<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 25, 1996
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
COMPRESSION LABS, INCORPORATED
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 94-2390960
(STATE OR OTHER JURISDICTION OF INCORPORATION
OR ORGANIZATION) (I.R.S. EMPLOYER IDENTIFICATION NUMBER)
</TABLE>
350 EAST PLUMERIA DRIVE
SAN JOSE, CA 95134
(408) 435-3000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
MICHAEL E. SEIFERT, VICE PRESIDENT, FINANCE
COMPRESSION LABS, INCORPORATED
350 EAST PLUMERIA DRIVE
SAN JOSE, CA 95134
(408) 435-3000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
CRAIG E. DAUCHY, ESQ.
COOLEY GODWARD LLP
FIVE PALO ALTO SQUARE
3000 EL CAMINO REAL
PALO ALTO, CALIFORNIA 94306
(415) 843-5000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
From time to time after this Registration Statement becomes effective.
------------------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the
Securities Act, please check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE AMOUNT TO BE OFFERING AGGREGATE REGISTRATION
REGISTERED REGISTERED PRICE PER SHARE OFFERING PRICE FEE
<S> <C> <C> <C> <C>
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Common Stock...................... 2,799,242 $4.3125 $12,071,731(1) $3,658
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee and
based upon the average of the high and low sale price of Common Stock of the
Registrant on the Nasdaq National Market on November 22, 1996.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
COMPRESSION LABS, INCORPORATED
------------------------
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND HEADING
IN FORM S-1 REGISTRATION STATEMENT CAPTION IN PROSPECTUS
- ------------------------------------------------------------- ------------------------------
<S> <C>
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus................................. Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of
Prospectus............................................... Inside Front and Outside Back
Cover Pages
3. Summary Information, Risk Factors and Ratio of Earnings
to Fixed Charges......................................... Prospectus Summary; Risk
Factors
4. Use of Proceeds.......................................... Use of Proceeds
5. Determination of Offering Price.......................... Inapplicable
6. Dilution................................................. Inapplicable
7. Selling Securityholders.................................. Principal and Selling
Securityholders
8. Plan of Distribution..................................... Outside Front and Inside Front
Cover Pages
9. Description of Securities to be Registered............... Description of Capital Stock
10. Interests of Named Experts and Counsel................... Legal Matters and Experts
11. Information with Respect to the Registrant............... Outside Front and Inside Front
Cover Pages; Prospectus
Summary; Risk Factors;
Dividend Policy; Selected
Financial Data; Management's
Discussion and Analysis of
Financial Condition and
Results of Operations;
Business; Management;
Principal and Selling
Securityholders; Description
of Capital Stock; Financial
Statements; Inside Back Cover
Page
12. Disclosure of Position on Indemnification for Securities
Act Liabilities.......................................... Inapplicable
</TABLE>
<PAGE> 3
PROSPECTUS
2,799,242 SHARES
COMPRESSION LABS, INCORPORATED
------------------------
COMMON STOCK
------------------------
This Prospectus relates to a total of 2,799,242 shares of Common Stock (the
"Shares"), with a par value of $0.001 per share (the "Common Stock") of
Compression Labs, Incorporated (the "Company" or "CLI") which are being offered
and sold by Infinity Investments Limited ("Infinity"), Seacrest Capital Limited
("Seacrest"), Brown Simpson LLC and Alpine Capital Partners, Inc. (collectively,
the "Selling Securityholders"). Of such Shares (i) 2,424,242 shares are issuable
upon the exercise of 350,000 shares of Series C Convertible Preferred Stock
("Series C Stock") which were sold by the Company to Infinity and Seacrest in a
private financing pursuant to a Convertible Preferred Stock Purchase Agreement
dated as of October 24, 1996 (the "Financing") and (ii) 375,000 shares are
issuable pursuant to the exercise of warrants held by Selling Securityholders
which were issued in connection with the Financing (the "Warrants"). The
Warrants have an exercise price of $5.70 per share.
The Common Stock is listed on the Nasdaq National Market under the symbol
"CLIX." On November 22, 1996, the last reported sale price of the Common Stock
on the Nasdaq National Market was $4.25 per share.
The Shares may be offered by the Selling Securityholders from time to time
in transactions on the Nasdaq National Market, in privately negotiated
transactions or a combination of such methods of sale, at fixed prices that may
be changed, at market prices prevailing at the time of sale, at prices related
to such prevailing market prices or at negotiated prices. The Selling
Securityholders may effect such transactions by selling the Shares to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Securityholders or the
purchasers of the Shares for whom such broker-dealers may act as agent or to
whom they sell as principal or both (which compensation to a particular
broker-dealer might be in excess of customary commissions). See "Principal and
Selling Securityholders" and "Plan of Distribution."
The Company received all of the proceeds from the sale of the Series C
Stock issued by the Company in the Financing and will receive any proceeds from
the exercise of the Warrants if and when exercised by the Selling
Securityholders but will not receive any of the proceeds from the sale of the
Shares by the Selling Securityholders hereof. See "Plan of Distribution."
------------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" ON PAGE 5.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
December , 1996
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Consolidated Financial Statements
and Notes thereto, appearing elsewhere in this Prospectus. The discussion in
this Prospectus contains forward-looking statements that involve risk and
uncertainties. The Company's actual results could differ materially from those
discussed herein. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business" as well as those discussed elsewhere in this
Prospectus.
THE COMPANY
Compression Labs, Incorporated (the Company or CLI) is a leader in the
development, manufacture and marketing of visual communication systems based on
Compressed Digital Video (CDV) technology. The Company's systems use proprietary
and industry standard algorithms to compress the amount of data required to
transmit digital video and audio signals, thereby significantly reducing the
cost of transmitting these signals over terrestrial, microwave, cable or
satellite networks. The Company's strategy is to use its expertise in CDV
technology to enhance its position in videoconferencing and to monitor new
markets such as the desktop and personal video markets.
CLI's group and desktop videoconferencing systems permit users at different
locations to conduct full-color motion videoconferences ranging from two-way
informal meetings between individuals to formal meetings between large groups at
multiple locations. The Company's present families of videoconferencing systems
include Rembrandt II/VP and Radiance videoconferencing systems, the eclipse
family of mid-range videoconferencing systems, and the CLI Desktop Video family.
Videoconferencing systems operate worldwide over a broad range of transmission
speeds from 56 kilobits per second (kbps) to 2.048 megabits per second (mbps)
for the Rembrandt and Radiance Systems, 768 kbps for the eclipse, and 384 kbps
for the desktop. All of CLI's current videoconferencing systems are compliant
with the International Telecommunication Union-Telecommunication (ITU-T) H.320
videoconferencing standard, and most also provide customer-selectable
proprietary algorithms. The videoconferencing market has grown as a result of
improvements in the price/performance of videoconferencing systems, decreases in
transmission costs and increased availability of switched digital transmission
services. However, there can be no assurance that this market growth will
continue in the future.
The Company has been a leader in video compression technology and believes
that its large worldwide installed base of videoconferencing systems affords the
Company significant competitive advantages. The Company's strategy is to
strengthen its position as a leading supplier of a full range of
high-performance quality group and desktop videoconferencing systems. CLI's
development efforts are primarily directed at achieving greater levels of
compression, improving picture quality and system functionality, continuing to
reduce system costs, and supporting and improving industry standards. The
Company's continued success in its chosen markets is dependent in part on the
results of its ongoing technology and product development efforts.
The Company's executive offices are located at 350 East Plumeria Drive, San
Jose, California 95134, and its telephone number at that location is (408)
435-3000.
2
<PAGE> 5
RISK FACTORS
In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 5 to 9 of this Prospectus should be
considered carefully in evaluating an investment in the Common Stock. The risks
of investment in the Common Stock include the following factors:
- The Company has a history of losses and there can be no assurance that it
will achieve profitability.
- The Company has limited working capital and there can be no assurance
that it will raise enough working capital to fund operations.
- The videoconferencing market is rapidly changing. The Company is
developing a next generation product, but there can be no assurance that
such efforts will be successful.
- The Company is dependent on certain suppliers who have put the Company on
a cash basis or terminated their relationship with the Company because of
the Company's shortages in available cash.
- The Company is dependent on its key technical and managerial personnel
and has had substantial layoffs and high turnover among its executive
officers.
- The videoconferencing market is becoming intensely competitive and there
can be no assurance that the Company will be able to compete with
competitors, many of whom have significantly greater resources than the
Company.
For a full discussion of these risk factors and other risk factors relating
to an investment in the Common Stock offered hereby, carefully read the "Risk
Factors" beginning on page 5 of this Prospectus.
CLI, the CLI logo, Cameo Personal Video, and Rembrandt are registered
trademarks of the Company. CDV, CLI Compressed Digital Video, the eclipse logo
and Radiance are trademarks of the Company. This Prospectus also includes
trademarks of other companies.
3
<PAGE> 6
THE OFFERING
Common Stock offered by the
Selling
Securityholders.......... 2,799,242 shares
Common Stock to be
outstanding after the
offering................. 18,663,295 shares(1)
Use of Proceeds............ The Company will not receive any of the proceeds
from the sale of the Shares. The Company has
received $7,000,000 from the sale of the Series C
Stock and will receive up to $2,137,500 when and if
the Warrants are exercised. The Company will use
such proceeds for working capital.
Nasdaq National Market
symbol................... CLIX
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
-------- ------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue............................. $ 61,331 $95,031 $ 95,095 $114,958 $112,979 $86,224 $65,612
------- ------- -------- -------- -------- ------- --------
Gross margin........................ 22,352 27,278 28,128 44,054 33,620 34,237 29,380
Special Charges..................... 17,317 -- -- -- -- -- --
Net loss from continuing
operations........................ (17,895) (3,418) (12,184) (4,878) (21,040) (3,555) (7,540)
Net income (loss)................... (15,102) (3,283) (3,483) 107 (57,582) (2,181) (7,540)
Net Income (loss) per share:
Net loss from continuing
operations........................ (1.84) (0.30) (1.04) (0.32) (1.37) (0.23) (0.48)
Net income (loss)................. (1.55) (0.29) (0.30) 0.01 (3.76) (0.14) (0.48)
Weighted average common shares and
common share equivalents
outstanding....................... 9,728 11,283 11,666 15,160 15,304 15,191 15,616
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................... $42,675 $31,902 $ 52,017 $ 53,820 $ 15,259 $ 14,214
Total assets.............................. 82,535 94,736 124,922 131,651 104,753 65,726
Short-term debt including current portion
of capital lease obligation............. 50 9,960 9,280 10,553 13,958 --
Long-term debt including capital lease
obligations............................. 2 -- 1,016 494 985 --
Redeemable convertible preferred stock.... -- -- 13,758 -- -- --
Stockholders' equity(2)................... 57,904 56,877 67,579 86,962 35,674 29,225
</TABLE>
- ---------------
(1) Based on shares outstanding as of November 1, 1996. Excludes 4,131,240
shares of Common Stock issuable upon exercise of outstanding stock options
as of November 1, 1996 at a weighted average exercise price of approximately
$7.98 per share, 751,004 shares of Common Stock issuable upon exercise of
warrants outstanding at November 1, 1996 at a weighted average exercise
price of approximately $8.35 per share. Includes 2,424,242 shares of Common
Stock issuable upon the conversion of the Series C Stock and 375,000 shares
of Common Stock issuable upon the exercise of the Warrants at an exercise
price of $5.70 per share.
(2) See Note 13 of Notes to Consolidated Financial Statements discussing
subsequent events involving litigation matters.
4
<PAGE> 7
RISK FACTORS
An investment in the Company involves a high degree of risk. The following
risk factors should be considered carefully before purchasing the Common Stock
offered hereby. The discussion in these Risk Factors contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed herein.
NET LOSS
The Company has experienced operating losses from continuing operations in
ten of the last eleven fiscal quarters and in each of the last five full fiscal
years beginning with 1991. The Company sustained a net loss of $57.6 million and
$3.5 million in 1995 and 1993, respectively. In 1994 the Company had net income
of $0.1 million. For the nine months ended September 30, 1996 and 1995, the
Company sustained a net loss of $7.5 million and $2.2 million, respectively.
Based on the operating results for the nine months ended September 30, 1996, it
is likely the Company will also experience a substantial operating loss in the
fiscal year ending December 31, 1996. There also can be no assurance that the
Company will be able to achieve a profit in 1997 or in subsequent quarters and
years, or at all. In the future, the Company's ability to achieve and sustain
profitable operations will depend upon a number of factors, including the
Company's ability to control costs; the Company's ability to generate sufficient
cash from operations or obtain additional funds to fund its operating expenses;
the Company's ability to develop innovative and cost-competitive new products
and to bring those products to market in a timely manner; competitive factors
such as new product introductions, product enhancements and aggressive marketing
and pricing practices; general economic conditions; and other factors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
NEGATIVE CASH FLOW/LIMITED WORKING CAPITAL
The Company's history of operating losses and product development activity
has required significant cash funding. As of September 30, 1996, the Company had
working capital of $14.2 million. The Company anticipates that existing cash and
lines of credit, together with other sources of liquidity such as private or
public offerings, sale and leaseback arrangements, equipment lease lines and
bank credit lines, will be sufficient to meet cash requirements through the
third quarter of 1997. The Company will need to significantly reduce operating
expenses and/or significantly increase revenue in order to finance its working
capital needs with cash generated by operations, and there can be no assurance
that it will be able to do so.
The Company expects that it will require significant additional financing
to support its future operations. There can be no assurance that any such
additional financing will be available to the Company on a timely basis or, if
available, will be on acceptable terms. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
In October 1996, the Company obtained $7.0 million through a private sale
of Series C Stock to the Selling Securityholders. Under the purchase agreement
with the Selling Securityholders, the Company may issue to the Selling
Securityholders up to an additional $13.0 million worth of preferred stock of
the Company in two separate installments by the fourth quarter of 1997, if
certain conditions are met.
Should the Company be unable to sell additional preferred stock to the
Selling Securityholders or should additional funding be required, there can be
no assurance that such funding will be available on acceptable terms as and when
required by the Company.
POTENTIAL DILUTION FROM ADDITIONAL FINANCING.
The Company may be required or may choose to sell equity securities to
obtain financing in the future including the sale of additional preferred stock
of the Company to the Selling Securityholders. If the Company sells additional
equity securities at a price per share less than the purchase price hereunder,
investors purchasing shares of Common Stock in this offering would incur
additional dilution. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
5
<PAGE> 8
APPEARANCE OF VIABILITY
The Company sells relatively low volume, high unit dollar complex capital
equipment systems typically requiring ongoing service requirements. The
Company's existing and potential customers have expressed concern regarding the
Company's ability to maintain itself as a going concern over the next several
years in relation to meeting their future technology needs and ongoing service
requirements. These concerns could negatively impact the Company's ability to
obtain future orders.
FLUCTUATIONS IN QUARTERLY PERFORMANCE
The Company has experienced substantial fluctuation in operating results.
The Company's product sales have historically been derived primarily from the
sale of videoconferencing systems and related equipment, the market for which is
still developing. Most of the Company's products are complex capital equipment
systems and/or involve significant equipment deployment; as such, these products
typically involve long order and sales cycles. Additionally, the Company's
revenues have typically occurred predominantly in the third month of each fiscal
quarter. The Company believes that this is due in some part to the timing of the
capital equipment budget procedures of its customers. Accordingly, the Company's
quarterly results of operations are difficult to predict, and delays in the
introduction or acceptance of new products, delays in orders for existing
products in anticipation of new products, or delays in the closing of sales near
the end of the quarter could cause quarterly revenues and, to a greater degree,
operating results to fall substantially short of anticipated levels. The
Company's total revenues and results of operations could also be adversely
affected by delays in achievement of planned cost reductions, cancellations of
orders, interruptions or delays in supply of key components, failure of new
products to meet specifications or performance expectations, changes in customer
base or product mix, seasonal patterns of capital spending by customers, delays
in purchase decisions due to new product announcements by the Company or its
competitors, increased competition and reductions in average selling prices.
HIGH LEVELS OF INVENTORY AND ACCOUNTS RECEIVABLE
The concentration of customer orders in the third month of each quarter,
together with relatively long manufacturing lead times, have required the
Company to maintain high levels of inventory in order to deliver products on a
timely basis. The Company also maintains equipment in inventory to provide
demonstration systems to customers or potential customers on a short-term loan
basis or on a monthly rental basis. Due to the rapid rate of change in CLI's
industry, a large inventory poses the risk of inventory obsolescence or delay in
realization of manufacturing cost improvements, either of which could have a
material adverse effect on the Company's financial results. In addition, the
Company's accounts receivable were $46.8 million at December 31, 1995 and $31.6
million at September 30, 1996. CLI expects accounts receivable and inventory
balances to fluctuate in the future. Among other things, introduction of new
products requires the purchase and accumulation of significant amounts of
inventory prior to the realization of revenue from the new products.
Accordingly, the Company has in place a number of ongoing and planned measures
to manage both inventories and accounts receivable; however, there can be no
assurance that the Company can maintain its level of asset utilization in the
future. Any significant increases in accounts receivable and inventories would
result in a significant use of cash. The Company continues to finance accounts
receivable and inventories through public and private offerings of equity
securities, sale and leaseback arrangements and bank credit lines. There can be
no assurance that the Company will be able to reduce or maintain its inventory
and accounts receivable levels in the future.
PRODUCT DEVELOPMENT AND RAPID TECHNOLOGICAL CHANGE
The videoconferencing market is characterized by rapid and significant
change in technology and user needs, requiring substantial product development
expenditures. These changes have resulted in frequent product introductions
generally characterized by improved video and audio performance, added
functionality and reduced prices. The Company's future success will depend to a
large extent on its ability to maintain its competitive technological position
and to continue to develop, on a cost effective and timely basis,
technologically advanced products that meet changing user needs, including the
development of a next
6
<PAGE> 9
generation group videoconferencing system. There can be no assurance that the
Company's product development efforts will be successful. In addition, customers
may delay purchase decisions on existing products in anticipation of new
products, which typically have higher initial manufacturing costs, higher
initial component costs and lower initial overall gross margins than more mature
products. The introduction of new products by the Company or its competitors may
also pose the risk of inventory obsolescence. See "-- Negative Cash Flow/Limited
Working Capital" and "Business -- Research and Development."
HIGHLY COMPETITIVE INDUSTRY
Competition in the video communications markets is intense, and the Company
expects competition to intensify. The Company's primary competitors are
PictureTel Corporation, General Plessey Telecommunications, British Telecom,
Sony Corporation and VTEL Corporation, and the Company expects other competitors
to enter the videoconferencing market. Many of these competitors have
significantly greater technical and financial resources than the Company. In
particular, the Company expects increased competition from Japanese
manufacturers, such as Nippon Electric Corporation, Sony Corporation and Hitachi
Limited that are now making substantial investments in order to enter the
market. The Company believes that its ability to compete will depend on a number
of factors, including the amount of financial resources available to the
Company, success and timing of new product developments by the Company and its
competitors, product performance, price and quality, breadth of distribution and
customer support. There can be no assurance that the Company will be able to
compete successfully with respect to these factors. If the Company cannot
continue to offer new videoconferencing products with improved performance and
reduced cost, its competitive position will erode. Moreover, competitive price
reductions may adversely affect the Company's results of operations. See
"Business -- Competition."
DEPENDENCE ON KEY VENDORS
Several of the critical components used in the Company's products,
including certain custom and programmable semiconductors, such as the Video
Processor, are currently available only from single or limited sources. In
addition, the Company relies on a few vendors to turnkey manufacture certain of
its products. The Company has executed master purchase agreements with some of
the suppliers of these sole or limited source components. The Company purchases
the remainder of these sole or limited source components pursuant to purchase
orders placed from time to time in the ordinary course of business and has no
guaranteed supply arrangements with these sole or limited source suppliers.
Therefore, these suppliers are not obligated to supply products to the Company
for any specific period, in any specific quantity or at any specific price,
except as may be provided in a particular purchase order. Although the Company
expects that these suppliers will continue to meet its requirements for the
components, there can be no assurance that they will do so. Certain suppliers,
due to the Company's shortages in available cash, have put the Company on a cash
or prepay basis and/or required the Company to provide security for their risk
in procuring components or reserving manufacturing time, and there is a risk
that suppliers will discontinue their relationship with the Company. In
addition, certain suppliers already have terminated their relationships with the
Company. An interruption or reduction in supply of any key components, excessive
rework costs associated with defective components or process errors, or a
failure to continually decrease vendor prices can adversely affect the Company's
operating results and damage customer relationships. See
"Business -- Manufacturing."
RELIANCE ON KEY PERSONNEL
The success of the Company depends to a large extent on a small number of
key technical and managerial personnel, the loss of one or more of whom could
have a material adverse effect on the business of the Company and in part on its
ability to continue to attract, retain and motivate additional highly skilled
personnel, who are in great demand. The Company has experienced high turnover
among its executive officers within the past year, including its Chief Executive
Officer, its Chief Financial Officer and several of its Vice Presidents. The
Company has also had substantial layoffs. Because of the Company's financial
difficulties, it has become increasingly difficult for it to hire new employees
and retain key management and current employees. The Company has implemented a
retention program for certain key employees in an effort to
7
<PAGE> 10
retain key personnel. Additionally, T. Gary Trimm, President and Chief Executive
Officer of the Company, and Larry L. Enterline, Executive Vice President of the
Company, have employment contracts with the Company that provide incentives to
such officers to remain at the Company but allow such officers to terminate
their employment at any time. The Company does not carry any key person life
insurance with respect to any of its personnel. In addition, it is a condition
to future issuances of preferred stock to the Selling Securityholders that Mr.
Trimm remain President and Chief Executive Officer of the Company.
VOLATILITY OF STOCK PRICE
The Company's Common Stock has historically been subject to substantial
price volatility, particularly as a result of announcements of new products by
the Company or its competitors, quarter-to-quarter variations in the financial
results of the Company or its competitors and changes in earnings estimates by
industry analysts. In addition, the stock market has experienced, and continues
to experience, price and volume fluctuations which have affected the market
price of many technology companies in particular and which have often been
unrelated to the operating performance of these companies. These broad market
fluctuations, as well as general economic and political conditions, may
adversely affect the market price of the Common Stock.
Such stock price volatility for the Common Stock has in the past provoked
securities litigation, and future volatility could provoke litigation in the
future that could divert substantial management resources and have an adverse
effect on the Company's results of operations.
INTERNATIONAL SALES
The Company expects that international sales, particularly sales to the
People's Republic of China, will represent between 15% - 20% of its future net
sales and that it will be subject to the normal risks of international sales
such as longer payment cycles, export controls and other governmental
regulations and, in some countries, a lesser degree of intellectual property
protection as compared to that provided under the laws of the United States.
International sales are subject to certain inherent risks including tariffs,
embargoes and other trade barriers, staffing and operating foreign sales and
service operations and collecting accounts receivable. The Company is also
subject to risks associated with regulations relating to the import and export
of high technology products. The Company cannot predict whether quotas, duties,
taxes or other charges or restrictions upon the importation or exportation of
the Company's products in the future will be implemented by the United States or
any other country, especially in relation to the People's Republic of China. In
such event, the Company's operating results could be materially or adversely
affected. Additionally, fluctuations in exchange rates could affect demand for
the Company's products. If for any reason exchange or price controls or other
restrictions on foreign currencies are imposed, the Company's business,
operating results and financial condition could be adversely affected. See
"Business -- Sales and Marketing."
LEGAL PROCEEDINGS
The Company is currently engaged in several legal proceedings. Such legal
proceedings are a drain on the Company's working capital and management's time.
There can be no assurance that the Company's legal proceedings can be settled
quickly or result in a favorable outcome to the Company. Continuation of such
legal proceedings for an extended period of time could have an adverse effect
upon the Company's working capital and management's ability to concentrate on
the business of the Company. In addition, unfavorable outcomes in any one or
several such legal proceedings could have a material adverse effect on the
Company. See "Business -- Legal Proceedings."
POSSIBLE DELISTING OF COMMON STOCK FROM NASDAQ NATIONAL MARKET
The Company's Common Stock is listed on the Nasdaq National Market and the
Company is required to continue to meet the continued listing requirements for
the Nasdaq National Market. Failure to meet the continued listing requirements
in the future could subject the Common Stock to delisting. The Common Stock
could be delisted from the Nasdaq National Market if the Company fails to
maintain capital and
8
<PAGE> 11
surplus of $1.0 million. Because of the substantial losses experienced by the
Company for the nine months ended September 30, 1996, any significant loss
experienced in a subsequent quarter could cause the Company to have insufficient
capital and surplus for continued listing on the Nasdaq National Market. The
Company's Common Stock is also subject to delisting in the event that the price
of the Common Stock drops below $1.00 per share for 10 consecutive trading days
(the last reported sales price for the Common Stock on the Nasdaq National
Market on November 22, 1996 was $4.25 per share). Because of the substantial
increase in the number of tradeable shares of Common Stock registered hereunder
and to be registered in the future if additional shares of convertible preferred
stock and warrants to purchase Common Stock are issued to the Selling
Securityholders (see "Management Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources"), there could be
downward pressure on the trading price of the Common Stock, which could cause
the Company to fail to meet the minimum bid price requirement for the Nasdaq
National Market. If the Company's Common Stock is delisted, there can be no
assurance that the Company will meet the requirements for initial inclusion in
the future, particularly the $3.00 minimum per share bid requirement. In
addition, Nasdaq has proposed increasing the requirements for the initial
listing of securities and for the maintenance of such listing on the Nasdaq
National Market and the Nasdaq SmallCap Market which, if adopted, could make it
more difficult for the Company to maintain the listing of its Common Stock with
Nasdaq or meet the requirements for initial inclusion. Trading in the listed
securities after delisting would be conducted on the Nasdaq SmallCap Market or
in the over-the-counter market in what are commonly referred to as the "pink
sheets." As a result, investors may find it more difficult to dispose of, or to
obtain accurate quotations as to the value of, the Company's securities. It is a
condition to the future issuances of preferred stock to the Selling
Securityholders that the Company's Common Stock is listed on the Nasdaq National
Market or the Nasdaq SmallCap Market and has not been suspended from listing for
more than a day or to permit the dissemination of material information. See
"Volatility of Stock Price."
EFFECT OF ANTITAKEOVER PROVISIONS OF DELAWARE LAW AND THE COMPANY'S CHARTER
DOCUMENTS
Certain provisions of Delaware law and the charter documents of the Company
may have the effect of delaying, deferring or preventing changes in control or
management of the Company. The Company is subject to the provisions of Section
203 of the Delaware General Corporation Law, which has the effect of restricting
changes in control of a company. In addition, the Company's Board of Directors
is divided into three separate classes. The Company's Board has authority to
issue up to 4,000,000 shares of preferred stock, less shares of issued and
outstanding Series C Stock, and to fix the rights, preferences, privileges and
restrictions, including voting rights, of such shares without any further vote
or action by its stockholders. The Company also has a Preferred Share Rights
Plan. The effect of certain provisions of the Company's Certificate of
Incorporation, the Company Rights Plan and the application of Delaware General
Corporation Law Section 203 could discourage certain types of transactions
involving an actual or potential change in control the Company, including
transactions in which the holders of Common Stock might otherwise receive a
premium for their shares over then current prices, and may limit the ability of
such stockholders to cause or approve transactions which they may deem to be in
their best interests, all of which could have an adverse effect on the market
price of the Common Stock offered hereby. See "Description of Capital Stock."
9
<PAGE> 12
USE OF PROCEEDS
The Company will not receive any proceeds from sales, if any, of Common
Stock by the Selling Securityholders. The Company has received $7.0 million from
the sale of Series C Stock and will receive up to approximately $2.1 million
from the exercise of the Warrants, if and when exercised, at an exercise price
of $5.70 per share. The Company intends to use such proceeds for working
capital. The Company will bear estimated expenses of approximately $100,000 in
connection with this offering. See "Plan of Distribution."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock. The Company is obligated to pay a cumulative dividend of 4% per annum,
payable quarterly, on the Series C Stock. The Company does not intend to pay any
cash dividends in the foreseeable future on the Common Stock. The Company's line
of credit with Greyrock Business Credit (Greyrock) prohibits the payment of
dividends and the repurchase of stock. Greyrock, however, gave its consent to
the Company to enter into a financing agreement with Infinity and Seacrest to
sell preferred stock that provides for cumulative dividends and to repurchase
such preferred stock.
10
<PAGE> 13
SELECTED FINANCIAL DATA
The selected financial data set forth below with respect to the Company's
statements of operations data for the years ended December 31, 1993, 1994 and
1995 and with respect to the balance sheet data at December 31, 1994 and 1995
are derived from the financial statements of the Company included elsewhere in
this Prospectus which have been audited by KPMG Peat Marwick LLP, independent
auditors. The balance sheet data at September 30, 1996 and the statement of
operations data for the nine months ended September 30, 1995 and 1996 are
derived from unaudited financial statements of the Company included elsewhere in
this Prospectus. The data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
-------- ------- -------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenue................... $ 61,331 $95,031 $ 95,095 $114,958 $112,979 $86,224 $65,612
------- ------- -------- -------- -------- ------- --------
Gross margin.............. 22,352 27,278 28,128 44,054 33,620 34,237 29,380
Special Charges........... 17,317 -- -- -- -- -- --
Net loss from continuing
operations............. (17,895) (3,418) (12,184) (4,878) (21,040) (3,555) (7,540)
Net income (loss)......... (15,102) (3,283) (3,483) 107 (57,582) (2,181) (7,540)
Net Income (loss) per
share:
Net loss from continuing
operations............. (1.84) (0.30) (1.04) (0.32) (1.37) (0.23) (0.48)
Net income (loss)...... (1.55) (0.29) (0.30) 0.01 (3.76) (0.14) (0.48)
Weighted average common
shares and common share
equivalents
outstanding............ 9,728 11,283 11,666 15,160 15,304 15,191 15,616
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------- SEPTEMBER 30,
1991 1992 1993 1994 1995 1996
------- ------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................. $42,675 $31,902 $ 52,017 $ 53,820 $ 15,259 $ 14,214
Total assets.................... 82,535 94,736 124,922 131,651 104,753 65,726
Short-term debt including
current
portion of capital lease
obligation................... 50 9,960 9,280 10,553 13,958 --
Long-term debt including capital
lease obligations............ 2 -- 1,016 494 985 --
Redeemable convertible preferred
stock........................ -- -- 13,758 -- -- --
Stockholders' equity(2)......... 57,904 56,877 67,579 86,962 35,674 29,225
</TABLE>
- ---------------
(1) See Note 1 of Notes to Consolidated Financial Statements for a description
of the shares used in calculating net income (loss) per share.
(2) See Note 13 of Notes to Consolidated Financial Statements discussing
subsequent events involving litigation matters.
11
<PAGE> 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed below, in
"Risk Factors," and Results of Operation" and "Business" as well as those
discussed elsewhere in this Prospectus.
Unless noted otherwise, the following discussion pertains to the Company's
continuing operations. Discussion of discontinued operations is contained in
Note 2 of Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following percentage table sets forth, for the periods indicated, the
relationship of selected items in the Company's Consolidated Statements of
Operations to revenues from continuing operations.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
---------------------- -----------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues.............................................. 100 % 100 % 100 % 100 % 100 %
Cost of revenues...................................... 70 % 62 % 70 % 60 % 55 %
Gross margin.......................................... 30 % 38 % 30 % 40 % 45 %
Selling, general and administrative................... 31 % 33 % 38 % 34 % 41 %
Research and development.............................. 11 % 9 % 9 % 8 % 14 %
Net loss from continuing operations................... (13 %) (4 %) (19 %) (4 %) (11 %)
Income (loss) from discontinued operations............ 9 % 4 % (32 %) 2 % 0 %
Net income (loss)..................................... (4 %) 0 % (51 %) (2 %) (11 %)
</TABLE>
Revenues
Revenues decreased 2% in 1995 and increased 21% in 1994 from the prior
years, respectively. The decrease in revenues for 1995 was primarily due to a
decrease in videoconferencing unit volume, partially offset by higher average
selling prices in the videoconferencing market and increased installation and
maintenance revenue. Unit volume of the Company's codec products decreased 11%
to 2,322 units in 1995 from 2,609 units in 1994. The increase in revenues from
continuing operations for 1994 compared to 1993 was primarily the result of an
increase in product sales, service and installation revenue, partially offset by
a decline in sales of personal video products. Unit volume of the Company's
codec product shipments increased 19% to 2,609 units in 1994 from 2,195 units in
1993. For the nine months ended September 30, 1996 and 1995, revenues were $65.6
million and $86.2 million, respectively, a decrease of 24%. The decrease in
revenues was due primarily to a decrease in videoconferencing unit shipments.
