any default, misrepresentation,
or breach of warranty or covenant hereunder, whether intentional or not, shall
be deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in any way any rights arising
by virtue of any prior or subsequent such occurrence.
10.10 SEVERABILITY. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability for the offending term or provision in any other
situation or in any other jurisdiction.
10.11 EXPENSES. Each Buyer, on the one hand, and the Seller, on the
other hand, will bear its own costs and expenses (including legal fees and
expenses and filing or processing fees imposes by governmental authorities)
incurred in connection with this Agreement and the transactions contemplated
hereby. The Company shall not pay or be liable for any of the Seller costs and
expenses (including the fees and expenses of their legal counsel or other
advisors) in connection with this Agreement.
10.12 CONSTRUCTION. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean including without limitation. The Parties intend
that each representation, warranty, and covenant contained herein, shall have
independent significance, and that all statements contained herein and in the
Disclosure Schedules and Exhibits hereto shall be deemed to be representations
and warranties hereunder. If any Party has breached any representation,
warranty, or covenant contained herein in any respect, the fact that there
exists another representation, warranty, or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
party is in breach of the first representation, warranty, or covenant.
34
<PAGE>
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
the date first above written.
ACOUSTIC COMMUNICATION SYSTEMS, INC.
By /s/ Robin Sheeley
------------------------------------------
Robin Sheeley
Its President
/s/ Robin Sheeley
------------------------------------------
Robin Sheeley
VIDEOLABS, INC.
By /s/ James Hansen
------------------------------------------
James Hansen
Its President
VL ACQUISITION CO.
By /s/ James Hansen
------------------------------------------
James Hansen
Its President
35
<PAGE>
FIRST AMENDMENT TO AGREEMENT
AND
PLAN OF MERGER
THIS FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
("Amendment") is made and entered into effective as of this 25th day of May,
1999 by and among Videolabs, Inc., a Delaware corporation ("Buyer"), VL
Acquisition Co., a Delaware corporation formed by Buyer ("Merger Subsidiary"),
Robin Sheeley, a Minnesota resident ("Seller") and Acoustic Communication
Systems, Inc., a Minnesota corporation (the "Company"). Capitalized terms used
herein not otherwise defined shall have the definitions set forth in the
Agreement and Plan of Merger of Acoustic Communication Systems, Inc. into VL
Acquisition Co. dated May 17, 1999 (the "Merger Agreement").
The Parties agree that the Merger Agreement is hereby amended as
follows:
1. At the end of the third "WHEREAS" clause on the first page, the
following sentence is hereby added:
The Parties intend that the merger contemplated hereby will
qualify as a "statutory merger" under Section 368(a)(1)(A) of the
Internal Revenue Code of 1986, as amended.
2. Section 1.7(a) of the Merger Agreement is hereby amended to read as
follows:
(a) An amount of cash equal to Five Hundred Thousand Dollars
($500,000); PLUS
3. The following sentence shall be added at the end of Section 1.8(a)
of the Merger Agreement:
(a) For the purposes of this Section 1.8, the debt incurred by
the Company in connection with the distribution to Seller by the
Company pursuant to Section 1.10 below shall be considered equity for
the purpose of determining the Minimum Equity Level under this Section.
4. The following section 1.10 shall be added to the Merger Agreement
immediately following Section 1.9:
1.10 Loan and Distribution. No later than June 15, 1999,
Seller shall loan to the Company cash in an amount equal to Five
Hundred Thousand Dollars ($500,000) pursuant to a promissory note in
form and substance reasonably acceptable to Buyer (the "Note"). The
Note shall be unsecured and shall provide for interest at the
"Applicable Federal Rate" established by Internal Revenue Service
Regulations during the period which the loan is outstanding. The Note
shall be due and payable in full upon the consummation of the Merger at
the Closing, or on September 30, 1999 whichever occurs earlier. If the
Note becomes due and payable upon consummation
<PAGE>
of the Merger, the obligation to pay the Note shall be assumed by
Merger Subsidiary, and payment shall be made to Seller at the Closing.
Any contrary statement, covenant or representation contained herein
notwithstanding, immediately upon receipt of the funds loaned by
Seller, the Company shall make a distribution of retained earnings, in
the form of a dividend, in the amount of $500,000.00 to Seller.
5. At the Closing of the Merger, the Buyer shall contribute to the
capital of the Merger Subsidiary (or extend a loan which will be deemed to be
capital) the amount of $500,000.00 in cash, to finance the payment of the Note
to the Seller.
6. Notwithstanding anything in the Merger Agreement to the contrary,
the computation and calculation of net equity of the Company under Section 1.8
of the Merger Agreement (for purposes of determining compliance with the Minimum
Equity Level) shall be made after giving full and complete effect to all
transactions contemplated in this Amendment (being the loan, dividend, capital
contribution and loan repayment).
7. The balance of the Merger Agreement is unchanged, is hereby ratified
and confirmed in all respects and remains in full force and effect.
VIDEOLABS, INC.
By: /s/ James Hansen
--------------------------------
James Hansen
Its President
VL ACQUISITION CO.
By: /s/ James Hansen
--------------------------------
James Hansen
Its President
ACOUSTIC COMMUNICATION SYSTEMS, INC.
By: /s/ Robin Sheeley
--------------------------------
Robin Sheeley
Its President
ROBIN SHEELEY
By: /s/ Robin Sheeley
--------------------------------
<PAGE>
SECOND AMENDMENT TO AGREEMENT
AND
PLAN OF MERGER
THIS SECOND AMENDMENT TO AGREEMENT AND PLAN OF MERGER ("Amendment") is
made and entered into effective as of this 3rd day of August, 1999 by and among
Videolabs, Inc., a Delaware corporation ("Buyer"), VL Acquisition Co., a
Delaware, corporation formed by Buyer ("Merger Subsidiary"), Robin Sheeley, a
Minnesota resident ("Seller") and Acoustic Communication Systems, Inc., a
Minnesota corporation (the "Company"). Capitalized terms used herein not
otherwise defined shall have the definitions set forth in the Agreement and
Plan of Merger of Acoustic Communication Systems, Inc. into VL Acquisition Co.
dated May 17, 1999, as amended by that certain First Amendment to Agreement and
Plan of Merger dated effective May 25, 1999 (as amended, the "Merger
Agreement").
The Parties agree that the Merger Agreement is hereby amended as follows:
1. The Parties have agreed that the number of shares of Buyer's stock
calculated pursuant to Section 1.7 of the Merger Agreement shall be computed
from the closing bid and asked prices of the Buyer's common stock as reported on
NASDAQ during the ten trading days ending on Thursday, July 29, 1999. The number
of shares to be issued is 1,209,678.
