<PAGE> 1
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark One)
[x] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the quarterly period ended September 30, 1999
[ ] Transition report under Section 13 or 15(d) of the Exchange Act
For the transition period from _________ to ____________
Commission file number 000-22235
Video Network Communications, Inc.
- - --------------------------------------------------------------------------------
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 54-1707962
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
50 International Drive
Portsmouth, NH 03801
- - --------------------------------------------------------------------------------
(Address of Principal Executive Offices)
(603) 334-6700
- - --------------------------------------------------------------------------------
(Issuer's Telephone Number, Including Area Code)
Objective Communications, Inc.
- - --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
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 _____
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of
common equity, as of November 12, 1999: 8,812,141
Transitional Small Business Disclosure Format (check one):
Yes_____ No __X__
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VIDEO NETWORK COMMUNICATIONS, INC.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
ASSETS
September30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $4,827,572 $ 8,532
Accounts receivable, less allowance for doubtful accounts of $ -0- and $22,246
at September 30, 1999 and December 31, 1998, respectively 232,827 184,670
Inventory 6,333,209 5,793,801
Other current assets 152,683 250,709
----------- -----------
Total current assets 11,546,291 6,237,712
Property and equipment, net 1,565,046 3,096,752
Trademarks and patents, less accumulated amortization of $ 34,056 and
$ 22,660 at September 30, 1999 and December 31, 1998, respectively 220,485 200,204
Other assets 68,309 88,321
----------- -----------
$13,400,131 $9,622,989
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable $ 20,000 $ 125,543
Subordinated convertible debentures - 3,200,674
Accounts payable 551,654 6,748,538
Deferred revenue 13,103 40,000
Accrued liabilities 700,476 841,526
Current portion of long term debt 1,215,098 -
Obligations under capital lease, current portion 12,254 187,220
----------- -----------
Total current liabilities 2,512,585 11,143,501
Obligations under capital lease 37,890 76,008
Long term debt 2,175,274 -
Commitments
Stockholders' equity (deficit):
Series B Convertible Preferred Stock, par value $.01, 954,545 shares authorized;
none and 209,091 issued and outstanding at September 30, 1999 and December 31,
1998, respectively - 1,173,958
Common stock, par value $.01, 30,000,000 shares authorized; 8,812,141 and
820,147 issued and outstanding at September 30, 1999 and December 31, 1998,
respectively 88,121 8,201
Additional paid-in capital 57,076,936 36,770,004
Deficit accumulated during development stage (48,490,675) (39,548,683)
----------- -----------
Total stockholders' equity (deficit) 8,674,382 (1,596,520)
----------- -----------
$13,400,131 $ 9,622,989
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
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VIDEO NETWORK COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Statements of Operations
(Unaudited)
-----------
<TABLE>
<CAPTION>
For the three months ended For the nine months ended For the period
September 30, September 30, October 5, 1993
(date of inception) to
1999 1998 1999 1998 September 30, 1999
---- ---- ---- ---- ------------------
<S> <C> <C> <C> <C> <C>
Revenues - equipment $ 149,496 $ 255,283 $ 1,554,921 $ 365,788 $ 2,495,839
Revenues - services 326,556 - 401,626 - 721,985
------------ ------------ ------------ ------------ ------------
Total revenues 476,052 255,283 1,956,547 365,788 $ 3,217,824
------------ ------------ ------------ ------------ ------------
Cost of sales - equipment 80,164 165,547 768,684 229,851 1,482,846
Cost of sales - services 225,950 - 248,471 - 328,537
------------ ------------ ------------ ------------ ------------
Cost of sales 306,114 165,547 1,017,155 229,851 1,811,353
------------ ------------ ------------ ------------ ------------
Gross margin 169,938 89,736 939,392 135,937 1,406,441
------------ ------------ ------------ ------------ ------------
Operating expenses:
Research and development 1,725,782 2,638,333 3,425,200 9,871,383 23,636,852
Selling, general and administrative 1,316,826 2,515,734 3,388,217 6,954,957 19,008,276
Depreciation and amortization 296,501 649,099 884,183 1,619,149 4,177,297
------------ ------------ ------------ ------------ ------------
Total operating expenses 3,339,109 5,803,166 7,697,600 18,445,489 46,822,425
------------ ------------ ------------ ------------ ------------
Loss from operations (3,169,171) (5,713,430) (6,758,208) (18,309,552) (45,415,984)
Interest (income) expense, net 36,039 22,410 2,183,784 (176,288) 2,667,794
------------ ------------ ------------ ------------ ------------
Net loss (3,205,210) (5,735,840) (8,941,992) (18,133,264) $(48,083,778)
------------ ------------ ------------ ------------ ============
Cumulative Series B dividend - (7,200) (22,672) (7,200)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (3,205,210) $ (5,743,040) $ (8,964,664) $(18,140,464)
============ ============ ============ ============
Net loss per common share -basic and
diluted $ ( .36) $ ( 7.00) $ ( 2.29) $ ( 22.23)
Weighted average shares outstanding -
basic and diluted 8,812,141 820,148 3,919,867 815,902
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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VIDEO NETWORK COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
For the period
October 5, 1993
Nine months ended September 30, (Date of inception)to
1999 1998 September 30, 1999
---- ---- ------------------
Cash flows from operating activities:
<S> <C> <C> <C>
Net loss $ (8,941,992) $(18,133,264) $(48,083,778)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 872,777 1,611,111 3,889,766
Amortization 11,405 8,038 287,529
Interest expense related to issuance of warrants 36,714 - 743,503
Interest expense related to debentures 74,649 35,959 150,323
Amortization of debt discount 1,270,214 - 1,270,214
Amortization of debt issuance costs 472,313 - 472,313
Non-cash compensation expense 422,765 422,766 1,326,618
Stock issued in exchange for services rendered - - 55,834
Net loss on sale of fixed assets 10,469 10,469
Other non-cash charges 354,992 62,256 373,811
Changes in operating assets and liabilities:
Accounts receivable (48,157) (110,226) (232,827)
Other current assets 69,159 415,355 48,513
Inventory 560,592 (4,737,464) (5,265,434)
Trademarks and patents (31,686) (74,691) (254,550)
Other assets 2,095 (20,802) (81,559)
Accounts payable (2,621,761) 2,561,476 4,166,918
Deferred revenue (26,897) (133,180) 13,103
Accrued liabilities 40,628 101,179 882,154
------------ ------------ ------------
Net cash used in operating activities (7,471,721) (17,991,487) (40,227,080)
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from sale of property and equipment 84,580 5,000 89,580
Proceeds from sale of leasehold improvements - 1,470,000 1,470,000
Purchase of property and equipment (37,719) (3,808,886) (6,493,443)
------------ ------------ ------------
Net cash provided by (used in) investing activities 46,861 (2,333,886) (4,933,863)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from the issuance of Series A Preferred Stock - - 1,810,643
Net proceeds from the issuance of Series B Preferred Stock - 1,150,000 1,150,000
Net proceeds from the issuance of common stock 14,127,017 - 46,421,700
Net proceeds from the issuance of stock options 100 - 100
Net proceeds from the exercise of stock options - 15,304 35,304
Net proceeds from the exercise of warrants - 205,936 235,937
Net proceeds from the issuance of debentures - 3,125,000 3,125,000
Net proceeds from the issuance of notes payable - - 2,550,000
Net proceeds from the issuance of unsecured
promissory notes and common stock 2,395,604 - 2,395,604
Repayment of unsecured promissory notes (2,850,000) - (2,850,000)
Repayment of notes payable (105,543) (103,257) (2,800,204)
Repayment of long term debt (1,175,000) - (1,175,000)
Proceeds from the issuance of notes payable to related parties 36,000 - 752,223
Repayment of notes payable to related parties (36,000) - (400,000)
Debt issuance costs - - (258,131)
Principal payments on capital leases (148,278) (510,933) (1,004,661)
------------ ------------ ------------
Net cash provided by financing activities 12,243,900 3,882,050 49,988,515
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 4,819,040 (16,443,323) 4,827,572
Cash and cash equivalents, at beginning of period 8,532 18,199,434 -
------------ ------------ ------------
Cash and cash equivalents, at end of period $ 4,827,572 $ 1,756,111 $ 4,827,572
============ ============ ============
Supplemental disclosure of non-cash investing and
financing activities: See Note 9
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
VIDEO NETWORK COMMUNICATIONS, INC.
(A Development Stage Enterprise)
Notes To Financial Statements
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed financial statements of Video Network
Communications, Inc. (the "Company") as of September 30, 1999 and for the three
and nine months ended September 30, 1999 and 1998 have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with instructions to Form 10-QSB and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, such financial statements contain all
adjustments consisting only of normal recurring entries, necessary to present
fairly the financial position of the Company as of September 30, 1999 and the
results of operations for the three and nine months September 30, 1999 and 1998.
The interim financial statements should be read in conjunction with the audited
financial statements and notes thereto for the year ended and as of December 31,
1998 included in the Company's Annual Report on Form 10-KSB, as filed with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended. Certain prior year items have been reclassified to conform to the
current period's format. The results of operations for the three and nine months
ended September 30, 1999 are not necessarily indicative of the results that may
be expected for the entire year.
On April 14, 1999, the stockholders of the Company approved a one share for
seven shares reverse stock split of the issued and outstanding common stock,
which was previously approved by the Board of Directors. The reverse stock split
was effected on April 14, 1999. All references throughout these financial
statements to number of shares and per share information have been restated to
reflect this reverse stock split. The number of shares as restated to reflect
the reverse stock split has not been adjusted to give effect to the cashing out
of fractional shares. The Company believes that the cashing out of fractional
share interests will not materially change the number of shares of common stock,
as restated.
2. Revenue Recognition
The Company's revenues, consisting principally of sales of the Company's video
network system and related products, are recognized upon delivery and acceptance
by customers and when collectability is reasonably assured. Service revenues are
recognized at the time the services are rendered and the Company has no
significant further obligations to the customer. Revenue from maintenance
contracts is recognized ratably over the term of the contract.
3. Net Loss Per Share
The Company computes basic and diluted earnings per share in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share". Net
loss per common share is based on the weighted average number of common shares
and dilutive common share equivalents outstanding during the periods presented.
Basic earnings (loss) per share are calculated by dividing net income (loss) by
the weighted average shares outstanding. Diluted earnings (loss) per share
reflect the dilutive effect of stock options, warrants, convertible preferred
stock, and convertible debentures and are presented only if the effect is not
anti-dilutive. As the Company incurred losses for all periods, there is no
difference between basic and diluted earnings per share. Had options and
warrants been included in the computation, shares for the diluted computation
would have increased by 400,000 and 7,485,056 as of September 30, 1998 and 1999,
respectively.
4. Income Taxes
The Company did not record a provision for income taxes for the three and nine
months ended September 30, 1999 and 1998 since the Company had net operating
losses during each of those periods. The Company recorded a full valuation
allowance against the net deferred tax asset generated primarily from its net
operating loss carryforwards.
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5. Inventory
Inventory consisted of the following at:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
---- ----
(Unaudited)
<S> <C> <C>
Raw Materials $5,612,262 $5,750,733
Finished Goods 720,947 43,068
---------- ----------
$6,333,209 $5,793,801
========== ==========
</TABLE>
6. Debt
Subordinated convertible debentures. In accordance with letter agreements
reached with the holders of the subordinated convertible debentures in May 1999,
the convertible debentures, and interest accrued thereon, automatically
converted to 873,415 shares of common stock at an agreed conversion price of
$3.75 per share on June 18, 1999.
Sanmina Note. In January 1999, the Company converted outstanding accounts
payable to Sanmina Corporation of $3,200,000 and $1,100,000, the latter
representing the value of inventory and materials located at a subcontract
manufacturer, to a $4,300,000 three-year term note accruing interest at 7% per
year. The Company paid Sanmina $1,100,000 in principal on the note in June 1999
and Sanmina transferred to the Company the title to the inventory and materials
located at Sanmina. During the first year, the note requires interest-only
payments, in arrears, semi-annually, beginning in July 1999. The first of the
required interest payments was made in the third quarter of 1999. Thereafter,
the Company will amortize the remaining principal and interest in equal monthly
payments over the remaining life of the note.
In connection with converting the accounts payable balance, the Company issued
to Sanmina warrants to purchase 39,286 shares of common stock, with a $19.25
exercise price per share. An independent appraisal assigned a market value of
$127,759 to these warrants. The Company has recorded the value of the warrants
as a discount against the face amount of the note and will amortize the value
over the life of the note.
Legal Counsel Note. In January 1999, the Company also converted $375,000 of
outstanding accounts payable to legal counsel to a two-year term loan accruing
interest at 7% per year. The Company has paid $75,000 of this balance through
September 1999. Other than the principal repayments noted above, the Company is
obligated to make two semi-annual interest-only payments commencing in July
1999. The first of the required interest payments was made in the third quarter
of 1999. Commencing in February 2000, the Company will commence making twelve
equal monthly payments to fully amortize the remaining balance of the note.
In connection with converting the accounts payable balance, the Company issued
to legal counsel warrants to purchase 5,714 shares of common stock, with a
$18.59 exercise price per share. An independent appraisal assigned a market
value of $18,583 to these warrants. The Company has recorded the value of the
warrants as a discount against the face amount of the note and will amortize the
value over the life of the note.
Private Placement of Units. In February 1999, the Company completed a private
placement of 28.5 units of unsecured promissory notes with a principal amount of
$2,850,000 and 160,701 shares of common stock, from which the Company received
net proceeds of approximately $2,396,000. The notes accrued interest at 10% per
year. Two principal officers of the Company invested a total of $125,000 in
units and were issued unsecured promissory notes with an aggregate original
principal amount of $125,000, and 4,999 shares of common stock. The principal
amount of and accrued interest on the notes, amounting to $2,955,000, were
repaid to the note holders in June 1999.
An independent appraisal assigned a market value of $1,305,000 to the common
stock issued in the February 1999 private placement. The Company has recorded
the value of the common stock as a discount against the face amount of the
unsecured promissory notes and will amortize the value over the life of the
notes. In the quarter ended June 30, 1999, two participants in the February 1999
private placement were required to return to the Company a total of 4,284 shares
of common stock, valued at $34,786. The Company amortized a total of $1,270,214
to interest expense in the first half of 1999 as a result of the repayment of
the note in June 1999.
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<PAGE> 7
7. Series B Preferred Stock
In accordance with the terms of the agreements governing the Series B Preferred
Stock, immediately following consummation of the public offering on June 18,
1999, all of the Company's outstanding shares of Series B Preferred Stock, and
accreted dividends thereon, automatically converted to 62,162 shares of common
stock at a conversion price of $19.25 per share.
8. Public Offering of Units
In June 1999 the Company completed a public offering of 2,000,000 units and
realized approximately $12.1 million net of costs of the offering. Each unit
consisted of three shares of common stock and two warrants to purchase common
stock at an exercise price of $4.00 per share. When issued, the units were
evidenced by separate unit certificates and the common stock and warrants
included in the units were not separately transferable. Subsequently, the
warrants were approved for quotation on The Nasdaq SmallCap Market, and the
common stock and warrants included in the units are detachable and separately
transferable. Also in June, the underwriter exercised their 15% overallotment
option and purchased an additional 300,000 units, yielding an additional
approximately $2.0 million in net proceeds to the Company.