Codec shipments were 1,296 units for the first nine months of 1996 compared to
1,812 units for the same period in 1995.
International revenues increased to $24.3 million or 22% of revenues in
1995, compared to $21.2 million or 18% of revenues in 1994 and $12.4 million or
13% of revenues in 1993. The increase in international revenues in 1995 compared
to 1994, as well as international revenues in 1994 as compared to 1993, resulted
primarily from growth of sales in China and other Far East locations. For the
first nine months of 1996 international revenues were $12.3 million, or 19% of
revenues, compared to $13.8 million, or 16% of revenues for the first nine
months of 1995. The Company does not presently engage in foreign currency
transactions, nor does it have any significant assets located outside the United
States. Therefore, the Company is not directly affected by foreign currency
exchange rate fluctuations.
Gross Margin
Gross margin as a percentage of sales was 30%, 38%, and 30% in 1995, 1994
and 1993, respectively. Gross margin on product sales in 1995 was negatively
impacted by charges of approximately $11.0 million in the fourth quarter of
1995. These charges resulted from the Company's decision to restructure its
videoconferenc-
12
<PAGE> 15
ing division, and included reductions in the carrying values of certain assets,
primarily inventory and capitalized software. See Note 2 of Notes to
Consolidated Financial Statements. The increase in gross margin in 1994 compared
to 1993 was due primarily to sales of higher margin Radiance and eclipse group
videoconferencing systems, and to a decline in sales of lower margin older
generation systems and personal video products. For the nine months ended
September 30, 1996 and 1995, gross margin as a percentage of revenues was 45%
and 40%, respectively. The increase in gross margin was primarily due to a
change in product mix to include a greater proportion of higher margin Radiance
and eclipse group videoconferencing systems and to reduced manufacturing costs.
The Company continues to seek improvement in gross margin through
introduction of new products with higher margins, as well as through cost
reductions of existing products. However, the Company anticipates that gross
margin on revenues will continue to be subject to fluctuations caused by the
introduction of new products, changes in product mix and variations in
manufacturing costs.
Selling, General and Administrative Expenses
Selling, general and administrative expenses were 38%, 33% and 31% of
revenues in 1995, 1994 and 1993, respectively. The increase as a percentage of
revenues in 1995 compared to 1994 was primarily due to $4.1 million of
additional expenses in the fourth quarter of 1995 resulting from the Company's
decision to restructure its videoconferencing division. These expenses relate to
provisions for doubtful accounts and reductions in the carrying values of
certain demonstration equipment and assets related to service activities. See
Note 2 of Notes to Consolidated Financial Statements.
The increase as a percentage of revenues in 1994 compared to 1993 was
primarily due to increases in sales and marketing costs related to increases in
personnel, new sales offices and equipment-related expenses necessary to
stimulate and support planned revenue growth in future periods.
For the nine months ended September 30, 1996 and 1995, selling, general and
administrative expenses increased to 41% of revenues compared to 34% of
revenues, respectively. The increase in selling, general and administrative
expenses as a percentage of revenues was primarily due to a decrease in revenues
and $1.7 million of additional expenses resulting from the Company's decision to
restructure its videoconferencing division. The additional expenses consisted
primarily of severance and related costs associated with headcount reductions in
the first quarter of 1996.
The Company anticipates that selling, general and administrative expenses
will generally increase with increases in the level of revenues but may vary
from period to period as a percentage of revenues.
Research and Development Expense
Research and development expenditures consisted of research and development
expenses, cost of revenues related to research and development contracts and
capitalized software development costs as summarized in the table below (in
millions):
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Research and development expense................. $10.5 $10.2 $10.0 $ 6.9 $ 9.4
Capitalized software development cost............ 2.9 3.9 4.8 1.0 .9
Cost of revenues related to research and
development contracts.......................... -- 1.0 -- -- --
----- ----- ----- ----- -----
Total research and development expenditures...... $13.4 $15.1 $14.8 $ 7.9 $10.3
===== ===== ===== ===== =====
</TABLE>
Research and development expense was 11% of revenues in 1993 and 9% of
revenues in 1994 and 1995. The decrease as a percentage of revenues in 1994
compared to 1993 was attributable to the increase in revenues in 1994, as well
as an increase in the amounts capitalized in conjunction with the development of
new
13
<PAGE> 16
software. Capitalized software development costs increased in 1995 and 1994 due
to increased activity on new software for more complex and feature-rich
videoconferencing products.
For the nine months ended September 30, 1996 and 1995, research and
development expense was 14% and 8% of revenues, respectively. The increase in
research and development expense as a percentage of revenues was due principally
to decreased revenues, as well as an increase in the portion of engineering
spending that was dedicated to research and development instead of capitalized
software activity.
The Company expects that the level of research and development expenses as
a percentage of revenues will fluctuate due to varying levels of research and
development activities, external funding, and amounts capitalized in conjunction
with software development activities.
Interest Income and Interest Expense
Interest income was $0.1 million in 1995 compared to $0.2 million in 1994
and $0.6 million in 1993. The decrease in 1995 compared to 1994 and 1993 was
principally due to a reduction of funds available for investment. Interest
expense increased to $1.1 million in 1995 compared to $0.8 million in both 1994
and 1993. Interest expense in 1995 reflected higher average outstanding
borrowings and higher interest rates compared to 1994. Interest expense in 1994
reflected lower average outstanding borrowings and higher interest rates
compared to 1993. Net interest expense was $0.7 million for the first nine
months of 1996 compared to $0.8 million for nine months of 1995. The reduction
is primarily due to the payment of term loans in connection with the sale of
discontinued operations. See Note 2 of Notes to Consolidated Financial
Statements.
Income Taxes
At December 31, 1995, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $46.0 million, of which $23.0
million related to deductions attributable to the exercise of non-qualified
stock options and employees' early disposal of stock acquired through incentive
stock options. The future net reduction in taxes otherwise payable arising from
such deductions will be credited to additional paid-in capital when realized. At
December 31, 1995, the Company had a federal general business credit
carryforward of approximately $2.2 million. The federal net operating loss and
tax credit carryforwards expire primarily in the years 1999 through 2010.
Discontinued Operations
In the fourth quarter of 1995, the Company adopted a plan to discontinue
operations of its broadcast products division and refocus its efforts and
resources on developing and marketing videoconferencing products. In the first
quarter of 1996, the Company decided to restructure the videoconferencing
division which resulted in adjustments that were recorded as of December 31,
1995 to carrying values of assets that were impacted-primarily inventories,
capitalized software and accounts receivable. In conjunction with this action,
the Company also reduced its workforce in the first quarter of 1996 and
identified a number of offices that would be closed. Severance and other
expenses associated with this action were reflected in the first quarter of
1996. In June 1996, the Company completed the sale of certain assets of its
broadcast products division. See Note 2 of Notes to Consolidated Financial
Statements.
Net Income (Loss)
The net loss from continuing operations was $21.0 million, $4.9 million and
$12.2 million in 1995, 1994 and 1993, respectively. The loss in 1995 was heavily
impacted by the charges discussed above in "Gross Margin." The decline in net
operating results in 1995 was also affected by higher selling, general and
administrative expenses, as well as a one-time charge of approximately $0.9
million resulting from settlement of litigation. The improvement in operating
results in 1994 compared to 1993 was primarily due to improved gross margins
resulting from increased revenues of videoconferencing products and changes in
videoconferencing product mix to higher margin products, partially offset by
higher selling, general and administrative expenses and reduced sales of
personal video products. For the first nine months of 1996, the net loss from
14
<PAGE> 17
continuing operations increased to $7.5 million as compared to $3.6 million
during the first nine months of 1995. This increase was primarily due to lower
revenues as well as $1.7 million of additional expenses resulting from the
Company's decision to restructure its videoconferencing division, partially
offset by improved gross margins on videoconferencing product sales.
Factors Affecting Future Results
The Company continues to seek improvement in operating results through
introduction of new products that are expected to have higher margins, as well
as through cost reductions of existing products. However, there can be no
assurance that the Company will be successful in its efforts. In the future, the
Company's operating results may be impacted by a number of factors, including
cancellation or delays of customer orders, interruption or delays in the supply
of key components, changes in customer base or product mix, seasonal patterns of
capital spending by customers, new product announcements by the Company or its
competitors, pricing pressures, and changes in general economic conditions.
Historically, a significant portion of the Company's shipments have been made in
the last month of each quarter. As a result, a shortfall in revenue compared to
expectation may not evidence itself until late in the quarter. Additionally, the
timing of expenditures for research and development activities and sales and
marketing programs, as well as the timing of orders by major customers, may
cause operating results to fluctuate between quarters and between years.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating and product development activities have required
significant cash. The Company has used internally generated funds, public and
private offerings of common stock and preferred stock, sale and leaseback
arrangements, and bank credit lines to finance its growth since 1983. In 1995,
the Company's operations generated $7.3 million in cash. The net loss was offset
primarily by depreciation and amortization, reductions in inventories and net
assets of discontinued operations and increases in accounts payables and accrued
liabilities. Cash generated by operations of $0.7 million in 1994, was primarily
from net income plus depreciation and amortization, increased deferred revenue,
and decreases in other current assets, partially offset by increases in accounts
receivable, inventories and net assets of discontinued operations and a decrease
in accounts payable. Capital expenditures were $7.2 million in 1995 and $9.4
million in 1994, consisting primarily of engineering and manufacturing equipment
for new product lines, office equipment, field service spares and demonstration
equipment.
For the first nine months of 1996, cash used in operations was $12.9
million compared to cash generated by operations of $8.0 million in the first
nine months of 1995. This increase in cash used in operations was primarily due
to the paydown of accounts payable and other liabilities, increased net loss,
and lower depreciation and amortization, partially offset by a decrease in
accounts receivable and inventories, as well as the reduction in carrying value
of assets related to the Company's discontinued operations. Net cash generated
by investing activities was $7.5 million for the first nine months of 1996
compared to net cash used in investing activities of $18.7 million for the nine
months ended September 30, 1995. This change is due primarily to cash generated
from the sale of assets related to the Company's discontinued operations, as
well as lower levels of spending related to property, equipment and intangible
assets, as well as decreased capitalization of software. Net cash used in
financing activities was $1.4 million during the first nine months of 1996
compared to net cash generated by financing activities of $10.4 million during
the first nine months of 1995. This change is due primarily to lower sales of
common stock, which was $6.1 million in the first nine months of 1995, and
payments made to reduce collateralized borrowings during the second quarter of
1996. See Note 7 of Notes to Consolidated Financial Statements.
As of September 30, 1996, the Company had cash and cash equivalents
totaling $5.8 million. The Company has a line of credit, which expires on June
30, 1997, in the amount of $15.0 million, of which $12.4 million was outstanding
at September 30, 1996. See Note 7 of Notes to Consolidated Financial Statements.
Working capital was $14.2 million at September 30, 1996, compared to $15.3
million at December 31, 1995.
15
<PAGE> 18
In October 1996, the Company obtained $7.0 million through a private sale
of Series C Stock to the Selling Securityholders. Under the purchase agreement
with the Selling Securityholders, the Company may issue to the Selling
Securityholders up to an additional $13.0 million worth of convertible preferred
stock of the Company in two separate installments by the fourth quarter 1997, if
certain closing conditions are met, including those described in "Risk
Factors -- Reliance on Key Personnel" and "-- Possible Delisting of Common Stock
from Nasdaq National Market."
The Company anticipates that existing cash, lines of credit, and the future
sales of convertible preferred stock, together with sources of additional
liquidity, such as private or public offerings, sale and leaseback arrangements,
equipment lease lines and bank credit lines, will be sufficient to meet cash
requirements through the third quarter of 1997. Should additional funding be
required, however, there can be no assurance that such funding will be available
on acceptable terms as and when required by the Company.
16
<PAGE> 19
BUSINESS
GENERAL DEVELOPMENTS
The Company, incorporated in California in December 1976 and reincorporated
in Delaware in October 1987, is a leader in the development, manufacture and
marketing of visual communication systems based on Compressed Digital Video
(CDV) technology. The Company's systems use proprietary and industry standard
algorithms to compress the amount of data required to transmit digital video and
audio signals, thereby significantly reducing the cost of transmitting these
signals over terrestrial, microwave, cable or satellite networks. The Company's
strategy is to use its expertise in CDV technology to enhance its position in
videoconferencing and to monitor new markets such as the desktop and personal
video markets.
CLI's group and desktop videoconferencing systems permit users at different
locations to conduct full-color, motion videoconferences ranging from two-way
informal meetings between individuals to formal meetings between large groups at
multiple locations. The Company's present families of videoconferencing systems
include Rembrandt II/VP and Radiance videoconferencing systems, the eclipse
family of mid-range videoconferencing systems, and the CLI Desktop Video family.
Videoconferencing systems operate worldwide over a broad range of transmission
speeds from 56 kilobits per second (kbps) to 2.048 megabits per second (mbps)
for the Rembrandt and Radiance Systems, 768 kbps for the eclipse, and 384 kbps
for the desktop. All of CLI's current videoconferencing systems comply with the
International Telecommunication Union-Telecommunication (ITU-T) H.320
videoconferencing standard, and most also provide customer-selectable
proprietary algorithms. The videoconferencing market has grown as a result of
improvements in the price/performance of videoconferencing systems, decreases in
transmission costs and increased availability of switched digital transmission
services. However, there can be no assurance that this market growth will
continue in the future.
INDUSTRY BACKGROUND
Over the past two decades, the advent of compressed digital video
technology has enabled the development of cost effective products for the
growing videoconferencing market, increasing productivity and decreasing costs
by enhancing the effectiveness of business, education and government
communication.
Effectiveness in today's fast-paced business environment demands accurate
and timely exchange of information by individuals and groups, often at distant
locations. Telephones and facsimile machines have become essential business
tools by providing communication in convenient and inexpensive formats. In many
situations, however, information cannot be transferred effectively by telephone
or in writing, and more natural face-to-face communication is necessary. A
substantial portion of business travel today is undertaken in order to permit
such face-to-face communication. The Company believes that the utilization of
visual communication systems, such as videoconferencing systems, has enhanced
productivity by allowing meaningful and timely face-to-face contact, and has
lowered costs by reducing business travel.
The concept of visual communications was introduced in 1964 at the New York
World's Fair when AT&T Corporation exhibited a prototype of its picturephone. At
that time, however, videoconferencing was commercially impractical because
transmitting uncompressed video signals was prohibitively expensive for business
users. In the late 1970s, the first video compression system, called a "codec"
(coder-decoder), was introduced. The market acceptance of early
videoconferencing systems was limited because of high hardware and transmission
costs, and the limited availability of transmission facilities. The first
companies to adopt videoconferencing utilized dedicated private networks
established expressly for videoconferencing.
Significant progress was made in the early 1980s in addressing many of the
problems associated with early videoconferencing efforts. A major advance in
transmission cost reduction was achieved by CLI with the introduction in 1982 of
a codec which provided the first economical means to communicate effectively
over standard networks at a transmission rate (bandwidth) of 1.544 mbps, the
standard T1 transmission rate, a reduction of approximately 60:1 from the 90
mbps bandwidth required to transmit uncompressed video signals. This lower
bandwidth significantly reduced transmission costs and permitted transmission
over available terrestrial, microwave, cable and satellite channels.
17
<PAGE> 20
Since the mid-1980s, driven by competition among telecommunication carriers
and technologies such as fiber optics, the cost of transmission services has
continued to decrease significantly. During this same period, the availability
of private networks and switched services increased dramatically. Switched
digital transmission services are now available in most U.S. metropolitan areas.
Advances in compressed digital video technology during this period also resulted
in the introduction of products with improved picture and audio quality. In the
mid-1980s, video compression systems were introduced that operated at
transmission rates below the standard T1 rate, although these low bandwidth
systems often failed to achieve picture quality acceptable to most users. By the
late 1980s, continued improvements in video compression technology and the
increasing availability of public switched services at bandwidths up to 384 kbps
had resulted in increased user acceptance of videoconferencing.
Collectively, the dramatic decreases in transmission costs, the increased
availability of switched digital services for both domestic and international
networks, the improvements in picture quality and the adoption of worldwide
standards have made global videoconferencing at various bandwidths increasingly
practical and cost effective. Many of these factors have also created
opportunities for application of CDV technology in the developing desktop and
personal video markets.
CLI STRATEGY
The Company is a leader in video compression technology and believes that
its large worldwide installed base of videoconferencing systems affords the
Company significant competitive advantages. The Company's strategy is to
strengthen its position as a leading supplier of a full range of high
performance value group and desktop videoconferencing systems. The Company's
strategy includes several key elements:
Technology Leadership
CLI has pioneered video compression technology and continues to develop
videoconferencing systems with enhanced picture and audio quality and features
at lower costs.
Broad Range of Videoconferencing Products
CLI has one of the broadest product lines in the videoconferencing
industry, spanning a wide range of market applications and operating at
transmission rates from 56 kbps to 2.048 mbps. The Company believes supplying a
full range of products to satisfy a customer's complete video communication
needs will be important to its future success.
Compliance with Industry Standards
CLI believes that the adoption of industry standards has expanded the
worldwide videoconferencing market by allowing systems from different
manufacturers to communicate with one another. The Rembrandt II/VP, Radiance,
eclipse, and CLI Desktop Video product families all conform with the ITU-T H.320
and T.120 videoconferencing standard that allows communication with CLI and
other vendors' products through industry standard communication modes. Where
standards do not exist, CLI has innovated to provide their customers with
additional value through proprietary implementations.
CLI TECHNOLOGY
CLI has been a leader in the evolution of digital video compression
technology for videoconferencing. Since the inception of this market, CLI's
development efforts are primarily directed at achieving greater levels of
compression, improving picture and sound quality and system functionality,
continuing to reduce system costs, and supporting and improving industry
standards. The Company's continued success in its chosen markets is dependent in
part on the results of its ongoing technology and product development efforts.
Early codecs, introduced in the late 1970s, used a technique called
interframe coding that achieved compression by measuring differences between
frames and transmitting only those differences, refreshing the unchanged
elements in the frame from memory. Interframe coding is useful in scenes where
there is limited
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motion, but can cause image degradation, such as blurring or jerkiness, in
scenes that contain significant motion. This technique required a high rate of
transmission to overcome its inherent limitations in motion sequences.
In 1982, CLI developed the first videoconferencing system that operated at
T1 rates incorporating a proprietary algorithm utilizing intraframe coding.
Intraframe coding does not measure differences between frames, but rather
achieves compression by breaking each individual frame into blocks and assigning
bits to each block based on the complexity of the scene in that block. Although
intraframe coding causes a slight degradation of detail resolution in a picture,
it maintains picture quality independent of the amount of motion in the picture.
This algorithm technique was based on Discrete Cosine Transform (DCT)
technology.
In 1984, CLI introduced the first sub-T1 algorithm combining both
interframe and intraframe technology. This proprietary algorithm, known as
Differential Transform Coding (DXC), combined the positive aspects of both
intraframe and interframe coding by using intraframe coding for blocks with high
motion and interframe coding for blocks with little or no motion. DXC allowed
transmission with minimal picture quality degradation at transmission rates as
low as 384 kbps.
In 1987, CLI introduced a new proprietary algorithm called Cosine Transform
Extended (CTX) which achieved transmission rates as low as 56 kbps by adding
motion compensation to the techniques pioneered in earlier codecs. Motion
compensation was an advancement in interframe techniques that allowed detection
and coding of the portions of the picture which are in motion.
In 1991, CLI announced the CTX Plus algorithm which significantly improved
picture resolution and increased frame rates at transmission rates of 384 kbps
and above, thereby providing near-broadcast image quality. The Company's
Radiance and Rembrandt II/VP families of large group videoconferencing products
incorporate the CTX and CTX Plus algorithms, as well as the ITU-T H.261
standard. The eclipse gold models fully comply with the most recent ITU-T
standards, and have transmission speeds ranging from 56 kbps to 2.048 mbps.
DCT technology has been the basis of all CLI products since 1982. The DCT
technology has been adopted as the foundation of the ITU-T H.261 video standard,
as well as the evolving MPEG standards for broadcast, cable and desktop
applications, and Joint Photographic Experts Group (JPEG) standard for still
image compression. The Company believes that its expertise in DCT technology
gives it a competitive advantage by simplifying the development of products that
are compatible with industry standards, while providing superior performance
through proprietary enhancements when operating in either the industry standard
or proprietary modes. To achieve these enhancements in the future, the Company
also continues to develop methods for pre- and post-processing video signals
utilizing techniques such as motion adaptive scene filtering in order to improve
performance of systems utilizing either industry standard or proprietary
algorithms.
CLI designs application specific integrated circuits (ASICs) for its
products, and cooperates with certain semiconductor vendors who are developing
semiconductor chips which the Company believes are important to its business.
Both activities are directed at reducing costs, enhancing performance, and
increasing flexibility in the Company's products. In many cases, CLI is able to
add elements of its proprietary technology with the implementation of these
chips in order to obtain cost and performance advantages compared to other users
of such chips.
VIDEOCONFERENCING PRODUCTS
CLI offers a broad range of group and desktop videoconferencing products
which includes the Rembrandt II/VP large group video codec family, the Radiance
family of prepackaged large group videoconferencing systems, the eclipse
mid-range group videoconferencing systems, the CLI Desktop Video family, and
Multipoint Control Units. The Company's videoconferencing systems offer two-way,
full-color, motion videoconferencing at various bandwidths ranging from 56 kbps
to 2.048 mbps. These systems enable the user to transmit compressed video,
audio, data and graphics over digital telecommunications channels. System users
can transmit the compressed signals over terrestrial, satellite or microwave
networks. CLI's video-
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conferencing products are used in point-to-point or multipoint videoconferences.
In a point-to-point videoconference, audio and full-color, motion images are
transmitted simultaneously in both directions so that the participants at one
site interact with the participants at the other site as in a normal meeting. In
a multipoint conference, participants in three or more locations can interact
with each location and are able to see and hear the participant who is speaking.
CLI systems work in conjunction with both dedicated network facilities and a
variety of switched network facilities, offering customers maximum networking
flexibility.
Rembrandt II/VP.
The principal component in the Company's videoconferencing systems is the
codec. One codec is required at each conference site to perform both coding and
decoding functions. The Rembrandt II/VP, which the Company began shipping in the
second half of 1991, incorporates the Company's proprietary CDV technology, and
was the industry's first codec to address the entire spectrum of
videoconferencing applications in a single product. These codec support
transmission rates from 56 kbps to 2.048 mbps, support the CTX and CTX Plus
proprietary algorithms, provide backward compatibility to the Company's older
products, and support the H.261 standard. The Company believes that its
proprietary algorithms (CTX at lower bandwidths and CTX Plus at bandwidths of
384 kbps and above) provide picture quality superior to the ITU-T H.261
standard. The Rembrandt II/VP list prices range from $38,000 to $48,500,
excluding options.
Radiance Group Videoconferencing Systems.
The Company's Radiance large group videoconferencing systems, first shipped
in January 1994, are complete, prepackaged large group systems which achieve up
to 30 frames per second (fps) and 480 lines of resolution at bandwidths ranging
from 56 kbps to 2.048 mbps. These systems come fully assembled for easy
installation, use, and maintenance, and utilize a tabletop touchpanel based on
CLI's Self-Guide user interface, which provides intuitive control via menus and
icons to guide the user. Radiance systems are interoperable with CLI's Rembrandt
II/VP codec, eclipse mid-range group systems, and CLI Desktop Video products
worldwide, as well as with other codecs that meet ITU-T H.320 standards. The
Radiance list prices range from $43,400 to $77,900, excluding options.
eclipse Group Videoconferencing Systems.
The Company's eclipse mid-range group videoconferencing systems, the first
product of which was introduced in early 1993, are complete, full-featured
videoconferencing systems priced as low as $26,400. The codec is housed in an
Intel Corporation ("Intel") 486 personal computer chassis with both a hard disk
and 3 1/2 inch floppy disk for software updates. The eclipse systems also
include an advanced, industry standard audio system with tabletop microphones,
full-duplex capability and integrated echo cancellation, which uses as little as
16 kbps of the 112/128 kbps bandwidth for audio. The eclipse comes with
high-quality video, capable of communicating using the ITU-T H.320 industry
standard or provides backward compatibility to other CLI systems using CLI's CTX
proprietary algorithm for communicating with older CLI systems. The eclipse
offers as standard features an auto-focus camera with pan/tilt/zoom
capabilities, easy-to-use presets, a choice of built-in line interfaces for
virtually every type of network, multipoint readiness, picture-in-picture, and
CLI's Self-Guide user interface. In 1995, the eclipse product family was
expanded to include a variety of models ranging from table top to dual monitor
systems. These eclipse 8200 models were fully compliant with ITU-T standards,
and offer full common intermediate format (FCIF) resolution, integrated network
interface supporting highly-affordable transmission speeds up to 112/128 kbps,
wideband audio up to 7 kHz, enhanced video from customized VLSI circuits
specifically designed for pre- and post-processing, far-end camera control,
high-resolution graphics, 27-inch monitors, wireless Self-Guide remote control
unit, a pan/tilt/zoom automatic-focus camera, and a variety of auxiliary
document cameras. The eclipse 8300 models included the same features as the
eclipse 8200 with the additional capability of transmission speeds up to 768
kbps. In April 1996, CLI further expanded the eclipse product line with the
introduction of the eclipse gold product family. These recently introduced
models offer features identical to the eclipse 8300 with the option of improved
video quality at 30 frames per second, transmission rates of up to 768 kbps and
a T.120 multimedia gateway. T.120 is an evolving series of standards from the
ITU-T that are aimed at facilitating "audio-
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graphic", multimedia conferencing for collaborative working meetings and
distance learning applications. Available as options on eclipse are: multipoint
chair control, dual monitors, the automatic focus SuperGraphicCam document
camera and an inverse multiplexer. eclipse gold list prices begin at $24,900 and
through bundled configurations can range up to $48,900, excluding options.
CLI Desktop Video Systems.
The Company announced in January 1996 a CLI Desktop Video family of
products to run on PCs powered by Intel's Pentium(TM)1 microprocessor under
Microsoft Windows versions 3.1 and 95. This family of products initially
includes two models: CLI Desktop Video 1000 and CLI Desktop Video 2000. CLI
Desktop Video products are kits consisting of a fixed digital camera, a single
codec board incorporating an integrated services digital network (ISDN) basic
rate interface, a telephone handset, and a choice of data collaboration
software, including Intel's ProShare(TM) Premier data collaboration software. In
the future, the product line will also support DataBeam's FarSite(TM)2 data
collaboration software. The CLI Desktop Video 1000 and 2000 models are capable
of transmission speeds ranging from 56 kbps to 384 kbps. CLI Desktop Video list
prices range from $1,795 for level solutions up to $4,995 for a bundled solution
with a Pentium PC.
Multipoint Control Units.
The Company also offers the Multipoint 2 Control Unit (MCU), a device that
allows people at multiple locations to participate in a fully interactive
videoconference. During a multipoint videoconference, the MCU acts as an audio
bridge and a controller, switching among different sites so participants can see
the person who is speaking and hear all other participants in the conference.
This switching can be voice-activated or manually controlled. The MCU is
compliant with the international multipoint videoconferencing standards
established by the ITU-T, and is compatible with videoconferencing systems from
any manufacturer who supports those international standards. In addition, MCUs
are compatible with the large installed base of CLI Rembrandt II/VP and other
codecs with compatible audio and communications configurations. List prices for
MCUs range from approximately $19,995 for a 4-user unit to approximately
$200,000 for a large system usable in a headquarters location, depending on the
number of ports and options required.
SALES AND MARKETING
The Company markets its videoconferencing systems to business, government,
health care and education customers. These customers frequently have multiple
domestic and/or international locations and often specify a single vendor to
supply videoconferencing equipment on a worldwide basis. The Company believes
that the sales effort to this sophisticated customer base requires the
initiation and maintenance of multilevel contacts in order to address the
customers' multi-location application and support needs. Historically, a
significant portion of the Company's sales have been to its existing customer
base. Nonetheless, CLI is committed to expanding sales outside of its current
customer base and believes that new customers are an important part of the
Company's future revenue growth. See "Risk Factors -- Appearance of Viability,"
"-- Product Development and Rapid Technological Change," and "-- Highly
Competitive Industry."
In 1995 and in the first nine months of 1996, the Company believes that at
least 35% of CLI's revenues from videoconferencing products were achieved
through indirect channels, which include resellers and co-marketers
(collectively, Resellers). To that end, the Company has entered into a strategic
co-marketing agreement with Lucent Technologies (formerly AT&T Corporation).
These co-marketers provide sales leads and customer prospects for direct
customer sales by the Company's domestic sales force. In addition, the Company
has a number of Reseller agreements in the United States with companies
including Norstan, Inc., Pacific Bell, and Williams Telecommunications, Inc.
(WilTel). These Resellers sell the Company's videoconferencing products directly
to end-users.
- ---------------
1 (TM)Pentium, and (TM)ProShare are trademarks of Intel Corporation
2 (TM)FarSite is a trademark of DataBeam Corporation.
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Internationally, the Company markets its videoconferencing products in most
countries outside the U.S. through distributors. CLI is attempting to increase
its new customer base by expanding its distribution channels. The Company's
products are distributed in over 50 countries outside the U.S. under
distribution agreements and arrangements with over 30 companies, including
Internet Video Communications in the U.K., Telecom Video Systems in France,
Deutsch Telekom in Germany, SOEI Tsusho Company, Ltd. in Japan, Daewoo in Korea,
Teledata in Southeast Asia, and Keytech S.A. in Argentina. Agreements with these
distributors generally provide for pricing and volume discounts, order lead
times, designation of a specific geographic territory and other terms and
conditions. Distributors typically order products only upon receipt of an order
from an end-user customer and generally provide local customer support,
including installation and maintenance. In 1993, the Company opened its first
international sales offices in Brussels, Belgium and Beijing, People's Republic
of China. The Company is closing the Brussels sales office and has entered into
an agreement with Multimedia and Teleconferencing Systems, Limited located in
Berskhire, United Kingdom to manage the Company's international sales operations
in Europe, Africa, the Middle East and India. In 1995 and in the first nine
months of 1996, revenue from non-U.S. customers represented 22% and 19%,
respectively, of total revenues. See Note 10 of Notes to Consolidated Financial
Statements. See "Risk Factors -- International Sales."
The Company believes that the availability of demonstration systems and
financing programs significantly enhances its direct sales and marketing
efforts. CLI provides videoconferencing equipment to customers and potential
customers on a short-term loan or monthly rental basis in order to allow
hands-on use of the equipment.
As of October 1996, the Company had 125 direct sales, marketing and
customer support personnel domestically and in three foreign countries.
CUSTOMER SERVICE AND SUPPORT
The Company believes that customer service and support are important
competitive factors. CLI provides service and support in more than 50 countries
worldwide either directly or in conjunction with its distributors, Resellers and
contract service providers. CLI and its contract service providers typically
provide comprehensive support to all customers to which CLI sells direct.
Customers who buy CLI products indirectly generally receive their primary level
of support from CLI's Resellers and supplemental support from CLI. All
distributors, Resellers and service providers are trained by the Company to
provide the appropriate level of service for the Company's products. CLI's
service strategy for much of its product line is predicated on designing
products with diagnostic capabilities and maintaining a toll-free Customer
Support Hotline staffed by technical support personnel who diagnose problems
remotely. The remote diagnostic capabilities of many of CLI's products often
allow the Company's Technical Support Center personnel to cost-effectively
service its products without requiring on-site service visits. To further
augment CLI's service capabilities, CLI signed an agreement in late 1995 with
Lucent Technologies under which Lucent Technologies will supply technicians who
will provide installation and service for designated CLI videoconferences
customers throughout the United States. See "Risk Factors -- Appearance of
Viability."