2. The Parties acknowledge their mutual desire to consummate the
Closing on this date, notwithstanding the current unavailability of the
Pre-Closing Balance Sheet, which the Company continues to work on. Therefore,
notwithstanding the contrary provisions of the Merger Agreement, the parties
have agreed to proceed as follows:
(a) The Closing Date shall be August 3, 1999, and all actions shall
be taken to effectuate the Merger effective as of this date.
(b) The Buyer waives the requirement of the Holdback under Section
9.6 of the Merger Agreement. However, the cash portion of the Merger
Consideration payable at closing (being the full $500,000), the share
certificate representing the Buyer's Stock (computed as provided above),
and the repayment of the Note (as defined and provided in the first
Amendment) shall not be paid or delivered until completion and delivery of
the Pre-Closing Balance Sheet (and confirmation of the Minimum Equity
Level or computation of any deficiency or delinquency in the Minimum
Equity Level), all as provided in the Merger Agreement.
(c) Following completion and delivery of the Pre-Closing Balance Sheet
and the confirmation of the Minimum Equity Level, the Buyer shall deliver
the cash Portion of the Merger Consideration (without reduction for
any deficiency in the Minimum Equity Level, if applicable), shall deliver a
stock certificate evidencing the Buyer's Stock, and further shall cause
the Company to repay the Note. In the event in a deficiency in the
Minimum Equity Level as of the Closing Date as provided in the Merger
Agreement, the parties agree to take all action necessary to offset such
<PAGE>
deficiency (according to the terms of the Merger Agreement) against the
consideration payable to the Principal under the Noncompetition Agreement
dated effective as of August 2, 1999.
3. The balance of the Merger Agreement is unchanged, is hereby ratified
and confirmed in all respects and remains in full force and effect.
VIDEOLABS, INC.
By: /s/ James Hansen
--------------------------
James Hansen
Its President
VL ACQUISITION CO.
By: /s/ James Hansen
--------------------------
James Hansen
Its President
ACOUSTIC COMMUNICATION SYSTEMS, INC.
By: /s/ Robin Sheeley
--------------------------
Robin Sheeley
Its President
/s/ Robin Sheeley
--------------------------
Robin Sheeley
EXHIBIT 10.25
EMPLOYMENT AGREEMENT
THIS AGREEMENT, dated effective as of August 3, 1999, by and between
VideoLabs, Inc., a Delaware corporation (the "Company") and Robin Sheeley, a
Minnesota resident ("Employee").
WHEREAS, Employee is the sole shareholder of Acoustic Communication
Systems, Inc., which is being acquired by the Company pursuant to a Plan and
Agreement of Merger dated May 17, 1999 (the "Merger Agreement"), which is
Closing on the date of this Agreement; and
WHEREAS, as a condition to Closing under the Merger Agreement, Employee
and the Company are entering into this Agreement to provide for the employment
of Employee by the Company upon and subject to the terms and conditions set
forth in this agreement.
NOW, THEREFORE, in consideration of the premises and the respective
undertakings of the Company and Employee set forth below, the Company and
Employee agree as follows:
1. EMPLOYMENT. The Company hereby employs Employee, and appoints
Employee to the position of Chief Technical Officer, and such other positions as
may be assigned by the Board of Directors or any executive officer of the
Company, and Employee accepts such employment and appointment and agrees to
perform services for the Company, for the period and upon the other terms and
conditions set forth in this agreement.
2. TERM OF EMPLOYMENT. The term of Employee's employment hereunder
shall commence on the effective date hereof and shall continue for an initial
term of three (3) years thereafter ("Term of Employment"). The Term of
Employment shall automatically renew for additional one year terms thereafter
unless prior written notice of nonrenewal is given by either Employee or the
Company at least sixty (60) days prior to the end of the Term of Employment.
Notwithstanding the foregoing, the Employee may terminate the Term of Employment
at any time upon ninety (90) days prior written notice to the Company.
3. POSITION AND DUTIES.
3.01 Service with Company. During the Term of Employment, Employee
agrees to perform such reasonable employment duties, consistent with the terms
of this agreement and the position held by Employee as provided in section 1
above, as the Board of Directors or any executive officer of the Company shall
assign to Employee from time to time. Such duties and employment
responsibilities shall be performed in accordance with the Company's rules,
regulations and instructions now in force or which may be adopted by the Company
in the future. In addition, during the Term of Employment the Company shall
<PAGE>
nominate, and recommend to its shareholders, the election of Employee to the
Board of Directors of the Company at each annual meeting of the shareholders.
3.02 Performance of Duties. During the Term of Employment, the
Employee agrees to serve the Company to the best of Employee's ability. The
Employee shall have active involvement and be fully committed to the business
and affairs of the Company, and shall devote Employee's full attention and time
to the affairs of the Company. Employee hereby confirms that Employee is under
no contractual commitments inconsistent with Employee's obligations set forth in
this agreement. During his Term of Employment, however, Employee shall not
render or perform services for any other corporation, firm, entity or person,
nor will Employee become involved in the operations or management of any other
commercial corporation, firm, entity or person, which is in competition with the
business of the Company.
3.03 Noncompetition. In addition to (and not in lieu of) any
noncompetition covenants given by Employee in connection with the Merger
Agreement, the Employee hereby covenants and agrees that during the Term of
Employment, and for a period of twelve (12) months following the termination of
Employee's employment for any reason (the "Restricted Term"), the Employee shall
not, for any person or entity other than the Company or its affiliates, directly
or indirectly, own, manage, operate, control, act as an advisor or consultant
to, or participate in, the ownership, management, operation, or control of any
business involving the manufacture or sale, whether at wholesale or retail, of
image capture, transmission or manipulation devices or the provision of
equipment, software or design, installation or maintenance services with regard
to the data, voice or video conferencing or presentation systems for customers
in any geographic market served by the Company or any of its subsidiaries during
the Restricted Term; provided, however, that the foregoing shall not prevent the
Employee from owning not more than a one percent (1%) interest in any entity
engaged in such a competing business whose securities are traded on any
securities exchange or in the over-the-counter markets.
4. COMPENSATION.
4.01 Base Salary. As base compensation for all services to be
rendered by the Employee under this agreement during the Term of Employment ,
the Company shall pay to Employee a minimum monthly base salary of $10,833 per
month beginning with the effective date of this agreement, which salary shall be
paid in accordance with the Company's normal payroll procedures and policies.
The board of directors may hereafter increase, but not decrease, such monthly
base salary.
4.02 Stock Options. Employee shall be granted as of the date hereof
an option to purchase shares of the Company's common stock, par value $.01 per
share, pursuant to the Company's NonQualified Stock Option Plan, as follows:
30,000 shares on the date of agreement vesting 10,000 shares per year on the
annual anniversary of this agreement.
2
<PAGE>
All options shall be granted at an exercise price equal to the closing
bid price for such common stock on the date of this agreement. All such stock
options shall be granted under, and pursuant to all terms and conditions of, the
Company's NonQualified Stock Option Plan.