9. Non-cash Transactions
The following non-cash transactions occurred in the periods indicated:
<TABLE>
<CAPTION>
For the period
October 5, 1993
Nine months ended September 30, (Date of inception)to
1999 1998 September 30, 1999
---- ---- ------------------
(Unaudited) (Unaudited) (Unaudited )
<S> <C> <C> <C>
Current asset financed by issuance of note payable $ - $ 230,063 $ 230,063
Capital lease obligations - 701,640 1,119,612
Dividend on preferred stock 22,672 - 46,630
Conversion of notes payable to related parties and accrued
interest to common stock - - 352,223
Conversion of preferred stock to common stock 1,196,630 - 1,196,630
Conversion of subordinated debentures to common stock 3,275,323 - 3,275,323
Reclassification of inventory to fixed assets - 32,225 32,225
Accounts payable transferred to notes payable - - 40,141
Accounts payable transferred to long term debt 3,575,000 - 3,575,000
Common stock issued with private placement 1,270,214 - 1,270,214
Warrants issued with long term debt 146,342 - 146,342
Inventory financed with long term debt 1,100,000 - 1,100,000
Equity financing costs in prepaid expenses 28,867 28,867
Reduction in accrued liabilities due to sale of assets 181,678 - 181,678
Cost of fixed assets sold - net 262,258 - 262,258
Vendor credit issued against formerly recorded fixed asset 10,123 - 10,123
Debt issuance costs in other assets - net 17,917 - 17,917
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In this Quarterly Report on Form 10-QSB, we refer to Video Network
Communications, Inc., a Delaware corporation, as the Company, VNCI, "we", "ours"
or "us." We refer to our investors as "you" or as "investors."
Certain statements contained in this Quarterly Report on Form 10-QSB, other than
historical financial information, constitute "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. All such
forward-looking statements involve known and unknown risks, uncertainties or
other factors which may cause our actual results, performance or achievements to
be materially different from any future results, performance or achievement
expressed or implied by such forward-looking statements. Factors that might
cause such a difference include risks and uncertainties related to the fact that
our product is new and we have limited experience selling and marketing it; our
operating revenue is not sufficient to cover our operating expenses, we will
require additional financing in the future and we do not have any commitments
for future debt or equity financing; we depend on our strategic partners and
third party resellers to market and sell our product and they have had limited
success to date; our product is in a new and evolving market and our success
will depend to a large extent on how that market develops; and our reliance on
our intellectual property and our limited ability to protect our intellectual
property. These forward-looking statements also depend on risks and
uncertainties associated with our growth strategy, technological changes and
competitive factors affecting us. We urge you to read the "Risk Factors" section
of this Quarterly Report in its entirety.
We completed a one share for seven shares reverse split of our outstanding
common stock on April 14, 1999. Historical share and per share information
presented in this Quarterly Report on Form 10-QSB has been restated to give
retroactive effect to the reverse stock split.
You should read the following discussion of our operating results in conjunction
with the unaudited financial statements and notes thereto appearing elsewhere in
this Quarterly Report on Form 10-QSB.
OVERVIEW
We design, market and sell a real-time video network system that operates using
our proprietary video switch over existing telephone lines without interfering
with normal telephone system functionality. With our video system users can
retrieve stored video from a video server and view video "on demand," broadcast
video to users throughout the video intranet and participate in interpersonal
video communications. Our video network systems offers television quality video
applications within the video intranet so that voice and video are completely
matched, and also enables video delivery and interpersonal communications to
users outside of the video intranet via the wide area network (WAN). We believe
that users need an effective video network solution, and that VNCI video
network solutions offer businesses a high quality, comprehensive and powerful
means to deliver video over the "last mile of the information superhighway."
We are a relatively new company offering a new product. We first introduced our
technology and initial products in late 1998 and our products first
demonstrated commercial readiness during the first half of 1999. Since that
time through September 30, 1999, we have received orders for video network
systems totaling $2.9 million in five market segments. The price for our
typical 30-user video network system is approximately $125,000. We believe that
we have shown meaningful revenue and sales growth over the past nine months
despite limited sales and marketing resources and our unstable financial
condition during the period. However, we believe that in order for our company
to be successful, we will need to achieve a significantly higher level of sales
in a relatively short time, which may require substantially higher sales and
marketing expenditures in the future. We have recently initiated a sales and
marketing campaign to enhance market awareness of our products, which we
believe will contribute to our desired level of growth. However, we have
limited resources available to support our sales and marketing initiative. We
do not expect that our revenues will be sufficient to support our operating
expenses for the foreseeable future.
We reported revenues of $476,000 in the third quarter of 1999, a decrease of
$349,000, or 42%, when compared with revenues reported in the second quarter of
1999. Our total operating expenses in the third quarter of $3,339,000 were
approximately $1,221,000, or 58%, higher than the second quarter of 1999. Our
revenues in the third quarter were below our expectations, principally because
at this stage of the market for business video, each sale of our video network
system accounts for a significant portion of our quarterly revenues and it is
difficult to predict with accuracy which of our marketing initiatives will
result in sales or when those sales will occur. We expect to continue to
experience significant, material fluctuations in our revenues on a quarterly
basis. We believe that our revenues for the third quarter are indicative of
this stage of development rather than of our prospects
8
<PAGE> 9
or strategic position.
We have a limited operating history and, therefore, we do not have any
substantial basis on which to predict our sales cycle. To date, our sales cycle
has been relatively long and we expect that will continue for the foreseeable
future. It takes substantial time for us to establish relationships with our
resellers and potential end-user customers. It also takes time for us to
familiarize our resellers and end-users with our video network system, the
manner in which it operates and its potential uses. In the case of our
resellers, we also have to train their sales forces about our product.
In addition, our video network system is a new product. Video is still a
relatively new tool for businesses and is not widely used in e-commerce.
Further, many prospective customers have invested in or used video conferencing
systems and have been disappointed with the voice and video that most existing
systems offer. For most of our potential end-user customers, our video network
system requires a substantial capital investment. Accordingly, we have found
that we need to educate our resellers and prospective customers about the
benefits to business from investing in our video network system and often need
to overcome performance-related concerns about video that our customers may
have.
For all of these reasons, we believe that it takes end-user customers at least
several months to decide to purchase our video network system. We expect our
sales cycle will decrease after we establish customer reference accounts, create
greater brand name recognition of our video network system, and have more
established relationships with resellers. We also believe that if our sales and
marketing initiatives are successful in increasing customer recognition of our
video network products, our sales cycle could shorten, as many prospective
business customers would already be familiar with our products and their
capabilities.
Although we distribute and sell our products primarily through resellers, we
typically ship our video systems directly to end-user customers. Our video
network system technology is new and the purchase of our system requires a
significant capital investment. Generally, our policy currently is to permit
new prospective end-user customers to evaluate our video network system for 30
to 45 days. After that period, we generally require customers to pay for the
system in full within 30 days, or to return the product. In some cases, we
require a down payment at the time an order is placed.
Our recent public offering, which took place in the second quarter of this year,
and our financial restructuring in late 1998 and early 1999 have given us a
foundation on which to build our business. However, we do not anticipate that we
will be able to achieve our desired "break-away" level of performance that would
produce consistent, progressive performance for the foreseeable future. During
this period, we expect that our performance will continue to be volatile.
As part of our sales and marketing ramp-up, we have recently engaged highly
reputable public relations and marketing communications firms. We have retained
these firms to publicize our video network system and other products to the
business community and to familiarize the business community with our company
and our products' capabilities. One of these firms also will be advising us
regarding how to best market and position our products, and will create and
distribute product marketing materials to support our marketing initiatives. We
also are specifically marketing our video network system to targeted markets
including: the financial services industry, medical facilities, and the
educational, legal, and governmental markets. We believe that our video network
offers unique, cost-effective benefits and provides an alternative method of
providing training and educational opportunities for these critical targeted
markets. In parallel with these efforts, our management also is aggressively
recruiting experienced sales and marketing talent, and continuing to evaluate
and develop the effectiveness of its existing direct sales and reseller
organizations.
In support of our sales and marketing initiative, we also are seeking alliances
with one or more strategic partners to market our video network system among
their business customers, which we believe would contribute significantly to our
business strategy. We have recently begun exploratory discussions with Internet
content providers, cable operators, satellite communications companies, and
Regional Bell Operating Companies (RBOCs) regarding possible strategic
partnerships to jointly deliver video to the business desktop. These discussions
are preliminary and at an early stage, so we cannot predict whether we will be
successful in our efforts to form strategic alliances or, if we form those
alliances, whether the alliances will contribute to our success. However, we
believe that these strategic joint ventures would be an excellent means for us
to access an existing business customer base that seeks a viable video solution
and, thus, could provide the best opportunity for us to successfully market and
advertise our video network solutions.
For the remainder of 1999, we intend to focus on selling and marketing our video
network solutions and continuing product development to meet customer demands
for new functionality and to lower the cost of our systems. Specifically, our
goals are to: (i) develop new strategic partnerships committed to marketing our
video network system as the video solution of choice to business users; (ii) use
our current strategic and reseller arrangements to increase sales of our systems
and create brand name recognition of our
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product, (iii) position our video network system as an enhancement to existing
telephone and information systems, (iv) develop our direct sales; and (v)
continue engineering our video network system to refine and improve its
functionality to meet new customer requirements and to lower our costs and the
price of our system through improved design. Our ability to meet these
objectives are subject to a number of risks and uncertainties, including our
ability to develop new strategic relationships with significant potential
resellers, our ability to sell and market our product and develop market
awareness of our video network system and our ability to obtain financing when
we require it. We cannot assure you that we will be able to meet these
objectives. We plan to continue to subcontract all major manufacturing and
production activities for the foreseeable future, but we will continue to retain
test and quality assurance functions until all subcontractors are certified with
respect to quality.
We expect to continue to incur significant operating expenses to support our
product development efforts and to enhance our sales and marketing capabilities
and organization, but we anticipate that our product development expenditures
will be lower than in prior years because we have introduced the commercial
version of our video network system. We expect that our results of operations
will vary significantly from quarter to quarter for the foreseeable future.
YEAR 2000
As many computer systems and other equipment with embedded chips or processors
use only two digits to represent the year, they may be unable to process
accurately certain data before, during or after the year 2000. As a result,
business and governmental entities are at risk for possible miscalculations or
systems failures causing disruptions in their business operations. This is
commonly known as the Year 2000 (or "Y2K") issue. The Y2K issue can arise at any
point in a company's supply, manufacturing, processing, distribution, and
financial chains.
We have evaluated the impact of the Y2K issue on our operations. This evaluation
consisted of identifying the sources of potential exposure to risk of systems
malfunction or failure in internal information technology ("IT") infrastructure,
in our product, including embedded systems and software, and in systems utilized
by significant vendors and customers. The evaluation process also developed
contingency plans in order to mitigate the negative effects to us of any failure
of these systems. We have completed our review process, and the costs associated
with our Y2K compliance evaluation were not material.
We believe that our video network system is not susceptible to Y2K problems
because it does not contain an internal clock. We also have evaluated whether
equipment and software that we use or that are embedded in our video network
system is Y2K compliant. Our evaluation consisted principally of securing
certifications from each of the vendors of these products that their product is
Y2K compliant and we did not independently assess whether a product has Y2K
problems. With respect to our internal IT infrastructure, including the
commercial financial software that we use, we have also obtained certifications
that the products that we use are Y2K compliant.
If, however, the equipment or software currently used or produced by us proves
to be susceptible to the Y2K issue, we may incur significant costs to modify,
re-program or replace the affected equipment or software. In addition, because
our video network system operates in a Windows environment, any susceptibility
of the Microsoft Windows operating system to Y2K issues could affect the
operation of our video network system.
We began an evaluation of the compliance of our current and future major
supplier's systems in the fourth quarter of 1998. Failure of any of our
significant supplier's systems could result in our inability to supply products
to our customers and adversely affect our operating results and cash flow. Our
Y2K plan includes contingency plans to reduce the risk of a disruption to normal
access to required components and materials or services. Our evaluation consists
of obtaining Y2K compliance certification from major software and hardware
suppliers. Although the cost of assessing Y2K compliance by third parties has
not been material to date and we believe that it will not be material in the
future, at this time we cannot estimate the costs of any steps that will need to
be taken to resolve any problems or secure alternative relationships with Y2K
compliant third parties.
In addition, we have evaluated the impact of the existence of Y2K issues on our
customer base. Based on those evaluations, we do not expect our potential
customers to reduce their capital expenditure budgets or to defer purchases of
our video network system because of concern about potential Y2K issues. We
provide all of our customers with Y2K certifications with respect to our video
network system, and we do not believe that the existence of Y2K issues with
respect to other technologies will materially adversely impact sales of our
video network.
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Our assessment of the impact of Y2K on our operations is based on current facts
and could change. Accordingly, we cannot assure you that there will not be
interruptions or other limitations of financial and operating systems
functionality or that we will not incur greater costs than projected to avoid
such interruptions. Our expectations about future costs associated with the Y2K
issue are subject to uncertainties that could cause actual results to have a
greater financial impact than currently anticipated. Factors that could
influence the amount and timing of future costs include our success in
identifying Y2K issues, the costs of remediation or avoidance, the costs of
assessing third-party compliance and its impact on our operations, and other
factors. The forward-looking statements discussed in this section regarding Y2K
compliance involve a number of risks and uncertainties, including those
described above, and general economic conditions, the competitive environment in
which we operate, and other risks and uncertainties identified elsewhere in this
Form 10-QSB.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Revenues. We recognized $476,000 in revenues during the three months ended
September 30, 1999 compared to $255,000 recognized in the comparable period in
1998. The revenues recognized in the third quarter of 1999 consisted of revenues
related to equipment sales, $149,000, and to services, $327,000. The service
revenues were related to completed and accepted installation activities and
other services. . Revenues generated in the comparable quarter of 1998 related
entirely to equipment sales.
Cost of sales. Cost of sales for the three months ended September 30, 1999 was
approximately $306,000 compared to $166,000 recognized in the comparable period
of 1998. Of the cost of sales recognized in the third quarter of 1999, $80,000
was related to the cost of equipment sold in the quarter and $226,000 was
related to the cost of providing services, including installation services.
Gross Margin on Sales. Overall gross margin on revenues recognized in the third
quarter of 1999 was $142,000, yielding a gross margin percentage of 36%. Of
this gross margin, $69,000 was derived from equipment sales, and $101,000 was
derived from service revenues. The gross margin percentages achieved for
equipment and services revenues were 46% and 31%, respectively. The gross
margin on revenues in the third quarter of 1998 was $90,000, or 35%, earned on
equipment sales.
Research and Development. Research and development costs decreased to $1,726,000
in the three months ended September 30, 1999, from $2,638,000 in the comparable
period of 1998, representing a decrease of approximately $912,000, or 35%.
Approximately $406,000 of the reduction resulted from reduced staffing costs as
overall engineering staffing in the research and development departments
declined from 34 at September 30, 1998 to 23 at September 30, 1999, the number
of other engineering support personnel were reduced by an average of four
people, and the use of contract labor was reduced. Recruiting and relocation
expenses declined approximately $97,000 due partly to reduced costs incurred in
the third quarter of 1999 compared to the same quarter of 1998, and partly due
to the reversal in the third quarter of 1999 of previously accrued relocation
costs. Materials and supplies purchased to support research and development
activities decreased by approximately $683,000, representing a decrease of
approximately $737,000 in the use of materials and supplies, offset by a net
increase of $54,000 in the reserve for excess and obsolete inventory in the
third quarter of 1999 compared to the third quarter of 1998. The costs
associated with the use of professional services increased approximately $56,000
in the third quarter of 1999 compared to the third quarter of 1998. In the third
quarter of 1999, we decided to discontinue a project to construct certain
testing equipment because it was no longer necessary. Accordingly, $355,000 of
the costs relative to that project was charged to expense. There were no similar
charges in the same period of 1998.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses decreased to approximately $1,317,000 during the three
months ended September 30, from approximately $2,516,000 during the three months
ended September 30, 1998, a decrease of approximately $1,199,000 or 48%.
Sales and marketing expenses decreased approximately $996,000 in the third
quarter of 1999 as compared to the same period of 1998. Approximately $493,000
of this reduction was due to lower marketing personnel costs, partially offset
by an increase of approximately $44,000 in staffing costs related to sales
personnel. Approximately $134,000 of the reduction was due to reduced costs
associated with advertising and trade-show attendance. Approximately $433,000 of
the reduction in costs was related to reduced costs of equipment shipped to
demonstration and evaluation sites in the three months ended September 30, 1999
compared to the same period in 1998. The costs of other material, supplies and
equipment declined by approximately $104,000 in the three months
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ended September 30, 1999 compared to the same period of 1998. Expenses related
to the use of professional services increased approximately $122,000 in the
third quarter of 1999 compared to the same period of 1998.