The Company provides installation and on-site service through its
regionally deployed technical support staff in select major cities or regional,
national, or multinational third-party service providers. The Company offers a
variety of maintenance plans to accommodate the various maintenance requirements
in the marketplace. Historically, maintenance revenue has been less than 10% of
total revenues.
CLI generally warrants its products to be free of defects in materials and
workmanship for periods ranging from three months to fourteen months from date
of shipment or twelve months from date of installation, depending on the
product. To date, defective product returns have not been material.
CUSTOMERS
The Company's products have been sold to organizations in such diverse
industries as aerospace, banking, communications, education, electronics, food
and consumer products, and pharmaceuticals, as well as in government and
telemedicine. In 1994, 1995, and the first nine months of 1996, there was no
single customer that accounted for greater than 10% of total revenues. In 1993,
sales to two customers accounted for approximately 17% and 10% of total
revenues, respectively. During 1993, 1994, 1995, and the first nine months
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of 1996, sales to international customers represented approximately 13%, 18%,
22%, and 19%, respectively, of the Company's total revenues.
RESEARCH AND DEVELOPMENT
Since its inception, the Company has recognized that a strong technical
base is essential to its long-term success and has made a substantial investment
in research and development. The Company's total research and development
expenditures in 1993, 1994, 1995, and the first nine months of 1996, aggregated
$13.4 million, $15.1 million, $14.8 million and $10.5 million, respectively.
Research and development expenditures consisted of research and development
expense, cost of revenues related to research and development contracts and
capitalized software development costs are summarized in the table in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- "Research and Development Expense."
The videoconferencing market is characterized by rapid and significant
change in technology and user needs, requiring substantial product development
expenditures. These changes have resulted in frequent product introductions
characterized by better picture quality at lower bandwidths and reduced prices.
The Company's ongoing videoconferencing research and development efforts are
focused on continued improvements in its CDV technology, product developments
and product enhancements. The Company's future success in this market will
depend to a large extent on its ability to maintain its competitive
technological position and to continue to develop, on a cost effective and
timely basis, technologically advanced videoconferencing products that meet
changing user needs. There can be no assurance that the Company's product
development efforts will be successful. See "Risk Factors -- Product Development
and Rapid Technological Change."
COMPETITION
The Company believes that the market for videoconferencing systems ranges
from applications for more formal meetings that require very high picture
quality using higher bandwidths, to applications such as informal meetings in
which reduced picture quality at lower bandwidths is acceptable in return for
significantly lower equipment and transmission costs.
The Company believes that the principal competitive factor in the
videoconferencing market is the ability to provide easy-to-use, cost effective,
enterprise-wide videoconferencing solutions. Performance, price, picture
quality, audio quality, bandwidth flexibility, network compatibility, standards
compliance, reliability, ease of use and diversity of features are important
product features; distribution and customer support are also important service
factors. While the relative importance of these factors varies from customer to
customer, CLI believes that it is competitive in each of these areas.
At the higher bandwidths, the Company believes that VTEL Corporation,
General Plessey Telecommunications and British Telecom in the United Kingdom are
currently its major competitors, although other companies have developed or may
develop such systems. In addition, PictureTel Corporation has made increasing
attempts to enter the high bandwidth markets by extending the performance of
their systems. At lower bandwidths, the Company believes that PictureTel
Corporation, Sony Corporation and VTEL Corporation are its primary competitors.
The Company expects other competitors, some with significantly greater
marketing, technical and financial resources, to enter the videoconferencing
systems market. In particular, the Company expects increased competition from
Japanese manufacturers, including Nippon Electric Corporation and Hitachi
Limited. If the Company cannot continue to offer new videoconferencing products
with improved performance and reduced cost, its competitive position will erode.
Moreover, competitive price reductions may adversely affect the Company's
results of operations.
In December 1990, the ITU-T adopted a worldwide videoconferencing standard,
commonly referred to as H.261 or px64, for transmitting video images over
digital networks at data transmission rates ranging from 64 kbps to 2.048 mbps.
This standard has become a part of the ITU-T standards, an evolving set of
standards which permit interoperability among videoconferencing systems from
different vendors. Although acceptance of the ITU-T standards is expected to
increase demand for videoconferencing products in general, the
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widespread acceptance of these standards and other related emerging
international standards may make the advantage of the Company's proprietary
technology less significant. In particular, the emergence of industry standards
may lower barriers to entry and result in increased price competition. See "Risk
Factors -- Highly Competitive Industry."
MANUFACTURING
The Company's manufacturing organization performs materials planning,
production scheduling, mechanical assembly, board testing, system integration,
burn-in, and final system testing of videoconferencing codec and integrated
systems. The organization performs quality assurance testing on selected
purchased parts, board assemblies and finished products during the course of the
manufacturing process. Some components are purchased through a small number of
selected component distributors who provide completed assemblies for printed
circuit boards. The parts which come in kits are drop-shipped from the component
distributor directly to selected subcontract assembly houses. Some components
are purchased directly from various manufacturers, and are assembled and tested
at CLI. Some videoconferencing equipment is purchased in its entirety from
suppliers and shipped to CLI where it may be integrated and tested to customer
specifications.
The Company uses many standard parts and components for its products.
Several of the critical components used in the Company's products, including
certain custom and programmable semiconductors, such as the Video Processor, are
currently available only from single or limited sources. In addition, the
Company relies on a few key vendors for sourcing and turnkey manufacturing of
its products. The Company has executed master purchase agreements with some, but
not all, of its component distributors and suppliers who provide the kits and
component parts. There can be no assurance that the Company will be able to
obtain a sufficient quantity of products or components for existing products on
acceptable terms to enable it to meet the demand for those products. The Company
is currently on a cash or prepay basis with certain of its key suppliers. In
addition, certain suppliers have terminated their relationship with the Company.
An interruption or reduction in supply of any key components, excessive rework
costs associated with defective components, or process errors or the inability
to obtain continued reduction of component prices could adversely affect the
Company's operating results and could damage customer relationships. See "Risk
Factors -- Dependence on Key Vendors."
QUALITY
CLI has a quality function with a Quality Council assigned to oversee the
implementation of a Total Quality Management (TQM) process and culture
throughout CLI. A cross-functional TQM council has been organized to support and
manage process quality improvement teams which focus on continuous improvement
of CLI's various products and processes used throughout the Company. The Company
has been granted the International Organization for Standardization (ISO) 9001
certification for its videoconferencing products operations.
PATENTS AND TRADEMARKS
The Company currently holds six U.S. patents relating to video compression,
five of which are jointly held by Charger Industries, Incorporated, a subsidiary
of General Instrument Corporation, following the sale of the Company's Broadcast
Division in June 1996. The patents cover CLI's scene-adaptive coding and DCT
techniques and expire between the year 2000 and the year 2004. These techniques,
together with the DXC, CTX and CTX Plus algorithms, serve as the basis of the
Company's videoconferencing product lines. The Company also holds three U.S.
patents relating to facsimile compression.
There can be no assurance that the Company's current patents will be upheld
as valid. Although the Company believes its patents are valuable, it also
believes that its future success depends primarily upon its technical and
engineering competence and the creative skills of its personnel.
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In addition to potential patent protection, CLI relies on the laws
prohibiting unfair competition, and the laws of copyright, trademark and trade
secrets to protect its proprietary rights. The Company also utilizes
nondisclosure agreements and internal secrecy procedures.
The Company believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. From time to
time, however, the Company has received communications from third parties
asserting that features or content of certain of its products may infringe
intellectual property rights of such parties. To date, no such claims have had
an adverse effect on the Company's ability to develop and market its products.
There can be no assurance, however, that third parties will not assert or
prevail in infringement claims against the Company with respect to current or
future products or that any such assertion may not require the Company to enter
into royalty arrangements or result in costly litigation. For example, Datapoint
Corporation has filed suit claiming that certain of the Company's products
infringe its patents. See "-- Legal Proceedings." Patent litigation or royalty
arrangements entered into to avoid or settle litigation could have a material
adverse effect upon the company's business, operating results and financial
condition.
EMPLOYEES
The Company's success depends to a large extent on the skill and competence
of its employees. There can be no assurance that the Company will be able to
continue to attract, retain and motivate competent employees.
As of October 31, 1996, the Company employed 364 people full-time in its
operations, including 112 in manufacturing, 79 in engineering, research and
development, 125 in sales and marketing and 48 in administration. In addition,
the Company also employs a number of temporary employees. The Company has also
had substantial layoffs and experienced high turnover among its management and
executive officers. None of the Company's employees are represented by a
collective bargaining agreement. The Company believes its relationship with its
employees is good. See "Risk Factors -- Reliance on Key Personnel."
PROPERTIES
The Company currently occupies 142,700 square feet of office and
manufacturing space in a modern industrial park in San Jose, California under a
lease which expires in December 2001, and occupies a warehouse facility
measuring 26,400 square feet which expires in June 2000. The Company also leases
sales offices in various locations on a short-term basis. The Company believes
that its facilities are suitable for its videoconferencing business. The Company
also believes it can locate and occupy additional facilities as they are needed.
LEGAL PROCEEDINGS
CIT Group/OSUERF
On August 24, 1993, the Company filed a complaint against Oklahoma State
University Education and Research Foundation, Inc. (OSUERF) in United States
District Court claiming that OSUERF breached an exclusive subcontract for the
Company to provide equipment to OSUERF under OSUERF's prime contract with the
United States Army, TRADOC Division. On November 18, 1993, the Company amended
the complaint to add Federal Leasing, Inc. (FLI) as a defendant. On February 4,
1994, the CIT Group/ Equipment Financing Inc. (CIT), as an assignee of FLI's
rights under the Financing Agreement, filed a complaint against the Company in
United States District Court claiming indemnification from the Company. The
Company responded to CIT's complaint by denying the material charging
allegations and stating certain affirmative defenses. The OSUERF and CIT actions
have been consolidated. On April 21, 1995, CIT filed a second amended complaint
asserting, among other things, a claim for fraud against OSUERF. In March 1995,
CIT and FLI separately moved for summary judgment against the Company seeking
damages in the amount of $2.0 million. The Company opposed the respective
motions. By order dated October 11, 1995 the court denied the summary judgment
motions of CIT and FLI, respectively.
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Subsequent to the denial of the summary judgment and for a variety of
reasons, including the resignation of one judge, the case has been reassigned
several times. Due to the recent recusal of another judge, the case is currently
unassigned and awaiting reassignment. A pretrial conference is set for January
9, 1997. Discovery has closed. No new trial date has been set.
The Company on November 19, 1996, entered into a settlement agreement with
CIT and FLI whereby the Company has agreed to pay CIT a minimum of $1,800,000
together with interest at 8.44% (in 41 monthly installments of $50,000) plus up
to an additional $1,629,921 depending on amounts recovered from OSUERF as well
as Southwestern Bell Telephone Company in a related action.
The Company is currently in settlement discussions with OSUERF as well as
Southwestern Bell Telephone Company. The Company believes that the ultimate
resolution of this matter will not have a material adverse impact on the
Company's consolidated financial position or results of operations.
Datapoint Corporation
In a complaint filed December 20, 1993, in the United States District Court
in Dallas, Texas, Datapoint Corporation (Datapoint) alleged that the Company had
infringed two United States patents owned by Datapoint relating to video
conferencing networks. The complaint seeks a judgment of infringement, monetary
damages, injunctive relief and reasonable attorney's fees. The Company responded
to the complaint on February 16, 1994 by denying the material allegations of the
complaint and asserting affirmative defenses. Pursuant to court order, the
parties have participated in mediation before a court-appointed mediator.
Discovery in the case has commenced. On September 27, 1995, the Company filed a
motion to construe the scope of the patent claims at issue in the litigation so
as to elucidate whether Datapoint can assert that the Company is infringing the
patents in suit, or whether Datapoint's patents are invalid in light of the
prior art. On April 24, 1996, a Special Master submitted a report which did not
recommend that the Court adopt the Company's positions set forth in the motion.
The Court on September 16, 1996, adopted the report of the Special Master
that the claims of the patents in suit be construed in a manner favorable to the
plaintiff, and a trial date of February 3, 1997, has been scheduled. The parties
at the request of the Court have filed status reports indicating that additional
time will be required to prepare for trial. In the meantime the Company has
filed motions to certify for appeal to the Federal Circuit on the issue of claim
construction and to stay discovery, which motions are pending.
The Company believes that it has meritorious defenses to the allegations of
the complaint and is pursuing an aggressive defense; however, there can be no
assurance that the Company will prevail. If any of the claims were to be decided
adversely to the defendants, the Company could be liable for monetary damages to
the plaintiff and be subject to injunctive relief. The Company believes that the
ultimate resolution of this matter will not have a material adverse impact on
the Company's consolidated financial position or results of operations.
Southwestern Bell Telephone Company
On April 6, 1995, the Company filed a complaint against Southwestern Bell
Telephone Company (SWBT) in Santa Clara, California Superior Court alleging that
SWBT intentionally interfered with CLI's contracts with OSUERF and Hughes
Network Systems (HNS). SWBT moved to quash service of summons for lack of
personal jurisdiction, which motion was granted on July 11, 1995. On July 25,
1995, the Company refiled the complaint in the United States District Court for
the Western District of Oklahoma. The complaint was served on SWBT which filed
its answer on October 17, 1995, denying the material allegations of the
complaint.
In September 6, 1995, CLI filed its notice of appeal of the Superior
Court's order granting SWBT's motion to quash service of summons for lack of
personal jurisdiction. The appeal was argued before the California Court of
Appeal for the Sixth Appellate District on July 18, 1996. By decision dated July
26, 1996, the Court of Appeals affirmed the holding of the Superior Court.
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The parties subsequently notified the United States District Court for the
Western District of Oklahoma to reopen the case and to take it out of
administrative closure. On October 2, 1996, the Court issued its Scheduling
Order pursuant to which the matter has been set for trial in May 1997, with
discovery to close April 1, 1997.
The Company is currently in settlement discussions with SWBT, as well as
OSUERF in the related CIT Group/OSUERF litigation. The Company believes that the
ultimate resolution of this matter will not have a material adverse impact on
the Company's consolidated financial position or results of operations.
Philips Consumer Electronics Company
The Company entered into a Joint Development and Marketing Agreement (JDMA)
with Philips Consumer Electronics Company (Philips) dated January 12, 1994, for
the supply of certain decoder units discussed in the Jabil matter below. By
amendment to the JDMA on May 24, 1995, Philips agreed to pay the Company $2.6
million for all intellectual property jointly developed under the JDMA. In a
related license agreement of May 12, 1995, the Company agreed to pay Philips
$5.6 million for a license under background patents and other intellectual
property. Philips owes the Company $1.3 million under the amendment, $0.9
million of which was due December 29, 1995. The Company owes Philips $3.3
million under the license agreement, $2.1 million of which was due December 29,
1995. The Company believes that Philips has failed to make certain technology
disclosures required under the license agreement. The Company has initiated and
is engaged in negotiations with Philips regarding disposition of rights and
monies owed under the amendment and license agreement. Philips has indicated an
interest in reaching a mutually acceptable, amicable solution. The Company
believes that the ultimate resolution of this matter will not have a material
adverse impact on the Company's consolidated financial position or results of
operations.
Jabil Circuits, Inc.
To fulfill a purchase order from Philips for the supply of certain decoder
units, the Company placed a purchase order with Jabil Circuits, Inc. (Jabil) for
the procurement of the component parts and the manufacture of the units. Due to
the cancellation of the Philips purchase order, the Company canceled its
purchase order with Jabil. By letter dated January 11, 1996, Jabil demanded that
the Company issue a purchase order for approximately $6.5 million for the
components which were outside the cancellation and reschedule windows. The
Company has negotiated with Philips and Jabil regarding the disposition of the
component inventory and responsibility for cost of inventory that cannot be
disposed of by Jabil. A resolution of the inventory issue has been reached as
between Jabil and Philips. CLI has made a claim against Philips for damages
associated with the Jabil inventory. The Company believes that the ultimate
resolution of this matter will not have a material adverse impact on the
Company's consolidated financial position or results of operations.
Mueller/Shields
On or about March 15, 1996, a complaint was filed against the Company by
Mueller/Shields OME in Superior Court of Orange County, California alleging
breach of a marketing research contract. In the action entitled Mueller/Shields
OME v. Compression Labs, Inc., Case No. 761079, Mueller/Shields sought $682,425
in compensatory damages, plus attorneys' fees provided by contract. Since the
filing of its complaint, Mueller/Shields served notice of its application for a
writ of attachment. Following service of the complaint and service of the writ
application, the Company and Mueller/Shields reached agreement on the terms of a
Settlement Agreement whereby the Company agreed to pay a total of approximately
$600,000 (principal and interest) on an installment basis beginning in April
1996 and concluding in September 1996. The total principal and interest has been
paid, and the underlying action was dismissed with prejudice on October 9, 1996.
27
<PAGE> 30
General
In the normal course of business, the Company receives and makes inquiries
with regard to other possible patent infringement. Where deemed advisable, the
Company may seek or extend licenses or negotiate settlements. Outcomes of such
negotiations may not be determinable at any point in time; however, management
does not believe that such licenses or settlements will, individually or in the
aggregate, have a material adverse affect on the Company's consolidated
financial position or results of operations.
28
<PAGE> 31
MANAGEMENT
The current officers and directors of the Company and their ages as of
November 22, 1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- ---- -------------------------------------------
<S> <C> <C>
T. Gary Trimm.............................. 49 President, Chief Executive Officer,
Principal Financial Officer and Director
Larry L. Enterline......................... 43 Executive Vice President
Dr. Wen H. Chen............................ 57 Senior Vice President, Engineering,
Research and Chief Scientist
Ted S. Augustine........................... 56 Vice President, Sales and Marketing
Michael E. Seifert......................... 38 Vice President, Finance, Treasurer and
Chief Accounting Officer
Glen R. Jones.............................. 55 General Counsel and Secretary
Dr. Arthur G. Anderson(1)(2)............... 69 Director, Chairman of the Board of
Directors
Robert J. Casale(1)(2)..................... 57 Director
Robert B. Liepold(1)(2).................... 70 Director
David A. Wegmann(1)(2)..................... 49 Director
</TABLE>
- ---------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
MR. TRIMM has been President, Chief Executive Officer and a member of the
Board of Directors since February 1996 and Principal Financial Officer since
April 1996. From February 1995 to February 1996, he was Senior Vice President
and President, Broadcast Products Group of the Company. From March 1994 to
February 1995, he was President of the North American Division of
Scientific-Atlanta, Inc. ("S-A"), which supplies advanced analog and digital
video systems to the cable and telephone industry. From January 1990 to March
1994, he held the position of President of the Subscriber Systems Division at
S-A, where he had general management responsibility for S-A's analog and digital
settop business. From April 1988 to March 1990, Mr. Trimm held other senior
management positions at S-A, including President of the Spectral Dynamics
Division.
MR. ENTERLINE has been Executive Vice President since July 1996. From
January 1996 to July 1996, he was a management consultant to several
corporations, including CLI. From 1995 to 1996, Mr. Enterline was President of
the World Wide Sales Division at S-A. From 1993 to 1995, he was President of the
International Division, where he had general management responsibility for S-A's
international sales. From 1989 to 1993, Mr. Enterline held other senior
management positions at S-A including Vice President of Business Development.
DR. CHEN has been Senior Vice President Engineering, Research and Chief
Scientist since October 1996. He served as Senior Vice President, Research and
Chief Scientist of the Company from September 1989 until October 1996.
MR. AUGUSTINE has been Vice President, Sales and Marketing since October
1996. He served as Vice President, Worldwide Sales, Videoconferencing Products
of the Company from December 1993 until October 1996. From January 1987 to
December 1993 he was Vice President, North American Sales, Videoconferencing
Products.
MR. SEIFERT has been Vice President, Finance and Chief Accounting Officer
of the Company since April 1996. Mr. Seifert was appointed Treasurer in July
1996. From October 1993 until April 1996, he was the Company's Corporate
Controller. Prior to joining the Company, from September 1990 to October 1993,
he was Corporate Controller of Sierra Semiconductor Corporation.
MR. JONES has served as General Counsel and Secretary of the Company since
July 1996. From March 1996 to July 1996 he was a contract attorney with Wilson
Sonsini Goodrich & Rosati and from May 1995 to December 1995 he was corporate
counsel for Kenetech Windpower, Inc. Mr. Jones was Vice
29
<PAGE> 32
President of Johnson & Higgins from July 1993 to February 1995 and previously
was General Counsel and Secretary of TY Lin International from February 1991 to
June 1993.
DR. ANDERSON has served as a member of the Board of Directors of the
Company since August 1984 and is currently serving as Chairman of the Board. He
is a consultant on science and engineering management and a member of the
National Academy of Engineering. Dr. Anderson held various positions with
International Business Machines Corporation ("IBM") from 1951 to June 1984,
including Director of Research, General Products Division President, Group
Executive and Vice President. He retired from IBM in June 1984.
MR. CASALE has served as a member of the Board of Directors since October
1986. He is currently Group President of the Brokerage Information Services
Group of Automatic Data Processing, Inc., a provider of computer and data
processing services. From 1986 to 1987 he served as a Managing Director for the
Mergers and Acquisitions Division of Kidder Peabody & Co., Incorporated, a
securities brokerage and investment banking firm. Mr. Casale is also a director
of Provident Mutual Life Insurance Co. and Quantum Corporation.
MR. LIEPOLD has served as a member of the Board of Directors of the Company
since May 1988. Since 1984, he has served as President of Robert B. Liepold,
Inc., an advisor to senior corporate management for strategic planning,
marketing and organization. He has served as President of KCWB, a television
station in Kansas City, Missouri, since 1996.
MR. WEGMANN has served as a member of the Board of Directors of the Company
since May 1981. He has been a private investor since 1988. Mr. Wegmann is also a
director of MMI Medical, Inc., Innoserve Technologies, Inc. and Plantronics,
Inc.
COMPENSATION OF DIRECTORS
The Company pays each non-employee director (a person that is elected as a
director of the Company or an affiliate of the Company and who is not otherwise
employed by the Company or an affiliate of the Company) fees consisting of
$5,000 annually plus $750 for each Board of Directors meeting and for each
Audit, Executive and Compensation Committee meeting attended. Non-employee
directors are also eligible for reimbursement in accordance with Company policy
for their expenses incurred in connection with attending meetings of the Board
of Directors and the Audit, Executive and Compensation Committees.
Each non-employee director is also entitled to receive annual
non-discretionary annual stock option grants under the Company's 1992
Non-Employee Directors' Stock Option Plan (Directors' Plan). Only non-employee
directors of the Company or an affiliate of the Company (as defined in the Code)
are eligible to receive options under the Directors' Plan. Options granted under
the Directors' Plan are intended by the Company not to qualify as incentive
stock options under the Code.
30
<PAGE> 33
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal years ended December 31, 1995,
1994 and 1993, compensation paid by the Company, including salary, bonuses,
stock options, and certain other compensation, to its current Chief Executive
Officer and each of its four other most highly compensated executive officers at
December 31, 1995, including two former officers, and one former chief executive
officer (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION ------------
------------------------ SECURITIES
BONUS AND UNDERLYING ALL OTHER
SALARY COMMISSIONS(1) OPTIONS(2) COMPENSATION(3)
NAME AND PRINCIPAL POSITION YEAR ($) ($) (#) ($)
- -------------------------------------- ----- ------- -------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
T. Gary Trimm......................... 1995 201,924 150,000 250,000 --
President, Chief Executive Officer, 1994 -- -- -- --
Principal Financial Officer 1993 -- -- -- --
and Director(4)
Dr. Wen H. Chen....................... 1995 197,370 -- 10,000 7,591
Senior Vice President, Engineering 1994 198,775 -- 15,000 11,387
Research and Chief Scientist 1993 182,891 -- 27,500 15,815
Ted S. Augustine...................... 1995 156,000 29,796 7,000 12,000
Vice President, Sales 1994 156,767 14,016 7,500 --
and Marketing 1993 162,020 -- 26,500 --
James D. Lakin........................ 1995 151,956 37,248 15,000 --
Former Vice President, Sales and 1994 147,194 47,097 7,500 --
Marketing, Broadcast Products(5) 1993 134,781 -- 10,000 --
John E. Tyson......................... 1995 280,000 -- 50,000 30,962
Former President, Chief Executive 1994 244,500 -- 40,000 95,442
Officer and Chairman of the Board(6) 1993 206,813 -- 35,000 --
Robert A. Silver...................... 1995 150,000 52,618 25,000 1,498
Former Vice President, Marketing, 1994 100,962 10,000 50,000 --
Videoconferencing Products(7) 1993 -- -- -- --
</TABLE>
- ---------------
(1) Amounts shown for 1995 consist of a bonus to Mr. Trimm of $150,000 and
commissions to Messrs. Augustine, Lakin and Silver of $29,796, $37,248 and
$52,618, respectively. Amounts shown for 1994 consist of a commission to Mr.
Augustine of $14,016, a bonus of $25,000, and a commission of $22,097 to Mr.
Lakin and a bonus of $10,000 to Mr. Silver.
(2) The Company has no stock appreciation rights (SARs).
(3) Amounts shown for 1995 consist of payments to Messrs. Chen, Augustine and
Tyson of $7,591, $12,000 and $30,962, respectively, in lieu of accrued and
unused paid time off. As of December 31, 1995, Mr. Silver was owed $1,498 in
lieu of accrued and unused paid time off. Amounts shown for 1994 consist of
payments to Messrs. Chen and Tyson of $11,387 and $95,442, respectively, in
lieu of accrued and unused paid time off. Amount shown for 1993 consists of
a payment to Mr. Chen of $15,815 in lieu of accrued and unused paid time
off.
(4) Mr. Trimm joined the Company in February 1995 as President, Broadcast
Products. Since February 1996, Mr. Trimm has been President, Chief Executive
Officer and a member of the Board of Directors.
(5) Mr. Lakin resigned as Vice President, Sales and Marketing, Broadcast
Products when the Company's Broadcast division was sold to Charger
Industries, Inc.
(6) Mr. Tyson resigned as President, Chief Executive Officer and Chairman of the
Board in February 1996. Mr. Tyson has currently entered into a consulting
relationship with the Company, at a rate that approximates Mr. Tyson's 1995
base annual salary, that will continue through February 1998. As part of the
separation and consulting agreement, Mr. Tyson's stock options continued to
vest during the consulting period and became fully vested in August 1996. In
addition, the Company has agreed to permit Mr. Tyson to exercise his stock
options, except for certain stock options granted in 1988 and 1989, no later
than the end of their full ten-year term, or March 1, 2001, whichever occurs
first.
31
<PAGE> 34
(7) Mr. Silver resigned as Vice President, Marketing, Videoconferencing Products
in December 1995. As part of a separation agreement entered into with the
Company, Mr. Silver continued to receive salary and benefits through May
1996.
EMPLOYMENT CONTRACTS
In July 1996, the Company entered into employment agreements with each of
T. Gary Trimm, President and Chief Executive Officer of the Company, and Larry
L. Enterline, Executive Vice President of the Company (collectively, the
"Executives"). The employment agreements between the Company and each of the
Executives provide for an annual salary to each of the Executives of $250,000
and an annual bonus. In addition the Company's employment agreement with Mr.
Trimm provided for the grant of an option to purchase 170,000 shares of Common
Stock. The Company's employment agreement with Mr. Enterline provided for the
grant of an option to purchase 150,000 shares of Common Stock and provided that
an option to purchase 75,000 shares of Common Stock previously granted by the
Board to Mr. Enterline, become effective at an exercise price equal to the
market price of the Common Stock as of the date of Mr. Enterline's employment
agreement.
If the Company terminates the employment of either of the Executives
without "Cause" (as defined in the employment agreements), or if either of the
Executives voluntarily terminates his employment with "Good Reason" (as defined
in the employment agreements), the Company shall continue to pay such Executive
his base salary for a period of 52 weeks (the "Severance Period"). The Company
shall discontinue such payments if such Executive enters into an activity in
competition with the Company or solicits the Company's employees. Following the
Severance Period, such Executive shall serve as a consultant to the Company for
a period of up to three (3) years. During such consulting period, the Company
will pay such Executive a monthly fee equal to the greater of $500 or $125 per
hour of consulting services performed during such month, and any options to
purchase Common Stock held by such Executive will continue to vest.
STOCK OPTION PLANS
Stock Option Plan and Supplemental Stock Option. In March 1996, the Board
amended the Combined 1980 Stock Plan and 1984 Supplemental Stock Option Plan
(the "Option Plans") and reserved 8,000,000 shares for issuance under the Option
Plans and the 1984 Employee Stock Purchase Plan. The Option Plans provide for
grants of incentive stock options to employees (including officers and employee
directors) and nonstatutory stock options, to employees (including officers),
directors and consultants of the Company. The Option Plans are administered by
the Compensation Committee, which determines recipients and types of awards to
be granted, including the exercise price, number of shares subject to the award
and the exercisability thereof. The Board may not grant options to purchase more
than 400,000 shares per calendar year to an individual employee, consultant or
director.
The term of a stock option granted under the Option Plans generally may not
exceed 10 years. The exercise price of options granted under the Option Plans is
determined by the Board of Directors but, in the case of an incentive stock
option, cannot be less than 100% of the fair market value of the Common Stock on
the date of grant or, in the case of 10% stockholders, not less than 110% of the
fair market value of the Common Stock on the date of grant, and in the case of a
nonqualified stock option, cannot be less than 85% of the fair market value of
the Common Stock on the date of grant. Options granted under the Option Plans to
new employees and consultants generally will vest at the rate of 1/4 of the
shares subject to option on the first anniversary of the date of hire and 1/48th
of such shares monthly thereafter. No option may be transferred by the optionee
other than by will or the laws of descent or distribution or, in certain limited
instances, pursuant to a qualified domestic relations order. An optionee whose
relationship with the Company or any related corporation ceases for any reason
(other than by death or disability) may exercise options in the three-month
period following such cessation (unless such options terminate or expire sooner
by their terms) or in such longer period as may be determined by the Board of
Directors.
Shares subject to options which have lapsed or terminated may again be
subject to options granted under the Option Plans. Furthermore, the Board of
Directors may offer to exchange new options for existing options, with the
shares subject to the existing options again becoming available for grant under
the Option Plans. In
32
<PAGE> 35
the event of a decline in the value of the Company's Common Stock, the Board of
Directors has the authority to offer optionees the opportunity to replace
outstanding higher price options with new lower priced options.
In the event of merger or consolidation involving the Company in which the
Company is not the surviving corporation, reverse merger, or liquidation or sale
of substantially all of the assets of the Company, all outstanding awards under
the Option Plans shall either be assumed or substituted by the surviving entity
or such awards will continue in full force and effect. If the surviving entity
determines not to assume or substitute such awards, the time during which such
awards may be exercised shall be accelerated and the awards terminated if not
exercised prior to the merger or consolidation.
As of November 1, 1996, there were 3,982,481 outstanding options under the
Option Plans. The Option Plans will terminate in 1999, unless terminated sooner
by the Board of Directors. See Note 9 of Notes to Consolidated Financial
Statements.
Employee Stock Purchase Plan. In March 1996, the Board amended the 1984
Employee Stock Purchase Plan (the "Purchase Plan") to increase the number of
shares of Common Stock reserved under the Purchase Plan to 8,000,000 shares of
Common Stock combined with the Option Plans. The Purchase Plan is intended to
qualify as an employee stock purchase plan within the meaning of Section 423 of
the Code. Under the Purchase Plan, the Board of Directors may authorize
participation by eligible employees, including officers, in periodic offerings.
Currently the Board has authorized continuous offerings coinciding with the
Company's fiscal quarters.
Employees are eligible to participate if they are employed by the Company,
or an affiliate of the Company designated by the Board of Directors, for at
least 20 hours per week and are employed by the Company or a subsidiary of the
Company designated by the Board for at least five months per calendar year.