4.03 Benefits. Employee shall be entitled to such company-sponsored
benefits as are provided to employees of the Company, subject to the terms and
conditions of the applicable policies and/or plans.
4.04 Expenses. The Company will pay or reimburse Employee for all
reasonable and necessary out-of-pocket expenses incurred by Employee in the
performance of Employee's duties under this agreement, subject to the
presentment of appropriate vouchers in accordance with the Company's normal
polices for expense verification.
4.05 Bonuses. Employee shall be entitled to participation in the
Company's management bonus pool. During the Term of Employment, Employee shall
be entitled receive, annually, a bonus of up to 100% of base salary based upon
agreed upon objectives and the Company's results for the year. The Employee
shall also be eligible for Company wide profit sharing pursuant to the Company's
employment policies from time to time in effect.
4.06 Vacation. Employee shall be entitled to paid vacation
consistent with the Company's normal vacation policy.
5. CONFIDENTIAL INFORMATION. Except as permitted or directed by the
Company's Board of Directors, during the Term of Employment or at any time
thereafter Employee shall not divulge, furnish or make accessible to anyone or
use in any way (other than in the ordinary course of the business of the
Company) any confidential or secret knowledge or information of the Company
which Employee has acquired or become acquainted with or will acquire or become
acquainted with prior to the termination of the Term of Employment, whether
developed by Employee or by others, concerning any trade secrets, confidential
or secret designs, processes, formulae, plans, devices or material (whether or
not patented or patentable) directly or indirectly useful in any aspect of the
business of the Company, any customer or supplier lists of the Company, any
confidential or secret development or research work of the Company, or any other
confidential information or secret aspects of the business of the Company.
Employee acknowledges that the above-described knowledge or information
constitutes a unique and valuable asset of the Company and represents a
substantial investment of time and expense by the Company and its predecessors,
and that any disclosure or other use of such knowledge or information other than
for the sole benefit of the Company would be wrongful and would cause
irreparable harm to the Company. The foregoing obligations of confidentiality,
however, shall not apply to any knowledge or information which is now published
or which subsequently becomes generally publicly known in the form in which it
was obtained from the Company, other than as a direct or indirect result of the
breach of this agreement by Employee. It is hereby acknowledged that it is not
the intention of the forgoing provisions to preclude the Employee from securing
gainful employment with
3
<PAGE>
subsequent employers who are not competitors of the Company or who would
otherwise have no reasonable commercial use of the above described knowledge or
information, but only to protect the Company's legitimate proprietary
information or knowledge.
6. VENTURES. If, during the Term of Employment, Employee is engaged in
or associated with the planning or implementing of any project, program or
venture involving the Company and a third party or parties, all rights in such
project, program or venture shall belong to the Company. Except as formally
approved by the Company's Board of Directors, Employee shall not be entitled to
any interest in such project, program or venture or to any commission, finder's
fee or other compensation in connection therewith other than the salary or other
compensation to be paid to Employee as provided in this agreement.
7. PATENT, COPYRIGHTS AND RELATED MATTERS.
7.01 Disclosure and Assignment. Employee will promptly disclose in
writing to the Company complete information concerning each and every invention,
discovery, improvement, device, design, apparatus, practice, process, method or
product, whether patentable or not, made, developed, perfected, devised,
conceived or first reduced to practice by Employee, either solely or in
collaboration with others, during the Term of Employment, or within six months
thereafter, whether or not during regular working hours, relating to any phase
of the business of the Company conducted at such time (hereinafter referred to
as "Developments"). Employee, to the extent that Employee has the legal right to
do so, hereby acknowledges that any and all of said Developments are the
property of the Company and hereby assigns and agrees to assign to the Company
and all of the Employee's right, title and interest in and to any and all of
such Developments.
7.02 Future Developments. As to any future Developments made by
Employee and which are first conceived or reduced to practice during the Term of
Employment, or within six months thereafter, but which are claimed for any
reason to belong to an entity or person other than the Company, Employee will
promptly disclose the same in writing to the Company and shall not disclose the
same to others if the Company, within sixty (60) days thereafter, shall claim
ownership of such Developments under the terms of this agreement. If the Company
makes such claim, Employee agrees that, insofar as the rights (if any) of
Employee are involved, it will be settled by arbitration in accordance with the
rules of the American Arbitration Association. The locale of the arbitration
shall be Minneapolis, Minnesota (or other locale convenient to the Company's
principal executive offices). If the Company makes no such claim, Employee
hereby acknowledges that the Company has made no promise to receive and hold in
confidence any such information disclosed by Employee.
7.03 Limitation on Sections 7.01 and 7.02. The provisions of
sections 7.01 and 7.02 shall not apply to any Development meeting the following
conditions:
(a) such Development was developed entirely on Employee's own
time; and
4
<PAGE>
(b) such Development was made without the use of any Company
equipment, supplies, facility or trade secret information; and
(c) either:
(i) such Development does not relate (i) directly to the
business of the Company, or (ii) to the Company's actual
or demonstrably anticipated research or development; or
(ii) such Development does not result from any work performed
by the Employee for the Company.
7.04 Employee Assistance. Employee agrees to assist Company in
obtaining patents or copyrights on any Developments assigned to the Company that
Company, in its sole discretion, seeks to patent or copyright. Employee also
agrees to sign all documents and do all things deemed necessary by Company to
obtain and/or maintain such patents or copyrights, to assign them to Company,
and to protect them against infringement. The obligations of this Section 7 are
continuing and shall survive the termination of Employee's employment with
Company.
7.05 Appointment of Agent. Employee irrevocably appoints the Company
to act as Employee's agent and attorney in fact to perform all acts necessary to
obtain/or maintain patents or copyrights to any Developments assigned by
Employee to Company under this agreement if (i) Employee refuses to perform
those acts or (ii) is unavailable, within the meaning of the United States
patent and copyright laws. Employee acknowledges that the grant of the foregoing
power of attorney is coupled with an interest and shall survive the death or
disability of Employee and the termination of Employee's employment with
Company.
8. TERMINATION.
8.01 Grounds for Termination. This agreement shall be terminated
prior to the end of the Term of Employment under the following circumstances:
(a) By mutual agreement of Employee and the Company;
(b) Immediately upon the death of Employee;
(c) Upon delivery by Employee of a notice of termination to the
Company, in which event this agreement shall be terminated
ninety (90) days after receipt of such notice; and
(d) Immediately for Cause, in the event of (i) Employee's personal
dishonesty, willful misconduct, breach of fiduciary duty,
intentional failure to perform stated duties, willful
violation of any laws (other than
5
<PAGE>
minor traffic violations or similar offenses), or material
breach of the policies or procedures of the Company. The
Company agrees to give Employee thirty (30) days notice to
cure those limited items that can actually be cured prior to
effecting termination pursuant to this subsection, such
termination to be deemed to be termination for cause; or (ii)
the bankruptcy or insolvency of the Company.