Customer support costs decreased by approximately $117,000 in the three months
ended September 30, 1999 compared to the same period in 1998. Approximately
$47,000 of the decrease was due to lower staffing costs, and 73,000 was
attributable to increased allocation to cost of sales-services. These reductions
were offset by an increase of approximately $3,000 in the use of materials and
small tools.
General and administrative costs declined by approximately $114,000 in the three
months ended September 30, 1999 compared to the same period in 1998. General and
administrative staffing costs increased by approximately $135,000. The Company
reduced professional services costs by approximately $117,000 and printing and
production costs associated with production of investor relations materials by
$78,000 in the three months ended September 30, 1999 compared to the same period
in 1998. Overall costs allocated to the sales, general and administrative
departments from service departments were reduced by $61,000.
Depreciation and Amortization. Depreciation and amortization decreased to
approximately $297,000 during the three months ended September 30, 1999, from
$649,000 in the three months ended September 30, 1998, a decrease of
approximately $353,000, or 54%. We use the accelerated depreciation method for
book purposes and, accordingly, we experience higher levels of depreciation in
the early years of depreciable assets' service lives. Also contributing to the
overall reduction in depreciation expense was the disposition or retirement of
assets held at one of our locations in January 1999.
Net Interest (Income) Expense. We recorded approximately $36,000 of net interest
expense in the three months ended September 30, 1999, compared to approximately
$22,000 of net interest expense in the comparable period of 1998. Interest
expense totaled approximately $106,000 during the third quarter of 1999,
compared to approximately $64,000 during the third quarter of 1998. During the
third quarter of 1999, we incurred approximately $71,000 in interest expense
related to long-term debt issued in connection with restructured vendor accounts
payable (including $13,000 of amortization of debt discount, $5,000 related to
capital lease obligations, and $29,000 related to overdue vendor payables), most
of which were paid during the quarter with a portion of the net proceeds of the
June 1999 Public Offering.
We earned approximately $70,000 in interest income during the third quarter of
1999, compared to $41,000 in interest income during the third quarter of 1998.
The interest income recorded in the third quarter of 1999 was earned on the
invested net proceeds of June 1999 Public Offering.
Net Loss. As a result of the foregoing factors, the net loss for the three
months ended September 30, 1999 decreased to approximately $3,205,000, from
$5,736,000 in the three months ended September 30, 1998, a decrease of
approximately $2,531,000 or 44%.
COMPARISON OF THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
Revenues. We recognized $1,957,000 in revenues during the nine months ended
September 30, 1999 compared to $366,000 recognized in the comparable period in
1998. We recognized $1,555,000 of equipment sales in the first nine months of
1999 compared to $366,000 in the first nine months of 1998. Revenues related to
services were $402,000 in the first nine months of 1999 compared to no service
revenues earned in the comparable period of 1998.
Cost of sales. Cost of sales for the nine months ended September 30, 1999 was
approximately $1,045,000 compared to $230,000 recognized in the comparable
period of 1998. Of the cost of sales recognized in the first nine months of
1999, $769,000 was related to the cost of equipment and $276,000 was related to
the cost of providing installation and other services. Cost of sales recorded in
the first nine months of 1998 related entirely to equipment sales.
Gross Margin on Sales. Overall gross margin on revenues recognized in the first
nine months of 1999 was $912,000 yielding a gross margin percentage of 47%. Of
this gross margin, $786,000 was derived from equipment sales, and $126,000 was
derived from service revenues. The gross margin percentages achieved for
equipment and services revenues were 51% and 31%, respectively. The gross margin
on sales recorded in the first nine months of 1998 was $136,000, or a gross
margin percentage of 37%.
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Research and Development. Research and development costs decreased to
$3,425,000 in the nine months ended September 30, 1999, from $9,871,000 in the
comparable period of 1998, representing decrease of approximately $6,446,000,
or 65%. The overall decrease in costs is primarily a result of our
cost-reduction plan implemented in mid-1998. Approximately $1,851,000 of the
reduction resulted from reduced staffing costs as engineering staffing in the
research and development departments declined from an average of approximately
49 in the nine months ended September 30, 1998 to approximately 24 in the nine
months ended September 30, 1999, a reduction in engineering support staff of
approximately eight, and the reduced use of contract labor. Recruiting and
relocation expenses declined by approximately $117,000, from approximately
$166,000 in the nine months ended September 30, 1998 to approximately $49,000
in the nine months ended September 30, 1999. Materials and supplies purchased
to support research and development activities decreased by approximately
$3,165,000. In the nine months ended September 30, 1999, the Company increased
the reserve for excess and obsolete material by $250,000, compared to an
increase of $596,000 in the comparable period of 1998. Decreased use of rented
equipment resulted in approximately $247,000 in cost reductions. Reduced usage
of design, consulting, and testing services also contributed approximately
$424,000 to the costs reductions during the nine months ended September 30,
1999, compared to the same period in 1998. In the third quarter of 1999, we
decided that a project to construct certain testing equipment was no longer
necessary. Accordingly, $355,000 of the costs were changed to expense. There
were no similar charges in the comparable period of 1998. Allocated costs from
service departments were reduced by approximately $409,000 as research and
development benefited by cost reductions attained in those departments.
Selling, General and Administrative Expenses. Selling, general, and
administrative expenses decreased to approximately $3,361,000 during the nine
months ended September 30, 1999, from approximately $6,955,000 during the nine
months ended September 30, 1998, a decrease of approximately $3,567,000 or 51%.
The decrease in selling, general and administrative expenses reflects the
results of our cost reduction program implemented in mid-1998.
Sales and marketing expenses decreased approximately $2,565,000 in the first
nine months of 1999 as compared to the same period of 1998. Approximately
$999,000 of this reduction was due to lower marketing personnel costs, partially
offset by an increase of approximately $101,000 in staffing costs related to
sales personnel. Approximately $132,000 of the decrease was attributable to a
reduction in recruiting and relocations expenses in the first nine months of
1999 relative to the first nine months of 1998. Approximately $495,000 of the
reduction was due to reduced costs associated with advertising and trade-shows.
In the first nine months of 1998, we incurred a charge of $133,000 related to
the cancellation of plans to open a new sales office in the Metropolitan
Washington, D.C. area. Approximately $207,000 of the decrease in expenses
related to reduced use of uncapitalized tools and equipment. Approximately
$564,000 of the reduction in costs was related to reduced costs of equipment
shipped to demonstration and evaluation sites in the nine months ended September
30, 1999 compared to the same period in 1998.
Customer support costs decreased by approximately $445,000 in the nine months
ended September 30, 1999 compared to the same period in 1998. Approximately
$162,000 of the decrease was due to lower staffing costs, $63,000 was due to a
decline in travel costs, and $93,000 associated with reduced use of materials
and uncapitalized tools and equipment. Approximately $102,000 of the reduction
in customer service costs in the nine months ended September 30, 1999 compared
to the same period in 1998 was due to the allocation of a portion of customer
service department costs to Cost of sales-services.
General and administrative costs declined by approximately $584,000 in the nine
months ended September 30, 1999 compared to the same period in 1998. We reduced
professional services costs by approximately $191,000 and printing and
production costs associated with production of investor relations materials by
$153,000 in the nine months ended September 30, 1999 compared to the same period
in 1998. Costs of general supplies, printing, and postage were reduced
approximately $107,000. Offsetting these reductions was an increase in general
and administrative staffing costs of $84,000 and recruiting and relocation
expenses of $46,000. Overall costs allocated to the sales, general and
administrative departments from service departments were reduced by $307,000.
Depreciation and Amortization. Depreciation and amortization decreased to
approximately $884,000 during the nine months ended September 30, 1999, from
$1,619,000 in the nine months ended September 30, 1998, a decrease of
approximately $735,000, or 45%. We use the accelerated depreciation method for
book purposes and, accordingly, we experience higher levels of depreciation in
the early years of depreciable assets' service lives. Also contributing to the
overall reduction in depreciation expense was the disposition or retirement of
assets held at one of our locations in January 1999.
Net Interest (Income) Expense. We recorded approximately $2,184,000 of net
interest expense in the nine months ended September 30, 1999, compared to
approximately $176,000 of net interest income in the comparable period of
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1998. Interest expense totaled approximately $2,273,000 during the first nine
months of 1999, compared to approximately $109,000 during comparable period of
1998. Of the interest expense recorded in the 1999 period, approximately
$1,847,000 was interest expense on the outstanding unsecured promissory notes
with an aggregate principal amount of $2,850,000, that we issued in a unit
offering completed in February of 1999. Included in the interest expense
recorded in connection with the unsecured promissory notes was approximately
$1,270,000 of amortization of debt discount and $472,000 of amortization of debt
issuance costs. In addition, during the first nine months of 1999, we incurred
approximately $252,000 in interest expense related to long-term debt issued in
connection with restructured vendor accounts payable (including $37,000 of
amortization of debt discount), $75,000 in interest incurred on the 5%
Convertible Debentures, $60,000 related to overdue vendor payables balances, and
an additional $33,000 related to capital lease obligations.
We earned approximately $89,000 in interest income during the first nine months
of 1999, compared to $285,000 in interest income during the nine months of 1998.
The interest income recorded in the first nine months of 1999 was earned
primarily on the invested proceeds of the public offering of common stock that
we completed in June 1999. We had lower average cash balances during first half
of 1999 available for investment compared to 1998 and accordingly earned less
interest income.
Net Loss. As a result of the foregoing factors, the net loss for the nine months
ended September 30, 1999 decreased to approximately $8,942,000 from $18,133,000
in the nine months ended September 30, 1998, a decrease of approximately
$9,191,000 or 51%.
LIQUIDITY AND CAPITAL RESOURCES
We have incurred cumulative losses aggregating approximately $48.1 million from
our inception through September 30, 1999. We expect to incur additional
operating losses for the foreseeable future, principally as a result of expenses
associated with product development efforts and anticipated sales, marketing,
and general and administrative expenses. During the first nine months of 1999,
we satisfied our cash requirements principally from the approximately $14.2
million in net proceeds received from a public offering of units in June 1999.
We had cash and cash equivalents of $4,827,000 at September 30, 1999 compared to
$8,000 at December 31, 1998, an increase of approximately $4,819,000. Increases
in cash and cash equivalents were primarily the result of the net proceeds of
the June 1999 public offering of units and, to a lesser extent, cash generated
by sales of our video network system during the first nine months of 1999,
offset by cash used in operations during the period. We expect that our current
cash will be sufficient to fund our operations at least through the first
quarter of 1999. We do not currently anticipate that our operating revenues will
be sufficient to fund our operations for the foreseeable future. Accordingly, we
anticipate that we will be required to obtain additional financing in the future
to continue operations.
Net cash used in operations during the nine months ended September 30, 1999 was
approximately $7,472,000. The net loss in the first nine months of 1999, reduced
by depreciation, amortization, non-cash compensation and other non-cash charges
was approximately $5,416,000. Inventory decreased by approximately $561,000
during the first nine months of 1999, primarily as a result of sales made during
the period, offset by an increase of $1.1 million in inventory acquired from
Sanmina upon issuance of long term debt. Accounts receivable increased by
$48,000 during the first nine months of 1999 as a result of new sales during the
period, offset by cash received from customers relating to outstanding accounts
receivable. Accounts payable decreased by approximately $2,622,000 in the first
nine months of 1999 due primarily to the repayment of overdue balances owed
vendors from a portion of the net proceeds of the public offering competed in
June 1999 and the conversion of $3,575,000 in accounts payable balances to long
term debt in the first quarter of 1999.
We generated $47,000 in cash from investing activities during the nine months
ended September 30, 1999. We generated $85,000 through the sale of certain
office furniture and equipment, primarily to a third party who assumed a lease
on property that we previously occupied, offset by $38,000 in additional capital
equipment during the first nine months of 1999.
We generated approximately $12,244,000 in cash from financing activities during
the nine months ended September 30, 1999. We received approximately $14,127,000
in net proceeds from the June 1999 public offering of units. We issued 2,300,000
units (including units issued upon exercise of the underwriter's 15%
overallotment option) at a price to the public of $7.50 per unit. Each unit
consists of three shares of common stock and two warrants to purchase common
stock for $4.00 per share.
In February 1999, we issued unsecured promissory notes with a face value of
$2,850,000 and 156,417 shares of common stock in a private placement from which
we received net proceeds of approximately $2,396,000. The net proceeds from the
February 1999 private placement provided most of our operating funds during the
first nine months of 1999 until we completed the public offering of
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units in June 1999. These notes and the accrued interest thereon, were repaid in
June 1999, using approximately $2,955,000 of the net proceeds from the public
offering.
We also received $36,000 as an unsecured loan from an employee in the first
quarter of 1999. That note was repaid in June 1999.
In February, we renegotiated amounts due to two of our trade creditors and
converted $3,575,000 in accounts payable balance to long term debt. In addition,
we acquired an additional $1,100,000 in inventory from Sanmina by issuing long
term debt. In the first half of 1999, we paid $1,175,000 of the principal amount
of the $4,675,000 in long term debt added in the first half of 1999.
In accordance with the terms of the agreements governing the Series B Preferred
Stock, immediately following the consummation of the public offering on June 18,
1999, all shares of Series B Preferred Stock, and accreted dividends thereon,
were converted to 62,162 shares of common stock using a conversion price of
$19.25 per share.
In accordance with letter agreements reached with the holders
of the subordinated convertible debentures in May 1999, our outstanding
convertible debentures, and interest accrued thereon, automatically converted to
873,415 shares of common stock at an agreed conversion price of $3.75 per share
on June 18, 1999.
Also in the first nine months of 1999, we paid an additional $106,000 of other
notes payable and $148,000 in capital lease obligations.
RISK FACTORS THAT MAY AFFECT OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION
The following are some of the important risks associated with our business and
our strategy, which could impact our future financial condition and results of
operations. You should read and consider carefully the following risk factors.
WE WILL REQUIRE ADDITIONAL FINANCING.
We estimate that our cash on hand will fund operations at least through the
first quarter of 2000. However, changes in the market in which we operate, in
our business, or in our business plan could increase our need for additional
capital. Our future capital requirements could exceed our current expectations
as a result of increases in the cost of manufacturing and marketing activities,
the size of our research and development programs, the length of time required
to collect accounts receivable, and competing technological and market
developments.
After our current cash is exhausted, we will need additional cash to continue
operating. To date, the cash generated from operations has not been sufficient
to fund our business and we have been dependent on financings to continue
operating. We expect that we will continue to require outside debt or equity
financing for the foreseeable future. We do not currently have any lines of
credit or bank financing, and we do not anticipate having access to bank
financing for the foreseeable future. We may not be able to raise any additional
money through equity or debt financings on acceptable terms or at all. If we
were to raise additional funds through the issuance of equity or convertible
debt securities, existing investors could be substantially diluted, or we could
issue securities that have preferences and privileges that our outstanding
securities do not have. If we are not able to complete additional financings or
generate funds when capital is needed, we will not be able to continue
operating.
CUSTOMERS MAY NOT BUY OUR PRODUCTS DUE TO CONCERNS OVER OUR VIABILITY.
Due to our recurring losses from operations and lack of cash, some potential
customers may decide not to purchase our video network system because of
concerns that we may be unable to service, enhance or upgrade the systems. If we
are not able to alleviate concerns about our long-term viability, we may not be
able to market and sell our video network system successfully and continue
operations.
WE HAVE A HISTORY OF SIGNIFICANT LOSSES AND EXPECT LOSSES TO CONTINUE.
We have incurred substantial losses from operations to date and had an
accumulated net loss of approximately $48 million through September 30, 1999.
Our financial statements for the year ended and as of December 31, 1998, and the
report of our independent accountants on those financial statements, indicate
that there is substantial doubt about our ability to continue as a going
concern.
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We expect to continue to lose money for the foreseeable future.