However, if an employee would own more than 5% of the Company's Common Stock
after participating in the Purchase Plan, such employee shall not be eligible
for the Purchase Plan. Employees who participate in an offering can have up to
15% of their earnings withheld pursuant to the Purchase Plan. The amount
withheld will then be used to purchase shares of the Common Stock on specified
dated determined by the Board of Directors. The price of Common Stock purchased
under the Purchase Plan will be equal to 85% of the lower of the fair market
value of the Common Stock on the commencement date of each offering period or
the last day of each offering period. Employees may end their participation in
the offering at any time during the offering period. Participation ends
automatically on termination of employment with the Company.
In the event of a merger or consolidation involving the Company in which
the Company is not the surviving corporation, reverse merger, or liquidation or
sale of substantially all of the assets of the Company, or certain changes in
the beneficial ownership of the Company's securities representing at least a 50%
change of such ownership, the Board of Directors has discretion to provide that
each right to purchase Common Stock will be assumed or an equivalent right
substituted by the successor corporation; the Board may shorten the offering
period and provide for all sums collected by payroll deductions to be applied to
purchase stock immediately prior to such merger or other transaction.
The Purchase Plan will terminate in December 1999. The Board has the
authority to amend or terminate the Purchase Plan, subject to the limitation
that no such action may adversely affect any outstanding rights to purchase
Common Stock.
1992 Non-Employee Directors' Stock Option Plan. In March 1996, the Board
amended the 1992 Non-Employee Directors' Stock Plan (the "Directors' Plan")
which provides for the automatic grant of options to purchase shares of Common
Stock to non-employee directors of the Company in order to increase the number
of shares reserved under the Directors' Plan to 168,000 shares of the Company's
Common Stock. The Directors' Plan is administered by the Board of Directors,
unless the Board delegates administration to a committee comprised of members of
the Board.
Pursuant to the terms of the Directors' Plan, each director of the Company,
not otherwise employed by the Company, automatically will be granted an option
to purchase 6,000 shares of Common Stock upon election as a director. Finally,
each director who continues to serve as a non-employee director will be granted
an additional option to purchase 6,000 shares of Common Stock on each
anniversary of the date of his or her
33
<PAGE> 36
initial grant. The options granted under the Directors' Plan shall vest in six
equal biannual installments commencing on the date six months after the date of
grant of option.
In the event of a merger or consolidation involving the Company in which
the Company is not the surviving corporation, reverse merger, liquidation or
sale of substantially all of the assets of the Company, or certain changes in
the beneficial ownership of the Company's securities representing at least a 50%
change of such ownership, then options outstanding under the Directors' Plan
will automatically become fully vested and will terminate if not exercised or
assumed by any surviving corporation prior to such event.
No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. The exercise price of
options under the Directors' Plan will equal the fair market value of the Common
Stock on the date of grant. The Directors' Plan will terminate March 2002,
unless earlier terminated by the Board.
STOCK OPTION GRANTS AND EXERCISES
The following tables show for the fiscal year ended December 31, 1995
certain information regarding options granted to, exercised by and held at year
end by the Named Executive Officers:
OPTION GRANTS IN 1995
<TABLE>
<CAPTION>
INDIVIDUALIZED GRANTS POTENTIAL REALIZABLE
--------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS GRANTED FOR OPTION TERM(3)
OPTIONS GRANTED TO EMPLOYEES IN EXERCISE EXPIRATION ---------------------
NAME ($)(1) 1995(2) PRICE($/SH) DATE 5% ($) 10% ($)
- ------------------------ --------------- --------------- -------------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
T. Gary Trimm........... 250,000 26.6% 7.250 02/15/05 1,139,872 2,888,658
Dr. Wen H. Chen......... 10,000 1.1% 8.313 09/12/05 52,280 132,488
Ted S. Augustine........ 7,000 .8% 8.313 09/12/05 36,596 92,741
James D. Lakin.......... 15,000 1.6% 10.250 07/25/05 96,693 245,038
John E. Tyson........... 50,000 5.3% 10.250 07/25/05 322,309 816,793
Robert A. Silver(4)..... 25,000 2.7% 9.445 04/02/05 148,498 376,322
</TABLE>
- ---------------
(1) Options generally vest in equal installments every six months over a
four-year period beginning on the date six months after the date of grant.
The options will fully vest upon a change of control, as defined in the
Company's option plans, unless the acquiring company assumes the options or
substitutes similar options. The Board of Directors may reprice the options
under the terms of the Company's option plans.
(2) Based on options exercisable for 938,510 shares granted in 1995.
(3) The potential realizable value is calculated based on the term of the option
at its time of grant (10 years). It is calculated by assuming that the stock
price on the date of grant appreciates at the indicated annual rate,
compounded annually for the entire term of the option and that the option is
exercised and sold on the last day of its term for the appreciated stock
price. No gain to the optionee is possible unless the stock price increases
over the option term.
(4) The option to purchase 25,000 shares of Common Stock fully lapsed as of
March 1, 1996.
34
<PAGE> 37
AGGREGATED OPTION EXERCISES IN 1995 AND DECEMBER 31, 1995 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED IN-
UNEXERCISED THE-MONEY
OPTIONS AT OPTIONS AT
SHARES DECEMBER 31, DECEMBER 31,
ACQUIRED ON 1995(#) 1995($)
EXERCISE VALUE EXERCISABLE/ EXERCISABLE/
NAME (#) REALIZED($)(1) UNEXERCISABLE UNEXERCISABLE(2)
- --------------------------------- ----------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
T. Gary Trimm.................... -0- -0- 78,571/171,429 0/0
Dr. Wen H. Chen.................. -0- -0- 237,376/ 30,624 74,500/0
Ted S. Augustine................. -0- -0- 109,563/ 24,999 1,367/0
James D. Lakin................... -0- -0- 73,438/ 24,062 0/0
John E. Tyson.................... -0- -0- 274,000/ 90,000 178,750/0
Robert A. Silver(3).............. -0- -0- 21,875/ 0 0/0
</TABLE>
- ---------------
(1) Value realized is based on the fair market value of the Company's Common
Stock on the date of exercise minus the exercise price and does not
necessarily indicate that the optionee sold such stock.
(2) Based on the closing price on December 29, 1995 of the Common Stock on the
Nasdaq National Market of $6.25 per share.
(3) The number of securities underlying unexercised options at December 31, 1995
does not include options to purchase 53,125 shares of Common Stock that
lapsed due to Mr. Silver's resignation. As of March 1, 1996, the remaining
options to purchase 21,875 shares of Common Stock lapsed.
35
<PAGE> 38
PRINCIPAL AND SELLING SECURITYHOLDERS
The following table sets forth certain information regarding the ownership
of the Company's class of voting securities as of November 1, 1996 by (i) all
those known by the Company to be beneficial owners of more than 5% of its voting
securities, (ii) all directors, (iii) each of the "Named Executive Officers",
(iv) all officers and directors of the Company as a group and (v) the Selling
Securityholders.
<TABLE>
<CAPTION>
APPROXIMATE PERCENT OF CLASS(1)
BENEFICIAL SHARES TO BE
DIRECTORS, OFFICERS, SELLING OWNERSHIP OF SOLD IN THE --------------------------------
SECURITYHOLDERS AND 5% STOCKHOLDERS COMMON STOCK(1) OFFERING BEFORE OFFERING AFTER OFFERING
- ---------------------------------------- --------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Infinity Investors Limited(2)........... 2,179,762 2,179,762 11.7% *
27 Wellington Road
Cork, Ireland
Thomson Consumer Electronics S.A........ 883,599 0 4.7% 4.7%
9, place de Vosges, La Defense 5
Courbevoie, Cedex 66
92050 Paris La Defense, France
TCW Group, Incorporated................. 789,800 0 4.2% 4.2%
865 Fiqueroa Street
Los Angeles, CA 90017
Ted S. Augustine(3)..................... 126,217 0 * *
Dr. Arthur G. Anderson(3)............... 133,700 0 * *
Robert J. Casale(3)..................... 91,500 0 * *
Dr. Wen H. Chen(3)...................... 260,658 0 1.4% 1.3%
James D. Lakin(3)....................... 75,313 0 * *
Robert B. Liepold(3).................... 85,000 0 * *
Robert A. Silver........................ 0 0 * *
John E. Tyson(3)........................ 317,699 0 1.7% 1.7%
T. Gary Trimm(3)........................ 145,714 0 * *
David A. Wegmann(3)..................... 92,000 0 * *
All executive officers and directors as
a group (10 persons)(3)............... 843,967 0 5.1% 5.1%
OTHER SELLING SECURITYHOLDERS
Seacrest Capital Limited(2)............. 519,480 519,480 * *
27 Wellington Road
Cork, Ireland
Brown Simpson LLC(2).................... 50,000 50,000 * *
Carnegie Hall Tower
152 West 57th Street, 40th Floor
New York, New York 10019
Alpine Capital Partners(2).............. 50,000 50,000 * *
645 Fifth Avenue, 17th Floor
New York, New York 10022
</TABLE>
- ---------------
* Less than 1%
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13G's filed with the Securities and
Exchange Commission (the "SEC"). Unless otherwise indicated in the footnotes
to this table and subject to community property laws where applicable, the
Company believes that each of the stockholders named in this table has sole
voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 18,663,295 shares of
Common Stock outstanding on November 1, 1996, including the conversion of
Series C Stock and the exercise of the Warrants adjusted as required by
rules promulgated by the SEC.
36
<PAGE> 39
(2) The shares of Common Stock offered hereby by the Selling Securityholders are
issuable upon conversion of an aggregate of 350,000 shares of the Company's
Series C Stock (275,000 shares held by Infinity Investors, Limited
("Infinity") and 75,000 shares held by Seacrest Capital Limited
("Seacrest")) and exercise of Warrants to purchase an aggregate of 375,000
shares of Common Stock (warrants to purchase 275,000 shares issued to
Infinity, warrants to purchase 50,000 shares issued to Brown Simpson, LLC
and warrants to purchase 50,000 shares issued to Alpine Capital Partners,
Inc.). The number of shares registered pursuant to this Prospectus has been
determined by agreement between the Company, Infinity and Seacrest. The
number of shares of Common Stock that will ultimately be issued to Infinity
and Seacrest upon conversion of the Series C Stock and offered hereby is
dependent upon a conversion formula which relies in part on the closing bid
price of the Common Stock for the 5 trading days immediately preceding the
date(s) of conversion and therefore cannot be determined at this time. The
terms of the Financing limit the conversion rights of the holders of Series
C Stock such that the maximum number of shares of Common Stock issuable upon
the conversion of Series C Stock may not exeed 4.9% of the then issued and
outstanding shares of Common Stock following such conversion, which limit
may be waived at the option of Infinity or Seacrest, as the case may be.
(3) Includes shares that certain executive officers, directors and former
executive officers of the Company have the right to acquire within 60 days
after November 1, 1996 pursuant to exercise of outstanding options as
follows: Ted S. Augustine, 124,020 shares; Dr. Arthur G. Anderson, 107,750
shares; Robert J. Casale, 90,000 shares; Dr. Wen H. Chen, 256,438 shares;
James D. Lakin, 75,313 shares; Robert B. Liepold, 85,000 shares; T. Gary
Trimm, 145,714 shares; John E. Tyson, 260,000 shares; David A. Wegmann,
90,000 shares; and all executive officers and directors as a group, 959,796
shares.
37
<PAGE> 40
PLAN OF DISTRIBUTION
The Company has registered 2,799,242 shares of its Common Stock (the
"Shares") issuable to the Selling Securityholders upon conversion of Series C
Stock and upon the exercise of the Warrants held by the Selling Securityholders,
pursuant to registration rights held by the Selling Securityholders. The Company
has been advised that all or part of the Shares may be offered by the Selling
Securityholders from time to time in transactions on the Nasdaq National Market
System, in privately negotiated transactions, through the writing of options on
the Shares or a combination of such methods of sale, at fixed prices that may be
changed, at market prices prevailing at the time of sale, at prices related to
such prevailing market prices or at negotiated prices. The methods by which the
Shares may be sold may include, but not be limited to, the following: (a) a
block trade in which the broker or dealer so engaged will attempt to sell the
Shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction; (b) purchases by a broker or dealer as principal
and resale by such broker or dealer for its account; (c) an exchange
distribution in accordance with the rules of such exchange; (d) ordinary
brokerage transactions and transactions in which the broker solicits purchasers;
(e) privately negotiated transactions; (f) short sales; and (g) a combination of
any such methods of sale. In effecting sales, brokers or dealers engaged by the
Selling Securityholders may arrange for other brokers or dealers to participate.
Brokers or dealers may receive commissions or discounts from the Selling
Securityholders or from the purchasers in amounts to be negotiated immediately
prior to the sale. The Selling Securityholders may also sell such shares in
accordance with Rule 144 under the Securities Act.
From time to time the Selling Securityholders may engage in short sales,
short sales against the box, puts and calls and other transactions in securities
of the Company or derivatives thereof, and may sell and deliver the shares in
connection therewith. From time to time Selling Securityholders may pledge their
Shares pursuant to the margin provisions of their respective customer agreements
with their respective brokers. Upon a default by a Selling Securityholder, the
broker may offer and sell the pledged shares of Common Stock from time to time.
The Company has agreed to use its best efforts to maintain the
effectiveness of the registration of the Shares being offered hereunder until
October 24, 1999 or such earlier date when all of the shares being offered
hereunder have been sold or may be sold without volume or other restrictions
pursuant to Rule 144 or Rule 144A under the Securities Act, as determined by
counsel to the Company pursuant to a written opinion letter.
None of the proceeds from the sale of the Shares by the Selling
Securityholders will be received by the Company. No underwriting commissions or
discounts will be paid by the Company in connection with this offering. The
Company has agreed to bear certain expenses, including the fees and expenses of
counsel to the Selling Securityholders in connection with the registration and
sale of the Shares being offered by the Selling Securityholders. The Company has
agreed to indemnify the Selling Securityholders against certain liabilities,
including certain liabilities under the Securities Act of 1933, as amended (the
"Securities Act").
The Selling Securityholders and any broker-dealers who act in connection
with the sale of Shares hereunder may be deemed to be "underwriters" as that
term is defined in the Securities Act, and any commissions received by them and
profit on any resale of the Shares as principal might be deemed to be
underwriting discounts and commissions under the Securities Act.
No person is authorized in connection with any offering made hereby to give
any information or to make any representation not contained or incorporated by
reference in this Prospectus, and any information or representation not
contained or incorporated herein must not be relied upon as having been
authorized by the Company. This Prospectus does not constitute an offer to sell,
or a solicitation of an offer to buy, by any person in any jurisdiction in which
it is unlawful for such person to make such offer or solicitation. Neither the
delivery of this Prospectus at any time nor any sale made hereunder shall, under
any circumstances, imply that the information herein is correct as of any date
subsequent to the date hereof.
The Selling Securityholders have advised the Company that, during such time
as they may be engaged in a distribution of the shares of Common Stock included
herein, they will comply with Rules 10b-6 and 10b-7 under the Exchange Act and,
in connection therewith, the Selling Securityholders have agreed not to engage
38
<PAGE> 41
in any stabilization activity in connection with any securities of the Company,
to furnish copies of this Prospectus to each broker-dealer through which the
shares of Common Stock included herein may be offered, and not to bid for or
purchase any securities of the Company or attempt to induce any person to
purchase any securities of the Company except as permitted under the Exchange
Act. The Selling Securityholders have also agreed to inform the Company and
broker-dealers through whom sales may be made hereunder when the distribution of
the shares is completed.
Rule 10b-6 under the Exchange Act prohibits participants in a distribution
from bidding for or purchasing for an account in which the participant has a
beneficial interest, any of the securities that are the subject of the
distribution. Rule 10b-7 under the Exchange Act governs bids and purchases made
to stabilize the price of a security in connection with a distribution of the
security.
DESCRIPTION OF CAPITAL STOCK
CLI's Restated Certificate of Incorporation authorizes the issuance of
25,153,658 shares of Common Stock, $.001 par value, and 4,000,000 shares of
preferred stock, $.001 par value ("Preferred Stock").
COMMON STOCK
As of November 1, 1996, there were 15,864,053 shares of Common Stock
outstanding held of record by approximately 920 holders of record excluding the
conversion of the Series C Stock and the exercise of the Warrants. A total of
8,312,967 shares were reserved on that date for issuance upon exercise of
outstanding options and outstanding warrants. The holders of Common Stock are
entitled to one vote for each share held of record on all matters submitted to a
vote of stockholders. Subject to preferences that may be applicable to any
Preferred Stock which may be outstanding, holders of Common Stock are entitled
to receive ratably such dividends as may be declared by the Board of Directors
out of funds legally available therefor. In the event of a liquidation,
dissolution or winding up of CLI, holders of Common Stock are entitled to share
ratably in all assets remaining after payment of liabilities and the liquidation
preference of any outstanding Preferred Stock. Holders of Common Stock have no
preemptive rights and have no rights to convert their Common Stock into any
other securities. The outstanding shares of Common Stock are fully paid and
nonassessable.
PREFERRED STOCK
The Board of Directors has the authority to issue the Preferred Stock in
one or more series, to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any wholly unissued shares of Preferred Stock and to
fix the number of shares constituting any series and the designations of such
series, without any further vote or action by the stockholder. The Board of
Directors, without stockholder approval, can issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock. The issuance of Preferred Stock may have the effect of
delaying, deferring or preventing a change in control of the Company.
As of November 1, 1996, 350,000 shares of Preferred Stock were designated
as Series C Convertible Preferred Stock ("Series C Stock"). There are no
outstanding shares of Series B Stock and there are 350,000 outstanding shares of
Series C Stock held of record by the Selling Securityholders. Pursuant to the
Convertible Preferred Stock Purchase Agreement dated October 24, 1996 between
the Company and the Selling Securityholders (the "Stock Purchase Agreement"),
the Company may issue up to 350,000 shares of Series D Convertible Preferred
Stock and up to 350,000 shares of Series E Convertible Preferred Stock. If
issued, the rights, preferences, privileges and restrictions of the Series D
Convertible Preferred Stock and the Series E Convertible Preferred Stock will be
similar to those of the Series C Stock as set forth below, except for certain
differences in the conversion rights.
The holders of Series C Stock are entitled to a 4% cumulative dividend,
payable quarterly in cash or Common Stock (at the option of the Company). The
Series C Stock has no voting rights except that a vote of a majority of the
shares of Series C Stock is required for any adverse change to the rights and
preferences of the Series C Stock and the creation of any class of stock senior
to the Series C Stock. The Series C Stock is
39
<PAGE> 42
convertible into Common Stock at a rate equal to $20 divided by the lesser of
(i) $4.225 or (ii) 80% of the five trading days (the "Per Share Market Value")
preceding conversion. The number of shares of Common Stock that would be
issuable upon the conversion of Series C Preferred shall be reduced if the Per
Share Market Value exceeds $4.225 by 50%. In addition, if the number of shares
of Common Stock issuable upon the conversion of Series C Stock is greater than
19.9% of the total number of outstanding shares of the Company's Common Stock,
the excess number of shares of Common Stock shall be redeemed by the Company.
Upon a liquidation, the Series C Stock shall be redeemed on an as-converted
basis at a price equal to 125% multiplied by the conversion ratio, as adjusted,
multiplied by the Per Share Market Value, as adjusted, the price of the Common
Stock at the time of the redemption (the "Redemption Price"). The Company shall
have the option to redeem the Series C Stock on 10 days' notice at the
Redemption Price.
WARRANTS
As of November 1, 1996, there were warrants outstanding to purchase: an
aggregate of 375,000 shares of the Company's Common Stock at an exercise price
of $5.70 per share, 10,000 shares of Common Stock at an exercise price of $7.875
per share, 195,000 shares of Common Stock at an exercise price of $10.75 per
share and 546,024 shares of Common Stock at an exercise price of $7.50 per
share. Under the Stock Purchase Agreement, the Company will issue warrants to
purchase an additional 75,000 shares of Common Stock at a price per share based
upon a percentage of the average market price within five days of the issue
date, if and when the Company issues the Series D Convertible Preferred Stock.
Each warrant contains or will contain provisions for the adjustment of the
exercise price and the aggregate number of shares issuable upon exercise of the
warrant under certain circumstances, including stock dividends, stock splits,
reorganizations, reclassification and consolidations.
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK -- STOCKHOLDER RIGHTS PLAN
In July 1991, the Board of Directors of the Company declared a dividend of
one preferred share purchase right for each outstanding share of Common Stock
held as of August 15, 1991. The description and terms of such rights are set
forth in an Amended and Restated Rights Agreement dated as of January 29, 1993,
between the Company and The First National Bank of Boston, as successor Rights
Agent (the "Rights Plan"). The Rights Plan is designed to deter coercive or
unfair takeover tactics and to prevent an acquiring entity from gaining control
of the Company without offering a fair price to all of the Company's
stockholders.
Each right entitles holders of the Company's Common Stock to purchase one
one-hundredth of a share of Series A Junior Participating Preferred Stock at an
exercise price of $100.00, subject to adjustment in certain cases to prevent
dilution. The rights are not exercisable or transferable apart from the Common
Stock until the earlier of 10 days after the date on which a person or group has
acquired beneficial ownership of 15% or more of the Common Stock (an "Acquiring
Entity") or 10 business days after the public announcement of the commencement
of a tender or exchange offer that would result in the Acquiring Entity owning
15% or more of the Common Stock. Further, the rights generally entitle each
right holder (except the Acquiring Entity) to purchase that number of shares of
the Company's Common Stock which have a market value equal to twice the exercise
price of the right, if any person becomes the beneficial owner of 15% or more of
the Common Stock. If an Acquiring Entity purchases at least 15% of the Company's
Common Stock, but has not acquired 50%, the Board of Directors may exchange the
rights (except those of the Acquiring Entity) for one share of Common Stock per
right. In addition, under certain circumstances, if the Company is involved in a
merger or other business combination in which the Company is not the surviving
corporation, the rights entitle the holder to buy common stock of the Acquiring
Entity with a market value of twice the exercise price of each right.
The Company is generally entitled to redeem the rights for $.01 per right
at any time until 20 days following a public announcement that a 15% stock
position has been acquired and in certain other circumstances. The Company may
amend the rights in any manner until such time as a person becomes an Acquiring
Entity; after such time, the Company may amend the rights in any manner which
would not adversely effect the interests of the holders of the rights. The
rights, which do not have voting rights, will expire on August 15, 2001, unless
redeemed or exchanged earlier by the Company pursuant to the Rights Plan.
40
<PAGE> 43
There can be no assurance that the Rights Plan would be enforceable as
currently in effect.
CLASSIFIED BOARD OF DIRECTORS
The Company's Restated Certificate of Incorporation provides that the Board
of Directors is divided into three classes, each class consisting, as nearly as
possible, of one-third of the total number of directors, with each class having
a three-year term. Each director serves for a term ending on the date of the
third annual meeting of stockholders following the annual meeting at which the
director is elected, or until his earlier death, resignation or removal. In the
event of a vacancy on the Board of Directors, unless the Board of Directors
otherwise determines, the Restated Certificate of Incorporation permits the
remaining members of the Board of Directors or the holders of a majority of the
outstanding shares of the Company entitled to vote on the election of directors
to fill such vacancy, and the director selected may serve for the remainder of
the full term of the class of directors in which the vacancy occurred and until
such director's successor is elected and qualified. The Board of Directors is
presently comprised of five members.
REGISTRATION RIGHTS
Pursuant to a Registration Rights Agreement entered into by the Company and
the Selling Securityholders, the Company has granted the Selling Securityholders
and their transferees rights to have the shares of Common Stock issuable upon
conversion of Series C Stock or upon exercise of the warrants registered for
resale pursuant to an effective registration within 90 days of the closing date.
This Prospectus is the result of such rights. The Company has agreed to keep
this Prospectus effective for three years or until all of the remaining
registered shares can be resold pursuant to Rule 144 of the Act in any three
month period. Holders of registration rights also have unlimited rights to
participate in registered public offerings by the Company. These rights are
subject to certain conditions, including the right of the Company to defer a
proposed offering for not more than 60 days upon its good faith determination
that it would be disadvantageous to the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock and Preferred Stock
is The First National Bank of Boston.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Cooley Godward LLP.
EXPERTS
The consolidated financial statements and schedules of Compression Labs,
Incorporated and subsidiaries as of December 31, 1993, 1994 and 1995, and for
each of the years in the three-year period ended December 31, 1995, have been
audited by KPMG Peat Marwick LLP, independent auditors, as set forth in their
reports included herein, and has been incorporated herein in reliance upon such
reports and upon the authority of said firm as experts in accounting and
auditing.
41
<PAGE> 44
NO SALESPERSON
No dealer, salesperson or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the offer made hereby. If given or made, such information or
representation must not be relied upon as having been authorized by the Company.
This Prospectus does not constitute an offer to sell or a solicitation of an
offer to buy any securities other than the Shares or an offer to sell or
solicitation of an offer to buy to any person in any jurisdiction in which such
an offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder shall under any circumstances create any
implication that the information contained herein is correct as of any time
subsequent to the date hereof.
ADDITIONAL INFORMATION
The Company is subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files annual and quarterly reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission"). Such
reports, proxy statements and other information may be inspected at the
Commission's Public Reference Section, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, as well as at the Commission's Regional Offices at 7
World Trade Center, 13th Floor, New York, New York 10048; and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549. The Common Stock of the
Company is quoted on the Nasdaq National Market. Reports and other information
concerning the Company may be inspected at the National Association of
Securities Dealers, Inc. at 1735 K Street N.W., Washington, D.C. 20006.
A Registration Statement on Form S-1, relating to the Common Stock offered
hereby has been filed by the Company with the Securities and Exchange Commission
(the "Commission"). This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in this Prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance reference
is made to the copy of such contract or other document filed as an exhibit to
the Registration Statement, each such statement being qualified in all respects
by such reference. For further information with respect to the Company and the
Common Stock offered hereby, reference is made to such Registration Statement,
exhibits and schedules. A copy of the Registration Statement may be inspected by
anyone without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street N.W., Judiciary Plaza, Washington, D.C. 20549,
and copies of all or any part thereof may be obtained from the Commission upon
the payment of certain fees prescribed by the Commission.
The Commission maintains a World Wide Web site that contains reports, proxy
and information statements and other information filed electronically with the
Commission. The address of the site is http://www.sec.gov.
42
<PAGE> 45
COMPRESSION LABS, INCORPORATED
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of KPMG Peat Marwick LLP, Independent Auditors................................. F-2
Financial Statements:
Consolidated Statements of Operations............................................... F-3
Consolidated Balance Sheets......................................................... F-4
Consolidated Statements of Stockholders' Equity..................................... F-5
Consolidated Statements of Cash Flows............................................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
</TABLE>
F-1
<PAGE> 46
REPORT OF KPMG PEAT MARWICK LLP, INDEPENDENT AUDITORS
The Stockholders And Board Of Directors
Compression Labs, Incorporated
We have audited the accompanying consolidated balance sheets of Compression
Labs, Incorporated and subsidiaries as of December 31, 1994 and 1995, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the years in the three-year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Compression
Labs, Incorporated and subsidiaries as of December 31, 1994 and 1995, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK
KPMG Peat Marwick LLP
San Jose, California
March 13, 1996
F-2
<PAGE> 47
COMPRESSION LABS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -----------------
1993 1994 1995 1995 1996
------- -------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues....................................... $95,095 $114,958 $112,979 $86,224 $65,612
Cost of revenues............................. 66,967 70,904 79,359 51,987 36,232
------- -------- -------- ------- -------
Gross margin.............................. 28,128 44,054 33,620 34,237 29,380
Operating expenses:
Selling, general and administrative.......... 29,646 38,153 42,761 29,199 26,786
Research and development..................... 10,452 10,158 9,974 6,934 9,472
Settlement of litigation..................... -- -- 897 897 --
------- -------- -------- ------- -------
Total operating expenses.................. 40,098 48,311 53,632 37,030 36,258
------- -------- -------- ------- -------
Net loss from operations.................. (11,970) (4,257) (20,012) (2,793) (6,878)
------- -------- -------- ------- -------
Interest income................................ 620 177 114 102 21
Interest expense............................... (834) (798) (1,142) (864) (683)
Net loss from continuing operations............ (12,184) (4,878) (21,040) (3,555) (7,540)
Discontinued operations:
Income (loss) from operations................ 8,701 4,985 (1,941) 1,374 --
Loss on disposal............................. -- -- (34,601) -- --
------- -------- -------- ------- -------
Net income (loss) from discontinued
operations.............................. 8,701 4,985 (36,542) 1,374 --
------- -------- -------- ------- -------
Net income (loss)......................... $(3,483) $ 107 $(57,582) $(2,181) $(7,540)
======= ======== ======== ======= =======
Net income (loss) per share:
Net loss from continuing operations.......... $ (1.04) $ (0.32) $ (1.37) $ (0.23) $ (0.48)
Net income (loss) from discontinued
operations................................ 0.74 0.33 (2.39) 0.09 --
------- -------- -------- ------- -------
Net income (loss) per share.................. $ (0.30) $ 0.01 $ (3.76) $ (0.14) $ (0.48)
======= ======== ======== ======= =======
Weighted average common shares and common share
equivalents outstanding...................... 11,666 15,160 15,304 15,191 15,616
======= ======== ======== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE> 48
COMPRESSION LABS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1994 1995 1996
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents................................ $ 11,319 $ 12,638 $ 5,761
Accounts receivable, less allowance for doubtful accounts
of $1,992 in 1994, $10,028 in 1995, and $6,848 in
1996.................................................. 54,470 46,798 31,565
Inventories.............................................. 29,511 22,821 12,640
Other current assets..................................... 2,715 1,096 749
-------- -------- --------
Total current assets.................................. 98,015 83,353 50,715
-------- -------- --------
Property and equipment
Furniture and fixtures................................... 5,273 9,551 8,242
Machinery and equipment.................................. 32,675 25,802 22,835
Equipment under capital lease............................ 2,185 2,090 --
-------- -------- --------
40,133 37,443 31,077
Accumulated depreciation and amortization................ (19,251) (20,171) (19,911)
-------- -------- --------
20,882 17,272 11,166
Capitalized software, net.................................. 11,868 3,828 3,560
Other assets............................................... 886 300 285
-------- -------- --------
Total assets.......................................... $131,651 $104,753 $ 65,726
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt.......................................... $ 9,803 $ 13,452 $ 12,408
Current portion of capital lease obligations............. 750 506 --
Accounts payable......................................... 20,040 26,169 11,394
Accrued liabilities...................................... 6,362 21,689 7,951
Deferred revenue......................................... 7,240 6,278 4,748
-------- -------- --------
Total current liabilities............................. 44,195 68,094 36,501
-------- -------- --------
Long-term debt and capital lease obligations............... 494 985 --
Stockholders' equity
Preferred stock --
Undesignated preferred stock, $.001 par value;
4,000,000 shares authorized; none issued or
outstanding......................................... -- -- --
Common stock --
$.001 par value; 25,153,658 shares authorized; shares
issued and outstanding: 14,655,745 in 1994,
15,491,475 in 1995, and 15,863,788 in 1996.......... 15 15 16
Additional paid-in capital............................... 114,402 120,696 121,786
Accumulated deficit...................................... (27,455) (85,037) (92,577)
-------- -------- --------
Total stockholders' equity............................ 86,962 35,674 29,225
-------- -------- --------
Total liabilities and stockholders' equity............ $131,651 $104,753 $ 65,726
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE> 49
COMPRESSION LABS, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN ACCUMULATED
SHARES AMOUNT CAPITAL DEFICIT TOTAL
------ ------ ---------- ----------- -------
<S> <C> <C> <C> <C> <C>
Balances at December 31, 1992................... 11,408 $ 11 $ 80,945 $ (24,079) $56,877
Exercises of common stock options............. 296 1 1,776 -- 1,777
Sale of common stock to employees............. 100 -- 976 -- 976
Sale of common stock to investors, net of
issuance costs of $171..................... 700 1 9,702 -- 9,703
Issuance of common stock under warrants....... 241 -- 1,729 -- 1,729
Net loss...................................... -- -- -- (3,483) (3,483)
------ --- -------- ------- -------
Balances at December 31, 1993................... 12,745 13 95,128 (27,562) 67,579
Exercises of common stock options, including
income tax benefit of $900................. 163 -- 2,173 -- 2,173
Sale of common stock to employees............. 100 -- 844 -- 844
Sale of common stock to investors, net of
issuance costs of $27...................... 148 -- 1,973 -- 1,973
Conversion of preferred stock to common
stock...................................... 1,435 2 13,756 -- 13,758
Issuance of common stock under warrants....... 65 -- 528 -- 528
Net income.................................... -- -- -- 107 107
------ --- -------- ------- -------
Balances at December 31, 1994................... 14,656 15 114,402 (27,455) 86,962
Exercises of common stock options............. 138 -- 545 -- 545
Sale of common stock to employees............. 100 -- 677 -- 677
Sale of common stock to investors, net of
issuance costs of $90...................... 565 -- 4,823 -- 4,823
Issuance of common stock under warrants....... 32 -- 249 -- 249
Net loss...................................... -- -- -- (57,582) (57,582)
------ --- -------- ------- -------
Balances at December 31, 1995................... 15,491 15 120,696 (85,037) 35,674
Exercises of common stock options
(unaudited)................................ 292 1 683 684
Sale of common stock to employees
(unaudited)................................ 75 -- 364 -- 364
Issuance of common stock under warrants
(unaudited)................................ 6 -- 43 -- 43
Net loss (unaudited).......................... -- -- -- (7,540) (7,540)
------ --- -------- ------- -------
Balances at September 30, 1996 (unaudited)...... 15,864 $ 16 $ 121,786 $ (92,577) $29,225
====== === ======== ======= =======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE> 50
COMPRESSION LABS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Cash flows from operating activities
Net income (loss)........................... $(3,483) $ 107 $(57,582) $ (2,181) $ (7,540)
Non-cash expenses included in operations --
Depreciation and amortization............ 9,330 11,104 17,237 8,825 5,229
Changes in certain assets and liabilities --
Accounts receivable...................... (212) (8,702) 2,681 (3,970) 7,137
Inventories.............................. (1,664) (2,381) 11,306 2,672 (678)
Other current assets..................... (1,198) 1,639 1,657 658 310
Accounts payable......................... 4,168 (4,614) 6,129 (810) (14,775)
Accrued liabilities...................... 336 352 15,327 5,289 (13,738)
Deferred revenue......................... 886 4,615 (962) (914) (1,530)
Discontinued operations.................. (14,519) (1,400) 11,503 (1,572) 12,638
------- ------- ------- ------- ------
Net cash generated by (used in)
operations........................ (6,356) 720 7,296 7,997 (12,947)
------- ------- ------- ------- ------
Cash flows from investing activities
Property and equipment additions............ (8,271) (9,434) (7,235) (5,765) (2,051)
Net proceeds from the sale of discontinued
operations............................... -- -- -- -- 10,528
Increase in capitalized software............ (4,999) (6,702) (9,371) (7,046) (978)
Decrease (increase) in other assets......... 260 853 586 (5,852) 15
------- ------- ------- ------- ------
Net cash generated by (used in)
investing activities.............. (13,010) (15,283) (16,020) (18,663) 7,514
------- ------- ------- ------- ------
Cash flows from financing activities
Sales of Series B preferred stock, net...... 13,758 -- -- -- --
Sales of common stock, net.................. 14,185 4,618 6,294 6,128 1,091
Payments of capital lease obligations....... (224) (359) (840) (608) (549)
Collateralized borrowings (payments)........ -- -- 1,597 1,855 (1,599)
Borrowings (payments) under line of credit
agreements............................... (1,257) 1,110 2,992 2,979 (387)
------- ------- ------- ------- ------
Net cash generated by (used in)
financing activities.............. 26,462 5,369 10,043 10,354 (1,444)
------- ------- ------- ------- ------
Net increase (decrease) in cash and cash
equivalents................................. 7,096 (9,194) 1,319 (312) (6,877)
Cash and cash equivalents at beginning of
period...................................... 13,417 20,513 11,319 11,319 12,638
------- ------- ------- ------- ------
Cash and cash equivalents at end of period.... $20,513 $11,319 $ 12,638 $ 11,007 $ 5,761
======= ======= ======= ======= ======
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE> 51
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Compression Labs, Incorporated (the Company) develops, manufactures and
markets visual communication systems for business, government, education and
healthcare customers globally.