Notwithstanding any termination of this agreement, Employee, in consideration of
his employment hereunder to the date of such termination, shall remain bound by
the provisions of this agreement which specifically relate to periods,
activities or obligations upon or subsequent to the termination of Employee's
employment, and the Company shall remain bound by the provisions of section 5
(to the extent that they relate to time periods prior to the date of such
termination).
8.02 Severance Payment for Termination Following a Change in
Control. If a Change in Control of the Company occurs during the Term of
Employment and, following such Change in Control, either (i) the Company
terminates the employment of Employee other than for Cause, or (ii) Employee
voluntarily terminates their employment, in either case during the six (6) month
period following the Change in Control, Employee shall be entitled to the
severance compensation provided in this Section 8.02, in full and complete
satisfaction of any and all obligations of the Company under this Agreement and
as the sole and exclusive remedy or severance available to Employee as a result
of the termination. The amount of the severance compensation shall be equal to
the sum of Employee's then current minimum base salary for twelve (12) months.
Any severance compensation shall be paid in equal installments over the twelve
(12) month period following the effective date of termination, and shall be
subject to applicable withholdings and in accordance with the regular payroll
practices of the Company. Any employee benefits provided to Employee shall
terminate upon the effective date of termination, subject to such continuation
rights as may be available to Employee by law. Nothing in this agreement,
including the severance payments described in this section, shall in any way be
construed to extend the period of Employee's employment with the Company.
For purposes of this section, a Change in Control shall mean either of
the following:
(a) a change in control of a nature that would be required to be
reported in response to Item 6(e) of Schedule 14A of
Regulation 14A promulgated under the Securities Exchange Act
of 1934, as amended (the "Exchange Act"), whether or not the
Company is then subject to such reporting requirement; or
(b) a merger or consolidation to which the Company is a party if,
following the effective date of such merger or consolidation,
the individuals and entities who were shareholders of the
Company prior to the effective date of such merger or
consolidation have beneficial ownership (as
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defined in Rule 13d-3 under the Exchange Act) of less than
fifty percent (50%) of the combined voting power of the
surviving corporation following the effective date of such
merger or consolidation.
8.03 Surrender of Records and Property. Upon termination of
his employment with the Company, Employee shall deliver promptly to the Company
all records, manuals, books, blank forms, documents, letters, memoranda, notes,
notebooks, reports, data, tables, calculations or copies thereof, which are the
property of the Company or which relate in any way to the business, products,
practices or techniques of the Company, and all other property, trade secrets
and confidential information of the Company, including, but not limited to, all
documents which in whole or in part contain any trade secrets or confidential
information of the Company, which in any of these cases are in Employee's
possession or under Employee's control. Provided, however, that Employee shall
be entitled to retain items of sentimental value, copies of which shall be
provided to the Company at the request of the Company and at the Company's
expense.
9. MISCELLANEOUS.
9.01 Governing Law. This agreement is made under and shall be
governed by and construed in accordance with the laws of the State of Minnesota.
9.02 Prior Agreements. This agreement contains the entire agreement
of the parties relating to the subject matter hereof and supersedes all prior
agreements and understandings with respect to such subject matter, and the
parties hereto have made no agreements, representations or warranties relating
to the subject matter of this agreement which are not set forth herein.
9.03 Withholding Taxes. The Company may withhold from all salary,
bonus, severance or other benefits payable under this agreement all federal,
state, city or other taxes as shall be required pursuant to any law or
governmental regulation or ruling.
9.04 Amendments. No amendment or modification of this agreement
shall be deemed effective unless made in writing and signed by the parties
hereto.
9.05 No Waiver. No term or condition of this agreement shall be
deemed to have been waived, nor shall there be any estoppel to enforce any
provisions of this agreement, except by a statement in writing signed by the
party whom enforcement of the waiver or estoppel is sought. Any written waiver
shall not be deemed a continuing waiver unless specifically stated, shall
operate only as to the specific term or condition waived and shall not
constitute a waiver of such term or condition for the future or as to any act
other than specifically waived.
9.06 Severability. To the extent any provision of this agreement
shall be invalid or unenforceable, it shall be considered deleted herefrom and
the remainder of such provision and of this agreement shall be unaffected and
shall continue in full force and effect.
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In furtherance and not in limitation of the foregoing, should the duration or
geographical extent of, or business activities covered by, any provision of this
agreement be in excess of that which is valid and enforceable under applicable
law, then such provision shall be construed to cover only that duration, extent
or activities which may validly and enforceably be covered. Employee
acknowledges the uncertainty of the law in this respect and expressly stipulates
that this agreement be given the construction which renders its provisions valid
and enforceable to the maximum extent (not exceeding its express terms) possible
under applicable law.
9.07 Assignment. This agreement shall not be assignable, in whole or
in part, by either party without the written consent of the other party.
9.08 Injunctive Relief. Employee agrees that it would be difficult
to compensate the Company fully for damages for any violation of the provisions
of this agreement, including without limitation the provisions of sections 5, 6,
and 7. Accordingly, Employee specifically agrees that the Company shall be
entitled to temporary and permanent injunctive relief to enforce the provisions
of this agreement and that such relief may be granted without the necessity of
proving actual damages. This provision with respect to injunctive relief shall
not, however, diminish the right of the Company to claim and recover damages in
addition to injunctive relief.
9.09 Mandatory Arbitration, In the event any dispute arises under
this agreement, or as to the breach hereof, and if the dispute cannot be settled
within a reasonable time through direct negotiations between the parties, which
the parties agree to pursue in good faith, such dispute shall be submitted to
binding arbitration conducted in Minneapolis, Minnesota, in accordance with the
then-current Commercial Rules of the American Arbitration Association ("AAA").
The costs and expenses of the arbitration shall be paid by the party against
whom the arbitrators render a decision, if a decision is rendered against a
party, otherwise the costs and expenses shall be shared equally by Employee and
the Company. The arbitrators shall have full power and authority to rule on any
question of law in the same manner as any judge of any court of competent
jurisdiction, and the decision of the arbitrators shall be final and conclusive
upon the parties, and shall not be subject to any appeal or review if the
arbitrators have followed the Commercial Rules of the AAA. The arbitrators shall
have full power to make any award (including the award of equitable remedies)
that shall under the circumstances presented to them be deemed to be proper;
provided that the arbitrators shall not have the power to award punitive damages
or to limit, expand or otherwise modify the terms of this agreement. Judgment
may be entered upon any award rendered by the arbitrators in accordance with
applicable law in any court of competent jurisdiction.
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IN WITNESS WHEREOF, the parties have executed this agreement effective
as of the date and year first written above.
VIDEOLABS, INC.
By /s/ James Hansen
-------------------------------------
Its CEO
----------------------------------
/s/ Robin Sheeley
---------------------------------------
Robin Sheeley
9
EXHIBIT 10.26
NONCOMPETITION AGREEMENT
THIS NONCOMPETITION AGREEMENT (the "AGREEMENT"), is made and entered
into effective as of August 3, 1999, by and between Robin Sheeley, a Minnesota
resident (the "PRINCIPAL"), and VideoLabs, Inc., a Delaware corporation (the
"COMPANY").