We recognized only $765,617 in revenues from the sale of products during the
year 1998, and recognized only $1.9 million in revenues during the first nine
months of 1999. We did not recognize any revenues in 1997. Accordingly, there is
no historical basis for you to expect that we will be able to realize operating
revenues or profits in the future. We have a limited number of orders for
delivery in the second half of 1999 and we cannot predict with accuracy what our
revenues will be in the future. Our ability to recognize operating revenues in
the future will depend on a number of factors, certain of which are beyond our
control, including:
- customer acceptance of products shipped and installed to date and in
the future;
- our ability to generate new sales of products and secure customer
acceptance; and
- the timing of customer payments.
WE HAVE A LIMITED OPERATING HISTORY.
Although we were incorporated in 1993, we focused on research and development
until we shipped our first commercial products in the third quarter of 1998.
James F. Bunker, our Chairman and Chief Executive Officer, has been with us
since only July 1998 and Carl Muscari, our President and Chief Operating
Officer, joined us in September 1999. Accordingly, we have limited experience
managing the Company since we shipped our first commercial video network system.
Because of our limited operating history, you have limited information on which
to assess our ability to realize operating revenues or profits in the future.
WE MAY NOT BE ABLE TO MARKET OUR PRODUCTS EFFECTIVELY.
We Depend on Our Resellers. We distribute our products primarily through
major sellers of telephony products, system integrators and value-added
resellers (VARs). Currently, we have agreements with approximately 15 resellers.
These arrangements are for relatively short contractual periods and may be
terminated under certain circumstances. We cannot assure you that we will be
able to maintain existing relationships or establish new relationships. We
compete for relationships with third-party resellers with larger,
better-established companies with substantially greater financial resources. If
we cannot maintain our current reseller relationships and cannot develop new
relationships, we may not be able to sell our video network system.
Resellers May Not Be Effective Distributors. Sales to third-party resellers
are expected to generate a significant part of our future revenues. However, we
have sold only a limited number of video network systems and components under
our reseller arrangements, and to date have recognized minimal revenues from
those sales. We currently have limited orders from our resellers for additional
sales of video network systems. If our resellers fail to market and sell our
products, or our products fail to become an accepted part of the resellers'
product offerings, the value of your investment could be reduced.
We May Not Be Able To Develop Direct Sales and Marketing Capabilities. We
expect to depend on the marketing efforts of our resellers for the foreseeable
future. However, we are also developing a direct marketing capability to promote
our video network system and to support our resellers. We cannot assure you that
we will be able to create awareness of, and demand for, our products through our
marketing efforts, or that the development of our direct marketing capabilities
will lead to sales of our products and services. If we cannot successfully
develop our own sales and marketing capabilities, we may not succeed in building
brand-name recognition of our system, and we will remain solely dependent on
reseller efforts.
THE MARKET FOR VIDEO COMMUNICATIONS PRODUCTS MAY NOT DEVELOP.
The market for video communications products is new and is rapidly evolving. As
is typical for a new technology, demand for and market acceptance of new
products is unpredictable. If the market for video communications products fails
to develop or develops more slowly than expected, our business and financial
condition could be materially and adversely affected.
UNCERTAIN PROTECTION OF INTELLECTUAL PROPERTY.
Our success will depend, in part, on our ability to protect our intellectual
property rights to our proprietary hardware products. To-
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ward that end, we rely in part on trademark, copyright and trade secret law to
protect our intellectual property in the U.S. and abroad. The degree of
protection provided by patents is uncertain and involves largely unresolved
complex legal and factual questions.
The process of seeking patent and trademark protection can be long and
expensive, and there is no assurance that any pending or future applications
will result in patents and/or registered trademarks. Further, we cannot assure
you that any proprietary rights granted will provide meaningful protection or
any commercial advantage to us. We also cannot assure you that claims for
infringement will not be asserted or prosecuted against us in the future,
although we are not presently aware of any basis for claims. A number of
companies have developed and received proprietary rights to technologies that
may be competitive with our technologies. Most of these entities are larger and
have significantly greater resources than we do. Given the rapid development of
technology in the telecommunications industry, we cannot assure you that our
products do not or will not infringe upon the proprietary rights of others.
WE DEPEND ON THIRD PARTIES FOR MANUFACTURING.
We outsource the manufacturing and assembly of many of the components of our
products. To date, we have relied primarily on two manufacturers for the
manufacture and assembly of the components used in our video switch. Several
other manufacturers also produce smaller sub-assemblies and components for us on
a per-project basis. We cannot assure you that our subcontractors will continue
to perform under our agreements with them or that we will be able to negotiate
continuing arrangements with these manufacturers on acceptable terms and
conditions, or at all. In particular, our failure to pay these manufacturers
when due during 1998 and early 1999 could affect their willingness to continue
working with us. If we cannot maintain relationships with our current
subcontractors, we may not be able to find other suitable manufacturers. Any
difficulties encountered with these manufacturers could cause product defects
and/or delays and cost overruns and may cause us to be unable to fulfill orders
on a timely basis. Any of these difficulties could materially and adversely
affect us.
SALES OF A LARGE NUMBER OF SHARES IN THE PUBLIC MARKET COULD REDUCE THE MARKET
PRICE OF OUR EQUITY SECURITIES.
Substantially all of our currently outstanding shares of common stock have been
registered for sale under the Securities Act of 1933, are eligible for sale
under an exemption from the registration requirements or are subject to
registration rights pursuant to which holders may require us to register their
shares in the future. Sales or the expectation of sales of a substantial number
of shares of our common stock in the public market could adversely affect the
prevailing market price of our common stock and other equity securities.
OUR MARKET VALUE IS HIGHLY VOLATILE.
The market price of our common stock has been highly volatile and may continue
to fluctuate in the future. We completed an initial public offering of 295,714
shares of our common stock at a price of $38.50 per share in April 1997.
Subsequently, in November 1997 we completed a follow-on public offering of
142,857 shares of common stock at a price of $161.875 per share. On November 19,
1999, the closing price per share of our common stock as reported on the Nasdaq
SmallCap market was $3.03125. As a result of our stock price volatility, it is
difficult to determine the market value of our company. You cannot be sure how
the price of our equity securities might change in the future.
GOVERNMENT REGULATION
The VidModem and VidPhone Switch components of our video network system must
comply with certain regulations of the Federal Communications Commission
("FCC"). Under FCC regulations, we will be required to follow a verification
procedure consisting of a self-certification that the VidModem complies with
applicable regulations pertaining to radio frequency devices. A qualified,
independent testing facility tested the VidModem, and it was found to comply
with FCC regulations. We obtained equipment registrations from the FCC for
certain VidPhone system components, including the VidPhone switch, that are
connected to the public switched telephone network.
Although we believe that at present our video network system complies with all
applicable government regulations, future government regulations could increase
the cost of bringing products to market or adversely affect our ability to
market and sell our products and technology.
17
<PAGE> 18
PART II
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
(a) We held our Annual Meeting of Stockholders on September 9, 1999.
(b) At our 1999 Annual Meeting of Stockholders, our stockholders elected two
directors, Richard S. Friedland and Cheryl Snyder.
(c) The following is a brief description of each matter voted upon at our 1999
Annual Meeting of Stockholders, the number of votes cast for, against or
withheld, as well as the number of abstentions and broker non0vtes as to
each such matter:
(i) Election of Directors: For Withheld
Richard S. Friedland 7,155,323 13,595
Cheryl Snyder 7,155,523 13,395
(ii) Consideration of a proposal to approve the adoption of a new 1999 Stock
Incentive Plan:
For Against Abstain Not Voted
2,063,043 45,072 27,722 5,033,081
(iii) Consideration of a proposal to approve and adopt the Fourth
Amended and Restated Certificate of Incorporation to change
the name of the corporation to Video Network Communications,
Inc.
For Against Abstain
7,188,704 18,090 32,124
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.7 3.1 Fourth Amended and Restated Certificate of Incorporation
10.15 1999 Stock Incentive Plan.
10.16 Employment Agreement dated as of September 9, 1999 by and between the
Registrant and Carl Muscari.
11 Statement of Computation of Earnings Per Share
27.1 Financial Data Schedule.
(b) Reports on Form 8-K during the quarter ended September 30, 1999.
None.
18
<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
as amended, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Video Network Communications, Inc.
By:
------------------------------
Carl Muscari
President
(duly authorized executive officer)
------------------------------
Robert H. Emery
Vice President, Administration and Finance
(principal financial officer)
November 22, 1999
19
<PAGE> 20
EXHIBIT INDEX
3.1 Fourth Amended and Restated Certificate of Incorporation.
10.15 1999 Stock Incentive Plan.
10.16 Employment Agreement dated as of September 9, 1999 by and between the
Registrant and Carl Muscari.
11 Statement of Computation of Earnings Per Share
27.1 Financial Data Schedule.
20
<PAGE> 1
FOURTH AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
VIDEO NETWORK COMMUNICATIONS, INC.
(FORMERLY OBJECTIVE COMMUNICATIONS, INC.)
The undersigned, a natural person, for the purpose of conducting the
business and promoting the purposes hereinafter stated, under the provisions and
subject to the requirements of the laws of the State of Delaware (particularly
Chapter 1, Title 8 of the Delaware Code, as amended, and referred to as the
"General Corporation Law of the State of Delaware"), hereby certifies that the
Corporation's original Certificate of Incorporation was filed with the Secretary
of State of the State of Delaware on October 5, 1993 and that:
ARTICLE FIRST
NAME
The name of the corporation is: Video Network Communications, Inc. (the
"Corporation").
ARTICLE SECOND
REGISTERED OFFICE AND REGISTERED AGENT
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, Wilmington, Delaware, 19801, County of New
Castle, Delaware, and the name of the Corporation's registered agent in the
State of Delaware at such address is The Corporation Trust Company.
ARTICLE THIRD
PURPOSE
The purpose or purposes for which the Corporation is organized is to engage
in any lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
ARTICLE FOURTH
CAPITAL STOCK
The total number of shares which the Corporation shall have authority to
issue is thirty two million five hundred thousand (32,500,000) shares of capital
stock, of which thirty million (30,000,000) shares shall be common stock, par
value of $.01 per share, and two million five hundred thousand (2,500,000) shall
be preferred stock, par value $.01 per share.
ARTICLE FIFTH
PREFERRED STOCK
Section A. Preferred Stock. Shares of Preferred Stock may be issued from
time to time in one or more classes or series as the Board of Directors of the
Corporation (the "Board"), by resolution or resolutions, may from time to time
determine, each of such classes or series to be distinctly designated. The
voting powers, preferences and relative, participating, optional and other
special rights, and the qualifications, limitations or restrictions thereof, if
any, of each such class or series may differ from those of any and all other
class or series of Preferred Stock at any time outstanding, and the Board is
hereby expressly granted authority to fix or alter, by resolution or
resolutions, the designation, number, voting powers, preferences and relative,
participating,
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optional and other special rights, and the qualifications, limitations and
restrictions, of each such series, including, but without limiting the
generality of the foregoing, the following:
1. The distinctive designation of, and the number of shares of
Preferred Stock that shall constitute, such class or series, which
number (except where otherwise provided by the Board in the
resolution establishing such class or series) may be increased (but
not above the total number of shares of Preferred Stock) or
decreased (but not below the number of shares of such class or
series then outstanding) from time to time by like action of the
Board;
2. The rights in respect of dividends, if any, of such class or series
of Preferred Stock, the extent of the preference or relation, if
any, of such dividends to the dividends payable on any other class
or classes or any other series of the same or other class or
classes of capital stock of the Corporation, and whether such
dividends shall be cumulative or noncumulative;
3. The right, if any, of the holders of such class or series of
Preferred Stock to convert the same into, or exchange the same for,
shares of any other class or classes or of any other series of the
same or any other class or classes of capital stock of the
Corporation, and the terms and conditions of such conversion or
exchange;
4. Whether or not shares of such class or series of Preferred Stock
shall be subject to redemption, and the redemption price or prices
and the times at which, and the terms and conditions on which,
shares of such class or series of Preferred Stock may be redeemed;
5. The rights, if any, of the holders of such class or series of
Preferred Stock upon the voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation or in the event of any
merger or consolidation of or sale of assets by the Corporation;
6. The terms of any sinking fund or redemption or purchase account, if
any, to be provided for shares of such class or series of the
Preferred Stock;
7. The voting powers, if any, of the holders of any class or series of
Preferred Stock generally or with respect to any particular matter,
which may be less than, equal to or greater than one vote per
share, and which may, without limiting the generality of the
foregoing, include the right, voting as a class or series by itself
or together with the holders of any other class or classes or
series of Preferred Stock or all series of Preferred Stock as a
class, to elect one or more directors of the Corporation (which,
without limiting the generality of the foregoing, may include a
specified number or portion of the then-existing number of
authorized directorships of the Corporation) generally or under
such specific circumstances and on such conditions as shall be
provided in the resolution or resolutions of the Board adopted
pursuant thereto; and
8. Such other powers, preferences and relative, participating,
optional and other special rights, and the qualifications,
limitations and restrictions thereof, as the Board shall determine.
Section B. Rights of Preferred Stock.
1. After the provisions with respect to preferential dividends on any
series of Preferred Stock (fixed in accordance with the provisions
of this Article Fifth), if any, shall have been satisfied and after
the Corporation shall have complied with all the requirements, if
any, with respect to redemption of, or the setting aside of sums as
sinking funds or redemption or purchase accounts with respect to,
any series of Preferred Stock (fixed in accordance with the
provisions of this Article Fifth), and subject further to any other
conditions that may be fixed in accordance with the provisions of
this Article Fifth, then and not otherwise, the holders of Common
Stock shall be entitled to receive such dividends as may be
declared from time to time by the Board.
2. In the event of the voluntary or involuntary liquidation,
dissolution or winding-up of the Corporation, after distribution in
full of the preferential amounts, if any, to be distributed to the
holders of Preferred Stock by reason thereof, the holders of Common
Stock shall, subject to the additional rights, if any (fixed in
accordance with the provisions of this Article Fifth), of the
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<PAGE> 3
holders of any outstanding shares of Preferred Stock, be entitled
to receive all of the remaining assets of the Corporation,
tangible or intangible, of whatever kind available for
distribution to stockholders ratably in proportion to the number
of shares of Common Stock held by them respectively.
3. Except as may otherwise be required by law, and subject to the
provisions of such resolution or resolutions as may be adopted by
the Board pursuant to this Article Fifth granting the holders of
one or more series of Preferred Stock exclusive voting powers with
respect to any matter, each holder of Common Stock may have one
vote in respect to each share of Common Stock held on all matters
voted upon by the stockholders.
The number of authorized shares of Preferred Stock and each class of Common
Stock may, without a class or series vote, be increased or decreased from time
to time by the affirmative vote of the holders of shares having a majority of
the total number of votes which may be cast in the election of directors of the
Corporation by all stockholders entitled to vote in such an election, voting
together as a single class.
ARTICLE SIXTH
DURATION
The Corporation is to have perpetual existence.
ARTICLE SEVENTH
BYLAWS
In furtherance and not in limitation of the powers conferred by statute,
the Board of Directors of the Corporation is expressly authorized to make,
alter, or repeal the Bylaws of the Corporation.
ARTICLE EIGHTH
INDEMNIFICATION
The Corporation shall, to the fullest extent permitted by Section 145 of
the General Corporation Law of the State of Delaware, as the same may be amended
and supplemented, indemnify and hold harmless any and all persons who it shall
have power to indemnify under said section from and against any and all of the
expenses, liabilities, or other matters referred to in or covered by said
section, and the indemnification provided for herein shall not be deemed
exclusive of any other rights to which those stockholders, or disinterested
directors or otherwise, both as to action in his or her official capacity and as
to action in any other capacity while holding such office, and shall continue as
to a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs, executors, and administrators of such a person.