Principles of Consolidation and Presentation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
The Company's interim fiscal quarters end on the Friday of the thirteenth
week following the end of the previous quarter. Accordingly, the actual dates of
the end of the third quarters of 1995 and 1996 were September 29 and September
27, respectively. The fiscal year end will remain as December 31. The
comparability of the financial statements between years is not materially
affected by this presentation.
The accompanying consolidated balance sheet as of September 30, 1996, the
consolidated statements of operations and cash flows for the nine months ended
September 30, 1995 and 1996, and the consolidated statement of stockholders'
equity for the nine months ended September 30, 1996 are unaudited but include
all adjustments of a recurring nature and certain one-time charges that in the
opinion of management are necessary for a fair presentation of the periods
presented. The consolidated results of operations for the nine months ended
September 30, 1996 are not necessarily indicative of the results for any future
period.
Revenue Recognition
The Company recognizes product revenues at the time of shipment. Revenues
from the sale of maintenance contracts are recognized ratably over the term of
the respective contract. Research and development contract revenues are
recognized under the percentage-of-completion method based on the ratio of costs
incurred to estimated total costs for fixed price contracts and on a
cost-plus-fee basis on time-and-materials contracts.
Warranty Costs
The Company's products are under warranty for periods ranging from 90 days
to 14 months. Estimated warranty costs are charged to cost of revenues when the
related sales are recognized.
Income Taxes
The Company accounts for income taxes under the asset and liability method
of accounting. Under the asset and liability method, deferred tax assets and
liabilities are recognized based on the future tax consequences attributable to
differences between the financial statement carrying amount of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of
changes in tax rates is recognized in income in the period that includes the
enactment date.
F-7
<PAGE> 52
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED) -- (CONTINUED)
The Company has a valuation allowance as of December 31, 1995 and September
30, 1996 that fully offsets its gross deferred tax assets due to the Company's
historical losses and management's belief that, based on currently available
evidence, it is more likely than not that the Company will not generate
sufficient taxable income to realize any or all of the deferred tax assets.
Earnings per Share
Net income per share is computed using the weighted average number of
common shares outstanding during each period including dilutive common share
equivalents, which consist of common stock options and warrants. Net loss per
share is computed using the weighted average number of common shares
outstanding. Common share equivalents are not included in the net loss per share
calculation because the effect would be anti-dilutive.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash on deposit with banks and money
market instruments with original maturities of three months or less.
Concentrations of Credit Risk
The Company sells its products to distributors and end-users in diversified
industries including business, government, education and healthcare. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral.
Inventories
Inventories are stated at the lower of cost, determined on a first-in
first-out basis, or market.
Property and Equipment
Property and equipment are stated at cost. Equipment acquired under capital
lease obligations is stated at the lower of fair value or the present value of
future minimum lease payments at the inception of the lease. Depreciation and
amortization are provided over the estimated useful lives of the assets or over
the life of the lease, if shorter, using the straight-line method. Field spares
are amortized over the estimated life of the related product.
Capitalized Software
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86. Amortization of
capitalized software begins upon initial product shipment. Software development
costs are amortized (a) over the estimated life of the related product,
generally thirty-six months, using the straightline method or (b) based on the
ratio of current revenues from the related products to total estimated revenues
for such products, whichever is greater.
Fair Value of Financial Instruments
The carrying amounts of cash, cash equivalents, accounts receivable,
accounts payable and accrued liabilities approximate fair values due to the
short maturity of those instruments. The carrying amounts of the short-term debt
approximates fair value because the interest rates change with market interest
rates. The fair value of the longterm debt and capital leases is not estimated
but reflects the contractual present value owed to non-related parties.
F-8
<PAGE> 53
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED) -- (CONTINUED)
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board issued SFAS No.
121, Accounting for the Impairment of LongLived Assets and for Long-Lived Assets
to be Disposed of. SFAS No. 121 becomes effective for fiscal years beginning
after December 15, 1995. Adopting SFAS No. 121 is not expected to have a
material effect on the Company's consolidated results of operations or financial
position.
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation. SFAS No. 123 will be effective for
fiscal years beginning after December 15, 1995 and will require that the Company
either recognize in its consolidated financial statements costs related to its
employee stock-based compensation plans, such as stock option and stock purchase
plans, or make pro forma disclosures of such costs in a footnote to the
consolidated financial statements.
The Company expects to continue to use the intrinsic value-based method of
Accounting Principles Board Opinion (APB) No. 25, as allowed under SFAS No. 123,
to account for all of its employee stock-based compensation plans. Therefore, in
its consolidated financial statements for fiscal 1996, the Company will make the
required pro forma disclosures in a footnote to the consolidated financial
statements. Adoption of SFAS No. 123 is not expected to have a material effect
on the Company's consolidated results of operations or financial position.
2. DISCONTINUED OPERATIONS AND RESTRUCTURING
During November 1995, the Company adopted a strategic plan to discontinue
operations of its broadcast products division. This division generally
manufactures and sells broadcast video products to commercial end-users. The
results for the division have been accounted for as discontinued operations in
accordance with APB No. 30, and the consolidated financial statements have been
presented to reflect the discontinuation of the division.
On June 27, 1996 the Company completed the sale of certain assets of its
broadcast products division to Charger Industries (Charger), a subsidiary of
General Instrument Corporation, in exchange for $12.5 million in cash (subject
to post-closing adjustments) and the assumption of $2.0 million in liabilities.
Charger assumed past warranty obligations associated with the product family
covered by the sale. With the exception of the accounts receivable, the Company
disposed of the remaining assets of the division to a separate buyer. The
components of net assets of discontinued operations included in the Consolidated
Balance Sheets at December 31, 1994 and 1995 and September 30, 1996 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- ------
<S> <C> <C> <C>
Accounts receivable, net............................... $19,920 $14,929 $6,833
Inventories............................................ 6,243 10,859 --
Property and equipment, net............................ 3,288 4,174 --
Capitalized software................................... 3,916 -- --
Other assets........................................... -- 38 --
------- ------- ------
$33,367 $30,000 $6,833
======= ======= ======
</TABLE>
Revenues from the discontinued division were approximately $46,232,000,
$42,029,000 and $36,974,000 for the years ended December 31, 1993, 1994 and
1995, respectively, and $29,035,000 and $11,211,000 for the nine months ended
September 30, 1995 and 1996, respectively. The amount of discontinued operations
on the 1995 Consolidated Statement of Operations included management's best
estimate of the net proceeds expected to be realized on the sale of the assets
of the division and the provisions for expected losses to be
F-9
<PAGE> 54
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED) -- (CONTINUED)
incurred, including a provision for future operating losses of $1,290,000
expected to be incurred during the phase-out period of the broadcast products
division.
In the first quarter of 1996, the Company decided to restructure the
videoconferencing division in order to seek profitability and growth. This
resulted in adjustments that were recorded as of December 31, 1995 to carrying
values of assets that were impacted -- primarily inventories, capitalized
software and accounts receivable. In conjunction with this action, the Company
also reduced its workforce in the first quarter of 1996 and identified a number
of offices that would be closed. Severance and other expenses associated with
this action were reflected in the first quarter of 1996.
3. UNBILLED RESEARCH AND DEVELOPMENT CONTRACT RECEIVABLES
At December 31, 1995 and September 30, 1996, the Company had $2,221,000 and
$864,000, respectively, of net unbilled receivables relating to research and
development contracts, of which $1,634,000 and $701,000 at December 31, 1995 and
September 30, 1996, respectively, relates to contracts entered into with Thomson
Consumer Electronics, Inc. and North American Philips Corporation. These
receivables are generally billable either in quarterly installments or upon the
delivery of specified items.
4. INVENTORIES
Inventories at December 31, 1994 and 1995 and September 30, 1996 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Raw materials......................................... $ 7,521 $ 2,189 $ 2,223
Work in process....................................... 4,293 3,858 1,584
Finished products
Products on hand.................................... 13,151 13,488 7,558
Products under rental and loan agreements........... 4,546 3,286 1,275
------- -------
$29,511 $22,821 $12,640
======= =======
</TABLE>
5. CAPITALIZED SOFTWARE
Internal software development costs capitalized by the Company was
$4,874,000 in 1993, $6,645,000 in 1994, $9,276,000 in 1995, and $6,951,000 and
$978,000 in the nine months ended September 30, 1995 and 1996, respectively. In
addition, the Company purchased software of $125,000 in 1993, $57,000 in 1994,
$95,000 in 1995, and $95,000 and $0 in the nine months ended September 30, 1995
and 1996, respectively. Amortization of capitalized software development costs
and purchased software was $4,049,000 in 1993, $5,120,000 in 1994, $17,411,000
in 1995, and $2,934,000 and $1,246,000 in the nine months ended September 30,
1995 and 1996, respectively. For the year ended December 31, 1995, total
amortization includes $13,340,000 of amortization expense to reduce the carrying
value of certain capitalized software relating to product lines for discontinued
operations and older-generation product lines for continuing operations. At
December 31, 1994 and 1995 and September 30, 1996, capitalized software, net of
accumulated amortization, was $11,868,000 (including $192,000 of purchased
software), $3,828,000 (including $22,000 of purchased software) and $3,560,000
(including $13,000 of purchased software), respectively.
F-10
<PAGE> 55
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED) -- (CONTINUED)
6. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1994 and 1995 and September 30, 1996
are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------- ------
<S> <C> <C> <C>
Employee compensation................................... $3,205 $ 3,202 $2,761
Accrued expenses, discontinued operations............... -- 13,887 1,028
Other accrued expenses, continuing operations........... 3,157 4,600 4,162
------ ------- ------
$6,362 $21,689 $7,951
====== ======= ======
</TABLE>
7. BANK LINE OF CREDIT AND LONG-TERM DEBT
Bank Line of Credit
The Company had a $15,000,000 revolving credit facility bearing interest at
the bank's prime rate plus 1%. The line of credit agreement was secured by
substantially all of the Company's assets. Under the credit agreement, the
Company was required to meet certain financial covenants involving capital
spending levels and debt ratio and could not declare or make any cash or stock
dividends. The Company was in compliance with these requirements or had obtained
a waiver for non-compliance from the bank, as of December 31, 1994 and 1995. At
December 31, 1995, the balance outstanding under this line of credit was
$12,795,000. In June 1996, this credit facility was terminated.
In June 1996, the Company obtained a $15,000,000 revolving credit facility
with a bank that bears interest at the highest London Interbank Offered Rate
(LIBOR), which was 5.39% for October 1996, plus 4.81%, which expires on June 30,
1997. The line of credit agreement is secured by substantially all of the
Company's assets. Under the credit agreement, the Company may not declare or
make any cash or stock dividends or repurchase stock of the Company. The bank,
however, gave its consent to the Company to enter into a financing agreement
with Infinity and Seacrest to sell preferred stock that provides for cumulative
dividends and to repurchase such preferred stock. See Note 9 of Notes to
Consolidated Financial Statements. At September 30, 1996, the balance
outstanding under this line of credit was $12,408,000.
Term Loans
In 1995, the Company entered into long-term agreements for $2,172,000
bearing interest at rates from 10.76% to 11.48% over thirty-six and forty-eight
months. At December 31, 1995, the balances outstanding under these loans were
$1,597,000. These loans, which were secured by specific capital assets, were
paid off in conjunction with the sale of discontinued operations. See Note 2 of
Notes to Consolidated Financial Statements.
8. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its facilities and other equipment under operating lease
agreements which expire at various dates through 2004. The Company also leases
certain manufacturing equipment under capital leases
F-11
<PAGE> 56
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED) -- (CONTINUED)
which expire in June 2000. Approximate future minimum lease payments under these
lease at December 31, 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR LEASES LEASES
------------------------------------------------------------------ ------- ---------
<S> <C> <C>
1996.............................................................. $ 592 $ 3,055
1997.............................................................. 58 2,634
1998.............................................................. 19 1,962
1999.............................................................. 8 1,968
2000.............................................................. 4 1,848
Thereafter........................................................ -- 2,626
---- -------
681 $14,093
=======
Less amount representing interest................................. 130
----
551
Less current portion.............................................. 506
----
$ 45
====
</TABLE>
Total operating lease expense was approximately $3,307,000 in 1993,
$2,760,000 in 1994 and $3,364,000 in 1995. Accumulated depreciation of equipment
under capital leases totaled $943,000 and $1,489,000 at December 31, 1994 and
1995, respectively. Depreciation expense on equipment under capital leases was
$250,000 in 1993, $693,000 in 1994 and $739,000 in 1995.
Contingencies
CIT Group/OSUERF
On August 24, 1993, the Company filed a complaint against Oklahoma State
University Education and Research Foundation, Inc. (OSUERF) in United States
District Court claiming that OSUERF breached an exclusive subcontract for the
Company to provide equipment to OSUERF under OSUERF's prime contract with the
United States Army, TRADOC Division. On November 18, 1993, the Company amended
the complaint to add Federal Leasing, Inc. (FLI) as a defendant. On February 4,
1994, the CIT Group/Equipment Financing Inc. (CIT), as an assignee of FLI's
rights under the Financing Agreement, filed a complaint against the Company in
United States District Court claiming indemnification from the Company. The
Company responded to CIT's complaint by denying the material charging
allegations and stating certain affirmative defenses. The OSUERF and CIT actions
have been consolidated. On April 21, 1995, CIT filed a second amended complaint
asserting, among other things, a claim for fraud against OSUERF. In March 1995,
CIT and FLI separately moved for summary judgment against the Company seeking
damages in the amount of $2.0 million. The Company opposed the respective
motions. By order dated October 11, 1995 the court denied the summary judgment
motions of CIT and FLI, respectively.
Subsequent to the denial of the summary judgment and for a variety of
reasons, including the resignation of one judge, the case has been reassigned
several times. Due to the recent recusal of another judge, the case is currently
unassigned and awaiting reassignment. As a result, all pretrial dates and the
trial date originally set for November 4, 1996, have been vacated.
The Company on November 19, 1996, entered into a settlement agreement with
CIT and FLI whereby the Company has agreed to pay CIT a minimum of $1,800,000
together with interest at 8.44% (in 41 monthly installments of $50,000) plus up
to an additional $1,629,921 depending on amounts recovered from OSUERF and
Southwestern Bell Telephone Company in a related action.
F-12
<PAGE> 57
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED) -- (CONTINUED)
Datapoint Corporation
In a complaint filed December 20, 1993, in the United States District Court
in Dallas, Texas, Datapoint Corporation (Datapoint) alleged that the Company had
infringed two United States patents owned by Datapoint relating to video
conferencing networks. The complaint seeks a judgment of infringement, monetary
damages, injunctive relief and reasonable attorney's fees. The Company responded
to the complaint on February 16, 1994 by denying the material allegations of the
complaint and asserting affirmative defenses. Pursuant to court order, the
parties have participated in mediation before a court-appointed mediator.
Discovery in the case has commenced. On September 27, 1995, the Company filed a
motion to construe the scope of the patent claims at issue in the litigation so
as to elucidate whether Datapoint can assert that the Company is infringing the
patents in suit, or whether Datapoint's patents are invalid in light of the
prior art. On April 24, 1996, a Special Master submitted a report which did not
recommend that the Court adopt the Company's positions set forth in the motion.
The Court on September 16, 1996, adopted the report of the Special Master
that the claims of the patents in suit be construed in a manner favorable to the
plaintiff, and a trial date of February 3, 1997, has been scheduled. The parties
at the request of the Court have filed status reports indicating that additional
time will be required to prepare for trial. In the meantime the Company has
filed motions to certify for appeal to the Federal Circuit on the issue of claim
construction and to stay discovery, which motions are pending.
The Company believes that it has meritorious defenses to the allegations of
the complaint and is pursuing an aggressive defense; however, there can be no
assurance that the Company will prevail. If any of the claims were to be decided
adversely to the defendants, the Company could be liable for monetary damages to
the plaintiff and be subject to injunctive relief. The Company believes that the
ultimate resolution of this matter will not have a material adverse impact on
the Company's financial position.
Southwestern Bell Telephone Company
On April 6, 1995, the Company filed a complaint against Southwestern Bell
Telephone Company (SWBT) in Santa Clara, California Superior Court alleging that
SWBT intentionally interfered with CLI's contracts with OSUERF and Hughes
Network Systems (HNS). SWBT moved to quash service of summons for lack of
personal jurisdiction, which motion was granted on July 11, 1995. On July 25,
1995, the Company refiled the complaint in the United States District Court for
the Western District of Oklahoma. The complaint was served on SWBT which filed
its answer on October 17, 1995, denying the material allegations of the
complaint.
On September 6, 1995, CLI filed its notice of appeal of the Superior
Court's order granting SWBT's motion to quash service of summons for lack of
personal jurisdiction. The appeal was argued before the California Court of
Appeal for the Sixth Appellate District on July 18, 1996. By decision dated July
26, 1996, the Court of Appeals affirmed the holding of the Superior Court.
The parties subsequently notified the United States District Court for the
Western District of Oklahoma to reopen the case and to take it out of
administrative closure. On October 2, 1996, the Court issued its Scheduling
Order pursuant to which the matter has been set for trial in May 1997, with
discovery to close April 1, 1997.
The Company is currently in settlement discussions with SWBT, as well as
the parties in the related CIT Group/OSUERF litigation. The Company believes
that the ultimate resolution of this matter will not have a material adverse
impact on the Company's financial position.
F-13
<PAGE> 58
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED) -- (CONTINUED)
Philips Consumer Electronics Company
The Company entered into a Joint Development and Marketing Agreement (JDMA)
with Philips Consumer Electronics Company (Philips) dated January 12, 1994, for
the supply of certain decoder units discussed in the Jabil matter below. By
amendment to the JDMA on May 24, 1995, Philips agreed to pay the Company $2.6
million for all intellectual property jointly developed under the JDMA. In a
related license agreement of May 12, 1995, the Company agreed to pay Philips
$5.6 million for a license under background patents and other intellectual
property. Philips owes the Company $1.3 million under the amendment, $0.9
million of which was due December 29, 1995. The Company owes Philips $3.3
million under the license agreement, $2.1 million of which was due December 29,
1995. The Company believes that Philips has failed to make certain technology
disclosures required under the license agreement. The Company has initiated and
is engaged in negotiations with Philips regarding disposition of rights and
monies owed under the amendment and license agreement. Philips has indicated an
interest in reaching a mutually acceptable, amicable solution. The Company
believes that the ultimate resolution of this matter will not have a material
adverse impact on the Company's consolidated financial position.
Jabil Circuits, Inc.
To fulfill a purchase order from Philips for the supply of certain decoder
units, the Company placed a purchase order with Jabil Circuits, Inc. (Jabil) for
the procurement of the component parts and the manufacture of the units. Due to
the cancellation of the Philips purchase order, the Company canceled its
purchase order with Jabil. By letter dated January 11, 1996, Jabil demanded that
the Company issue a purchase order for approximately $6.5 million for the
components which were outside the cancellation and reschedule windows. The
Company has negotiated with Philips and Jabil regarding the disposition of the
component inventory and responsibility for cost of inventory that cannot be
disposed of by Jabil. A resolution of the inventory issue has been reached as
between Jabil and Philips. CLI has made a claim against Philips for damages
associated with the Jabil inventory. The Company believes that the ultimate
resolution of this matter will not have a material adverse impact on the
Company's consolidated financial position.
Mueller/Shields
On or about March 15, 1996, a complaint was filed against the Company by
Mueller/Shields OME in Superior Court of Orange County, California alleging
breach of a marketing research contract. In the action entitled Mueller/Shields
OME v. Compression Labs, Inc., Case No. 761079, Mueller/Shields sought $682,425
in compensatory damages, plus attorneys' fees provided by contract. Since the
filing of its complaint, Mueller/Shields served notice of its application for a
writ of attachment. Following service of the complaint and service of the writ
application, the Company and Mueller/Shields reached agreement on the terms of a
Settlement Agreement whereby the Company agreed to pay a total of approximately
$600,000 (principal and interest) on an installment basis beginning in April
1996 and concluding in September 1996. The total principal and interest has been
paid, and the underlying action was dismissed with prejudice on October 9, 1996.
General
In the normal course of business, the Company receives and makes inquiries
with regard to other possible patent infringement. Where deemed advisable, the
Company may seek or extend licenses or negotiate settlements. Outcomes of such
negotiations may not be determinable at any point in time; however, management
does not believe that such licenses or settlements will, individually or in the
aggregate, have a material adverse affect on the Company's consolidated
financial position.
F-14
<PAGE> 59
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED) -- (CONTINUED)
9. STOCKHOLDERS' EQUITY
Preferred Stock
The Company's Certificate of Incorporation authorize the issuance of
4,000,000 shares of undesignated preferred stock at $.001 par value. On February
1, 1993, Thomson Consumer Electronics S.A. (TCE) purchased 14,900 shares of
redeemable Series B convertible preferred stock, par value $.001 for $1,000 per
share. The Company received $13,758,000 net of commissions and issuance costs.
Each Series B convertible preferred share was convertible into 96.3 shares, or a
total of 1,434,900 shares, of the common stock of the Company at $10.384 per
share, and carried equivalent voting rights to common stock on an "as if
converted" basis. In 1994 TCE converted all of its shares of Series B
convertible preferred stock into 1,434,900 shares of the Company's common stock.
There were no outstanding shares of Series B Convertible preferred stock at
December 31, 1995.
On October 24, 1996, the Company entered into a purchase agreement (the
Agreement) with two institutional investors for the private placement of up to 1
million shares of the Company's convertible preferred stock, $.001 par value, at
$20 per share stated value, and warrants to purchase up to 450,000 shares of the
Company's common stock. The Company is required to register for resale the
common stock underlying the preferred stock and warrants subject to the
Agreement.
Pursuant to the Agreement, the preferred stock is issuable in three
installments at the Company's option through approximately December 31, 1997,
with each installment being between 180 to 210 days apart. The preferred stock
is non-voting and senior to other securities in right of payment of the $20
stated value per share and related unpaid dividends. The dividends are
cumulative, accrue at 4% per year on the stated value, without interest, and
payable quarterly in cash (at the option of the Company) or shares of common
stock. Each preferred share is also convertible into shares of common stock at a
ratio equal to the stated value plus unpaid dividends divided by the conversion
price, as defined. The conversion price, among other things, is dependent on the
average market price, as defined, of the common stock on the preferred stock
issue date and the date the conversion option is exercised. The preferred shares
become convertible at the option of the holder the earlier of (1) 90 days after
the original issue date of the preferred shares or (2) the effective date of the
registration statement required by the Agreement. Once the registration
statement becomes effective, the preferred shares are convertible at the option
of the Company on and after one year after the original issue date of the
preferred shares.
The Agreement also provides for the issuance of warrants to purchase
375,000 shares of common stock under the first installment and 75,000 shares of
common stock if issued under the second installment. Warrants issued under the
first installment are exercisable at any time and expire after five years, with
those issued under the second installment expiring after four years. The
exercise price for the warrants is dependent upon a percentage of the average
market price within five days of the issue date.
On October 25, 1996, the Company completed an initial placement of 350,000
shares of Class C Preferred Stock and received approximately $7.0 million net of
certain issuance costs, pursuant to the Agreement. The conversion price of Class
C Preferred Stock is the lower of $4.225 per share or 80% of the average per
share market value for the five days preceding the conversion date. The warrants
to purchase 375,000 of common stock expire in October 2001 and are exercisable
at $5.70 per share.
Offering of Common Stock
In May 1994, the Company sold 147,929 shares of its common stock to Intel
Corporation in a private offering for $1,973,000 net of issuance costs. In July
1995, the Company received an aggregate of $4,900,000 relating to the sale of
565,000 shares of newly issued common stock of the Company to an investor at
prices equal to an average of market prices on the Nasdaq National Market during
a specified period.
F-15
<PAGE> 60
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED) -- (CONTINUED)
Preferred Share Purchase Rights Plan
In 1991, the Company adopted a Preferred Share Purchase Rights Plan (Rights
Plan) under which, for each outstanding share of the Company's common stock,
stockholders received one right, exercisable upon the occurrence of certain
events, to purchase one one-hundredth of a share of a new series of preferred
stock. In the event that any individual or group acquires 15% or more of the
common stock of the Company, the Rights Plan permits the holder of each right,
other than the acquiring individual or group, to purchase the Company's common
stock having a market value of $200 at a 50% discount. In the event the Company
is acquired in a merger or similar transaction in which the Company is not the
surviving company, the holder of each right will have the right to purchase
common stock of the acquiring company having a market value of $200 at a 50%
discount. The Company may, subject to certain conditions, redeem the rights for
$.01 each or exchange one share of common stock for each right.
Employee Stock Option Plans and Stock Purchase Plan
Under the Company's stock option plans, options to purchase shares of
common stock may be granted to employees, directors and consultants at not less
than the fair market value at the date of grant, as determined by the Board of
Directors, in the case of Incentive Stock Options (ISOs) as defined by the
Internal Revenue Code of 1986, as amended, and at not less than 85% of fair
market value at the date of grant in the case of options other than ISOs.
Options typically vest at six-month intervals over a period of four years and
expire after ten years. In the event of employee termination, the Company has
the right to cancel any vested options not exercised within 90 days of the
termination date. Canceled options are returned to the option plans and are
available for future grants.
In November 1994, the Company agreed to exchange outstanding options to
purchase the Company's common stock held by non-officer employees for an equal
number of options with an exercise price of $7.63, the then-current fair market
value of the Company's common stock. In return, participating employees who
chose to exchange their options agreed to vesting schedules for the new options
which were delayed compared to vesting schedules for the original options.
Options covering a total of 671,727 shares were exchanged under this program.
The effect of such exchanged reduced the weighted average exercise price of
outstanding options from $10.79 to $9.74 per share. The effect of the exchange
has been included in the accompanying table as options granted and canceled. No
officer of the Company was allowed to participate in this exchange.
At December 31, 1995 and September 30, 1996, the Company had 4,190,693 and
4,423,721 shares, respectively, of common stock reserved for the exercise of
stock options outstanding under all plans and for future option grants and the
issuance of shares under the option plans and the purchase plan. At December 31,
1995 and September 30, 1996, outstanding options to purchase the Company's
common stock had a weighted average option price of $8.73 and $8.02,
respectively, and 496,240 and 453,660 shares, respectively, were available for
future grant under all options and purchase plans. At December 31, 1994 and 1995
and September 30, 1996, outstanding option under the employees stock option
plans were exercisable for 2,048,341, 2,277,507 and 1,800,968 shares,
respectively.
F-16
<PAGE> 61
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED) -- (CONTINUED)
Options under the employee option plans have been granted, exercised and
canceled as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES OPTION PRICE PER SHARE
---------------- ----------------------
<S> <C> <C>
Outstanding at December 31, 1992................... 3,218,580 $ 2.88 to $27.13
Granted in 1993.................................... 630,822 $ 8.63 to $14.25
Exercised in 1993.................................. (296,291) $ 2.88 to $14.13
Canceled in 1993................................... (223,277) $ 5.38 to $23.75
--------- ---------------
Outstanding at December 31, 1993................... 3,329,834 $ 2.88 to $27.13
Granted in 1994.................................... 1,378,562* $ 6.50 to $13.38
Exercised in 1994.................................. (163,456) $ 2.88 to $11.25
Canceled in 1994................................... (970,582)* $ 6.50 to $27.13
--------- ---------------
Outstanding at December 31, 1994................... 3,574,358 $ 2.88 to $20.50
Granted in 1995.................................... 1,098,510 $ 7.19 to $10.25
Exercised in 1995.................................. (138,357) $ 2.88 to $ 9.00
Canceled in 1995................................... (840,058) $ 5.38 to $19.63
--------- ---------------
Outstanding at December 31, 1995................... 3,694,453 $ 2.88 to $20.50
Granted in 1996.................................... 1,510,530 $ 5.00 to $ 8.13
Exercised in 1996.................................. (292,150) $ 2.88 to $ 7.63
Canceled in 1996................................... (976,297) $ 2.88 to $20.50
--------- ---------------
Outstanding at September 30, 1996.................. 3,936,536 $ 2.88 to $20.00
========= ===============
</TABLE>
- ---------------
* Includes 671,727 shares exchanged under the above-mentioned program.