RECITALS:
WHEREAS, pursuant to the terms of a Plan and Agreement of Merger dated
May 17, 1999, by and between, among others, Acoustic Communication Systems,
Inc., a Minnesota corporation ("ACS") and Company (the "MERGER AGREEMENT"), ACS
has agreed to be merged with and into a subsidiary of Company; and
WHEREAS, as a condition to Company's agreement to the merger, Company
has required that the Principal refrain from competing with the Company pursuant
to the terms of this Agreement; and
WHEREAS, the Principal is willing to enter into this Agreement subject
to the consideration set forth in this Agreement.
AGREEMENTS:
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements set forth herein, the receipt and sufficiency of which
are acknowledged, the parties agree as follows:
1. Restrictive Covenants. In consideration of the amount payable
pursuant to Section 3, the consummation of the transactions pursuant to the
Merger Agreement and other agreements, and in addition to (and not in lieu of)
any other covenants given by Principal in connection with the Merger Agreement
and that certain Employment Agreement by and between Principal and the Company
of even date herewith (the "Employment Agreement"), Principal covenants and
agrees that for a period of twelve (12) years commencing on the date of this
Agreement (the "Term of Restriction"):
(a) Principal shall not, for any person or entity other than
VideoLabs or its affiliates, directly or indirectly, own, manage,
operate, join, control or participate in, be compensated by or be
connected with as an officer, employee, agent, consultant, partner,
stockholder, or otherwise, any Competitive Business (as defined below)
anywhere within Iowa, Minnesota, Nebraska, North Dakota, South Dakota,
or
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Wisconsin. As used in this Agreement, the term "COMPETITIVE BUSINESS"
means any business involving the provision of equipment, software or
design, installation or maintenance services with regard to the data,
voice or video conferencing or presentation systems for customers;
provided, however, that the foregoing shall not prevent the Principal
from owning not more than a one percent (1%) interest in any entity
engaged in such a competing business whose securities are traded on any
securities exchange or in the over-the-counter markets.
(b) Except as permitted or directed by the Company's Board of
Directors, during the Term of Restriction or at any time thereafter
Principal shall not divulge, furnish or make accessible to anyone or use
in any way (other than in the ordinary course of the business of the
Company) any confidential or secret knowledge or information of ACS
which Principal has acquired or become acquainted with prior to or as of
the Closing of the Merger Agreement, whether developed by Principal or
by others, concerning any trade secrets, confidential or secret designs,
processes, formulae, plans, devices or material (whether or not patented
or patentable) directly or indirectly useful in any aspect of the
business of the ACS, any customer or supplier lists of the ACS, any
confidential or secret development or research work of ACS, or any other
confidential information or secret aspects of the business of ACS.
Principal acknowledges that the above-described knowledge or information
constitutes a unique and valuable asset of ACS and represents a
substantial investment of time and expense by ACS and its predecessors,
and that any disclosure or other use of such knowledge or information
other than for the sole benefit of ACS or the Company would be wrongful
and would cause irreparable harm to ACS. Both during and after the Term
of Restriction, Principal will refrain from any acts or omissions that
would reduce the value of such knowledge or information to ACS. The
foregoing obligations of confidentiality, however, shall not apply to
any knowledge or information which is now published or which
subsequently becomes generally publicly known in the form in which it
was obtained from the ACS, other than as a direct or indirect result of
the breach of this Agreement by Principal. It is hereby acknowledged
that it is not the intention of the forgoing provisions to preclude the
Principal from securing gainful employment with subsequent employers who
are not competitors of ACS or the Company or who would otherwise have no
reasonable commercial use of the above described knowledge or
information, but only to protect ACS's legitimate proprietary
information or knowledge.
The covenants of the Principal set forth in this Section 1 are collectively
referred to as the "RESTRICTIVE COVENANTS."
2. Reasonable Scope of Restrictive Covenants; Severability. The
necessity of protection against the competition of Principal and the nature and
scope of such protection has been carefully considered and negotiated by the
parties to this Agreement. Principal agrees and acknowledges that (a) the
duration, scope and geographic areas applicable to the covenant not to compete
described in this Section are fair, reasonable and necessary and (b)
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<PAGE>
adequate consideration has been received by Principal for such obligations. If,
however, for any reason any term or provision of this Agreement, or any part or
aspect thereof, shall be deemed by a court of competent jurisdiction to be
overly broad in scope or duration or both, the court considering the same shall
have the power and hereby is authorized and the parties agree that it may modify
such term or provision to limit such scope and duration so that such term or
provision is no longer overly broad and to enforce the same as so limited.
Subject to the foregoing sentence, in the event that any provisions of this
Agreement shall be held to be invalid or unenforceable for any reason, such
invalidity or unenforceability shall attach only to such provisions and shall
not affect or render invalid or unenforceable any other provision of this
Agreement. Subject further to the foregoing, if a court of any one or more
jurisdictions holds any term or provision of this Agreement, or any part or
aspect thereof, unenforceable by reason of the breadth of such scope or
otherwise, then such determination will not affect or render invalid or
unenforceable such term or provision in any other jurisdiction; such terms and
provisions as they relate to each such jurisdiction being, for this purpose,
severable into separate and independent covenants.
3. Consideration. In consideration of the provisions of this Agreement,
the Company agrees to pay Principal the sum of $750,000, in cash or other
immediately available funds, on April 7, 2000. The Principal may at his
discretion defer such payment for up to twelve (12) successive one-year periods,
in which event the deferred balance shall accrue interest at the Company's short
term, cost of borrowing.
4. Remedies for Breach. In the event that the Principal shall breach the
Restrictive Covenants, then the Principal shall pay to the Company, as
liquidated damages and as full and complete settlement of any damages incurred
by Company, an amount equal to the then unamortized balance of the consideration
(which will amortize evenly over the one hundred forty-four (144) months at
$5,208.33 per month) set forth in Section 3 of this Agreement, plus attorneys'
fees and collection costs. The balance of the consideration to be repaid by
Principal to the Company shall be calculated by rounding the date of Principal's
breach to the first day of the nearest month and subtracting that period of
Principal's compliance with the Restrictive Covenants from one hundred
forty-four (144). However, in the event of Principal's actual or threatened
breach of this Agreement and Principal's failure to repay the consideration as
set forth above, the Company shall be entitled to such full and complete relief
as any court of equity can then afford, including, but not limited to, the
remedies of specific performance and injunctive relief, until the repayment
obligation set forth above is paid in full. To secure the foregoing repayment
obligation, from the time of payment by the Company under Section 3 above, and
until the end of the Term of Restriction, Principal shall deliver, and Company
shall hold in pledge, an equivalent number of shares of the Buyer's Stock (as
defined in the Merger Agreement) equal to the unamortized balance of such
amount. The number of shares so held in pledge shall be reasonably adjusted from
time to time to reflect changes in the unamortized balances and the fair value
of such shares. Principal shall be entitled to substitute collateral of
equivalent value upon notice to Company. Upon termination of the Term of
Restriction, payment of the foregoing amount, or such substitution, the Company
shall return to Principal any shares then held in pledge.