ARTICLE NINTH
BOARD OF DIRECTORS
Section A. Classified Board. The Board of Directors shall be divided into
three classes, as nearly equal in number as the then-authorized number of
directors constituting the Board permits, with the term of office of one class
expiring each year and with each director serving for a term ending at the third
annual meeting of stockholders following the annual meeting at which such
director was elected. One class of directors shall be initially elected for a
term expiring at the annual meeting of shareholders to be held in 1999, the
second class shall be initially elected for a term expiring at the annual
meeting of stockholders to be held in 2000 and the third class shall be
initially elected for a term expiring at the annual meeting of stockholders to
be held in 2001. Members of each class shall hold office until their successors
are elected and qualified. At each succeeding annual meeting of the stockholders
of the Corporation, the successors of the class of directors whose term expires
at the meeting shall be elected by a plurality vote of all votes cast at such
meeting to hold office for a term expiring at the annual meeting of stockholders
held in the third year following the year of their election. Any vacancy on the
Board resulting from the resignation or removal of a director may be filled
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<PAGE> 4
by the remaining members of the Board of Directors, and the director so chosen
shall hold office for the remainder of the full term of the resigning or removed
director's seat.
Section B. Vote Required for Modification of Classified Board. Any action
to amend or repeal this Article Ninth will require the affirmative vote of the
holders of 66 2/3% of the outstanding shares of Common Stock, voting together as
a single class, unless such action has been previously approved by a majority
vote of the full Board, in which case the affirmative vote of the holders of a
majority of the outstanding shares of Common Stock entitled to vote thereon will
be sufficient to amend or repeal any provision of this Article Ninth.
ARTICLE TENTH
LIMITATION ON DIRECTOR LIABILITY
A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) under Section 174 of the General Corporation Law of the
State of Delaware, or (iv) for any transaction from which the director derived
any improper personal benefit. If the General Corporation Law of the State of
Delaware is amended after the filing of this Third Amended and Restated
Certificate of Incorporation to authorize corporate action further eliminating
or limiting the personal liability of directors, then the liability of a
director of the Corporation shall be eliminated or limited to the fullest extent
permitted by the General Corporation Law of the State of Delaware. No
modifications or repeal of the provisions of this Article Tenth shall adversely
affect any right or protection of any director of the Corporation existing at
the date of such modification or repeal or create any liability or adversely
affect any such right or protection for any acts or omissions of such director
occurring prior to such modification or repeal.
ARTICLE ELEVENTH
RIGHTS OF STOCKHOLDERS
From time to time any of the provisions of this Fourth Amended and Restated
Certificate of Incorporation may be amended, altered, or replaced, and other
provisions authorized by the laws of the State of Delaware at the time in force
may be added or inserted in the manner and at the time prescribed by said laws,
and all rights at any time conferred upon the stockholders of the Corporation by
this Certificate of Incorporation are granted subject to the provisions of this
Article Eleventh.
IN WITNESS WHEREOF, this Fourth Amended and Restated Certificate of
Incorporation which restates and integrates and also amends the provisions of
the Certificate of Incorporation of the Corporation and which has been duly
adopted in accordance with Sections 242 and 245 of the General Corporation Law
of
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the State of Delaware, as the Corporation has received payment for its capital
stock, has been executed by its President and Chief Executive Officer and the
Secretary this ____day of September, 1999.
Video Network Communications, Inc.
(formerly Objective Communications,
Inc.)
By:
--------------------------------------
Name: James F. Bunker
Title: President and Chief Executive
Officer
Attest:
By:
--------------------------------------
Name: Robert H. Emery
Title: Secretary
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OBJECTIVE COMMUNICATIONS, INC.
1999 STOCK INCENTIVE PLAN
ARTICLE I
PURPOSES
1.1. The Plan is intended to assist Objective Communications, Inc. (hereinafter
the "Company") in recruiting and retaining individuals with ability and
initiative by enabling such persons to participate in the future success
of the Company and its Affiliates and to associate their interests with
those of the Company and its stockholders. The Plan is intended to permit
the grant of both Options qualifying under Section 422 of the Code and
Options not so qualifying, and the grant of SARs and Stock Awards. No
Option that is intended to be an Incentive Stock Option shall be invalid
for failure to qualify as an Incentive Stock Option. The proceeds received
by the Company from the sale of Common Stock pursuant to this Plan shall
be used for general corporate purposes.
ARTICLE II
DEFINITIONS
2.1. Affiliate means any "subsidiary" or "parent" company (within the meaning
of Section 424 of the Code) of the Company.
2.2. Agreement means a written agreement (including any amendment or supplement
thereto) between the Company and a Participant specifying the terms and
conditions of a Stock Award, Option or SAR granted to such Participant.
2.3. Board means the Board of Directors of the Company.
2.4. Change of Control means:
(a) a "person" or "group" (which terms, shall have the meaning they have
when used in Section 13(d) of the Exchange Act) (other than the
Company, any trustee or other fiduciary holding securities under an
employee benefit plan of the Company, any corporation owned directly
or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of voting securities of the
Company) becomes (other than solely by reason of a repurchase of
voting securities by the Company), the "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act), directly or indirectly, of
forty (40%) or more of the combined voting power of the Company's then
total outstanding voting securities;
(b) The Company consolidates with or merges with or into another
corporation or partnership or conveys, transfers or leases, in any
transaction or series of transactions, all or substantially all of its
assets to any corporation or partnership, or any corporation or
partnership consolidates with or merges with or into the Company, in
any event pursuant to a transaction in which the outstanding voting
stock of the Company is reclassified or changed into or exchanged for
cash, securities or other property, other than any such transaction
where (i) the outstanding voting securities of the Company are changed
into or exchanged for voting securities of the surviving corporation
and (ii) the persons who were the beneficial owners of the Company's
voting securities immediately prior to such transaction beneficially
own immediately after such transaction forty (40%) or more of the
total outstanding voting power of the surviving corporation, or the
Company is liquidated or dissolved or adopts a plan of liquidation or
dissolution.
2.5. Code means the Internal Revenue Code of 1986, and any amendments thereto.
2.6. Committee means a committee of the Board designated by the Board to
administer the Plan and composed of not less than two directors, each of
whom is a "Non-Employee Director" (within the
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meaning of Rule 16b-3 under the Exchange Act) and an "outside direction"
(within the meaning of Code Section 162(m), to the extent that Rule 16b-3
of the Exchange Act and Code Section 162(m), respectively, are at such
times applicable to the Company and the Plan. If no such Committee is
appointed, the full Board shall serve as the Committee.
2.7. Common Stock means the common stock, $.01 par value, of the Company.
2.8. Company means Objective Communications, Inc., a Delaware corporation.
2.9. Consultant means any person performing consulting or advisory services for
the Company or any Affiliate, with or without compensation, to whom the
Committee chooses to grant a Stock Award, Option, or SAR in accordance
with the Plan.
2.10. Corresponding SAR means an SAR that is granted in relation to a particular
Option and that can be exercised only upon the surrender to the Company,
unexercised, of that portion of the Option to which the SAR relates.
2.11. Director means a member of the Company's Board of Directors.
2.12. Disability shall have the meaning provided for in Section 22(e)(3) of the
Code or any successor statute thereto.
2.13. Exchange Act means the Securities Exchange of 1934, as amended, and as in
effect from time to time.
2.14. Fair Market Value means, on any given date, the current fair market value
of the shares of Common Stock as determined pursuant to subsection (a) or
(b) below.
(a) While the Company is a Public Company, Fair Market Value shall be
determined as follows: (i) if the Common Stock is traded on The Nasdaq
Stock Market or listed on a national securities exchange, the last
sale price of the Common Stock on the determination date, or, if there
are no sales on such date, then on the next preceding date on which
there were sales of Common Stock, (ii) if the Common Stock is not
traded on The Nasdaq Stock Market or listed on a national securities
exchange, the last sale price last reported by the National
Association of Securities Dealers, Inc. for the over-the-counter
market on the determination date, or, if no sales are reported on such
date, then on the next preceding date on which there were such sales.
(b) If the Company becomes a Non-Public Company, the Committee in good
faith using any reasonable method shall determine Fair Market Value.
(c) Notwithstanding subsections (a) and (b) of this Section, in all cases,
Fair Market Value shall not be less than the par value of the Common
Stock.
(d) For purposes of this Section, the term "Public Company" means that the
Company has filed a registration statement to register its Common
Stock for offering and sale under the Securities Act the registration
statement has been declared effective by the Securities; and Exchange
Commission, and the Company is currently obligated to file reports
with the Securities and Exchange Commission pursuant to Section 13(a)
or 15(d) of the Exchange Act. The term "Non-Public Company" means,
subsequent to the effective date of the Plan, the Company ceases to be
obligated to file reports with the Securities and Exchange Commission
pursuant to Section 13(a) or 15(d) of the Exchange Act.
2.15. Initial Value means, with respect to an SAR, the Fair Market Value of one
share of Common Stock on the date of grant.
2.16. Incentive Stock Option means an Option qualifying for special tax
treatment under Section 422 of the Code.
2.17. Nonqualified Stock Option means an option which is not an Incentive Stock
Option.
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2.18. Option means a stock option that is either a Nonqualified Stock Option or
Incentive Stock Option that entitles the holder to purchase from the
Company a stated number of shares of Common Stock at the price set forth
in an Agreement.
2.19. Optionee means the employee, Director or Consultant to whom an Option is
granted.
2.20. Participant means an employee of the Company or an Affiliate, a Director
or a Consultant who satisfies the requirements of Article IV and is
selected by the Committee to receive a Stock Award, Option, SAR or a
combination thereof.
2.21. Plan means this Objective Communications, Inc. 1999 Stock Incentive Plan.
2.22. SAR means a stock appreciation right that in accordance with the terms of
an Agreement entitles the holder to receive, with respect to each share of
Common Stock encompassed by the exercise of such SAR, the amount
determined by the Committee and specified in an Agreement. In the absence
of such a determination, the holder shall be entitled to receive, with
respect to such share of Common Stock encompassed by the exercise of such
SAR, the excess of its Fair Market Value on the date of exercise over the
Initial Value. References to "SARs" include both Corresponding SARs and
SARs granted independently of Options, unless the context requires
otherwise.
2.23. Securities Act means the Securities Act of 1933, as amended and as in
effect from time to time.
2.24. Stock Award means Common Stock awarded to a Participant under Article
VIII.
2.25. Stockholder means the holder of Common Stock issued under the Plan as a
result of exercise of an Option or SAR or grant of a Stock Award.
2.26. Termination of Employment means with respect to an individual the last to
occur of the date the individual ceases to be employed by the Company or
its Affiliates, a member of the Board, or a Consultant to the Company or
its Affiliates.
2.27. Ten Percent Stockholder means any individual owning more than ten percent
(10%) of the total combined voting power of all classes of stock of the
Company or of an Affiliate. An individual shall be considered to own any
voting stock owned (directly or indirectly) by or for his brothers,
sisters, spouse, ancestors or lineal descendants and shall be considered
to own proportionately any voting stock owned (directly or indirectly) by
or for a company, partnership, estate or trust of which such individual is
a stockholder, partner or beneficiary.
ARTICLE III
ADMINISTRATION
3.1. The Committee shall administer the Plan. The Committee shall have
authority to grant Stock Awards, Options and SARs upon such terms (not
inconsistent with the provisions of this Plan) as the Committee may
consider appropriate. Such terms may include conditions (in addition to
those contained in this Plan) on the exercisability of all or any part of
an Option or SAR or on the transferability or forfeitability of a Stock
Award. Notwithstanding any such conditions, the Committee may, in its
discretion, accelerate the time at which any Option or SAR may be
exercised, or the time at which a Stock Award may become transferable or
nonforfeitable or the time at which may be settled. The Committee may
modify an outstanding Option, SAR or Stock Award provided that no
modification shall, without a Participant's consent, adversely affect any
rights or the Participant. The Committee shall have complete authority to
interpret all provisions of this Plan; to prescribe the form of
Agreements; to adopt, amend, and rescind rules and regulations pertaining
to the administration of the Plan; and to make all other determinations
necessary or advisable for the administration of this Plan. The express
grant in the Plan of any specific power to the Committee shall not be
construed as limiting any power or authority of the Committee; provided
that the Committee may not exercise any right or power reserved to the
Board. Any decision made, or action taken, by the Board or the Committee
or in connection with the administration of this Plan shall be final and
conclusive on all persons having an
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interest in the Plan. No member of the Board or the Committee shall be liable
for any act done in good faith with respect to this Plan or any Agreement,
Option, SAR, Stock Award. All expenses of administering this Plan shall be borne
by the Company.
3.2. To the extent not prohibited by law, or the Certificate of Incorporation
or Bylaws of the Company, the Committee, in its discretion, may delegate
to one or more officers of the Company, all or part of the Committee's
authority and duties with respect to grants and awards to individuals,
provided that the Committee may not delegate its authority with respect to
the granting of Awards to persons subject to Sections 16(a) and 16(b) of
the Exchange Act if such delegation would cause a grant of an Award under
the Plan not to qualify as an exempt transaction under Rule 16(b)-3 under
the Exchange Act or any successor rule.
ARTICLE IV
ELIGIBILITY
4.1. Any employee of the Company or an Affiliate (including a company that
becomes an Affiliate after the adoption of this Plan), a Director or a
Consultant to the Company or an Affiliate (including a company that
becomes an Affiliate after the adoption of this Plan) is eligible to
participate in this Plan if the Committee, in its sole discretion,
determines that such person has contributed significantly or can be
expected to contribute significantly to the profits or growth of the
Company or an Affiliate. Only employees of the Company or an Affiliate are
eligible to receive Incentive Stock Options.
ARTICLE V
STOCK SUBJECT TO PLAN
5.1. Shares Issued. Upon the award of shares of Common Stock pursuant to a
Stock Award the Company may issue shares of authorized but unissued Common
Stock or shares of previously issued Common Stock that has been reacquired
by the Company. Upon the exercise of any Option or SAR the Company may
deliver to the Participant (or the Participant's broker if the Participant
so directs), shares of authorized but unissued Common Stock or shares of
previously issued Common Stock that has been reacquired by the Company.
5.2. Aggregate Limit. The maximum aggregate number of shares of Common Stock
that may be issued under this Plan pursuant to the exercise of SARs and
Options and the grant of Stock Awards is two million six hundred and forty
thousand (2,640,000) shares. The Committee may provide any one Participant
with awards for up to five hundred thousand (500,000) shares (subject to
adjustment under Article X) under this Plan in any given calendar year.
The maximum aggregate number of shares that may be issued under this Plan
shall be subject to adjustment as provided in Article X.
5.3. Reallocation of Shares. If an Option is terminated, in whole or in part,
for any reason other than its exercise or the exercise of a Corresponding
SAR that is settled with Common Stock, the number of shares of Common
Stock allocated to the Option or portion thereof may be reallocated to
other Options, SARs and Stock Awards to be granted under this Plan. If an
SAR is terminated, in whole or in part, for any reason other than its
exercise or the exercise of a related Option, the number of shares of
Common Stock allocated to the SAR or portion thereof may be reallocated to
other Options, SARs and Stock Awards to be granted under this Plan.
ARTICLE VI
OPTIONS
6.1. Award. In accordance with the provisions of Article IV, the Committee
will designate each individual to whom an Option is to be granted and will
specify the number of shares of Common Stock covered by such awards. The
Option Agreement shall specify whether the Option is an Incentive Stock
Option or Nonqualified Stock Option, the vesting schedule applicable to
such Option and any other terms of such
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Option. An individual must be an employee of the Company or the Affiliate
to be eligible to be granted an Incentive Stock Option.
6.2. Option Price. The exercise price per share for Common Stock subject to an
Option shall be determined by the Committee on the date of grant;
provided, however, that the exercise price per share for Common Stock for
an Option that is an Incentive Stock Option shall not be less than one
hundred percent (100%) of the Fair Market Value on the date the Option is
granted. Notwithstanding the preceding sentence, the exercise price per
share for Common Stock subject to an Option that is an Incentive Stock
Option granted to an individual who is or is deemed to be a Ten Percent
Stockholder on the date such option is granted, shall not be less than one
hundred ten percent (110%) of the Fair Market Value on the date the Option
is granted.