In 1989 and 1992, the Company issued warrants to purchase a total of
890,000 shares of the Company's common stock at $7.50 per share to PaineWebber
R&D Partner II, L.P. as part of a research and development contract. At December
31, 1994 and 1995 and September 30, 1996 warrants for 584,607 shares, 551,940
shares and 546,269 shares, respectively, were outstanding and exercisable under
these warrants. On October 25, 1996, the Company also issued warrants to
purchase 375,000 of common stock pursuant to the initial placement of 350,000
shares of Class C preferred stock as discussed in more detail at Preferred Stock
above.
Through the Company's 1984 Employee Stock Purchase Plan, eligible employees
of the Company may purchase common stock at 85% of the fair market value of the
stock at the beginning or end of each offering period (calendar quarter),
whichever is lower. Each participant may contribute up to 15% of total
compensation toward purchase of shares. Shares have been issued under the plan
as follows:
<TABLE>
<CAPTION>
YEAR NUMBER OF SHARES PRICE PER SHARE AVERAGE PRICE PER SHARE
- ----- ---------------- ---------------- -----------------------
<S> <C> <C> <C> <C>
1993 99,645 $8.71 to $11.37 $9.80
1994 99,588 $6.80 to $10.09 $8.47
1995 99,547 $5.31 to $ 8.29 $6.80
1996 (Nine months) 74,822 $4.30 to $ 5.63 $4.87
</TABLE>
10. REVENUE
International revenue, principally from customers located in East Asia,
Australia and Western Europe, was approximately $12,396,000 or 13%, $21,159,000
or 18%, $24,331,000 or 22%, $13,800,000 or 16%, and $12,260,000 or 19% of
revenues in 1993, 1994, 1995, and the nine months ended September 30, 1995 and
1996, respectively. No single customer accounted for greater than 10% of
revenues in 1994, 1995 and for the
F-17
<PAGE> 62
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED) -- (CONTINUED)
nine months ended September 30, 1995 and 1996. In 1993, sales to two cutomers
accounted for 17% and 10% of revenues, respectively.
11. INCOME TAXES
As of December 31, 1995, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $46,000,000, of which
$23,000,000 relates to deductions attributable to the exercise of non-qualified
stock options and employees' early disposition of stock acquired through
incentive stock options. The future net reduction in taxes otherwise payable
arising from such deductions will be credited to additional paid-in capital when
realized. As of December 31, 1995, the Company had a federal general business
credit carryforward of approximately $2,200,000. The federal net operating loss
and tax credit carryforwards expire primarily in the years 1999 through 2010.
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
-------- --------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to the allowance for
doubtful accounts........................................... $ 863 $ 4,466
Inventories, principally due to the allowance for obsolete
inventories and additional costs inventoried for tax
purposes.................................................... 1,949 4,672
Property and equipment, principally due to differences in
depreciation................................................ 3,925 6,683
Capitalized research and development expenses.................. 2,380 3,394
Accrued expenses, not currently deductible..................... 1,227 9,423
Deferred revenue............................................... 931 738
Tax credit carryforwards....................................... 2,708 2,291
Net operating loss carryforwards............................... 14,486 15,959
Other.......................................................... 20 --
-------- --------
28,489 47,626
Less: valuation allowance........................................ (22,250) (44,441)
-------- --------
Net deferred tax assets........................................ 6,239 3,185
-------- --------
Deferred tax liabilities:
Capitalized software........................................... (4,121) (1,279)
Long-term contract revenue..................................... (1,218) (1,906)
-------- --------
(5,339) (3,185)
-------- --------
Net deferred tax asset......................................... $ 900 $ --
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of December 31, 1995 was
$44,441,000. In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers the projected future taxable income and tax planning strategies in
making the assessment.
F-18
<PAGE> 63
COMPRESSION LABS, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND
1996 AND AT SEPTEMBER 30, 1996 IS UNAUDITED) -- (CONTINUED)
Federal tax law imposes significant restrictions on the utilization of net
operating loss carryforwards in the event of a shift in ownership of the Company
which constitutes an "ownership change," as defined in Internal Revenue Code,
Section 382. The Company's net operating loss and general business credit
carryforwards have not been subjected to any potential limitations as a result
of these provisions.
12. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid no federal income taxes during the years ended December
31, 1993, 1994, 1995 or for the nine months ended September 30, 1996. Interest
payments were $846,000, $798,000, $1,142,000, $848,000 and $763,000 for the
years ended December 31, 1993, 1994 and 1995 and the nine months ended September
30, 1995 and 1996, respectively. The Company purchased property and equipment
through capital lease obligations totaling $1,817,000, $0, $147,000, $98,000 and
$0 for the years ended December 31, 1993, 1994 and 1995 and the nine months
ended September 30, 1995 and 1996, respectively.
In 1994, additional paid-in capital increased $13,758,000 from the
conversion of 14,900 shares of Series B convertible preferred stock into
1,434,900 shares of the Company's common stock. See Note 9 of Notes to
Consolidated Financial Statements.
13. SUBSEQUENT EVENT
The Company on November 19, 1996, entered into a settlement agreement with
CIT and FLI whereby the Company has agreed to pay CIT a minimum of $1,800,000
together with interest at 8.44% (in 41 monthly installments of $50,000) plus up
to an additional $1,629,921 depending on amounts recovered from OSUERF and
Southwestern Bell Telephone Company in a related action. The Company has
received settlement offers from OSUERF and Southwestern Bell Telephone Company
and is in continuing negotiations to finalize a settlement. In no event would
the Company be required to pay additional amounts if the amount recovered from
OSUERF and Southwestern Bell Telephone Company does not exceed $1,800,000.
F-19
<PAGE> 64
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS
OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE,
SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR THE SOLICITATION OF AN OFFER
TO BUY, ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES,
OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................... 2
Risk Factors.......................... 5
Use Of Proceeds....................... 10
Dividend Policy....................... 10
Selected Financial Data............... 11
Management's Discussion And Analysis
Of Financial Condition And Results
Of Operations....................... 12
Business.............................. 17
Management............................ 29
Principal and Selling
Securityholders..................... 36
Plan of Distribution.................. 38
Description Of Capital Stock.......... 39
Legal Matters......................... 41
Experts............................... 41
No Salesperson........................ 42
Available Information................. 42
Index To Financial Statements......... F-1
- ---------------------------------------------
- ---------------------------------------------
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
2,799,242 SHARES
COMPRESSION LABS,
INCORPORATED
COMMON STOCK
------------------------
PROSPECTUS
December , 1996
------------------------
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 65
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates except
for the registration fee.
<TABLE>
<S> <C>
SEC registration fee.............................................. $ 3,658
Nasdaq listing fee................................................ 17,500
Legal fees and expenses........................................... 35,000
Accounting fees and expenses...................................... 20,000
Printing and Engraving fees....................................... 13,750
Miscellaneous..................................................... 10,092
--------
TOTAL................................................... $100,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under Section 145 of the Delaware General Corporation Law the Company has
broad powers to indemnify its directors and officers against liabilities they
may incur in such capacities, including liabilities under the Securities Act.
The Company's By-laws provide that the Company will indemnify its directors and
executive officers and may indemnify other officers to the full extent permitted
by law. The Company believes that indemnification under its By-laws covers at
least negligence and gross negligence by directors and officers, and requires
the Company to advance litigation expenses in the case of stockholder derivative
actions or other actions, against an undertaking by the officer or director to
repay such advances if it is ultimately determined that the director or officer
is not entitled to indemnification. The By-laws further provide that rights
conferred under such By-laws shall not be deemed to be exclusive of any other
right such persons may have or acquire under any statute, provision of any
Restated Certificate of Incorporation, By-law, agreement, vote of stockholders,
disinterested directors or otherwise.
In addition, the Company's Restated Certificate of Incorporation provides
that, pursuant to Delaware law, its directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty of care to the Company and
its stockholders. This provision in the Restated Certificate of Incorporation
does not eliminate the duty of care, and in appropriate circumstances equitable
remedies such as injunctive or other forms of non-monetary relief will remain
available under Delaware law. In addition, each director will continue to be
subject to liability for breach of the director's duty of loyalty to the
Company, for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental laws.
The Company has entered into indemnification contracts with certain of its
directors and executive officers. The Company currently has a liability
insurance policy which insures directors and officers of the Company in certain
circumstances. The policy also insures the Company against losses as to which
its directors and officers are entitled to indemnification.
II-1
<PAGE> 66
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Since November 25, 1993, the Registrant has sold and issued the following
unregistered securities to the following persons on the dates indicated:
<TABLE>
<S> <C> <C> <C>
One accredited investor........ 05/05/94 147,929 shares of Common Stock $1,973,000
Four accredited investors...... 10/24/96 350,000 shares of Series C $7,000,000
Convertible Preferred Stock and
Warrants to purchase 375,000 shares
of Common Stock
</TABLE>
The sales and issuances of securities described above were deemed to be
exempt from registration under the Securities Act by virtue of Section 4(2) of
the Securities Act.
Appropriate legends are affixed to the stock and warrant certificates
issued in the aforementioned transactions. Similar legends were imposed in
connection with any subsequent sales of any such securities so long as
appropriate. All recipients either received adequate information about the
Registrant or had access, through employment or other relationships, to such
information.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of Registrant, as amended.(1)
3.2 Bylaws, as amended.(2)
4.1 Warrant, dated as of December 19, 1989, between the Company and PaineWebber R&D
Partners, II, L.P.(3)
4.2 Amendment No. 1 to Warrant, dated as of October 16, 1992, between the Company and
PaineWebber R&D Partners II, L.P.(3)
4.3 Form of Warrant Certificate.(3)
4.4 Form of Common Stock Certificate.(3)
4.5 Certificate of Determination of Preferences of Series A Junior Participating
Preferred Stock.(11)
4.6 Form of Side Letter Agreement.***
4.7 Registration Rights Agreement dated October 24, 1996 among the Company, Infinity
Investors, Ltd. and Seacrest Capital Limited.(4)
4.8 Certificate of Designation of Series C Convertible Preferred Stock.(4)
5.1 Opinion of counsel as to the legality of the securities being registered.***
10.1 1980 Stock Option Plan, as amended (the ISO Plan).(5)
10.2 Revised forms of Incentive Stock Option and Early Exercise Stock Purchase
Agreement used in connection with the issuance and exercise of options under the
ISO Plan.(6)
10.3 1984 Employee Stock Purchase Plan, as amended (the 1984 Purchase Plan).(5)
10.4 Form of Offering and Participation and Payroll Deduction Agreement used in
connection with the purchase of Common Stock under the 1984 Purchase Plan.(7)
10.5 1984 Supplemental Stock Option Plan, as amended (the Supplemental Plan).(5)
10.6 Form of Supplemental Stock Option Plan and Early Exercise Stock Purchase agreement
used in connection with the issuance and exercise of options under the
Supplemental Plan.(6)
10.7 Lease Agreement, dated as of January 16, 1987, covering the Company's principal
executive offices and manufacturing facility.(2)
10.8 Sublease Agreement, dated December 6, 1990, covering the Company's additional
principal executive offices.(8)
10.10 Perquisite Plan.(9)
10.11 Amended and Restated 1992 Non-Employee Directors' Stock Option Plan (the
Directors' Plan) and Form of Grant used in connection therewith.(5)
10.12 Lease Agreement, dated March 31, 1992, between MLH Income Realty Partnership III,
Lessor, and Compression Labs, Incorporated, Lessee, covering the Company's
principal manufacturing facility.(10)
</TABLE>
II-2
<PAGE> 67
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <S>
10.13 First Amendment to Lease, dated December 14, 1994, between MLH Income Realty
Partnership III, Lessor, and Compression Labs, Incorporated, Lessee, covering the
Company's principal manufacturing facility.(5)
10.14 Amended and Restated Rights Agreement between the Company and First National Bank
of Boston dated January 29, 1993.(11)
10.15 Investment Agreement by and between Compression Labs, Incorporated and Fletcher
Asset Management, Inc., dated as of June 16, 1995.(5)
10.16 Loan and Security Agreement, entered into as of August 21, 1995, by and between
Compression Labs, Incorporated and BankAmerica Business Credit, Inc.(12)
10.17 Consulting and Separation Agreement with John E. Tyson dated February 16,
1996.(13)
10.18 Consulting and Separation Agreement with Robert Silver dated November 29,
1995.(13)
10.19 Waiver and First Amendment to Credit Agreement, entered into as of April 11, 1996,
by and between Compression Labs, Incorporated and BankAmerica Business Credit,
Inc.(13)
10.20 Waiver and Second Amendment to Credit Agreement, entered into as of May 17, 1996,
by and between Compression Labs, Incorporated and BankAmerica Business Credit,
Inc.(14)
10.21 Termination Agreement, dated June 4, 1996, between Compression Labs, Incorporated
and BankAmerica Business Credit, Inc.(15)
10.22 Loan and Security Agreement between the Company and Greyrock Business Credit, a
Nations Bank Company.(15)
10.23 Asset Purchase Agreement between the Company and Charger Industries, Inc. dated
June 7, 1996.(16)
10.24 Second Amendment to Amended Lease, dated June 20, 1996, by and between The
Equitable Life Assurance Society of the United States and Compression Labls,
Incorporated.
10.25 Sublease Agreement, dated June 24, 1996, between Compression Labs, Inc. and
Charger Industries, Inc.***
10.26 Employment Agreement with T. Gary Trimm dated July 17, 1996.
10.27 Employment Agreement with Larry L. Enterline dated July 17, 1996.
10.28 Convertible Preferred Stock Purchase Agreement dated October 24, 1996 among the
Company, Infinity Investors, Ltd. and Seacrest Capital Limited.(4)
First Amendment to Lease, dated September 3, 1996, by and between AMB Western
Properties Fund-I, and Compression Labs, Incorporated.***
11.1 Statement recomputation of Net Income (Loss) Per Share. Reference is made to Page
II-7.
21.1 Subsidiaries of the Company.(9)
23.1 Independent Auditors' Report on Schedule and Consent. Reference is made to Page
II-8.
23.2 Consent of counsel. Reference is made to Exhibit 5.1.***
24.1 Power of Attorney. Reference is made to Page II-6.
27.1 Financial Data Schedules for Compression Labs, Incorporated for the Quarter Ending
September 30, 1996.(17)
</TABLE>
- ---------------
*** To be filed by amendment.
(1) Filed as an exhibit to a Registration Statement on Form S-8 filed on
November 29, 1989 (Registration No. 33-32366) and incorporated herein by
reference.
(2) Filed as an exhibit to an Annual Report on Form 10-K filed on April 14,
1988 (Commission File No. 0-13218) and incorporated herein by reference.
(3) Filed as an exhibit to a Registration Statement on Form S-3 filed on April
5, 1993 and incorporated herein by reference.
II-3
<PAGE> 68
(4) Filed as an exhibit to a Current Report on Form 8-K filed on November 1,
1996 (Commission File No. 0-13218) and incorporated herein by reference.
(5) Filed as an exhibit to an Annual Report on Form 10-K filed for the year
ended December 31, 1994 (Commission File No. 0-13218) and incorporated
herein by reference.
(6) Filed as an exhibit to a Registration Statement on Form S-8 filed June 6,
1994 (file No. 33-79790) and incorporated herein by reference.
(7) Filed as an exhibit to a Registration Statement on Form S-8 filed on March
29, 1985 (Registration No. 2-9628) and incorporated herein by reference.
(8) Filed as an exhibit to an Annual Report on Form 10-K filed for the year
ended December 31, 1990 (Commission File No. 0-13218) and incorporated
herein by reference.
(9) Filed as an exhibit to a Registration Statement on Form S-1 filed on July
10, 1986 (Registration No. 33-7128) or Amendment No. 1 to such Registration
Statement filed on July 24, 1986 and incorporated herein by reference.
(10) Filed as an exhibit to an Annual Report on Form 10-K filed for the year
ended December 31, 1992 (Commission File No. 0-13218) and incorporated
herein by reference.
(11) Filed as an exhibit to a Current Report on Form 8-K filed on February 1,
1993 (Commission File No. 0-13218) and incorporated herein by reference.
(12) Filed as an exhibit to a quarterly report on Form 10-Q for the quarterly
period ended September 30, 1995 (Commission File No. 0-13218) and
incorporated herein by reference.
(13) Filed as an exhibit to an Annual Report on Form 10-K filed for the year
ended December 31, 1995 (Commission File No. 0-13218) and incorporated
herein by reference.
(14) Filed as an exhibit to a Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1996 (Commission File No. 0-13218) and incorporated
herein by reference.
(15) Filed as an exhibit to a Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996 (Commission File No. 0-13218) and incorporated
herein by reference.
(16) Filed as an exhibit to a Current Report on Form 8-K filed on June 14, 1996
(Commission File No. 0-13218) and incorporated herein be reference.
(17) Filed as an exhibit to a Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996 (Commission File No. 0-13218) and
incorporated herein by reference.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts. Reference is made to Page
II-9.
ITEM 17. UNDERTAKINGS
(A) RULE 415 OFFERING
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933, as amended (the "Securities Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in this Registration Statement or any
material change to such information in the Registration Statement.
II-4
<PAGE> 69
(2) That, for the purpose of determining any liability under the Securities
Act, each such posteffective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
(h) ACCELERATION OF EFFECTIVENESS
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
(i) REGISTRATION STATEMENT PERMITTED BY RULE 430A
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
II-5
<PAGE> 70
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
CERTIFIES THAT IT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF SAN
JOSE, STATE OF CALIFORNIA, ON NOVEMBER 25, 1996.
COMPRESSION LABS, INCORPORATED
By /s/ T. GARY TRIMM
------------------------------------
(T. Gary Trimm)
President and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints T. Gary Trimm, Michael E. Seifert and
Glen R. Jones, and each or either of them, his true and lawful attorneys-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place, and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement,
and to file the same, with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys-in-fact and agents, and each of them, full power and authority to
do and perform each and every act and thing requisite and necessary to be done
in connection therewith, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their or his substitutes or
substitute, may lawfully do or cause to be done by virtue hereof.
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ------------------------- ------------------
<C> <S> <C>
/s/ T. GARY TRIMM President, Chief November 25, 1996
- ----------------------------------------------- Executive Officer and
(T. Gary Trimm) Director (Principal
Executive and Financial
Officer)
/s/ MICHAEL E. SEIFERT Vice President and Chief November 25, 1996
- ----------------------------------------------- Accounting Officer
(Michael E. Seifert) (Principal Accounting
Officer)
/s/ ARTHUR G. ANDERSON Director November 25, 1996
- -----------------------------------------------
(Arthur G. Anderson)
/s/ ROBERT J. CASALE Director November 25, 1996
- -----------------------------------------------
(Robert J. Casale)
/s/ ROBERT B. LIEPOLD Director November 25, 1996
- -----------------------------------------------
(Robert B. Liepold)
/s/ DAVID A. WEGMANN Director November 25, 1996
- -----------------------------------------------
(David A. Wegmann)
</TABLE>
II-6
<PAGE> 71
EXHIBIT 11.1
COMPRESSION LABS, INCORPORATED
STATEMENT REGARDING COMPUTATION OF
NET INCOME (LOSS) PER SHARE
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER NINE MONTHS
31, ENDED SEPTEMBER 30,
1995 1995 1996
----------- ------- -------
<S> <C> <C> <C>
Net income (loss) from continuing operations................ $ (21,040) $(3,555) $(7,540)
Weighted average of common stock outstanding................ 15,304 15,191 15,616
----------- ------- -------
Shares used in per share computation........................ 15,304 15,191 15,616
----------- ------- -------
Net income (loss) per share from continuing operations...... $ (1.37) $ (0.23) $ (0.48)
========= ======= =======
Net income (loss) from discontinued operations.............. $ (36,542) $ 1,374 $ --
Weighted Average of common stock outstanding................ 15,304 15,191 15,616
----------- ------- -------
Shares used in per share computation........................ 15,304 15,191 15,616
----------- ------- -------
Net income (loss) per share from discontinued operations.... $ (2.39) $ 0.09 $ --
========= ======= =======
Net income (loss) per share from continuing operations...... $ (1.37 $ (0.23) $ (0.48)
Net income (loss) per share from discontinued operations.... (2.39) 0.09 --
----------- ------- -------
Net income (loss) per share................................. $ (3.76) $ (0.14) $ (0.48)
========= ======= =======
</TABLE>
II-7
<PAGE> 72
EXHIBIT 23.1
INDEPENDENT AUDITORS' REPORT ON SCHEDULE AND CONSENT
The Stockholders and Board of Directors
Compression Labs, Incorporated:
The audits referred to in our report dated March 13, 1996, included the
related financial statement schedule as of December 31, 1995 and for each of the
years in the three year period ended December 31, 1995, included in the
registration statement. The financial statement schedule is the responsibility
of the Company's management. Our responsibility is to express an opinion on the
financial statement schedule based on our audits. In our opinion the financial
statement schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
We consent to the use of our reports included herein and to the reference
to our firm under the headings "Selected Financial Data" and "Experts" in the
prospectus.
/s/ KPMG Peat Marwick LLP
San Jose, California
November 25, 1996
II-8
<PAGE> 73
SCHEDULE II
COMPRESSION LABS, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, 1993
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE AT CHARGED TO BALANCE
BEGINNING OF COSTS AND AT END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1995:
Deducted from asset accounts --
Allowance for doubful accounts................ $1,992 $ 11,349 $ (3,313)(1) $10,028
Product warranty liability....................... $ 881 $ 2,487 $ (2,793)(2) $ 575
Product upgrades................................. $ 97 $ 60 $ (97)(3) $ 60
Year ended December 31, 1994:
Deducted from asset accounts --
Allowance for doubful accounts................ $1,358 $ 841 $ (207)(1) $ 1,992
Product warranty liability....................... $ 880 $ 2,696 $ (2,695)(2) $ 881
Product upgrades................................. $ 333 $ 324 $ (560)(3) $ 97
Year ended December 31, 1993:
Deducted from asset accounts --
Allowance for doubtful accounts............... $1,018 $ 387 $ (47)(1) $ 1,358
Product warranty liability....................... $ 570 $ 1,598 $ (1,288)(2) $ 880
Product upgrades................................. $1,335 $ -- $ (1,002)(3) $ 333
</TABLE>
- ---------------
(1) Uncollectable accounts written off during the year.
(2) Costs incurred for warranty repairs during the year.
(3) Charges incurred for options and additional software features owed to
customers.
II-9
<PAGE> 74
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------ ----------------------------------------------------------------------------------
<C> <S>
3.1 Restated Certificate of Incorporation of Registrant, as amended. (1)
3.2 Bylaws, as amended. (2)
4.1 Warrant, dated as of December 19, 1989, between the Company and PaineWebber R&D
Partners, II, L.P. (3)
4.2 Amendment No. 1 to Warrant, dated as of October 16, 1992, between the Company and
PaineWebber R&D Partners II, L.P. (3)
4.3 Form of Warrant Certificate. (3)
4.4 Form of Common Stock Certificate. (3)
4.5 Certificate of Determination of Preferences of Series A Junior Participating
Preferred Stock. (11)
4.6 Form of Side Letter Agreement.***
4.7 Registration Rights Agreement dated October 24, 1996 among the Company, Infinity
Investors, Ltd. and Seacrest Capital Limited. (4)
4.8 Certificate of Designation of Series C Convertible Preferred Stock. (4)
5.1 Opinion of counsel as to the legality of the securities being registered.****
10.1 1980 Stock Option Plan, as amended (the ISO Plan). (5)
10.2 Revised forms of Incentive Stock Option and Early Exercise Stock Purchase
Agreement used in connection with the issuance and exercise of options under the
ISO Plan. (6)
10.3 1984 Employee Stock Purchase Plan, as amended (the 1984 Purchase Plan). (5)
10.4 Form of Offering and Participation and Payroll Deduction Agreement used in
connection with the purchase of Common Stock under the 1984 Purchase Plan. (7)
10.5 1984 Supplemental Stock Option Plan, as amended (the Supplemental Plan). (5)
10.6 Form of Supplemental Stock Option Plan and Early Exercise Stock Purchase agreement
used in connection with the issuance and exercise of options under the
Supplemental Plan. (6)
10.7 Lease Agreement, dated as of January 16, 1987, covering the Company's principal
executive offices and manufacturing facility. (2)
10.8 Sublease Agreement, dated December 6, 1990, covering the Company's additional
principal executive offices. (8)
10.10 Perquisite Plan. (9)
10.11 Amended and Restated 1992 Non-Employee Directors' Stock Option Plan (the
Directors' Plan) and Form of Grant used in connection therewith. (5)
10.12 Lease Agreement, dated March 31, 1992, between MLH Income Realty Partnership III,
Lessor, and Compression Labs, Incorporated, Lessee, covering the Company's
principal manufacturing facility. (10)
10.13 First Amendment to Lease, dated December 14, 1994, between MLH Income Realty
Partnership III, Lessor, and Compression Labs, Incorporated, Lessee, covering the
Company's principal manufacturing facility. (5)
10.14 Amended and Restated Rights Agreement between the Company and First National Bank
of Boston dated January 29, 1993. (11)
10.15 Investment Agreement by and between Compression Labs, Incorporated and Fletcher
Asset Management, Inc., dated as of June 16, 1995. (5)
10.16 Loan and Security Agreement, entered into as of August 21, 1995, by and between
Compression Labs, Incorporated and BankAmerica Business Credit, Inc. (12)
10.17 Consulting and Separation Agreement with John E. Tyson dated February 16, 1996.
(13)
10.18 Consulting and Separation Agreement with Robert Silver dated November 29, 1995.
(13)
10.19 Waiver and First Amendment to Credit Agreement, entered into as of April 11, 1996,
by and between Compression Labs, Incorporated and BankAmerica Business Credit,
Inc. (13)
10.20 Waiver and Second Amendment to Credit Agreement, entered into as of May 17, 1996,
by and between Compression Labs, Incorporated and BankAmerica Business Credit,
Inc. (14)
10.21 Termination Agreement, dated June 4, 1996, between Compression Labs, Incorporated
and BankAmerica Business Credit, Inc. (15)
10.22 Loan and Security Agreement between the Company and Greyrock Business Credit, a
Nations Bank Company. (15)
10.23 Asset Purchase Agreement between the Company and Charger Industries, Inc. dated
June 7, 1996. (16)
</TABLE>
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
----------------------------------------------------------------------------------
<C> <S>
10.24 Second Amendment to Amended Lease, dated June 20, 1996, by and between The
Equitable Life Assurance Society of the United States and Compression Labs,
Incorporated.
10.25 Sublease Agreement, dated June 24, 1996, between Compression Labs, Inc. and
Charger Industries, Inc.****
10.26 Employment Agreement with T. Gary Trimm dated July 17, 1996.
10.27 Employment Agreement with Larry L. Enterline dated July 17, 1996.
10.28 Convertible Preferred Stock Purchase Agreement dated October 24, 1996 among the
Company, Infinity Investors, Ltd. and Seacrest Capital Limited. (4)
10.29 First Amendment to Lease, dated September 3, 1996, by and between AMB Western
Properties Fund-I, and Compression Labs, Incorporated.****
11.1 Statement recomputation of Net Income (Loss) Per Share. Reference is made to II-7.
21.1 Subsidiaries of the Company. (9)
23.1 Independent Auditors' Report on Schedule and Consent. Reference is made to Page
II-8.
23.2 Consent of counsel. Reference is made to Exhibit 5.1.***
24.1 Power of Attorney. Reference is made to Page II-6.
27.1 Financial Data Schedules for Compression Labs, Incorporated for the Quarter Ending
September 30, 1996.(17)
</TABLE>
- ---------------
**** To be filed by amendment.
(1) Filed as an exhibit to a Registration Statement on Form S-8 filed on
November 29, 1989 (Registration No. 33-32366) and incorporated herein by
reference.
(2) Filed as an exhibit to an Annual Report on Form 10-K filed on April 14,
1988 (Commission File No. 0-13218) and incorporated herein by reference.
(3) Filed as an exhibit to a Registration Statement on Form S-3 filed on April
5, 1993 and incorporated herein by reference.
(4) Filed as an exhibit to a Current Report on Form 8-K filed on November 1,
1996 (Commission File No. 0-13218) and incorporated herein by reference.
(5) Filed as an exhibit to an Annual Report on Form 10-K filed for the year
ended December 31, 1994 (Commission File No. 0-13218) and incorporated
herein by reference.
(6) Filed as an exhibit to a Registration Statement on Form S-8 filed June 6,
1994 (file No. 33-79790) and incorporated herein by reference.
(7) Filed as an exhibit to a Registration Statement on Form S-8 filed on March
29, 1985 (Registration No. 2-9628) and incorporated herein by reference.
(8) Filed as an exhibit to an Annual Report on Form 10-K filed for the year
ended December 31, 1990 (Commission File No. 0-13218) and incorporated
herein by reference.
(9) Filed as an exhibit to a Registration Statement on Form S-1 filed on July
10, 1986 (Registration No. 337128) or Amendment No. 1 to such Registration
Statement filed on July 24, 1986 and incorporated herein by reference.
(10) Filed as an exhibit to an Annual Report on Form 10-K filed for the year
ended December 31, 1992 (Commission File No. 0-13218) and incorporated
herein by reference.
(11) Filed as an exhibit to a Current Report on Form 8-K filed on February 1,
1993 (Commission File No. 0-13218) and incorporated herein by reference.
(12) Filed as an exhibit to a quarterly report on Form 10-Q for the quarterly
period ended September 30, 1995 (Commission File No. 0-13218) and
incorporated herein by reference.
(13) Filed as an exhibit to an Annual Report on Form 10-K filed for the year
ended December 31, 1995 (Commission File No. 0-13218) and incorporated
herein by reference.
(14) Filed as an exhibit to a Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 1996 (Commission File No. 0-13218) and incorporated
herein by reference.
(15) Filed as an exhibit to a Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1996 (Commission File No. 0-13218) and incorporated
herein by reference.
(16) Filed as an exhibit to a Current Report on Form 8-K filed on June 14, 1996
(Commission File No. 0-13218) and incorporated herein by reference.
(17) Filed as an exhibit to a Quarterly Report on Form 10-Q for the quarterly
period ended September 30, 1996 (Commission File No. 0-13218) and
incorporated herein by reference.
<PAGE> 1
EXHIBIT 10.24
SECOND AMENDMENT TO AMENDED LEASE
THIS SECOND AMENDMENT TO AMENDED LEASE (this "Second Amendment to
Amended Lease") dated for reference purposes only as June 20, 1996, is made by
and between The Equitable Life Assurance Society of the United States, a New
York corporation ("Landlord") and Compressions Labs, Inc., a California
corporation ("Tenant"). Any capitalized term used herein and not defined shall
have the same meaning as given to that term in the Lease.
1. RECITALS: The parties hereto enter into this Sixty Amendment
based upon the following facts and with the following intentions:
A. Landlord and Tenant entered into that certain lease
dated January 16, 1987 for certain premises located at 2860 Junction Ave., San
Jose (the "Premises") as amended by that certain Amendment to Lease dated April
1, 1989 and that certain First Amendment to Amended Lease dated April 10, 1992
(collectively referred to herein as the "Lease"). Landlord and Tenant
acknowledge that after the original lease dated January 16, 1987 was executed,
it was amended by a series of amendments all executed prior to April 1, 1989
(the "Prior Amendments"), and that such Prior Amendments were terminated and
made of no further force or effect by that Amendment to Lease dated April 1,
1989 (as more particularly set forth in Recital B and Paragraph 12 of said
Amendment to Lease dated April 1, 1989).