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5. Termination. This Agreement shall immediately terminate upon the
occurrence of any of the following:
(a) At the option of Principal, provided that to exercise this
option the Principal provides Company with: (i) thirty (30) days
written notification thereof; and (ii) a cash payment with the
notice in an amount equal to the unamortized balance of the
consideration as set forth in Sections 3 and 4 of this Agreement
from and after the date of the notice (or the date of
termination, if later); provided, however, that in calculating
the cash payment for the unamortized portion, Principal shall
not be required to pay for any period as to which Principal is
restricted from competing under any other agreement with
Company, so long as Principal is not in breach thereof.
(b) Immediately upon a "Change in Control" as defined herein. For
purposes of this section, a Change in Control shall mean either
of the following:
(i) a change in control of a nature that would be required
to be reported in response to Item 6(e) of Schedule 14A
of Regulation 14A promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"),
whether or not the Company is then subject to such
reporting requirement; or
(ii) a merger or consolidation to which the Company is a
party if, following the effective date of such merger or
consolidation, the individuals and entities who were
shareholders of the Company prior to the effective date
of such merger or consolidation have beneficial
ownership (as defined in Rule 13d-3 under the Exchange
Act) of less than fifty percent (50%) of the combined
voting power of the surviving corporation following the
effective date of such merger or consolidation.
6. Miscellaneous.
6.01 Governing Law. This Agreement is made under and shall be governed
by and construed in accordance with the laws of the State of Minnesota.
6.02 Prior Agreements. This Agreement, the Merger Agreement, and the
Employment Agreement contain the entire agreement of the parties relating to the
subject matter hereof and thereof and supersedes all prior agreements and
understandings with respect to such subject matter, and the parties hereto and
thereto have made no agreements,
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representations or warranties relating to the subject matter of this Agreement,
the Merger Agreement, and the Employment Agreement which are not set forth
herein and therein.
6.03 Withholding Taxes. The Company may withhold from the consideration
all federal, state, city or other taxes as shall be required pursuant to any law
or governmental regulation or ruling.
6.04 Amendments. No amendment or modification of this Agreement shall be
deemed effective unless made in writing and signed by the parties hereto.
6.05 No Waiver. No term or condition of this Agreement shall be deemed
to have been waived, nor shall there be any estoppel to enforce any provisions
of this agreement, except by a statement in writing signed by the party whom
enforcement of the waiver or estoppel is sought. Any written waiver shall not be
deemed a continuing waiver unless specifically stated, shall operate only as to
the specific term or condition waived and shall not constitute a waiver of such
term or condition for the future or as to any act other than specifically
waived.
6.06 Assignment. This Agreement shall not be assignable, in whole or in
part, by either party without the written consent of the other party. However,
the Company may assign the Agreement to an affiliate under the control of the
Company or under common control with the Company without the consent of the
Principal.
IN WITNESS WHEREOF, the parties have executed this Agreement effective
as of the date and year first written above.
VIDEOLABS, INC.
By /s/ James Hansen
----------------------------------------
Its CEO
------------------------------------
/s/ Robin Sheeley
-------------------------------------------
Robin Sheeley
14
EXHIBIT 10.27
REGISTRATION AGREEMENT
THIS AGREEMENT is made as of August 3, 1999, among VideoLabs, Inc., a
Delaware corporation (the "Company") and Robin Sheeley, a resident of Minnesota
(the "Investor").
The Investor is a party to an Agreement and Plan of Merger dated as of
May 17, 1999 ("Merger Agreement") pursuant to which Accoustic Communications
Systems, Inc., a corporation wholly-owned by Investor, was merged into a
wholly-owned subsidiary of the Company (the "Merger"). In connection with the
Merger, the Investor received 1,209,678 shares of Common Stock from the Company
and the Company has agreed to provide the registration rights set forth in this
Agreement. Unless otherwise provided in this Agreement, capitalized terms used
herein shall have the meanings set forth in paragraph 8 hereof or in the Merger
Agreement.
The parties hereto agree as follows:
1. PIGGYBACK REGISTRATIONS.
a. Right to Piggyback. Whenever the Company proposes to
register any of its securities under the Securities Act and the
registration form to be used may be used for the registration of
Investor Registrable Securities (as hereinafter defined) (a "Piggyback
Registration"), the Company shall give prompt written notice to the
Investor of its intention to effect such a registration and shall
include in such registration all Investor Registrable Securities with
respect to which the Company has received a written request for
inclusion therein within 20 days after the receipt of the Company's
notice (subject to paragraphs 2(c) and (d) below).
b. Piggyback Expenses. The Registration Expenses shall be paid
in all Piggyback Registrations as provided in Paragraph 4 below.
c. Priority on Primary Registrations. If a Piggyback
Registration is an underwritten primary registration on behalf of the
Company, and the managing underwriter(s) advise the Company in writing
that in their opinion the number of securities requested to be included
in such registration exceeds the number which can be sold in such
offering without adversely affecting the marketability of the offering,
the Company shall include in such registration (i) first, the
securities the Company proposes to sell, (ii) second, the Investor
Registrable Securities requested to be included in such registration
and (iii) third, other securities requested to be included in such
registration.
<PAGE>
d. Priority on Secondary Registrations. If a Piggyback
Registration is an underwritten secondary registration on behalf of
holders of the Company's securities, and the managing underwriters
advise the Company in writing that in their opinion the number of
securities requested to be included in such registration exceeds the
number which can be sold in such offering without adversely affecting
the marketability of the offering, the Company shall include in such
registration (i) first, the securities requested to be included therein
by the holders requesting such registration, (ii) second, the Investor
Registrable Securities requested to be included in such registration,
and (iii) third, other securities requested to be included in such
registration.
e. Selection of Underwriters. If any Piggyback Registration is
an underwritten offering, the selection of investment banker(s) and
manager(s) for the offering shall be made solely by the Company.
f. Other Registrations. If the Company has previously filed a
registration statement with respect to Investor Registrable Securities
pursuant to the paragraph 1 and if such previous registration has not
been withdrawn or abandoned, the Company shall not file or cause to be
effected any other registration of any of its equity securities or
securities convertible or exchangeable into or exercisable for its
equity securities under the Securities Act (except on Form S-8 or any
successor form), whether on its own behalf or at the request of any
holder or holders of such securities, until a period of at least 180
days has elapsed from the effective date of such previous registration.