6.3. Maximum Option Period. The maximum period in which an Option may be
exercised shall be determined by the Committee on the date of grant,
except that no Option that is an Incentive Stock Option shall be
exercisable after the expiration of ten years from the date such Option
was granted. In the case of an Incentive Stock Option that is granted to a
Participant who is or is deemed to be a Ten Percent Stockholder on the
date of grant, such Option shall not be exercisable after the expiration
of five years from the date of grant. The terms of any Option that is an
Incentive Stock Option may provide that it is exercisable for a period
less than such maximum period.
6.4. Maximum Value of Options which are Incentive Stock Options. To the extent
that the aggregate Fair Market Value of the Common Stock with respect to
which Incentive Stock Options granted to any person are exercisable for
the first time during any calendar year (under all stock option plans of
the Company or any of its Affiliates) exceeds $100,000, the Options are
not Incentive Stock Options. For purposes of this section, the Fair Market
Value of the Common Stock will be determined as of the time the Incentive
Stock Option with respect to the Common Stock is granted. This paragraph
will be applied by taking Incentive Stock Options into account in the
order in which they are granted.
6.5. Nontransferability. Except as provided in Section 6.6, each Option
granted under this Plan shall be nontransferable except by will or by the
laws of descent and distribution. In the event of any such transfer, the
Option and any Corresponding SAR that relates to such Option must be
transferred to the same person or persons or entity or entities. Except to
the extent an Option is transferred in accordance with Section 6.6, during
the lifetime of the Participant to whom the Option is granted, the Option
may be exercised only by the Participant. No right or interest of a
Participant in any Option shall be liable for, or subject to, any lien,
obligation, or liability of such Participant.
6.6. Transferable Options. Section 6.5 to the contrary notwithstanding, if the
Agreement so provides, an Option that is not an Incentive Stock Option may
be transferred by a Participant to the Participant's children,
stepchildren, grandchildren, spouse, one or more trusts for the benefit of
such family members or a partnership in which such family members are the
only partners; provided, however, that Participant may not receive any
consideration for the transfer. The holder of an Option transferred
pursuant to this section shall be bound by the same terms and conditions
that governed the Option during the period that it was held by the
Participant. In the event of any such transfer, the Option and any
Corresponding SAR that relates to such Option must be transferred to the
same person or persons or entity or entities.
6.7. Vesting and Termination of Employment. Except as provided in an Option
Agreement, the following rules shall apply:
(a) Options will vest as provided in the Option Agreement. An Option will
be exercisable only to the extent that it is vested on the date of
exercise.
(b) If the Optionee's Termination of Employment is for reason of death or
Disability, the right to exercise the Option (to the extent vested)
will expire on the earlier of (i) one (1) year after the date of the
Optionee's Termination of Employment, or (ii) the expiration date
under the terms of the Agreement. Until the expiration date, the
Optionee's heirs, legatees or legal representative may exercise the
Option, except to the extent the Option was previously transferred
pursuant to Section 6.6.
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(c) If the Optionee's Termination of Employment is for any reason other
than death or Disability, the right to exercise the Option (to the
extent that it is vested) will expire on the earlier of (i) three (3)
months after the date of the Optionee's Termination of Employment, or
(ii) the expiration date under the terms of the Agreement. However, if
the Option would then expire during the Pooling Period and the Common
Stock received upon the exercise of the Option would be subject to the
Pooling Period transfer restrictions, then the right to exercise the
Option will expire ten (10) calendar days after the end of the Pooling
Period. "Pooling Period" means the period in which property is subject
to restrictions on transfer in compliance with the "Pooling of
Interests Accounting" rules set forth in the Securities and Exchange
Commission Accounting Series Releases 130 and 135. If Termination of
Employment is for a reason other than the Optionee's death or
disability and the Option holder dies after his or her Termination of
Employment but before the right to exercise the Option has expired,
the right to exercise the Option shall expire on the earlier of (i)
one (1) year after the date of the Optionee's Termination of
Employment, or (ii) the date the Option expires under the terms of the
Agreement, and, until expiration, the Optionee's heirs, legatees or
legal representative may exercise the Option, except to the extent the
Option was previously transferred pursuant to Section 6.6.
6.8. Forfeiture for Cause. Notwithstanding any provision of the Plan to the
contrary, unless provided otherwise in an Option Agreement, all
unexercised Options granted to an Optionee whose Termination of Employment
is for "cause" shall terminate and be forfeited by the Optionee. A
termination of Employment shall be for cause if it is by reason of (i)
conduct related to the Optionee's service to the Company or an Affiliate
for which either criminal or civil penalties against the Optionee may be
sought, (ii) a material violation of Company policies, or (iii) disclosing
or misusing any confidential information or material concerning the
Company or Affiliate. An Optionee may be released from the forfeiture
provisions of this section if the Committee (or its duly appointed agent)
determines in its sole discretion that such action is in the best
interests of the Company.
6.9. Employee Status. For purposes of determining the applicability of Section
422 of the Code (relating to incentive stock options), or in the event
that the terms of any Option provide that it may be exercised only during
employment or within a specified period of time after Termination of
Employment, the Committee may decide to what extent leaves of absence for
governmental or military service, illness, temporary disability, or other
reasons shall not be deemed interruptions of continuous employment.
6.10. Exercise. The Option holder must provide written notice to the Secretary
of the Company of the exercise of Options and the number of Options
exercised. Subject to the provisions of this Plan and the applicable
Agreement, an Option may be exercised to the extent vested in whole at any
time or in part from time to time at such times and in compliance with
such requirements as the Committee shall determine. An Option granted
under this Plan may be exercised with respect to any number of whole
shares less than the full number for which the Option could be exercised.
A partial exercise of an Option shall not affect the right to exercise the
Option from time to time in accordance with this Plan and the applicable
Agreement with respect to the remaining shares subject to the Option. An
Option may not be exercised with respect to fractional shares of Common
Stock. The exercise of an Option shall result in the termination of any
Corresponding SAR to the extent of the number of shares with respect to
which the Option is exercised.
6.11. Payment. Unless otherwise provided by the Agreement, payment of the
Option price shall be made in cash or a cash equivalent acceptable to the
Committee. Unless otherwise provided by the Agreement, payment of all or
part of the Option price may also be made by surrendering shares of Common
Stock to the Company that have been held for at least six (6) months prior
to the date of exercise. If Common Stock is used to pay all or part of the
Option price, the sum of the cash or cash equivalent and the Fair Market
Value (determined as of the date of exercise) of the shares surrendered
must not be less than the Option price of the shares for which the Option
is being exercised. With the consent of the Committee, all or part of the
Option price may be paid with a full-recourse promissory note. However,
the par value of the Common Stock, if newly issued, shall be paid in cash
or cash equivalents. The shares received upon exercise of the Option shall
be pledged as security for payment of the principal
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amount of the promissory note and interest thereon. The interest rate payable
under the terms of the promissory note shall not be less than the minimum rate
(if any) required to avoid the imputation of additional interest under the Code.
Subject to the foregoing, the Board Committee (at its sole discretion)
shall specify the term, interest rate, amortization requirements (if any)
and other provisions of such note. If the Common Stock is traded on an
established securities market, the Committee may approve payment of the
exercise price by a broker-dealer or by the Option holder with cash
advanced by the broker-dealer if the exercise notice is accompanied by the
Option holder's written irrevocable instructions to deliver the Common
Stock acquired upon exercise of the Option to the broker-dealer.
6.12. Stockholder Rights. No Participant shall have any rights as a stockholder
with respect to shares subject to an Option until the date of exercise of
such Option.
6.13. Disposition and Stock Certificate Legends for Incentive Stock Option
Shares. A Participant shall notify the Company of any sale or other
disposition of Common Stock acquired pursuant to an Incentive Stock Option
if such sale or disposition occurs (i) within two years of the grant of an
Option or (ii) within one year of the issuance of the Common Stock to the
Participant. Such notice shall be in writing and directed to the Secretary
of the Company. The Company may require that certificates evidencing
shares of Common Stock purchased upon the exercise of Incentive Stock
Option issued under the Plan be endorsed with a legend in substantially
the following form:
The shares evidenced by this certificate may not be sold or
transferred prior to , 19 , in the absence
of a written statement from the Company to the effect that the
Company is aware of the facts of such sale or transfer.
The blank contained in this legend shall be filled in with the date that
is the later of (i) one year and one day after the date of the exercise of
such Incentive Stock Option or (ii) two years and one day after the grant
of such Incentive Stock Option. Upon delivery to the Company, at its
principal executive office, of a written statement to the effect that such
shares have been sold or transferred prior to such date, the Company does
hereby agree to promptly deliver to the transfer agent for such shares a
written statement to the effect that the Company is aware of the fact of
such sale or transfer.
ARTICLE VII
SARS
7.1. Award. In accordance with the provisions of Article IV, the Committee
will designate each individual to whom SARs are to be granted and will
specify the number of shares covered by such awards. In addition no
Participant may be granted Corresponding SARs (under all Incentive Stock
Option plans of the Company and its Affiliates) that are related to
Incentive Stock Options which are first exercisable in any calendar year
for stock having an aggregate Fair Market Value (determined as of the date
the related Option is granted) that exceeds $100,000.
7.2. Maximum SAR Period. The maximum period in which an SAR may be exercised
shall be determined by the Committee on the date of grant, except that no
Corresponding SAR that is related to an Incentive Stock Option shall be
exercisable after the expiration of ten years from the date such related
Option was granted. In the case of a Corresponding SAR that is related to
an Incentive Stock Option granted to a Participant who is or is deemed to
be a Ten Percent Stockholder, such Corresponding SAR shall not be
exercisable after the expiration of five years from the date such related
Option was granted. The terms of any Corresponding SAR that is related to
an Incentive Stock Option may provide that it is exercisable for a period
less than such maximum period.
7.3. Nontransferability. Except as provided in Section 7.4, each SAR granted
under this Plan shall be nontransferable except by will or by the laws of
descent and distribution. In the event of any such transfer, a
Corresponding SAR and the related Option must be transferred to the same
person or persons or entity or entities. During the lifetime of the
Participant to whom the SAR is granted, the SAR may be exercised only by
the Participant. No right or interest of a Participant in any SAR shall be
liable for, or subject to, any lien, obligation, or liability of such
Participant.
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7.4. Transferable SARs. Section 7.3 to the contrary notwithstanding, if the
Agreement so provides, a SAR may be transferred by a Participant to the
children, stepchildren, grandchildren, spouse, one or more trusts for the
benefit of such family members or a partnership in which such family
members are the only partners; provided, however, that Participant may not
receive any consideration for the transfer. In the event of any such
transfer, a Corresponding SAR and the related Option must be transferred
to the same person or persons or entity or entities. The holder of an SAR
transferred pursuant to this section shall be bound by the same terms and
conditions that governed the SAR during the period that it was held by the
Participant.
7.5. Exercise. Subject to the provisions of this Plan and the applicable
Agreement, an SAR may be exercised in whole at any time or in part from
time to time at such times and in compliance with such requirements as the
Committee shall determine; provided, however, that a Corresponding SAR
that is related to an Incentive Stock Option may be exercised only to the
extent that the related Option is exercisable and only when the Fair
Market Value exceeds the option price of the related Option. An SAR
granted under this Plan may be exercised with respect to any number of
whole shares less than the full number for which the SAR could be
exercised. A partial exercise of an SAR shall not affect the right to
exercise the SAR from time to time in accordance with this Plan and the
applicable Agreement with respect to the remaining shares subject to the
SAR. The exercise of a Corresponding SAR shall result in the termination
of the related Option to the extent of the number of shares with respect
to which the SAR is exercised.
7.6. Employee Status. If the terms of any SAR provide that it may be exercised
only during employment or within a specified period of time after
Termination of Employment, the Committee may decide to what extent leaves
of absence for governmental or military service, illness, temporary
disability or other reasons shall not be deemed interruptions of
continuous employment.
7.7. Settlement. At the Committee's discretion, the amount payable as a result
of the exercise of an SAR may be settled in cash, Common Stock, or a
combination of cash and Common Stock. No fractional share will be
deliverable upon the exercise of an SAR but a cash payment will be made in
lieu thereof.
7.8. Stockholder Rights. No Participant shall, as a result of receiving an SAR
award, have any rights as a stockholder of the Company or any Affiliate
until the date that the SAR is exercised and then only to the extent that
the SAR is settled by the issuance of Common Stock.
ARTICLE VIII
STOCK AWARDS
8.1. Award. In accordance with the provisions of Article IV, the Committee
will designate each individual to whom a Stock Award is to be made and
will specify the number of shares of Common Stock covered by such awards.
8.2. Vesting. The Committee, on the date of the award, may prescribe that a
Participant's rights in the Stock Award shall be forfeitable or otherwise
restricted for a period of time or subject to such conditions as may be
set forth in the Agreement.
8.3. Performance Objectives. In accordance with Section 8.2, the Committee may
prescribe that Stock Awards will become vested or transferable or both
based on objectives such as, but not limited to, the Company's, an
Affiliate's or an operating unit's return on equity, earnings per share,
total earnings, earnings growth, return on capital, return on assets, or
Fair Market Value. If the Committee, on the date of award, prescribes that
a Stock Award shall become nonforfeitable and transferable only upon the
attainment of performance objectives, the shares subject to such Stock
Award shall become nonforfeitable and transferable only to the extent that
the Committee certifies that such objectives have been achieved.
8.4. Stock Legends. The Committee, on behalf of the Company, may endorse such
legend or legends upon the certificates representing the shares of Common
Stock, and may issue such "stop transfer"
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instructions as it determines to be necessary or appropriate to implement
the provisions of any agreement between the Company or an Affiliate and
the Participant with respect to such shares.
8.5. Employee Status. In the event that the terms of any Stock Award provide
that shares may become transferable and nonforfeitable thereunder only
after completion of a specified period of employment, the Committee may
decide in each case to what extent leaves of absence for governmental or
military service, illness, temporary disability, or other reasons shall
not be deemed interruptions of continuous employment.
8.6. Nontransferability. Except as provided in Section 8.7, Stock Awards
granted under this Plan shall be nontransferable except by will or by the
laws of descent and distribution. No right or interest of a Participant in
a Stock Award shall be liable for, or subject to, any lien, obligation, or
liability of such Participant.
8.7. Transferable Stock Awards. Section 8.6 to the contrary notwithstanding if
the Award so provides, a Stock Award may be transferred by a Participant
to the children, stepchildren, grandchildren, spouse, one or more trusts
for the benefit of such family members or a partnership in which such
family members are the only partners; provided, however, that Participant
may not receive any consideration for the transfer. The holder of a Stock
Award transferred pursuant to this section shall be bound by the same
terms and conditions that governed the Stock Award during the period that
it was held by the Participant.
8.8. Stockholder Rights. Prior to their forfeiture (in accordance with the
applicable Agreement) and while the shares of Common Stock granted
pursuant to the Stock Award may be forfeited or are nontransferable, a
Participant will have all rights of a stockholder with respect to a Stock
Award, including the right to receive dividends and vote the shares;
provided, however, that during such period (i) a Participant may not sell,
transfer, pledge, exchange, hypothecate, or otherwise dispose of shares of
Common Stock granted pursuant to a Stock Award, (ii) the Company shall
retain custody of the certificates evidencing shares of Common Stock
granted pursuant to a Stock Award, and (iii) the Participant will deliver
to the Company a stock power, endorsed in blank, with respect to each
Stock Award. The limitations set forth in the preceding sentence shall not
apply after the shares of Common Stock granted under the Stock Award are
transferable and are no longer forfeitable.
ARTICLE IX
CHANGE IN CAPITAL STRUCTURE
9.1. The existence of outstanding Options shall not affect in any way the right
or power of the Company or its stockholders to make or authorize any or
all adjustments, recapitalizations, reorganizations or other changes in
the Company's capital structure or its business, or any merger or
consolidation of the Company, or any issuance of bonds, debentures,
preferred or prior preference stock ahead of or affecting the Common Stock
or the rights thereof, or the dissolution or liquidation of the Company,
or any sale or transfer of all or any part of its assets or business, or
any other corporate act or proceeding, whether of a similar character or
otherwise.