B. Tenant desires to sublease the Premises to Charger
Industries, Inc. ("Charger"). Tenant acknowledges that the Lease provides that
Landlord has the right to terminate the Lease in the event the Tenant elects to
sublease the Premises. Notwithstanding the foregoing, Landlord has agreed to
consent to the proposed sublease and waive its right to terminate the Lease on
account of the proposed sublease on the condition that Tenant agrees to amend
the Lease to provide for the following:
(1) To increase Base Monthly Rent for the
Premises to Sixty-Six Thousand Seven Hundred Sixteen Dollars ($66,716)
effective as of July 1, 1996;
(2) To eliminate Tenant's option to extend the
term of the Lease; and
(3) To require Tenant to waive its right to any
"profit" that it shall receive on account of any sublease or assignment
pursuant to Paragraph 14B of the Lease.
2. BASE MONTHLY RENT INCREASE: Paragraph 3.1 of the Lease
entitled "Base Monthly Rent" is hereby amended by deleting subparagraphs G and
H in their entirety and inserting the following language in lieu thereof:
"G. From October 1, 1995, through and including June 30,
1996, Base Monthly Rent shall equal Fifty-Two Thousand Six
Hundred Thirty-One and 59/100 Dollars ($52,631.59) per month.
<PAGE> 2
H. From July 1, 1996, through and including September
30, 1997, Base Monthly Rent shall equal Sixty-Six Thousand
Seven Hundred Sixteen Dollars ($66,716) per month."
3. CONFIRMATION OF EXPIRATION DATE AND ELIMINATION OF OPTION TO
EXTEND: Landlord and Tenant confirm and agree that the Lease Term shall expire
and terminate on September 30, 1997, and Tenant shall have no right to renew or
extend such term. To implement the foregoing, Landlord and Tenant agree that
Paragraph 2.6 of the Lease entitled "Options to Extend Lease Term" is hereby
deleted in its entirety.
4. WAIVER OF TENANT'S RIGHTS TO SHARE IN SUBLEASING PROFITS:
Subparagraph 14.1C(2) of the Lease is hereby amended by deleting the second and
third sentences appearing in such subparagraph and replacing such deleted
sentences with the following:
"If Tenant assigns its interest in this Lease in accordance
with this subparagraph (2), then Tenant shall pay to Landlord
one hundred percent (100%) of all consideration received by
Tenant over and above the assignee's agreement to assume the
obligations of Tenant under this Lease. If Tenant sublets all
or part of the Premises, then if and to the extent all rent
and other consideration paid by the subtenant to Tenant
exceeds the Base Monthly Rent, all Operating Expenses, and all
Real Property Taxes paid by Tenant to Landlord pursuant to
this Lease with respect to and which are allocable to the area
so sublet, one hundred percent (100%) of such excess shall be
paid to Landlord."
5. WAIVER OF LANDLORD'S TERMINATION RIGHT: Landlord hereby
waives its right to terminate the Lease pursuant to Subparagraph 14.1C of the
Lease on account of the proposed sublease by Tenant to Charger. The waiver
made by Landlord herein is only with respect to the proposed sublease to
Charger and Landlord does not waive any right that it may have to terminate the
Lease with respect to any other proposed Transfer (as that term is defined in
the Lease) of the Lease. Notwithstanding the foregoing, a Transfer by Charger
pursuant to Paragraph 14.1E (a "Permitted Transfer") shall not require
Landlord's consent nor trigger any right of Landlord to terminate the Lease or
recapture the Premises.
6. CONDITION PRECEDENT: Notwithstanding anything in this Second
Amendment to Amended Lease to the contrary, if the closing ("Closing") of the
purchase transaction which is contemplated in that certain Asset Purchase
Agreement dated as of June 7, 1996 between Tenant, as seller and Charger, as
buyer has not occurred nor has this condition been waived by Tenant, in
writing, on or before July 1, 1996, then this Agreement shall be and become
void and of no force and effect to either party hereto.
7. COUNTERPART EXECUTION: This Second Amendment to Amended Lease
may be executed in counterparts, and shall become binding upon Landlord and
Tenant when each has executed a counterpart of this Amendment and each has
transmitted a true copy of this Amendment as so executed to the other, and such
copy has actually been received by the other, by means of personal delivery,
courier, or telecopy transmission. Each party shall take such
2.
<PAGE> 3
action as is reasonably necessary to ensure that each party receives an
original counterpart of this Amendment bearing original signatures of both
parties.
8. MISCELLANEOUS: In the event of any conflict between the terms
of this Second Amendment to Amended Lease and the terms of the Lease, the terms
of this Second Amendment to Amended Lease shall prevail. Except as amended
hereby, the Lease shall remain in full force and effect.
<TABLE>
<S> <C>
LANDLORD: TENANT:
THE EQUITABLE LIFE ASSURANCE COMPRESSION LABS, INC.,
SOCIETY OF THE UNITED STATES, a California corporation
a New York corporation
By: /s/ James Piane By: /s/ Thomas G. Trimm
-------------------------------- -------------------------------
Printed Printed
Name: James Piane Name: Thomas G. Trimm
------------------------------ -----------------------------
Title: Investment Officer Title: President & CEO
----------------------------- ----------------------------
Date: June 21, 1996 Date: June 25, 1996
------------------------------ -----------------------------
</TABLE>
3.
<PAGE> 1
EXHIBIT 10.26
EMPLOYMENT AGREEMENT
This employment agreement (this "Agreement") is made this 17th day of
July, 1996 ("Effective Date"), by and between Compression Labs, Incorporated
(the "Company") and Thomas G. Trimm ("Executive").
WHEREAS, Executive is presently serving as President and Chief
Executive Officer of the Company; and
WHEREAS, the Company recognizes the valuable contributions Executive
has made to the success of the Company and wishes to arrange for the continued
availability of Executive's services to the Company; and
WHEREAS, Executive desires to continue to serve the Company;
NOW, THEREFORE, in consideration of the mutual covenants, the Company
and Executive enter into this Agreement.
1. EMPLOYMENT.
(a) Executive is currently employed as the President and
Chief Executive Officer of the Company.
(b) The Company and Executive each agree and acknowledge
that Executive is employed by the Company as an "at-will" employee and that
either Executive or the Company has the right at any time to terminate
Executive's employment with the Company, with or without cause or advance
notice, for any reason or for no reason. The Company and Executive wish to set
forth the compensation and benefits which Executive shall be entitled to
receive in the event that Executive's employment with the Company terminates
under the circumstances described herein.
(c) The duties and obligations of the Company to
Executive under this Agreement are in recognition of Executive's past services
to the Company and shall be in consideration for Executive's continued
employment with the Company.
2. POSITION AND DUTIES.
(a) Executive shall continue to have such
responsibilities and authority as may be given Executive from time to time by
the Company's Board of Directors (the "Board"). It is contemplated that during
his employment Executive shall continue to serve as an executive of the
Company, reporting directly to the Board, with duties and responsibilities
commensurate with those that Executive has on the date of this Agreement;
provided, however, that the
<PAGE> 2
Company reserves the right to modify Executive's job duties from time to time
as it deems necessary.
(b) Executive shall devote his full time and attention
during normal business hours to the business affairs of the Company except for
reasonable vacations and except for illness or incapacity, but nothing in this
Agreement shall preclude Executive from devoting reasonable time required for
serving as a director or a member of a committee of any organization involving
no conflict of interest with the interest of the Company, from engaging in
charitable and community activities, and from managing his personal affairs,
provided that such activities do not materially interfere with the regular
performance of his duties and responsibilities under this Agreement.
3. COMPENSATION AND BENEFITS.
(a) SALARY AND BENEFITS. During the period of
Executive's employment hereunder, the Company shall pay to Executive an annual
salary in an amount of two hundred fifty thousand dollars ($250,000), less
standard deductions and withholdings, payable in installments in accordance
with Company policy. Executive also shall be entitled to all rights and
benefits for which he meets applicable eligibility conditions under such group
insurance and other Company benefit programs, including sick and vacation leave
and the Employee Stock Purchase Plan, which may be in force from time to time
and provided to Executive or for the Company's employees generally. The
Company reserves the right to modify Executive's compensation and benefits from
time to time as it deems necessary.
(b) BONUS. Executive shall be eligible for an individual
performance bonus based on overall Company performance payable at such time and
in such amount that is reasonable and mutually agreed upon by the Compensation
Committee of the Board and Executive.
(c) STOCK OPTIONS. The Company has previously granted to
Executive stock options under its 1980 Stock Option Plan and 1984 Supplemental
Stock Option Plan (the "Option Plans") to purchase an aggregate of 330,000
shares of the Company's common stock. In addition, on the date of this
Agreement, the Company has granted to Executive under the Option Plans options
to purchase 170,000 shares of the Company's common stock at an exercise price
equal to the common stock's fair market value as of the date hereof. Executive
acknowledges and agrees that there are no further commitments or obligations on
the part of the Company to grant to Executive any additional options.
(d) MANAGEMENT PERQ CHECKBOOK. The Company shall
allocate to Executive seven thousand dollars ($7,000) annually under the
current Management Perq Checkbook Plan.
(e) EXPENSES. Executive shall be entitled to receive
prompt reimbursement of all actual and reasonable expenses incurred by
Executive in performing Company services,
2.
<PAGE> 3
including expenses related to travel and expenses while away from home on
business. Such expenses shall be accounted for under the policies and
procedures established by the Company.
4. TERMINATION BY THE COMPANY. Executive's employment with the
Company may be terminated by the Company in the following circumstances.
(a) DEATH. Upon Executive's death, the termination date
shall be the last day of the month in which Executive's death occurs.
(b) DISABILITY. If Executive becomes incapacitated due
to physical or mental illness, or if Executive is absent from his full-time
duties for twelve (12) consecutive weeks on account of physical or mental
illness, the Company shall continue to pay to Executive an amount which, when
combined with disability or income-continuance benefits pursuant to a Company
plan or provided under state law and received by Executive, shall equal but not
exceed Executive's base salary, less standard deductions and withholdings.
However, Executive must submit claims for any and all such disability benefits
to which he may be entitled. For any waiting period during which Executive
receives no benefits under any disability plan, the Company shall pay his
entire base salary, less standard deductions and withholdings. The Company
shall continue to integrate such salary payments with benefits until such time
as Executive's employment is terminated in accordance with the provisions
relating to termination on account of disability, but in no event for longer
than twelve (12) weeks.
(c) FOR CAUSE. If the Company terminates Executive's
employment for Cause, Executive shall not be entitled to receive any payments
or benefits under the provisions of this Agreement, except as otherwise
specifically set forth herein, and the Company shall cease paying compensation
or providing benefits to Executive as of Executive's termination date. For
purposes of this Agreement, Cause shall mean misconduct, including: (i)
conviction of any felony or any crime involving moral turpitude or dishonesty;
(ii) participation in a fraud or act of dishonesty against the Company; (iii)
wilful breach of the Company's policies; (iv) intentional damage to the
Company's property; (v) material breach of this Agreement or Executive's
Proprietary Information and Inventions Agreement attached hereto as Exhibit B;
or (vi) conduct by Executive which in the good faith and reasonable
determination of the Board demonstrates unacceptable job performance or gross
unfitness to serve. Physical or mental disability shall not constitute Cause.
(d) WITHOUT CAUSE. The Company shall have the right to
terminate Executive's employment at any time, without Cause, effective on the
date determined by the Company. If the Company terminates Executive's
employment without Cause, then Executive shall be paid the following:
(i) SEVERANCE PAYMENTS. The Company shall
continue to pay Executive his base salary in effect at the time of such
termination for fifty-two (52) weeks following the date of termination
("Severance Payments"). The Severance Payments shall be made on the Company's
normal payroll dates and will be subject to standard deductions and
3.
<PAGE> 4
withholdings. Notwithstanding the foregoing, pursuant to Section 7(b) of this
Agreement (relating to a termination of benefits in the event Executive
competes with the Company or solicits on behalf of another person or entity),
the Severance Payments shall cease as of the date Executive enters into an
activity in competition with the Company or solicits the Company's employees,
consultants or independent contractors, as determined solely by the Company,
and Executive shall have no further rights to such benefits.
(ii) HEALTH INSURANCE. To the extent permitted by
law and by the Company's group health insurance plans, Executive will be
eligible, after the date of termination, to continue his health insurance
benefits under the federal COBRA law, at his own expense for up to eighteen
(18) months and, later, to convert to an individual policy if he wishes.
Executive will be provided with a separate notice of his COBRA rights. If
Executive elects COBRA continuation, the Company agrees to pay Executive's
health insurance continuation premiums for twelve (12) months following the
termination date ("Benefit Period"). The Company's obligation to make such
payments shall cease immediately if, during the Benefit Period, (A) Executive
becomes eligible for other health insurance benefits at the expense of a new
employer; or (B) in accordance with Section 7(b) of this Agreement, Executive
competes with the Company or solicits on behalf of another person or entity.
Executive agrees to notify a duly authorized officer of the Company, in
writing, at least ten (10) business days prior to his acceptance of any
employment which provides health insurance benefits, or his engagement in
prohibited activity defined in Section 7(b).
5. TERMINATION BY EXECUTIVE. Executive may terminate his
employment with the Company (1) for Good Reason within sixty (60) consecutive
days following the occurrence of an event or events constituting such Good
Reasons; or (2) for the convenience of Executive.
(a) GOOD REASON. If Executive voluntarily terminates his
employment with Good Reason, Executive shall receive the Severance Payments and
other benefits set forth in Section 4(d) above. For the purposes of this
Agreement, Good Reason means (i) substantial reduction of Executive's rate of
compensation as in effect immediately prior to the Effective Date of this
Agreement; (ii) failure to provide a package of welfare benefit plans which,
taken as a whole, provide substantially similar benefits to those in which the
Executive is entitled to participate (except that employee contributions may be
raised to the extent of any cost increases imposed by third parties) or any
action by the Company which would adversely affect Executive's participation or
substantially reduce Executive's benefits under any of such plans; (iii) change
in Executive's responsibilities, authority, title or office resulting in
diminution of position, excluding for this purpose an isolated, insubstantial
and inadvertent action not taken in bad faith which is remedied by the Company
promptly after notice thereof is given by Executive; (iv) request that
Executive relocate his current residence, unless Executive accepts such
relocation request; (v) material reduction in Executive's duties; (vi) failure
or refusal of a successor to the Company to assume the Company's obligations
under this Agreement; or (vii) material breach by the Company or any successor
to the Company of any of the material provisions of this Agreement.
4.
<PAGE> 5
(b) CONVENIENCE. If Executive voluntarily resigns his
employment without Good Reason as defined below, the Company shall pay
Executive his base salary, less standard deductions and withholdings, through
the date of termination at the rate in effect at the time of the notice of
termination. Thereafter, the Company shall have no further obligations to
Executive under this Agreement.
6. CONSULTING AGREEMENT. If the Company terminates Executive's
employment without Cause, or if Executive resigns for Good Reason within sixty
(60) consecutive days following the occurrence of an event or events
constituting Good Reason, Executive shall serve as a consultant to the Company
under the terms specified below. The consulting relationship shall commence on
the date of termination and continue for a period of three (3) years (the
"Consulting Period").
(a) CONSULTING SERVICES. Executive shall provide
consulting services to the Company in any area for which he is qualified by
virtue of his education, experience and training upon request by a duly
authorized officer of the Company. He agrees to exercise the highest degree of
professionalism and to utilize his expertise and creative talents in performing
these services. Executive agrees to make himself available to perform such
consulting services throughout the Consulting Period, up to a maximum of twenty
(20) hours per month.
(b) CONSULTING FEES AND BENEFITS.
(i) CONSULTING FEES. In consideration for
Executive's consulting services, the Company shall pay Executive for each month
a fee equal to the greater of five hundred dollars ($500) or one hundred twenty
five dollars ($125) per hour of consulting services performed during the month
("Consulting Fees") plus reimbursement of expenses for travel incurred by
Executive in the course of performing such services for the Company.
(ii) TAXES AND WITHHOLDING. The Company will not
withhold from the Consulting Fees any amount for taxes, social security or
other payroll deductions. The Company will issue Executive a Form 1099 with
respect to Executive's Consulting Fees. Executive acknowledges that he will be
entirely responsible for payment of any such taxes, and he hereby indemnifies
and holds harmless the Company from any liability for any taxes, penalties or
interest which may be assessed by any taxing authority.
(iii) STOCK OPTIONS. Executive's stock options
which are outstanding as of the termination date (the "Stock Options") shall
continue in effect and shall continue to vest during the Consulting Period
under the vesting schedule or schedules specified in the relevant Stock Option
agreements, and under the same terms and conditions specified in the relevant
Stock Option agreements. At the end of the Consulting Period, vesting in each
Stock Option will cease and such Stock Options will terminate, provided that
Executive may exercise each Stock Option (to the extent vested at the end of
the Consulting Period) for such period thereafter as is specified in the Stock
Option agreement for exercising the Stock Option following Executive's
termination of employment or ceasing to provide other services to the Company
(but
5.
<PAGE> 6
not after the expiration date of the Stock Options). Executive acknowledges
that, to the extent that this subsection provides an extension of any incentive
stock option beyond the term specified in the Stock Option agreement for such
incentive stock option, or results in a "modification" of such incentive stock
option (within the meaning of the Internal Revenue Code), then such an
incentive stock option may no longer be eligible for treatment as such, but may
hereafter be treated for tax purposes as a non-qualified stock option.
(iv) COMPETITIVE ACTIVITY. Throughout the
Consulting Period, Executive retains the right to engage in employment,
consulting or other work relationships in addition to his work for the Company.
Notwithstanding the foregoing, if, during the Consulting Period, Executive
enters into an activity in competition with the Company or solicits on behalf
of another person or entity, as described in Section 7(b) of this Agreement,
then (A) the Company's obligation to pay Executive Consulting Fees shall cease
as of the date Executive entered into such activity; and (B) Executive's
vesting in each Stock Option will cease and each Stock Option will terminate as
of the date Executive entered into such activity, as determined by the Company.
(v) LIMITATIONS ON AUTHORITY. Executive shall
have no responsibilities or authority as a consultant to the Company other than
as provided for above. Executive shall not represent or purport to represent
the Company in any manner whatsoever to any third party unless authorized by
the Company, in writing, to do so.
(vi) EARLY TERMINATION OF CONSULTING RELATIONSHIP.
Notwithstanding the foregoing, in the event of Executive's death or physical or
mental disability or in the event Executive voluntarily terminates his
consulting relationship with the Company upon notifying the Company, in
writing, at least ten (10) business days in advance, any of which events occur
prior to the expiration of the Consulting Period, the Company's obligation to
pay Executive any further Consulting Fees and Executive's vesting in each Stock
Option shall cease as of the termination date of the consulting relationship.
Executive's Stock Options thereupon will terminate and shall be exercisable (to
the extent then vested) only to the extent provided in subsection 6(b)(iii), or
in the respective Stock Option agreements. The consulting relationship shall
not expire prior to the expiration of its term for any reason other than a
reason set forth herein or in Section 7(b).
7. LIMITATIONS AND CONDITIONS ON BENEFITS; AMENDMENT OF AGREEMENT
(a) REDUCTION IN PAYMENTS AND BENEFITS. The benefits
provided under this Agreement are in lieu of any other benefit provided under
any group severance plan of the Company in effect at the time of termination.
(b) EARLY CESSATION OF PAYMENTS AND OTHER BENEFITS. In
the event that Executive, at any time during his employment with the Company,
while receiving Severance Payments, or during the Consulting Period, (i)
performs work for any business entity, or engages in any other work activity
which is in competition, or is preparing to compete, with the
6.
<PAGE> 7
Company; or (ii) either directly or through others, solicits or attempts to
solicit any employee, consultant, or independent contractor of the Company to
terminate his or her relationship with the Company in order to become an
employee, consultant or independent contractor to or for any other person or
entity, then, except as otherwise specifically provided herein, the Company's
obligations to pay Executive any amounts, including but not limited to
Severance Payments or health insurance premiums, or provide any benefits under
the terms of this Agreement. For purposes of this Agreement, the holding of
less than one percent (1%) of the outstanding voting securities of any firm or
business organization in competition with the Company shall not constitute
activities or services precluded by this Agreement. Executive agrees to notify
the Company, in writing, at least ten (10) business days prior to (i) engaging
in any work for any business purpose other than work for the Company; or (ii)
soliciting or attempting to solicit any employee, consultant, or independent
contractor of the Company to terminate his other relationship with the Company
on behalf of another person or entity. The Company shall not seek to recover
any amounts paid or benefits provided to Executive prior to his engagement in
such competitive or solicitation activities.
(c) RELEASE AND WAIVER OF CLAIMS. Prior to the receipt
of any Severance Payments and other benefits provided under this Agreement
following termination of Executive's Employment, and prior to the beginning of
the Consulting Period, Executive shall, as of the date of termination, execute
a Release and Waiver of Claims in the form attached hereto as Exhibit A
("Release"). In the event Executive does not execute the Release within the
specified period set forth in the Release, no further amounts shall be payable
and no further benefits shall be provided under this Agreement, and this
Agreement shall be null and void.
(d) CERTAIN REDUCTIONS IN PAYMENTS OR BENEFITS.
(i) In the event that any payments or other
benefits received or to be received by Executive pursuant to this Agreement
("Payments") would (A) constitute a "parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and
(B) but for this subsection (d), be subject to the excise tax imposed by
Section 4999 of the Code (the "Excise Tax"), then, in accordance with this
subsection 7(d), such Payments shall be reduced to the maximum amount that
would result in no portion of the Payments being subject to the Excise Tax.
For such purpose, the maximum amount of Payments that may be paid without
incurring the Excise Tax shall be determined by KPMG Peat Marwick or any other
nationally recognized accounting firm which is the Company's outside auditor at
the time of such determination (the "Accounting Firm") and shall be the largest
amount for which there is substantial authority (within the meaning of Section
6662(d)(2)(B) of the Code) for no portion of the Payments being treated as
subject to the Excise Tax. Any such determination shall be conclusive and
binding on Executive and the Company. For purposes of making the calculations
required by this subsection 7(d)(i), the Accounting Firm may make reasonable
assumptions and approximations concerning applicable taxes and may rely on
reasonable, good faith interpretations concerning the application of Sections
280G and 4999
7.
<PAGE> 8
of the Code. All fees and expenses of the Accounting Firm shall be borne
solely by the Company. If the Internal Revenue Service (the "IRS") determines
that a Payment is subject to the Excise Tax, then subsection 7(d)(ii) hereof
shall apply.
(ii) If, notwithstanding any reduction described
in subsection 7(d)(i) hereof (or in the absence of any such reduction), the IRS
determines that Executive is liable for the Excise Tax as a result of the
receipt of Payments, then Executive shall be obligated to pay back to the
Company, within 30 days after final IRS determination, an amount of the
Payments sufficient that none of the Payments retained by Executive constitute
a "parachute payment" within the meaning of Code Section 280G that is subject
to the Excise Tax.
(e) CERTAIN DEFERRAL OF PAYMENTS. Notwithstanding the
other provisions of this Agreement, to the extent that any amounts payable
hereunder would not be deductible by the Company for federal income tax
purposes on account of the limitations of Section 162(m) of the Code, the
Company may defer payment of such amounts to the earliest one or more
subsequent calendar years in which the payment of such amounts would be
deductible by the Company.
(f) AMENDMENT OR TERMINATION OF THIS AGREEMENT. This
Agreement may be changed or terminated only upon the mutual written consent of
the Company and Executive. The written consent of the Company to a change or
termination of this Agreement must be signed by an appropriate officer of the
Company other than Executive, which may be the Company's Chief Financial
Officer, Vice President of Human Resources or other officer authorized by the
Compensation Committee of the Board, after such change or termination has been
approved by the Compensation Committee of the Board.
8. NONEXCLUSIVITY. Nothing in the Agreement shall prevent or
limit Executive's continuing or future participation in any benefit, bonus,
incentive or other plans, programs, policies or practices provided by the
Company and for which Executive may otherwise qualify, nor shall anything
herein limit or otherwise affect such rights as Executive may have under any
stock option or other agreements with the Company; provided, however, that any
benefits provided hereunder shall be in lieu of any other severance payments to
which Executive may otherwise be entitled, including without limitation, under
any employment contract or severance plan. Except as otherwise expressly
provided herein, amounts which are vested benefits or which Executive is
otherwise entitled to receive under any plan, policy, practice or program of
the Company at or subsequent to the date of termination shall be payable in
accordance with such plan, policy, practice or program.
9. CONFIDENTIALITY. The parties mutually agree not to disclose
publicly the terms of this Agreement except to the extent that disclosure is
mandated by applicable law.
10. NONSOLICITATION. Executive agrees that for two (2) years
after his employment with the Company is terminated or for two (2) years after
the Consulting Period ends, whichever occurs later, he will not, either
directly or through others, solicit or attempt to solicit any
8.
<PAGE> 9
employee, consultant, or independent contractor of the Company to terminate his
or her relationship with the Company in order to become an employee, consultant
or independent contractor to or for any other person or entity.
11. NOTICES. Any notices called for under this Agreement shall be
given as follows or to such other addresses as either party may furnish the
other from time to time:
If to Executive: Thomas G. Trimm
555 Panorama Drive
LaVonia, GA 30553
If to the Company: Compression Labs, Inc.
Chairman, Board of Directors
350 E. Plumeria Drive
San Jose, CA 95134
12. CONFIDENTIAL ARBITRATION. To ensure rapid and economical
resolution of any and all disputes which may arise under this Agreement, the
Company and Executive each agree that any and all disputes or controversies,
whether of law or fact of any nature whatsoever (including, but not limited to,
all state and federal statutory and common law discrimination claims), with the
sole exception of those disputes which may arise from Executive's Proprietary
Information Agreement, arising from or regarding the interpretation,
performance, enforcement or breach of this Agreement, or any other disputes or
claims arising from or related to Executive's employment or the termination of
his employment, shall be resolved by final and binding confidential arbitration
under the procedures set forth in Exhibit C to this Agreement and the then
existing Judicial Arbitration and Mediation Services Rules of Practice and
Procedure (except insofar as they are inconsistent with the procedures set
forth in Exhibit C).
13. SEVERABILITY. If a court of competent jurisdiction determines
that any term or provision of this Agreement is invalid or unenforceable, in
whole or in part, then the remaining terms and provisions hereof shall be
unimpaired. Such court will have the authority to modify or replace the
invalid or unenforceable term or provision with a valid and enforceable term or
provision that most accurately represents the parties' intention with respect
to the invalid or unenforceable term or provision.
14. WAIVER. If either party should waive any breach of any
provisions of this Agreement, he or it shall not thereby be deemed to have
waived any preceding or succeeding breach of the same or any other provision of
this Agreement.
15. ENTIRE AGREEMENT. This Agreement, including Exhibits A, B and
C, constitutes the complete, final and exclusive embodiment of the entire
agreement between Executive and the Company with regard to the subject matter
hereof and supersedes any and all prior agreements relating to such subject
matter, including, without limitation, that certain offer letter dated January
23, 1995. This Agreement is entered into without reliance on any promise or
9.
<PAGE> 10
representation, written or oral, other than those expressly contained herein.
It may not be modified except in a writing signed by Executive and a duly
authorized officer of the Company. Each party has carefully read this
Agreement, has been afforded the opportunity to be advised of its meaning and
consequences by his or its respective attorneys, and signed the same of his or
its own free will.
16. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind
and inure to the benefit of and be enforceable by Executive and the Company,
and their respective successors, assigns, heirs, executors and administrators,
except that Executive may not assign any of his duties hereunder and he may not
assign any of his rights hereunder without the written consent of the Company,
which consent shall not be withheld unreasonably.
17. ATTORNEY FEES. If either party hereto brings any action to
enforce his or its rights hereunder, each party in any such action shall be
responsible for his or its costs and attorneys fees incurred in connection with
such action.
18. COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, all of which together
shall constitute one and the same instrument.
19. HEADINGS. The headings of the Sections hereof are inserted
for convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
IN WITNESS WHEREOF,the parties have duly authorized and caused this
Agreement to be executed as follows:
<TABLE>
<S> <C>
THOMAS G. TRIMM, COMPRESSION LABS, INCORPORATED,
an individual a corporation
/s/ Thomas G. Trimm By: /s/ Arthur G. Anderson
- ---------------------------------- -------------------------------
Thomas G. Trimm
Title: Chairman
----------------------------
Date: July 17, 1996 Date: July 17, 1996
</TABLE>
10.
<PAGE> 11
EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In exchange for the Severance Payments and other benefits to which I
would not otherwise be entitled, I hereby furnish Compression Labs,
Incorporated (the "Company") with the following release and waiver.
I hereby release, and forever discharge the Company, its officers,
directors, agents, employees, stockholders, attorneys, successors, assigns and
affiliates, of and from any and all claims, liabilities, demands, causes of
action, costs, expenses, attorneys fees, damages, indemnities and obligations
of every kind and nature, in law, equity, or otherwise, known and unknown,
suspected and unsuspected, disclosed and undisclosed, arising at any time prior
to and including my employment termination date with respect to any claims
relating to my employment and the termination of my employment, including but
not limited to, claims pursuant to any federal, state or local law relating to
employment, including, but not limited to, discrimination claims, claims under
the California Fair Employment and Housing Act, and the Federal Age
Discrimination in Employment Act of 1967, as amended ("ADEA"), or claims for
wrongful termination, breach of the covenant of good faith, contract claims,
tort claims, and wage or benefit claims, including but not limited to, claims
for salary, bonuses, commissions, stock, stock options, vacation pay, fringe
benefits, severance pay or any form of compensation.
I also acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT
EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS
FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive
and relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to any claims I may have against
the Company.
I acknowledge that, among other rights, I am waiving and releasing any
rights I may have under ADEA, that this waiver and release is knowing and
voluntary, and that the consideration given for this waiver and release is in
addition to anything of value to which I was already entitled as an employee of
the Company. I further acknowledge that I have been advised, as required by
the Older Workers Benefit Protection Act, that: (a) the waiver and release
granted herein does not relate to claims which may arise after this agreement
is executed; (b) I have the right to consult with an attorney prior to
executing this agreement (although I may choose voluntarily not to do so); (c)
I have twenty-one (21) days from the date I receive this agreement, in which to
consider this agreement (although I may choose voluntarily to execute this
agreement earlier); (d) I have seven (7) days following the execution of this
agreement to revoke my consent to the agreement; and (e) this agreement shall
not be effective until the seven (7) day revocation period has expired.
Date: July 17, 1996 By: /s/ Thomas G. Trimm
<PAGE> 12
EXHIBIT B
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
<PAGE> 13
EXHIBIT C
ARBITRATION PROCEDURE
1. The parties agree that any dispute that arises in connection
with this Agreement or the termination of this Agreement shall be resolved by
binding arbitration in the manner described below.
2. A party intending to seek resolution of any dispute under the
Agreement by arbitration shall provide a written demand for arbitration to the
other party, which demand shall contain a brief statement of the issues to be
resolved.
3. The arbitration shall be conducted in San Jose, California by
a mutually acceptable retired judge from the panel of Judicial Arbitration and
Mediation Services, Inc. ("JAMS"). At the request of either party, arbitration
proceedings will be conducted in the utmost secrecy and, in such case, all
documents, testimony and records shall be received, heard and maintained by the
arbitrator in secrecy under seal, available for inspection only by the parties
to the arbitration, their respective attorneys, and their respective expert
consultants or witnesses who shall agree, in advance and in writing, to receive
all such information confidentially and to maintain such information in
secrecy, and make no use of such information except for the purposes of the
arbitration, unless compelled by legal process.
4. The arbitrator is required to disclose any circumstances that
might preclude the arbitrator from rendering an objective and impartial
determination. In the event the parties cannot mutually agree upon the
selection of a JAMS arbitrator, the President and Vice- President of JAMS shall
designate the arbitrator.
The party demanding arbitration shall promptly request that JAMS
conduct a scheduling conference within fifteen (15) days of the date of that
party's written demand for arbitration or on the first available date
thereafter on the arbitrator's calendar. The arbitration hearing shall be held
within thirty (30) days after the scheduling conference or on the first
available date thereafter on the arbitrator's calendar. Nothing in this
paragraph shall prevent a party from at any time seeking temporary equitable
relief, from JAMS or any court of competent jurisdiction, to prevent
irreparable harm pending the resolution of the arbitration.