2. HOLDBACK AGREEMENTS.
a. The Investor shall not effect any public sale or
distribution (including sales pursuant to Rule 144) of equity
securities of the Company, or any securities convertible into or
exchangeable or exercisable for such securities, during the seven days
prior to and the 180-day period beginning on the effective date of any
underwritten Piggyback Registration in which Investor Registrable
Securities are included (except as part of such underwritten
registration), unless the underwriters managing the registered public
offering otherwise agree.
b. The Company (i) shall not effect any public sale or
distribution of its equity securities, or any securities convertible
into or exchangeable or exercisable for such securities, during the
holdback period mandated by the managing underwriters of the registered
public offering, which period shall not exceed the 180-day period
beginning on the effective date of any underwritten Piggyback
Registration (except as part of such underwritten registration or
pursuant to registrations on Form S-8 or any successor form), and (ii)
shall cause each holder of more than 8% of its Common Stock, or any
securities convertible into or exchangeable or exercisable for Common
Stock, purchased from the Company at any time after the date of this
Agreement (other than in a registered public offering) to agree not to
effect any public sale or
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<PAGE>
distribution (including sales pursuant to Rule 144) of any such
securities during such period (except as part of such underwritten
registration, if otherwise permitted).
3. REGISTRATION PROCEDURES. Whenever the Investor has requested
that any Investor Registrable Securities be registered pursuant to this
Agreement, the Company shall use its best efforts to effect the registration and
the sale of such Investor Registrable Securities in accordance with the intended
method of disposition thereof, and pursuant thereto the Company shall as
expeditiously as possible:
a. prepare and file with the Securities and Exchange
Commission a registration statement with respect to such Investor
Registrable Securities and use its best efforts to cause such
registration statement to become effective (provided that before filing
a registration statement or prospectus or any amendments or supplements
thereto, the Company shall furnish to the counsel selected by the
Investor copies of all such documents proposed to be filed, which
documents shall be subject to the review and reasonable comment of such
counsel);
b. notify the Investor of the effectiveness of each
registration statement filed hereunder and prepare and file with the
Securities and Exchange Commission such amendments and supplements to
such registration statement and the prospectus used in connection
therewith as may be necessary to keep such registration statement
effective for a period of not less than 180 days and comply with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such registration statement during such period in
accordance with the intended methods of disposition by the sellers
thereof set forth in such registration statement;
c. furnish to the Investor such number of copies of such
registration statement, each amendment and supplement thereto, the
prospectus included in such registration statement (including each
preliminary prospectus) and such other documents as the Investor may
reasonably request in order to facilitate the disposition of the
Investor Registrable Securities owned by the Investor;
d. use its best efforts to register or qualify such Investor
Registrable Securities under such other securities or blue sky laws of
such jurisdictions as the Investor reasonably requests and do any and
all other acts and things which may be reasonably necessary or
advisable to enable the Investor to consummate the disposition in such
jurisdictions of the Investor Registrable Securities owned by the
Investor (provided that the Company shall not be required to (i)
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this subparagraph, (ii)
subject itself to taxation in any such jurisdiction or (iii) consent to
general service of process in any such jurisdiction);
e. notify the Investor, at any time when a prospectus relating
thereto is required to be delivered under the Securities Act, of the
happening of any event as a result of which the prospectus included in
such registration statement contains an
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<PAGE>
untrue statement of a material fact or omits any fact necessary to make
the statements therein not misleading, and, at the request of the
Investor, the Company shall prepare a supplement or amendment to such
prospectus so that, as thereafter delivered to the purchasers of such
Investor Registrable Securities, such prospectus shall not contain an
untrue statement of a material fact or omit to state any fact necessary
to make the statements therein not misleading;
f. cause all such Investor Registrable Securities to be listed
on each securities exchange on which similar securities issued by the
Company are then listed and, if not so listed, to be listed on the NASD
automated quotation system;
g. provide a transfer agent and registrar for all such
Investor Registrable Securities not later than the effective date of
such registration statement;
h. enter into such customary agreements (including
underwriting agreements in customary form) and take all such other
actions as the Investor or the underwriters, if any, reasonably request
in order to expedite or facilitate the disposition of such Investor
Registrable Securities (including effecting a stock split or a
combination of shares);
i. otherwise use its best efforts to comply with all
applicable rules and regulations of the Securities and Exchange
Commission, and make available to its security holders, as soon as
reasonably practicable, an earnings statement covering the period of at
least twelve months beginning with the first day of the Company's first
full calendar quarter after the effective date of the registration
statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
j. in the event of the issuance of any stop order suspending
the effectiveness of a registration statement, or of any order
suspending or preventing the use of any related prospectus or
suspending the qualification of any common stock included in such
registration statement for sale in any jurisdiction, the Company shall
use its best efforts promptly to obtain the withdrawal of such order;
k. use its best efforts to cause such Investor Registrable
Securities covered by such registration statement to be registered with
or approved by such other governmental agencies or authorities as may
be necessary to enable the Investor to consummate the disposition of
such Investor Registrable Securities; and
l. in the case of a primary offering, obtain a cold comfort
letter from the Company's independent public accountants in customary
form and covering such matters of the type customarily covered by cold
comfort letters as the Investor reasonably requests.
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<PAGE>
4. REGISTRATION EXPENSES.
a. All expenses incident to the Company's performance of or
compliance with this Agreement, including without limitation all
registration and filing fees, fees and expenses of compliance with
securities or blue sky laws, printing expenses, messenger and delivery
expenses, fees and disbursements of custodians, and fees and
disbursements of counsel for the Company and all independent certified
public accountants, underwriters (excluding discounts and commissions)
and other Persons retained by the Company (all such expenses being
herein called "Registration Expenses") shall be borne as provided in
this Agreement, except that the Company shall, in any event, pay its
internal expenses (including, without limitation, all salaries and
expenses of its officers and employees performing legal or accounting
duties), the expense of any annual audit or quarterly review, the
expense of any liability insurance and the expenses and fees for
listing the securities to be registered on each securities exchange on
which similar securities issued by the Company are then listed or on
the NASD automated quotation system.
b. In connection with each Piggyback Registration, the
Investor shall be responsible for the fees and disbursements of legal
counsel chosen by the Investor.
c. To the extent Registration Expenses are required to be paid
by the Company pursuant to paragraph 5(a), each holder of securities
included in any registration hereunder shall pay those Registration
Expenses allocable to the registration of such holder's securities so
included, and any Registration Expenses not so allocable shall be borne
by all sellers of securities included in such registration in
proportion to the aggregate selling price of the securities to be so
registered.