9.2. If the Company shall effect a subdivision or consolidation of shares or
other capital readjustment, the payment of a stock dividend, or other
increase or reduction of the number of shares of the Common Stock
outstanding, without receiving compensation therefore in money, services
or property, then (i) the number, class, and per share price of shares of
Common Stock subject to outstanding Options, SARs and Stock Awards
hereunder shall be appropriately adjusted in such a manner as to entitle
an optionee to receive upon exercise of an Option or an SAR or the receipt
of a Stock Award, for the same aggregate cash consideration, the same
total number and class of shares as he would have received had the
optionee exercised his or her Option or SAR or received his or her Stock
Award in full immediately prior to the event requiring the adjustment; and
(ii) the number and class of shares then reserved for issuance under the
Plan and the maximum number of shares for which awards may be granted to a
Participant during a specified time period shall be adjusted by
substituting for the total number and class
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of shares of Common Stock then reserved that number and class of shares of
Common Stock that would have been received by the owner of an equal number
of outstanding shares of each class of Common Stock as the result of the
event requiring the adjustment.
9.3. After a merger of one or more corporations into the Company or after a
consolidation of the Company and one or more corporations in which the
Company shall be the surviving company, each holder of an Option or an SAR
shall, at no additional cost, be entitled upon exercise of such Option or
SAR to receive (subject to any required action by stockholders) in lieu of
the number and class of shares as to which such Option or SAR shall then
be so exercisable, the number and class of shares of stock or other
securities to which such Option holder would have been entitled pursuant
to the terms of the agreement of merger or consolidation if, immediately
prior to such merger or consolidation, such Option holder had been the
holder of record of the number and class of shares of Common Stock equal
to the number and class of shares as to which such Option or SAR shall be
so exercised.
9.4. If the Company is merged into or consolidated with another company under
circumstances where the Company is not the surviving company, or if the
Company is liquidated, or sells or otherwise disposes of substantially all
of its assets to another company while unvested or unexercisable Options
or SARs, or unvested Stock Awards, remain outstanding under the Plan,
unless provisions are made in connection with such transaction for the
continuance of the Plan and/or the assumption or substitution of such
Options, SARs or Stock Awards with new options, stock appreciation rights
or stock awards covering the stock of the successor company, or parent or
subsidiary thereof, with appropriate adjustments as to the number and kind
of shares and prices, then all outstanding Options, SARs and Stock Awards
which have not been continued, assumed or for which a substituted award
has not been granted shall be vested and exercisable immediately prior to
the effective date of any such merger, consolidation, liquidation, or sale
(the "corporate event"). Upon occurrence of the corporate event, all
unexercised SARs and Options which have not been continued or assumed,
whether or not such Options were vested or exercisable before application
of this Section, shall terminate and all SARs and Options which have not
been continued or assumed shall be deemed to have been exercised.
9.5. Except as previously expressly provided, neither the issuance by the
Company of shares of stock of any class, or securities convertible into
shares of stock of any class, for cash or property, or for labor or
services either upon direct sale or upon the exercise of rights or
warrants to subscribe therefor, or upon conversion of shares or
obligations of the Company convertible into such shares or other
securities, nor the increase or decrease of the number of authorized
shares of stock, nor the addition or deletion of classes of stock, shall
affect, and no adjustment by reason thereof shall be made with respect to,
the number, class or price of shares of Common Stock then subject to
outstanding Options.
9.6. Adjustment under the preceding provisions of this section will be made by
the Committee, whose determination as to what adjustments will be made and
the extent thereof will be final, binding, and conclusive. No fractional
interest will be issued under the Plan on account of any such adjustment.
No adjustment will be made in a manner that causes an Incentive Stock
Option to fail to continue to qualify as an Incentive Stock Option under
the Code.
9.7. The Committee may make Stock Awards and may grant Options and SARs in
substitution for performance shares, phantom shares, stock awards, stock
options, stock appreciation rights, or similar awards held by an
individual who becomes an employee of the Company or an Affiliate in
connection with a transaction described in Section 9.3 of this Article IX.
Notwithstanding any provision of the Plan (other than the maximum number
of shares of Common Stock that may be issued under the Plan), the terms of
such substituted Stock Awards or Option or SAR grants shall be as the
Committee, in its discretion, determines is appropriate.
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ARTICLE X
WITHHOLDING OF TAXES
10.1. The Company shall have the right, before any certificate for any Common
Stock is delivered, to deduct or withhold from any payment owed to a
Participant any amount that is necessary in order to satisfy any
withholding requirement that the Company in good faith believes is imposed
upon it in connection with Federal, state, or local taxes, including
transfer taxes, as a result of the issuance of, or lapse of restrictions
on, such Common Stock, or otherwise require such Participant to make
provision for payment of any such withholding amount. Subject to such
conditions as may be established by the Committee, the Committee may
permit a Participant to (i) have Common Stock otherwise issuable under an
Option, SAR or Stock Award withheld, (ii) tender back to the Company
shares of Common Stock received pursuant to an Option, SAR or Stock Award,
(iii) deliver to the Company previously acquired Common Stock, (iv) have
funds withheld from payments of wages, salary or other cash compensation
due the Participant, or (v) pay the Company in cash, in order to satisfy
part or all of the obligations for any taxes required to be withheld or
otherwise deducted and paid by the Company with respect to the Option, SAR
or Stock Award.
ARTICLE XI
COMPLIANCE WITH LAW AND
APPROVAL OF REGULATORY BODIES
11.1. General Requirements. No Option or SAR shall be exercisable, no Common
Stock shall be issued, no certificates for shares of Common Stock shall be
delivered, and no payment shall be made under this Plan except in
compliance with all applicable Federal and state laws and regulations
(including, without limitation, withholding tax requirements), any listing
agreement to which the Company is a party, and the rules of all domestic
stock exchanges or quotation systems on which the Company's shares may be
listed. The Company shall have the right to rely on an opinion of its
counsel as to such compliance. Any share certificate issued to evidence
Common Stock when a Stock Award is granted or for which an Option or SAR
is exercised may bear such legends and statements as the Committee may
deem advisable to assure compliance with Federal and state laws and
regulations. No Option or SAR shall be exercisable, no Stock Award shall
be granted, no Common Stock shall be issued, no certificate for shares
shall be delivered, and no payment shall be made under this Plan until the
Company has obtained such consent or approval as the Committee may deem
advisable from regulatory bodies having jurisdiction over such matters.
11.2. Participant Representatives. The Committee may require that a
Participant, as a condition to receipt of a particular award, execute and
deliver to the Company a written statement, in form satisfactory to the
Committee, in which the Participant represents and warrants that the
shares are being acquired for such person's own account, for investment
only and not with a view to the resale or distribution thereof. The
Participant shall, at the request of the Committee, be required to
represent and warrant in writing that any subsequent resale or
distribution of shares of Common Stock by the Participant shall be made
only pursuant to either (i) a registration statement on an appropriate
form under the Securities Act, which registration statement has become
effective and is current with regard to the shares being sold, or (ii) a
specific exemption from the registration requirements of the Securities
Act, but in claiming such exemption the Participant shall, prior to any
offer of sale or sale of such shares, obtain a prior favorable written
opinion of counsel, in form and substance satisfactory to counsel for the
Company, as to the application of such exemption thereto.
ARTICLE XII
GENERAL PROVISIONS
12.1. Effect on Employment and Service. Neither the adoption of this Plan, its
operation, nor any documents describing or referring to this Plan (or any
part thereof) shall confer upon any individual any right to continue in
the employ or service of the Company or an Affiliate or in any way affect
any right
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and power of the Company or an Affiliate or in any way affect any right
and power of the Company or an Affiliate to terminate the employment or
service of any individual at any time with or without assigning a reason
therefor.
12.2. Unfunded Plan. The Plan, insofar as it provides for grants, shall be
unfunded, and the Company shall not be required to segregate any assets
that may at any time be represented by grants under this Plan. Any
liability of the Company to any person with respect to any grant under
this Plan shall be based solely upon any contractual obligations that may
be created pursuant to this Plan. No such obligation of the Company shall
be deemed to be secured by any pledge of, or other encumbrance on, any
property of the Company.
12.3. Rules of Construction. Headings are given to the articles and sections of
this Plan solely as a convenience to facilitate reference. The reference
to any statute, regulation, or other provision of law shall be construed
to refer to any amendment to or successor of such provision of law.
12.4. Choice of Law. The Plan and all Agreements entered into under the Plan
shall be interpreted under the law of the State of Delaware.
ARTICLE XIII
AMENDMENT
13.1. The Board may amend or terminate this Plan from time to time; provided,
however, that no amendment may become effective until stockholder approval
is obtained if required under applicable Federal or state corporate or
securities laws, or pursuant to the terms of any listing or similar
agreement to which the Company is a party, or pursuant to the rules of any
domestic stock exchange or quotation system on which the Company's shares
may then be listed. No amendment shall, without a Participant's consent,
adversely affect any rights of such Participant under any outstanding
Stock Award, Option or SAR outstanding at the time such amendment is made.
ARTICLE XIV
EFFECTIVE DATE OF PLAN, DURATION OF PLAN
14.1. The Plan became effective as of , 199 , upon adoption by the
stockholders of the Company after approval by the Board on June 24, 1999.
14.2. Unless previously terminated, the Plan will terminate ten (10) years after
the earlier of (i) the date the Plan is adopted by the Board, or (ii) the
date the Plan is approved by the stockholders, except that Options, SARs
and Stock Awards that are granted under the Plan prior to its termination
will continue to be administered under the terms of the Plan until the
Options terminate or are exercised.
<TABLE>
<S> <C> <C>
Date: Objective Communications, Inc.
------------------
By:
--------------------------------------------------------
Title:
--------------------------------------------------------
</TABLE>
A-12
<PAGE> 1
EMPLOYMENT AGREEMENT
AGREEMENT dated as of September 9, 1999, between VIDEO NETWORK
COMMUNICATIONS, INC., a Delaware corporation (the "Company") and CARL MUSCARI,
residing in Nashua, New Hampshire (the "Executive").
WHEREAS, the Executive is willing to perform services for the Company,
and the Company desires to retain the services of the Executive;
NOW, THEREFORE, in consideration of the foregoing and the respective
covenants and agreements of the Executive and the Company herein contained, the
parties hereto agree as follows:
1. Employment.
The Company agrees to employ the Executive and may assign the Executive to
work for it or for any subsidiary or affiliated company and the Executive agrees
to perform the duties assigned to him upon the terms and conditions herein
provided.
2. Position and Responsibilities.
The Company shall employ the Executive and the Executive agrees to serve
as the President and Chief Operating Officer of the Company, subject to
conditions herein set forth. The Executive agrees to perform such reasonable and
lawful duties and services not inconsistent with his position and shall report
to James F. Bunker (while he serves as the Chief Executive Officer of the
Company) (hereinafter "James F. Bunker") or the Board of Directors of the
Company (the "Board") who shall have the authority to direct and supervise the
Executive's business actions
3. Term of Agreement and Duties.
(a) Term of Employment. The period of the Executive's employment
under this Agreement shall commence on September 9, 1999 and shall
continue for period of four (4) years thereafter.
(b) Duties. During such period of his employment hereunder, except
for illness, vacation periods, and reasonable leaves of absence, the Executive
shall devote substantially all of his business time, attention, skill and
efforts to the faithful performance of his duties under this Agreement. The
Executive may serve on the board of directors of, or hold any other offices in,
other companies or organizations so long as that service does not conflict with
the interests of the Company or materially affect the Executive's performance of
his duties pursuant to this Agreement.
4. Compensation.
For all services to be rendered by the Executive in any capacity during
the period of his employment under this Agreement, including, without
limitation, services as an employee, officer, director, or member of any
committee of the Company or of any subsidiary, affiliate or division thereof,
the Company will pay or cause to be paid to the Executive and will provide or
cause to be provided to the Executive the following:
(a) Salary. The Executive shall be compensated by the Company for his
services in such capacities at the minimum base salary rate of One Hundred
Eighty-Eight Thousand Dollars ($188,000) per year, or such higher rate as the
Board may in its discretion determine, payable in accordance with the Company's
regular payroll policies. The minimum base salary of the Executive shall be
adjusted upward
<PAGE> 2
- 2 -
from time to time in the sole discretion of the Board, in which case such
increased amount shall thereafter constitute the Executive's minimum base
salary.
(b) Incentive Compensation.
(i) The Executive shall receive, as an initial cash incentive,
thirty percent (30%) of the Executive's minimum base salary if the Company
demonstrates profitability for two consecutive quarters. This initial cash
incentive shall be paid no later than ten (10) days after the Company files with
the Securities and Exchange Commission its Quarterly Report on Form 10-QSB or
Annual Report on Form 10-KSB (or any successor or comparable form on which such
reports are then filed) covering the second relevant quarter. Profitability for
this purpose shall mean the Company's operating profit (income before payment of
interest, taxes and dividends) as reported on the Company's Quarterly Reports on
Form 10-QSB or Annual Reports on Form 10-KSB.
(ii) If the Company demonstrates profitability for two
consecutive quarters as provided in Section 4(b)(i) above, within one hundred
and thirty-five days(135) days after the end of the second relevant quarter, the
Board shall reach an agreement with the Executive on future annual cash
incentive plans which plans shall offer the Executive equal or greater incentive
compensation than the initial cash incentive set forth above in Section 4(b)(i).
(c) Vacations. The Executive shall annually be entitled to three (3)
weeks of vacation, effective upon the commencement of his employment hereunder.
The Executive may carryover unused vacation time in accordance with the
Company's policies applicable to executive officers as in effect from time to
time.
5. Expenses.
The Company shall reimburse the Executive for all reasonable expenses,
including travel, and other disbursements incurred by him for, or on behalf of
the Company (or its subsidiaries or affiliates), in the performance of his
duties hereunder consistent with the current reimbursement policies of the
Company. The Company shall also reimburse the Executive for his long term
disability insurance premiums for the maximum coverage reasonably available
during such times that the Company does not have a long term disability
insurance plan for its employees. The Company shall reimburse the Executive for
his legal expenses, up to $1,000, for initial preparation of various employment
agreements.
6. Participation in Benefit and Incentive Plans.
The Executive shall participate with full eligibility, upon his date of
hire, in all Company retirement, pension, group life, health, disability, or
accident insurance, stock option, stock purchase, restricted stock, bonus or any
other employee benefit or incentive plans generally available to the executives
and employees of the Company (or any subsidiary or affiliate), whether now in
force or hereafter adopted, in accordance with their terms. With respect to
disability insurance, the Company will provide for $100,000 of disability
coverage.
7. Termination of Employment.
(a) Discharge for Cause. Notwithstanding any of the foregoing
provisions of this Agreement, the Executive may, at any time during the
term of this Agreement, be discharged by the Board
<PAGE> 3
- 3 -
for Cause. For the purposes of this Agreement, Cause shall mean: (i) conviction
of a felony or crime involving an act of moral turpitude, dishonesty, or
misfeasance that substantially interferes with the orderly business of the
Company or any of its subsidiaries; or (ii) conduct that substantially
interferes with or damages the business, standing or reputation of the Company
or any of its subsidiaries; or (iii) the repeated failure of Executive to follow
the directives of the Board of Directors or the CEO; or (iv) negligence or
malfeasance by the Executive in the performance of his duties; or (v) material
breach by the Executive of this Agreement; or (vi) a determination by the Board
that Executive has engaged in illegal conduct, after written notice to Executive
and an opportunity for Executive to be heard by the Board.
Termination by the Company. If the Company terminates the Executive for any
reason other than Cause, death, Disability, retirement or at the end of the
applicable term of this Agreement:
(i) The Company shall pay to the Executive, as severance pay,
on the Date of Termination (as hereinafter defined), an amount equal to the
Executive's annual minimum base salary effective at the date of the Notice of
Termination, payable in accordance with the Company's normal payroll practices
over the severance period; plus, any bonuses which the Executive earned and, if
applicable, the Company shall pro rate any bonuses through the Date of
Termination which the Executive would have been paid had he remained an employee
of the Company.