5. Discovery shall be conducted as follows: (a) prior to the
arbitration any party may make a written demand for lists of the witnesses to
be called and the documents to be introduced at the hearing; (b) the lists must
be served within fifteen days of the date of receipt of the demand, or one day
prior to the arbitration, whichever is earlier; and (c) each party may take no
more than two depositions (pursuant to the procedures set forth in the
California Code of Civil Procedure) with a maximum of five hours of examination
time per deposition, and no other form of pre-arbitration discovery shall be
permitted.
<PAGE> 14
6. It is the intent of the parties that the Federal Arbitration
Act ("FAA") shall apply to the enforcement of this provision unless it is held
inapplicable by a court with jurisdiction over the dispute, in which event the
California Arbitration Act ("CAA") shall apply.
7. The arbitrator shall apply California law, including the
California Evidence Code, and shall be able to decree any and all relief of an
equitable nature, including but not limited to such relief as a temporary
restraining order, a preliminary injunction, a permanent injunction, or
replevin of Company property. The arbitrator shall also be able to award
actual, general or consequential damages, but shall not award any other form of
damage (e.g., punitive damages).
8. Each party shall pay its pro rata share of the arbitrator's
fees and expenses, in addition to other expenses of the arbitration approved by
the arbitrator, pending the resolution of the arbitration. The arbitrator
shall have authority to award the payment of such fees and expenses to the
prevailing party, as appropriate in the discretion of the arbitrator. Each
party shall pay its own attorneys fees, witness fees and other expenses
incurred for its own benefit.
9. The arbitrator shall render a written award setting forth the
reasons for his or her decision. The decree or judgment of an award rendered
by the arbitrator may be entered and enforced in any court having jurisdiction
over the parties. The award of the arbitrator shall be final and binding upon
the parties without appeal or review except as permitted by the FAA, or if the
FAA is not applicable, as permitted by the CAA.
<PAGE> 1
EXHIBIT 10.27
EMPLOYMENT AGREEMENT
This employment agreement (this "Agreement") is made this 17th day of
July, 1996, by and between Compression Labs, Incorporated (the "Company") and
Larry L. Enterline ("Executive").
WHEREAS, Executive is presently serving as a consultant to the Company;
and
WHEREAS, the Company recognizes the valuable contributions Executive
has made to the success of the Company and now wishes to employ Executive; and
WHEREAS, Executive desires to be employed by the Company;
NOW, THEREFORE, in consideration of the mutual covenants, the Company
and Executive enter into this Agreement.
1. EMPLOYMENT.
(a) Executive's employment with the Company commences the
date hereof. The Board of Directors (the "Board") will appoint Executive as
the Executive Vice President of the Company at its meeting on or about July 25,
1996. The Consulting Agreement entered into between Executive and the Company
by letter dated October 10, 1995, and any other agreements related to
Executive's services as a consultant prior to the date hereof, are hereby
terminated and superseded, and all obligations of the Company under such
Consulting Agreement and any other such agreements shall hereby cease as of the
date hereof.
(b) The Company and Executive each agree and acknowledge
that Executive is employed by the Company as an "at-will" employee and that
either Executive or the Company has the right at any time to terminate
Executive's employment with the Company, with or without cause or advance
notice, for any reason or for no reason. The Company and Executive wish to set
forth the compensation and benefits which Executive shall be entitled to
receive in the event that Executive's employment with the Company terminates
under the circumstances described herein.
(c) The duties and obligations of the Company to
Executive under this Agreement are in recognition of Executive's past services
to the Company and shall be in consideration for Executive's employment with
the Company.
2. POSITION AND DUTIES.
(a) Executive shall have such responsibilities and
authority as may be given Executive from time to time by the Company's
President and Chief Executive Officer (the "CEO"). It is contemplated that
during his employment Executive shall serve as an executive
<PAGE> 2
of the Company, reporting directly to the CEO, with duties and responsibilities
customarily associated with this position, and such other duties as may be
assigned to you by the Company. The Company reserves the right to modify
Executive's job duties from time to time as it deems necessary.
(b) Executive shall devote his full time and attention
during normal business hours to the business affairs of the Company except for
reasonable vacations and except for illness or incapacity, but nothing in this
Agreement shall preclude Executive from devoting reasonable time required for
serving as a director or a member of a committee of any organization involving
no conflict of interest with the interest of the Company, from engaging in
charitable and community activities, and from managing his personal affairs,
provided that such activities do not materially interfere with the regular
performance of his duties and responsibilities under this Agreement.
3. COMPENSATION AND BENEFITS.
(a) SALARY AND BENEFITS. During the period of
Executive's employment hereunder, the Company shall pay to Executive an annual
salary in an amount of two hundred fifty thousand dollars ($250,000), less
standard deductions and withholdings, payable in installments in accordance
with Company policy. Executive also shall be entitled to all rights and
benefits for which he meets applicable eligibility conditions under such group
insurance and other Company benefit programs, including sick and vacation
leave, and the Employee Stock Purchase Plan which may be in force from time to
time and provided to Executive or for the Company's employees generally. The
Company reserves the right to modify Executive's compensation and benefits from
time to time as it deems necessary.
(b) BONUS. Executive shall be eligible for an individual
performance bonus based on overall Company performance payable at such time and
in such amount that is reasonable and mutually agreed upon by the Compensation
Committee of the Board and Executive.
(c) STOCK OPTIONS. The Company in December 1995 granted
to Executive a nonqualified stock option under its 1984 Supplemental Stock
Option Plan (the "1984 Option Plan") to purchase 150,000 shares of the
Company's common stock. In April 1996, the Compensation Committee of the Board
approved the grant to Executive of nonqualified options under the 1984 Option
Plan to purchase an additional 75,000 shares of common stock, subject to
Executive's acceptance of full-time employment with the Company. Such options
take effect on the date of this Agreement and have an exercise price equal to
the common stock's fair market value as of the date hereof. In addition, on
the date of this Agreement, the Company has granted to Executive under its 1980
Stock Option Plan and the 1984 Option Plan options to purchase 150,000 shares
of the Company's common stock at an exercise price equal to the common stock's
fair market value as of the date hereof. Executive acknowledges and agrees
that there are no further commitments or obligations on the part of the Company
to grant to Executive any additional options.
2.
<PAGE> 3
(d) MANAGEMENT PERQ CHECKBOOK. The Company shall
allocate to Executive seven thousand dollars ($7,000) annually under the
current Management Perq Checkbook Plan.
(e) EXPENSES. Executive shall be entitled to receive
prompt reimbursement of all actual and reasonable expenses incurred by
Executive in performing Company services, including expenses related to travel
and expenses while away from home on business. Such expenses shall be
accounted for under the policies and procedures established by the Company.
4. TERMINATION BY THE COMPANY. Executive's employment with the
Company may be terminated by the Company in the following circumstances.
(a) DEATH. Upon Executive's death, the termination date
shall be the last day of the month in which Executive's death occurs.
(b) DISABILITY. If Executive becomes incapacitated due
to physical or mental illness, or if Executive is absent from his full-time
duties for twelve (12) consecutive weeks on account of physical or mental
illness, the Company shall continue to pay to Executive an amount which, when
combined with disability or income-continuance benefits pursuant to a Company
plan or provided under state law and received by Executive, shall equal but not
exceed Executive's base salary, less standard deductions and withholdings.
However, Executive must submit claims for any and all such disability benefits
to which he may be entitled. For any waiting period during which Executive
receives no benefits under any disability plan, the Company shall pay his
entire base salary, less standard deductions and withholdings. The Company
shall continue to integrate such salary payments with benefits until such time
as Executive's employment is terminated in accordance with the provisions
relating to termination on account of disability, but in no event for longer
than twelve (12) weeks.
(c) FOR CAUSE. If the Company terminates Executive's
employment for Cause, Executive shall not be entitled to receive any payments
or benefits under the provisions of this Agreement, except as otherwise
specifically set forth herein, and the Company shall cease paying compensation
or providing benefits to Executive as of Executive's termination date. For
purposes of this Agreement, Cause shall mean misconduct, including: (i)
conviction of any felony or any crime involving moral turpitude or dishonesty;
(ii) participation in a fraud or act of dishonesty against the Company; (iii)
wilful breach of the Company's policies; (iv) intentional damage to the
Company's property; (v) material breach of this Agreement or Executive's
Proprietary Information and Inventions Agreement attached hereto as Exhibit B;
or (vi) conduct by Executive which in the good faith and reasonable
determination of the Board demonstrates unacceptable job performance or gross
unfitness to serve. Physical or mental disability shall not constitute Cause.
(d) WITHOUT CAUSE. The Company shall have the right to
terminate Executive's employment at any time, without Cause, effective on the
date determined by the Company. If the Company terminates Executive's
employment without Cause, then Executive shall be paid the following:
3.
<PAGE> 4
(i) SEVERANCE PAYMENTS. The Company shall
continue to pay Executive his base salary in effect at the time of such
termination for fifty-two (52) weeks following the date of termination
("Severance Payments"). The Severance Payments shall be made on the Company's
normal payroll dates and will be subject to standard deductions and
withholdings. Notwithstanding the foregoing, pursuant to Section 7(b) of this
Agreement (relating to a termination of benefits in the event Executive
competes with the Company or solicits on behalf of another person or entity),
the Severance Payments shall cease as of the date Executive enters into an
activity in competition with the Company or solicits the Company's employees,
consultants or independent contractors, as determined solely by the Company,
and Executive shall have no further rights to such benefits.
(ii) HEALTH INSURANCE. To the extent permitted by
law and by the Company's group health insurance plans, Executive will be
eligible, after the date of termination, to continue his health insurance
benefits under the federal COBRA law, at his own expense for up to eighteen
(18) months and, later, to convert to an individual policy if he wishes.
Executive will be provided with a separate notice of his COBRA rights. If
Executive elects COBRA continuation, the Company agrees to pay Executive's
health insurance continuation premiums for twelve (12) months following the
termination date ("Benefit Period"). The Company's obligation to make such
payments shall cease immediately if, during the Benefit Period, (A) Executive
becomes eligible for other health insurance benefits at the expense of a new
employer; or (B) in accordance with Section 7(b) of this Agreement, Executive
competes with the Company or solicits on behalf of another person or entity.
Executive agrees to notify a duly authorized officer of the Company, in
writing, at least ten (10) business days prior to his acceptance of any
employment which provides health insurance benefits, or his engagement in
prohibited activity defined in Section 7(b).
5. TERMINATION BY EXECUTIVE. Executive may terminate his
employment with the Company (1) for Good Reason within sixty (60) consecutive
days following the occurrence of an event or events constituting such Good
Reasons; or (2) for the convenience of Executive.
(a) GOOD REASON. If Executive voluntarily terminates his
employment with Good Reason, Executive shall receive the Severance Payments and
other benefits set forth in Section 4(d) above. For the purposes of this
Agreement, Good Reason means (i) substantial reduction of Executive's rate of
compensation as set forth in Section 3(a) of this Agreement; (ii) failure to
provide a package of welfare benefit plans which, taken as a whole, provide
substantially similar benefits to those in which the Executive is entitled to
participate (except that employee contributions may be raised to the extent of
any cost increases imposed by third parties) or any action by the Company which
would adversely affect Executive's participation or substantially reduce
Executive's benefits under any of such plans; (iii) change in Executive's
responsibilities, authority, title or office resulting in diminution of
position, excluding for this purpose an isolated, insubstantial and inadvertent
action not taken in bad faith which is remedied by the Company promptly after
notice thereof is given by Executive; (iv) request that Executive relocate his
current residence, unless Executive accepts such relocation request; (v)
material reduction in Executive's duties; (vi) failure or refusal of a
successor to the Company to assume
4.
<PAGE> 5
the Company's obligations under this Agreement; or (vii) material breach by the
Company or any successor to the Company of any of the material provisions of
this Agreement.
(b) CONVENIENCE. If Executive voluntarily resigns his
employment without Good Reason as defined below, the Company shall pay
Executive his base salary, less standard deductions and withholdings, through
the date of termination at the rate in effect at the time of the notice of
termination. Thereafter, the Company shall have no further obligations to
Executive under this Agreement.
6. CONSULTING AGREEMENT. If the Company terminates Executive's
employment without Cause, or if Executive resigns for Good Reason within sixty
(60) consecutive days following the occurrence of an event or events
constituting Good Reason, Executive shall serve as a consultant to the Company
under the terms specified below. The consulting relationship shall commence on
the date of termination and continue for a period of three (3) years (the
"Consulting Period").
(a) CONSULTING SERVICES. Executive shall provide
consulting services to the Company in any area for which he is qualified by
virtue of his education, experience and training upon request by a duly
authorized officer of the Company. He agrees to exercise the highest degree of
professionalism and to utilize his expertise and creative talents in performing
these services. Executive agrees to make himself available to perform such
consulting services throughout the Consulting Period, up to a maximum of twenty
(20) hours per month.
(b) CONSULTING FEES AND BENEFITS.
(i) CONSULTING FEES. In consideration for
Executive's consulting services, the Company shall pay Executive for each month
a fee equal to the greater of five hundred dollars ($500) or one hundred twenty
five dollars ($125) per hour of consulting services performed during the month
("Consulting Fees") plus reimbursement of expenses for travel incurred by
Executive in the course of performing such services for the Company.
(ii) TAXES AND WITHHOLDING. The Company will not
withhold from the Consulting Fees any amount for taxes, social security or
other payroll deductions. The Company will issue Executive a Form 1099 with
respect to Executive's Consulting Fees. Executive acknowledges that he will be
entirely responsible for payment of any such taxes, and he hereby indemnifies
and holds harmless the Company from any liability for any taxes, penalties or
interest which may be assessed by any taxing authority.
(iii) STOCK OPTIONS. Executive's stock options
which are outstanding as of the termination date (the "Stock Options") shall
continue in effect and shall continue to vest during the Consulting Period
under the vesting schedule or schedules specified in the relevant Stock Option
agreements, and under the same terms and conditions specified in the relevant
Stock Option agreements. At the end of the Consulting Period, vesting in each
Stock Option will cease and such Stock Options will terminate, provided that
Executive may exercise each
5.
<PAGE> 6
Stock Option (to the extent vested at the end of the Consulting Period) for
such period thereafter as is specified in the Stock Option agreement for
exercising the Stock Option following Executive's termination of employment or
ceasing to provide other services to the Company (but not after the expiration
date of the Stock Options). Executive acknowledges that, to the extent that
this subsection provides an extension of any incentive stock option beyond the
term specified in the Stock Option agreement for such incentive stock option,
or results in a "modification" of such incentive stock option (within the
meaning of the Internal Revenue Code), then such an incentive stock option may
no longer be eligible for treatment as such, but may hereafter be treated for
tax purposes as a non-qualified stock option.
(iv) COMPETITIVE ACTIVITY. Throughout the
Consulting Period, Executive retains the right to engage in employment,
consulting or other work relationships in addition to his work for the Company.
Notwithstanding the foregoing, if, during the Consulting Period, Executive
enters into an activity in competition with the Company or solicits on behalf
of another person or entity, as described in Section 7(b) of this Agreement,
then (A) the Company's obligation to pay Executive Consulting Fees shall cease
as of the date Executive entered into such activity; and (B) Executive's
vesting in each Stock Option will cease and each Stock Option will terminate as
of the date Executive entered into such activity, as determined by the Company.
(v) LIMITATIONS ON AUTHORITY. Executive shall
have no responsibilities or authority as a consultant to the Company other than
as provided for above. Executive shall not represent or purport to represent
the Company in any manner whatsoever to any third party unless authorized by
the Company, in writing, to do so.
(vi) EARLY TERMINATION OF CONSULTING RELATIONSHIP.
Notwithstanding the foregoing, in the event of Executive's death or physical or
mental disability or in the event Executive voluntarily terminates his
consulting relationship with the Company upon notifying the Company, in
writing, at least ten (10) business days in advance, any of which events occur
prior to the expiration of the Consulting Period, the Company's obligation to
pay Executive any further Consulting Fees and Executive's vesting in each Stock
Option shall cease as of the termination date of the consulting relationship.
Executive's Stock Options thereupon will terminate and shall be exercisable (to
the extent then vested) only to the extent provided in subsection 6(b)(iii), or
in the respective Stock Option agreements. The consulting relationship shall
not expire prior to the expiration of its term for any reason other than a
reason set forth herein or in Section 7(b).
7. LIMITATIONS AND CONDITIONS ON BENEFITS; AMENDMENT OF AGREEMENT
(a) REDUCTION IN PAYMENTS AND BENEFITS. The benefits
provided under this Agreement are in lieu of any other benefit provided under
any group severance plan of the Company in effect at the time of termination.
6.
<PAGE> 7
(b) EARLY CESSATION OF PAYMENTS AND OTHER BENEFITS. In
the event that Executive, at any time during his employment with the Company,
while receiving Severance Payments, or during the Consulting Period, (i)
performs work for any business entity, or engages in any other work activity
which is in competition, or is preparing to compete, with the Company; or (ii)
either directly or through others, solicits or attempts to solicit any
employee, consultant, or independent contractor of the Company to terminate his
or her relationship with the Company in order to become an employee, consultant
or independent contractor to or for any other person or entity, then, except as
otherwise specifically provided herein, the Company's obligations (i) to pay
Executive any amounts, including but not limited to Severance Payments, health
insurance premiums or Consulting Fees, or provide any benefits under the terms
of this Agreement; or (ii) to provide any further vesting of any Stock Option,
shall all cease immediately, and each Stock Option shall thereupon terminate.
For purposes of this Agreement, the holding of less than one percent (1%) of
the outstanding voting securities of any firm or business organization in
competition with the Company shall not constitute activities or services
precluded by this Agreement. Executive agrees to notify the Company, in
writing, at least ten (10) business days prior to (i) engaging in any work for
any business purpose other than work for the Company; or (ii) soliciting or
attempting to solicit any employee, consultant, or independent contractor of
the Company to terminate his other relationship with the Company on behalf of
another person or entity. The Company shall not seek to recover any amounts
paid or benefits provided to Executive prior to his engagement in such
competitive or solicitation activities.
(c) RELEASE AND WAIVER OF CLAIMS. Prior to the receipt
of any Severance Payments and other benefits provided under this Agreement
following termination of Executive's Employment, and prior to the beginning of
the Consulting Period, Executive shall, as of the date of termination, execute
a Release and Waiver of Claims in the form attached hereto as Exhibit A
("Release"). In the event Executive does not execute the Release within the
specified period set forth in the Release, no further amounts shall be payable
and no further benefits shall be provided under this Agreement, and this
Agreement shall be null and void.
(d) CERTAIN REDUCTIONS IN PAYMENTS OR BENEFITS.
(i) In the event that any payments or other
benefits received or to be received by Executive pursuant to this Agreement
("Payments") would (A) constitute a "parachute payment" within the meaning of
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code"), and
(B) but for this subsection (d), be subject to the excise tax imposed by
Section 4999 of the Code (the "Excise Tax"), then, in accordance with this
subsection 7(d), such Payments shall be reduced to the maximum amount that
would result in no portion of the Payments being subject to the Excise Tax.
For such purpose, the maximum amount of Payments that may be paid without
incurring the Excise Tax shall be determined by KPMG Peat Marwick or any other
nationally recognized accounting firm which is the Company's outside auditor at
the time of such determination (the "Accounting Firm") and shall be the largest
amount for which there is substantial authority (within the meaning of Section
6662(d)(2)(B) of the Code) for no portion of the Payments being treated as
subject to the Excise
7.
<PAGE> 8
Tax. Any such determination shall be conclusive and binding on Executive and
the Company. For purposes of making the calculations required by this
subsection 7(d)(i), the Accounting Firm may make reasonable assumptions and
approximations concerning applicable taxes and may rely on reasonable, good
faith interpretations concerning the application of Sections 280G and 4999 of
the Code. All fees and expenses of the Accounting Firm shall be borne solely
by the Company. If the Internal Revenue Service (the "IRS") determines that a
Payment is subject to the Excise Tax, then subsection 7(d)(ii) hereof shall
apply.
(ii) If, notwithstanding any reduction described
in subsection 7(d)(i) hereof (or in the absence of any such reduction), the IRS
determines that Executive is liable for the Excise Tax as a result of the
receipt of Payments, then Executive shall be obligated to pay back to the
Company, within 30 days after final IRS determination, an amount of the
Payments sufficient that none of the Payments retained by Executive constitute
a "parachute payment" within the meaning of Code Section 280G that is subject
to the Excise Tax.
(e) CERTAIN DEFERRAL OF PAYMENTS. Notwithstanding the
other provisions of this Agreement, to the extent that any amounts payable
hereunder would not be deductible by the Company for federal income tax
purposes on account of the limitations of Section 162(m) of the Code, the
Company may defer payment of such amounts to the earliest one or more
subsequent calendar years in which the payment of such amounts would be
deductible by the Company.
(f) AMENDMENT OR TERMINATION OF THIS AGREEMENT. This
Agreement may be changed or terminated only upon the mutual written consent of
the Company and Executive. The written consent of the Company to a change or
termination of this Agreement must be signed by an appropriate officer of the
Company other than Executive, which may be the Company's Chief Executive
Officer, Chief Financial Officer, Vice President of Human Resources or other
officer authorized by the Compensation Committee of the Board, after such
change or termination has been approved by the Compensation Committee of the
Board.
8. NONEXCLUSIVITY. Nothing in the Agreement shall prevent or
limit Executive's continuing or future participation in any benefit, bonus,
incentive or other plans, programs, policies or practices provided by the
Company and for which Executive may otherwise qualify, nor shall anything
herein limit or otherwise affect such rights as Executive may have under any
stock option or other agreements with the Company; provided, however, that any
benefits provided hereunder shall be in lieu of any other severance payments to
which Executive may otherwise be entitled, including without limitation, under
any employment contract or severance plan. Except as otherwise expressly
provided herein, amounts which are vested benefits or which Executive is
otherwise entitled to receive under any plan, policy, practice or program of
the Company at or subsequent to the date of termination shall be payable in
accordance with such plan, policy, practice or program.
9. CONFIDENTIALITY. The parties mutually agree not to disclose
publicly the terms of this Agreement except to the extent that disclosure is
mandated by applicable law.
8.
<PAGE> 9
10. NONSOLICITATION. Executive agrees that for two (2) years
after his employment with the Company is terminated or for two (2) years after
the Consulting Period ends, whichever occurs later, he will not, either
directly or through others, solicit or attempt to solicit any employee,
consultant, or independent contractor of the Company to terminate his or her
relationship with the Company in order to become an employee, consultant or
independent contractor to or for any other person or entity.
11. NOTICES. Any notices called for under this Agreement shall be
given as follows or to such other addresses as either party may furnish the
other from time to time:
If to Executive: Larry L. Enterline
1095 Secret Cove Drive
Sugar Hill, GA 30518
If to the Company: Compression Labs, Inc.
Chairman, Board of Directors
350 E. Plumeria Drive
San Jose, CA 95134
12. CONFIDENTIAL ARBITRATION. To ensure rapid and economical
resolution of any and all disputes which may arise under this Agreement, the
Company and Executive each agree that any and all disputes or controversies,
whether of law or fact of any nature whatsoever (including, but not limited to,
all state and federal statutory and common law discrimination claims), with the
sole exception of those disputes which may arise from Executive's Proprietary
Information Agreement, arising from or regarding the interpretation,
performance, enforcement or breach of this Agreement, or any other disputes or
claims arising from or related to Executive's employment or the termination of
his employment, shall be resolved by final and binding confidential arbitration
under the procedures set forth in Exhibit C to this Agreement and the then
existing Judicial Arbitration and Mediation Services Rules of Practice and
Procedure (except insofar as they are inconsistent with the procedures set
forth in Exhibit C).
13. SEVERABILITY. If a court of competent jurisdiction determines
that any term or provision of this Agreement is invalid or unenforceable, in
whole or in part, then the remaining terms and provisions hereof shall be
unimpaired. Such court will have the authority to modify or replace the
invalid or unenforceable term or provision with a valid and enforceable term or
provision that most accurately represents the parties' intention with respect
to the invalid or unenforceable term or provision.
14. WAIVER. If either party should waive any breach of any
provisions of this Agreement, he or it shall not thereby be deemed to have
waived any preceding or succeeding breach of the same or any other provision of
this Agreement.
15. ENTIRE AGREEMENT. This Agreement, including Exhibits A, B and
C, constitutes the complete, final and exclusive embodiment of the entire
agreement between Executive and
9.
<PAGE> 10
the Company with regard to the subject matter hereof and supersedes any and all
prior agreements relating to such subject matter, including, without
limitation, those certain letters dated July 17, 1996 and October 10, 1995.
This Agreement is entered into without reliance on any promise or
representation, written or oral, other than those expressly contained herein.
It may not be modified except in a writing signed by Executive and a duly
authorized officer of the Company. Each party has carefully read this
Agreement, has been afforded the opportunity to be advised of its meaning and
consequences by his or its respective attorneys, and signed the same of his or
its own free will.
16. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind
and inure to the benefit of and be enforceable by Executive and the Company,
and their respective successors, assigns, heirs, executors and administrators,
except that Executive may not assign any of his duties hereunder and he may not
assign any of his rights hereunder without the written consent of the Company,
which consent shall not be withheld unreasonably.
17. ATTORNEY FEES. If either party hereto brings any action to
enforce his or its rights hereunder, each party in any such action shall be
responsible for his or its costs and attorneys fees incurred in connection with
such action.
18. COUNTERPARTS. This Agreement may be executed in two
counterparts, each of which shall be deemed an original, all of which together
shall constitute one and the same instrument.
19. HEADINGS. The headings of the Sections hereof are inserted
for convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
IN WITNESS WHEREOF,the parties have duly authorized and caused this
Agreement to be executed as follows:
LARRY L. ENTERLINE, COMPRESSION LABS, INCORPORATED,
an individual a corporation
/s/ Larry L. Enterline By: /s/ Arthur G. Anderson
- ---------------------------------- -------------------------------
Larry L. Enterline
Title: Chairman
----------------------------
Date: July 17, 1996 Date: July 17, 1996
10.
<PAGE> 11
EXHIBIT A
RELEASE AND WAIVER OF CLAIMS
In exchange for the Severance Payments and other benefits to which I
would not otherwise be entitled, I hereby furnish Compression Labs,
Incorporated (the "Company") with the following release and waiver.
I hereby release, and forever discharge the Company, its officers,
directors, agents, employees, stockholders, attorneys, successors, assigns and
affiliates, of and from any and all claims, liabilities, demands, causes of
action, costs, expenses, attorneys fees, damages, indemnities and obligations
of every kind and nature, in law, equity, or otherwise, known and unknown,
suspected and unsuspected, disclosed and undisclosed, arising at any time prior
to and including my employment termination date with respect to any claims
relating to my employment and the termination of my employment, including but
not limited to, claims pursuant to any federal, state or local law relating to
employment, including, but not limited to, discrimination claims, claims under
the California Fair Employment and Housing Act, and the Federal Age
Discrimination in Employment Act of 1967, as amended ("ADEA"), or claims for
wrongful termination, breach of the covenant of good faith, contract claims,
tort claims, and wage or benefit claims, including but not limited to, claims
for salary, bonuses, commissions, stock, stock options, vacation pay, fringe
benefits, severance pay or any form of compensation.
I also acknowledge that I have read and understand Section 1542 of the
California Civil Code which reads as follows: "A GENERAL RELEASE DOES NOT
EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS
FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE
MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR." I hereby expressly waive
and relinquish all rights and benefits under that section and any law of any
jurisdiction of similar effect with respect to any claims I may have against
the Company.
I acknowledge that, among other rights, I am waiving and releasing any
rights I may have under ADEA, that this waiver and release is knowing and
voluntary, and that the consideration given for this waiver and release is in
addition to anything of value to which I was already entitled as an employee of
the Company. I further acknowledge that I have been advised, as required by
the Older Workers Benefit Protection Act, that: (a) the waiver and release
granted herein does not relate to claims which may arise after this agreement
is executed; (b) I have the right to consult with an attorney prior to
executing this agreement (although I may choose voluntarily not to do so); (c)
I have twenty-one (21) days from the date I receive this agreement, in which to
consider this agreement (although I may choose voluntarily to execute this
agreement earlier); (d) I have seven (7) days following the execution of this
agreement to revoke my consent to the agreement; and (e) this agreement shall
not be effective until the seven (7) day revocation period has expired.
Date: July 17, 1996 By: /s/ Larry L. Enterline
<PAGE> 12
EXHIBIT B
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
<PAGE> 13
EXHIBIT C
ARBITRATION PROCEDURE
1. The parties agree that any dispute that arises in connection
with this Agreement or the termination of this Agreement shall be resolved by
binding arbitration in the manner described below.
2. A party intending to seek resolution of any dispute under the
Agreement by arbitration shall provide a written demand for arbitration to the
other party, which demand shall contain a brief statement of the issues to be
resolved.
3. The arbitration shall be conducted in San Jose, California by
a mutually acceptable retired judge from the panel of Judicial Arbitration and
Mediation Services, Inc. ("JAMS"). At the request of either party, arbitration
proceedings will be conducted in the utmost secrecy and, in such case, all
documents, testimony and records shall be received, heard and maintained by the
arbitrator in secrecy under seal, available for inspection only by the parties
to the arbitration, their respective attorneys, and their respective expert
consultants or witnesses who shall agree, in advance and in writing, to receive
all such information confidentially and to maintain such information in
secrecy, and make no use of such information except for the purposes of the
arbitration, unless compelled by legal process.
4. The arbitrator is required to disclose any circumstances that
might preclude the arbitrator from rendering an objective and impartial
determination. In the event the parties cannot mutually agree upon the
selection of a JAMS arbitrator, the President and Vice- President of JAMS shall
designate the arbitrator.
The party demanding arbitration shall promptly request that JAMS
conduct a scheduling conference within fifteen (15) days of the date of that
party's written demand for arbitration or on the first available date
thereafter on the arbitrator's calendar. The arbitration hearing shall be held
within thirty (30) days after the scheduling conference or on the first
available date thereafter on the arbitrator's calendar. Nothing in this
paragraph shall prevent a party from at any time seeking temporary equitable
relief, from JAMS or any court of competent jurisdiction, to prevent
irreparable harm pending the resolution of the arbitration.
5. Discovery shall be conducted as follows: (a) prior to the
arbitration any party may make a written demand for lists of the witnesses to
be called and the documents to be introduced at the hearing; (b) the lists must
be served within fifteen days of the date of receipt of the demand, or one day
prior to the arbitration, whichever is earlier; and (c) each party may take no
more than two depositions (pursuant to the procedures set forth in the
California Code of Civil Procedure) with a maximum of five hours of examination
time per deposition, and no other form of pre-arbitration discovery shall be
permitted.
<PAGE> 14
6. It is the intent of the parties that the Federal Arbitration
Act ("FAA") shall apply to the enforcement of this provision unless it is held
inapplicable by a court with jurisdiction over the dispute, in which event the
California Arbitration Act ("CAA") shall apply.
7. The arbitrator shall apply California law, including the
California Evidence Code, and shall be able to decree any and all relief of an
equitable nature, including but not limited to such relief as a temporary
restraining order, a preliminary injunction, a permanent injunction, or
replevin of Company property. The arbitrator shall also be able to award
actual, general or consequential damages, but shall not award any other form of
damage (e.g., punitive damages).
8. Each party shall pay its pro rata share of the arbitrator's
fees and expenses, in addition to other expenses of the arbitration approved by
the arbitrator, pending the resolution of the arbitration. The arbitrator
shall have authority to award the payment of such fees and expenses to the
prevailing party, as appropriate in the discretion of the arbitrator. Each
party shall pay its own attorneys fees, witness fees and other expenses
incurred for its own benefit.
9. The arbitrator shall render a written award setting forth the
reasons for his or her decision. The decree or judgment of an award rendered
by the arbitrator may be entered and enforced in any court having jurisdiction
over the parties. The award of the arbitrator shall be final and binding upon
the parties without appeal or review except as permitted by the FAA, or if the
FAA is not applicable, as permitted by the CAA.