5. INDEMNIFICATION.
a. The Company agrees to indemnify, to the extent permitted by
law, the Investor, its officers and directors and each Person who
controls the Investor ( within the meaning of the Securities Act)
against all losses, claims, damages, liabilities and expenses caused by
any untrue or alleged untrue statement of material fact contained in
any registrable statement, prospectus or preliminary prospectus or any
amendment thereof or supplement thereto or any omission or alleged
omission of a material fact required to be stated therein or necessary
to make the statements therein not misleading, except insofar as the
same are caused by or contained in any information furnished in writing
to the Company by the Investor expressly for use therein or by the
Investor's failure to deliver a copy of the registration statement or
prospectus or any amendments or supplements thereto after the Company
has furnished the Investor with a sufficient number of copies of the
same. In connection with an underwritten offering, the Company shall
indemnity such underwriters, their officers and directors and each
Person who controls such underwriters (within the meaning of the
Securities Act) to the same extent as provided above with respect to
the indemnification of the Investor.
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<PAGE>
b. In connection with any registration statement in which the
Investor is participating, the Investor shall furnish to the Company in
writing such information and affidavits as the Company reasonably
requests for use in connection with any such registration statement or
prospectus and, to the extent permitted by law, shall indemnify the
Company, its directors and officers and each Person who controls the
Company (within the meaning of the Securities Act) against any losses,
claims, damages, liabilities and expenses resulting from any untrue or
alleged untrue statement of material fact contained in the registration
statement, prospectus or preliminary prospectus or any amendment
thereof or supplement thereto or any omission or alleged omission of a
material fact, required to be stated therein or necessary to make the
statements therein not misleading, but only to the extent that such
untrue statement or omission is contained in any information or
affidavit so furnished in writing by the Investor; provided that the
obligation to indemnify shall be limited to the net amount of proceeds
received by the Investor from the sale of Investor Registrable
Securities pursuant of such registration statement.
c. Any Person entitled to indemnification hereunder shall (i)
give prompt written notice to the indemnifying party of any claim with
respect to which it seeks indemnification (provided that the failure to
give prompt notice shall not impair any Person's right to
indemnification hereunder to the extent such failure has not prejudiced
the indemnifying party) and (ii) unless in such indemnified party's
reasonable judgment a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel
reasonably satisfactory to the indemnified party. If such defense is
assumed, the indemnifying party shall not be subject to any liability
for any settlement made by the indemnified party without its consent
(but such consent shall not be unreasonably withheld). An indemnifying
party who is not entitled to, or elects not to, assume the defense of a
claim shall not be obligated to pay the fees and expenses of more than
one counsel for all parties indemnified by such indemnifying party with
respect to such claim, unless in the reasonable judgment of any
indemnified party a conflict of interest may exist between such
indemnified party and any other of such indemnified parties with
respect to such claim.
d. The indemnification provided for under this Agreement shall
remain in full force and effect regardless of any investigation made by
or on behalf of the indemnified party or any officer, director or
controlling Person of such indemnified party and shall survive the
transfer of securities. The Company also agrees to make such
provisions, as are reasonably requested by any indemnified party, for
contribution to such party in the event the Company's indemnification
is unavailable for any reason.
6. DEFINITIONS.
"Common Stock" means the Company's common stock, $.01 par
value.
- 6 -
<PAGE>
"Investor Registrable Securities" means (i) the 1,209,678
shares of Common Stock issued to the Investor pursuant to the Merger
Agreement, or (ii) any equity securities issued or issuable with
respect to the securities referred to in clause (i) by way of a stock
dividend or stock split or in connection with a combination of shares,
recapitalization, merger, consolidation or other reorganization. As to
any particular Investor Registrable Securities, such securities shall
cease to be Investor Registrable Securities when they have been
distributed to the public pursuant to an offering registered under the
Securities Act or sold to the public through a broker, dealer or market
maker in compliance with Rule 144 under the Securities Act (or any
similar rule then in force) or otherwise sold, transferred or disposed
of by the Investor.
"Person" means an individual, a partnership, a corporation, a
limited liability company, an association, a joint stock company, a
trust, a joint venture, an unincorporated organization and a government
entity or any department, agency or political subdivision thereof.
"Securities Act" means the Securities Act of 1933, as amended
from time to time.
"Securities Exchange Act" means the Securities Exchange Act of
1934, as amended from time to time.
7. MISCELLANEOUS.
a. No Inconsistent Agreements. The Company shall not hereafter
enter into any agreement with respect to its securities which is
inconsistent with or violates the rights granted to the Investor in
this Agreement.
b. Remedies. Any Person having rights under any provision of
this Agreement shall be entitled to enforce such rights specifically to
recover damages caused by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law. The parties
hereto agree and acknowledge that money damages may not be an adequate
remedy for any breach of the provisions of this Agreement and that any
party may in its sole discretion apply to any court of law or equity of
competent jurisdiction (without posting any bond or other security) for
specific performance and for other injunctive relief in order to
enforce or prevent violation of the provisions of this Agreement.
c. Amendments and Waivers. Except as otherwise provided
herein, the provisions of this Agreement may be amended or waived only
upon the prior written consent of the Company and the Investor.
d. Successors and Assigns. All covenants and agreements in
this Agreement by or on behalf of any of the parties hereto shall bind
and inure to the benefit of the respective permitted successors and
assigns of the parties hereto. The
- 7 -
<PAGE>
provisions of this Agreement which are for the benefit of the Investor
are not transferable and may not be assigned or otherwise transferred
to any person or purchaser of Investor Registrable Securities or
Warrant.
e. Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and
valid under applicable law, but if any provision of this Agreement is
held to be prohibited by or invalid under applicable law, such
provision shall be ineffective only to the extent of such prohibition
or invalidity, without invalidating the remainder of this Agreement.
f. Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, any one of which need not contain the
signatures of more than one party, but all such counterparts taken
together shall constitute one and the same Agreement.
g. Descriptive Headings. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a
part of this Agreement.
h. Governing Law. This Agreement shall be governed by, and
construed in accordance with, the laws of the State of Minnesota.
i. Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this
Agreement shall be in writing and shall be deemed to have been given
when delivered personally to the recipient, sent to the recipient by
reputable overnight courier service (charges prepaid) or mailed to the
recipient by certified or registered mail, return receipt requested and
postage prepaid. Such notices, demands and other communications shall
be sent to the addressed indicated below:
To the Investor: Robin Sheeley
Acoustic Communication Systems, Inc.
13705 26th Avenue North, Suite 110
Plymouth, MN 55441
To the Company: VideoLabs, Inc.
3960 Golden Hill Drive
Golden Valley, MN 55466
Attn: Chairman
with copies to: Hinshaw & Culbertson
3100 Piper Jaffray Tower
222 South Ninth Street
Minneapolis, Minnesota 55402
Attn: Shane R. Kelley
- 8 -
<PAGE>
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
IN WITNESS WHEREOF, the parties have executed this Registration
Agreement as of the date first written above.
VIDEOLABS, INC.
By /s/ James Hansen
------------------------------------
Its CEO
--------------------------------
/s/ Robin Sheeley
---------------------------------------
ROBIN SHEELEY
- 9 -
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<PERIOD-START> JAN-01-1999
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