(ii) The Executive shall continue to receive medical, benefits
paid by the Company, through the one year period following the Date of
Termination.
(iii) The Executive shall be entitled to six (6) months from
the Date of Termination in which to exercise any or all of his vested stock
options.
The foregoing shall be in addition to payment of the Executive's full
base salary through the Date of Termination at the rate effective at the time
the Notice of Termination was given, as well as to all of the employee benefits
the Executive shall receive in accordance with this Agreement through the Date
of Termination.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 7(b) by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 7(b) be reduced by
any compensation earned by the Executive as the result of employment by another
employer after the Date of Termination, or otherwise.
However, if the Executive does accept alternative employment during the
period that any payment or benefit is provided by the Company pursuant to this
Section 7(b), and Executive's new employer provides the Executive with medical
insurance, then the Company shall not be obligated to continue to provide such
benefits after the date on which the new employer provides them.
(b) Executive Disability. If at any time while employed hereunder the
Executive, because of accident, disability, or physical or mental illness,
becomes incapable of performing the essential functions of the job with or
without reasonable accommodation, the Company shall have the right to terminate
the Executive's employment only upon sixty (60) days' written notice to the
Executive. "Disability" for purposes of this Agreement shall have the same
meaning as provided under any long-term disability policy of the
<PAGE> 4
- 4 -
Company that covers the Executive, or if none, as defined in the Executive's
long-term disability insurance policy, a copy of which shall be provided to the
Company.
(c) Change in Control and/or Change in Reporting. Video Network
Communications, Inc. expects that during the Executive's tenure as President and
Chief Operating Officer of the Company, the Executive will contribute to the
growth and success of the Company in significant ways, and that the Executive
will develop an intimate knowledge of the business and affairs of the Company
and its policies, methods, personnel, and problems. The Company also expects
that such contributions and knowledge will be of significant benefit to the
future growth and success of the Company.
The Board of Directors of the Company recognizes that a change in control
of the Company or a change in reporting relationships within the Company may
occur and that the threat of such changes may result in the departure of key
management personnel to the detriment of the Company and its stockholders. The
Board has determined that appropriate steps should be taken to reinforce and
encourage the continued dedication of key members of the Company's management,
including the Executive, to their assigned duties in the face of the potentially
disturbing circumstances arising from the possibility of such changes.
To induce the Executive to remain in the employ of the Company and to
continue to perform the Executive's duties as an officer of the Company in a
manner that is, in the Executive's judgment, in the best interests of the
Company, the Company hereby agrees to provide the Executive with certain
severance benefits in the event that the Executive's employment with the Company
is terminated subsequent to a Change in Control (as defined in Section 7(d)(i)
hereof), or a Change in Reporting Relationships (as defined in Section 7(d)(ii)
hereof) under the circumstances described below.
(i) Change in Control Defined. Except as provided in Section
7(d)(ii), no benefits shall be payable hereunder unless there shall have been a
Change in Control as set forth below, and the Executive's employment by the
Company shall thereafter have been terminated in accordance with Section 7(d)
(iii) below. For purposes of this Agreement, a "Change in Control" shall occur
if: (1) greater than 50% of the total voting power of the capital stock or
membership interests of the surviving entity in any merger, consolidation, or
reorganization to which the Company is a party changes hands during that
transaction; (2) the Company issues shares of its capital stock such that after
the issuance or series of issuances a Person holds greater than 50% of the total
voting power of the capital stock of the Company; (iii) greater than 50% of the
total voting power of the capital stock of the Company is acquired by a Person
in any transaction or series of transactions; or (iv) all or substantially all
of the assets of the Company are sold to another entity and less than 50% of the
total voting power of the capital stock or membership interests of the other
entity is held by Persons who were the holders of Company common stock prior to
the sale. "Person" shall include an individual, entity or a group of individuals
or entities.
(ii) Change in Reporting Relationship Defined. Except as
provided in Section 7(d)(i), no benefits shall be payable hereunder unless there
shall have been a Change in Reporting Relationship as set forth below, and the
Executive's employment by the Company shall thereafter have been terminated in
accordance with Section 7(d)(iii) below. For purposes of this Agreement, a
"Change in Reporting Relationship" shall occur if the Executive is required to
report to or to seek authorization or approval for his actions on behalf of the
Company from any other officer, individual director or employee of the Company
other than James F. Bunker or the Board.
<PAGE> 5
- 5 -
(iii) Termination Following Change in Control or Change in
Reporting Relationship. The Executive shall be entitled to the benefits provided
for in Section 7(d)(iv) hereof if the Executive's employment as an officer of
the Company terminates within six months after a Change in Control or Change in
Reporting Relationship for any reason, voluntary or involuntary, including the
Executive's resignation, other than death, retirement, disability or termination
by the Company for Cause (as hereinbefore defined) or at the end of the
applicable term of this Agreement.
(iv) Compensation Upon Termination Following Change in Control or
Change in Reporting Relationship. Upon termination of Executive within six
months following a Change in Control or Change in Reporting Relationship as
described in Sections 7(d)(i), (ii) and (iii):
(1) The Company shall pay to the Executive, as severance
pay, within ten (10) business days of termination, a lump sum amount equal to
the Executive's then effective annual minimum base salary; plus, all reasonable
legal fees and expenses incurred by the Executive as a result of such
termination (including all such fees and expenses, if any, incurred in
contesting or disputing any such termination or in seeking to obtain or enforce
any right or benefit provided for by this Agreement).
(2) The Company shall pay to the Executive, within ten (10)
business days of termination, any bonuses which the Executive earned and, if
applicable, the Company shall pro rate any bonuses through the Date of
Termination which the Executive would have been paid had he remained an employee
of the Company.
(3) The Executive shall continue to receive medical, dental,
long term disability and life insurance benefits paid by the Company, through
the one year period following the Executive's termination.
(4) The Executive shall be entitled to six (6) months from
the termination in which to exercise any or all of his vested stock options.
The foregoing shall be in addition to payment of the Executive's full base
salary through the Date of Termination at the rate effective at the time of
termination, as well as to all of the employee benefits the Executive shall
receive in accordance with this Agreement through the Date of Termination.
The Executive shall not be required to mitigate the amount of any payment
provided for in this Section 7(b) by seeking other employment or otherwise, nor
shall the amount of any payment provided for in this Section 7(b) be reduced by
any compensation earned by the Executive as the result of employment by another
employer after the Date of Termination, or otherwise. However, if the Executive
does accept alternative employment during the period that any payment or benefit
is provided by the Company pursuant to this Section 7(b), and Executive's new
employer provides the Executive with medical insurance, then the Company shall
not be obligated to continue to provide such benefits after the date on which
the new employer provides them.
(d) Notice of Termination. Any termination by the Company for Cause
(as such term is defined in Section 7(a)), pursuant to Section 7(b), or
Disability (as such term is defined in Section 7(c)), shall be communicated by
Notice of Termination to the Executive given in accordance with Section 14. For
purposes of this Agreement, a "Notice of Termination" means a written notice
that,
<PAGE> 6
- 6 -
(i) indicates the specific termination provision in this
Agreement relied upon,
(ii) to the extent applicable, sets forth in reasonable detail
the facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated, and
(iii) if the Date of Termination (as defined below) is other than
the date of receipt of such notice, specifies the termination date.
(e) Date of Termination. "Date of Termination" means
(i) if the Executive's employment is terminated by the Company
for Cause, the date of receipt of the Notice of Termination or any later date
specified therein, as the case may be,
(ii) if the Executive's employment is terminated by the Company
pursuant to Section 7(b), the Date of Termination shall be specified in the
Notice of Termination, and
(iii) if the Executive's employment is terminated by reason of
death or Disability pursuant to Section 7(c), the Date of Termination shall be
the date of death of the Executive or the date the Executive is determined to
have a Disability in accordance with this Agreement, as the case may be.
8. Indemnification.
(a) The Company hereby agrees to indemnify the Executive for expenses
(including legal fees and related expenses), costs, losses, damages and other
liabilities incurred in connection with or arising out of any threatened,
pending, or completed proceeding, by reason of the fact that the Executive is or
was a director, officer or employee of the Company, or is or was serving at the
request of the Company as a director, officer, trustee, employee or agent of
another entity or by reason of any action alleged to have been taken or not
taken by the Executive while acting in any such capacity during the term of this
Agreement, except to the extent that such expenses, costs or liabilities are
shown to have arisen out of or been the result of the Executive's gross
negligence or willful misconduct or as otherwise may be prohibited by applicable
law. The right to indemnification conferred herein shall include the right to be
paid by the Company the expenses incurred, from time to time, in connection with
the proceeding in advance of the final disposition thereof promptly after
receipt by the Company of requests therefor stating the expenses incurred;
provided, however, the payment of such expenses in advance of the final
disposition of a proceeding shall be made only upon receipt of an undertaking by
or on behalf of the Executive to repay such amounts if it shall ultimately be
determined that the Executive is not entitled to indemnification.
(b) If a claim for indemnification is not paid in full by the Company
within forty-five (45) days after a written claim has been received by the
Company, the Executive may, at any time thereafter, bring suit against the
Company to recover the unpaid amount of the claim. The Executive shall also be
entitled to the expenses, including without limitation legal fees and related
expenses of prosecuting such claim to the extent the Executive is successful in
establishing his right to indemnification.
(c) The right to indemnification shall not be exclusive of any other
rights to which the Executive seeking indemnification may be entitled, both as
to action in his official capacity and as to action in any other capacity while
holding that office. Subject to applicable law, to the extent that any rights to
<PAGE> 7
- 7 -
indemnification of the Executive under any bylaw, agreement, vote of
shareholders, directors or otherwise, are more favorable to the Executive, the
more favorable rights shall control.
(d) The right to indemnification shall continue as to the Executive
who has ceased to be an employee or to serve in any other of the capacities
described herein, and shall inure to the benefit of the heirs, personal
representatives, and administrators of such Executive. Notwithstanding any
amendment or repeal of, or the adoption of any provision inconsistent with, this
Section 8, if the Executive serves at the request of the Company as a director,
officer, employee, trustee, or agent of another entity, the Executive shall be
entitled to indemnification in accordance with the provisions hereof with
respect to any action taken or omitted prior to such amendment or repeal or
adoption of such inconsistent provision, except to the extent such amendment,
repeal, or inconsistent provision provides broader rights to indemnification
than the Company was permitted to provide prior thereto or to the extent
otherwise prescribed by law.
(e) Notwithstanding anything herein to the contrary, the Company shall
not be obligated to indemnify the Executive to the extent prohibited by
applicable law. In the event that any successor law thereto is amended with
respect to the permissive limits of indemnification of the Executive, this
Section 8 shall be deemed to provide the fullest indemnification permitted under
such amended law.
9. Successors; Binding Agreement.
(a) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company, by agreement in
form and substance satisfactory to the Executive, to expressly assume and agree
to perform this Agreement in the same manner and to the same extent that the
Company would be required to perform it if no such succession had taken place.
Failure of the Company to obtain such agreement prior to the effectiveness of
any such succession shall be a breach of this Agreement and shall entitle the
Executive to compensation from the Company in the same amount and on the same
terms as the Executive would be entitled to hereunder if the Executive's
employment terminated in accordance with Section 7(b) hereof, except that for
purposes of implementing the foregoing, the date on which any such succession
becomes effective shall be deemed the Date of Termination. As used in this
Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid which executes and delivers
the agreement provided for in this Section 9 or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law.
(b) This Agreement shall inure to the benefit of and be enforceable by
the Executive's personal or legal representatives, executors, administrators,
successors, heirs, distributees, devisees, and legatees. If the Executive should
die while any amount would still be payable to the Executive hereunder if the
Executive had continued to live, all such amounts, unless otherwise provided
herein, shall be paid in accordance with the terms of this Agreement to the
Executive's devisee, legatee or other designee or, if there be no such designee,
to the Executive's estate.
10. Entire Agreement.
This Agreement contains the entire understanding of the Company and the
Executive with respect to the subject matter hereof.
11. Arbitration.
<PAGE> 8
- 8 -
Any dispute or controversy between the parties relating to this Agreement
shall be settled by binding arbitration pursuant to the governing rules of the
American Arbitration Association and shall be subject to the provisions of NH
RSA Chapter 542. Judgment upon the award may be entered in any court of
competent jurisdiction.
12. Assignability.
This Agreement is binding on and is for the benefit of the parties hereto
and their respective successors, heirs, executors, administrators and other
legal representatives. Neither this Agreement nor any right or obligation
hereunder may be assigned by the Company (except to any subsidiary or affiliate)
or by the Executive.
13. Amendment; Waiver.
This Agreement may be amended only by an instrument in writing signed by
the parties hereto, and any provision hereof may be waived only by an instrument
in writing signed by the party or parties against whom or which enforcement of
such waiver is sought. The failure of either party hereto at any time to require
the performance by the other party hereto of any provision hereof shall in no
way affect the full right to require such performance at any time thereafter,
nor shall the waiver by either party hereto of a breach of any provision hereof
be taken or held to be a waiver of any succeeding breach of such provision or a
waiver of the provision itself or a waiver of any other provision of this
Agreement.
14. Notices.
All notices and other communications hereunder shall be in writing and
shall be given by hand delivery to the other party or by registered or certified
mail, return receipt requested, postage prepaid, addressed as follows:
If to the Executive:
Carl Muscari
24 Newcastle Drive, Apt. 12
Nashua, NH 03060
If to the Company:
Video Network Communications, Inc.
Chairman
50 International Drive
Portsmouth, NH 03801-2844
or to such other address as either party shall have furnished to the other in
writing in accordance herewith. Notice and communications shall be effective
when actually received by the addressee.
15. Validity.
<PAGE> 9
- 9 -
The invalidity or unenforceability of any provision or provisions of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect, nor shall the
invalidity or unenforceability of a portion of any provision of this Agreement
affect the validity or enforceability of the balance of such provision. If any
provision of this Agreement, or portion thereof is so broad, in scope or
duration, as to be unenforceable, such provision or portion thereof shall be
interpreted to be only so broad as is enforceable.
16. Beneficiary.
The Executive hereby designates as his beneficiary under this Agreement
The Carl Muscari Revocable Trust, provided that the Executive may change his
beneficiary, or provide for alternate beneficiaries, at any time by notifying
the Company in writing of such change, and no consent shall be required from the
beneficiary or from the Company.
17. Applicable Law.
This Agreement shall be governed by and construed in accordance with the
substantive internal law and not the conflict of law provisions of the State of
New Hampshire.
IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement
as of the date first mentioned above.
VIDEO NETWORK COMMUNICATIONS, INC.
By:
---------------------------------
Robert Emery, Vice President
Administration & Finance and Secretary
EXECUTIVE:
By:
---------------------------------
Carl Muscari
<PAGE> 1
EXHIBIT 11
Information regarding the computation of earnings per share is included in Note
3 of the Notes to Financial Statements (unaudited).
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 4,827,572
<SECURITIES> 0
<RECEIVABLES> 232,827
<ALLOWANCES> 0
<INVENTORY> 6,333,209
<CURRENT-ASSETS> 11,546,291
<PP&E> 5,127,456
<DEPRECIATION> 3,562,410
<TOTAL-ASSETS> 13,400,131
<CURRENT-LIABILITIES> 2,512,585
<BONDS> 0
0
0
<COMMON> 88,121
<OTHER-SE> 8,586,261
<TOTAL-LIABILITY-AND-EQUITY> 13,400,131
<SALES> 1,956,547
<TOTAL-REVENUES> 1,956,547
<CGS> 1,017,155
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 7,697,600
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,183,784
<INCOME-PRETAX> (8,941,992)
<INCOME-TAX> 0
<INCOME-CONTINUING> (8,941,992)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,941,992)
<EPS-BASIC> (2.29)
<EPS-DILUTED> (2.29)
</TABLE>
