<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
Commission file number 0-13218
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COMPRESSION LABS, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 94-2390960
(State or other jurisdiction of (I. R. S. Employer
incorporation or organization) Identification No.)
2860 JUNCTION AVENUE, SAN JOSE, CALIFORNIA 95134
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (408) 435-3000
Securities registered pursuant to Section 12 (b) of the Act: NONE
Securities registered pursuant to Section 12 (g) of the Act: COMMON STOCK,
$.001 PAR VALUE
PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. /X/
The approximate aggregate market value of the Common Stock held by
non-affiliates of the Registrant, based upon the closing bid price of the Common
Stock reported on the Nasdaq National Market was $57,367,382 as of April 4,
1996.
The number of outstanding shares of the registrant's Common Stock as of
April 4, 1996 was 15,500,396.
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DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Registrant's definitive Proxy Statement for
the Registrant's Annual Meeting of Stockholders, to be held May 23, 1996, which
will be filed with the Securities and Exchange Commission, are incorporated by
reference to the extent stated herein.
<PAGE> 2
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENTS
Compression Labs, Incorporated (the Company or CLI(R)), 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(TM)) 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 has been to use
its expertise in CDV technology to enhance its leadership position in
videoconferencing, to develop a leadership position in the emerging broadcast
and cable markets, and to monitor new markets such as the desktop and personal
video markets.
In November 1995, the Company conducted a strategic review of its
position in both the videoconferencing and broadcast and cable markets, and its
ongoing prospects in these markets. As a result of this review, the Company
adopted a plan to discontinue operations of its Broadcast products division and
to refocus its efforts and resources on developing and marketing group and
desktop videoconferencing products. The Company has held discussions with
various companies regarding the possible sale of the broadcast products
division. No definitive agreement has been reached, nor can there be any
assurances that an agreement with terms acceptable to the Company will
ultimately be reached. Unless noted otherwise, this Annual Report on Form 10-K
pertains to the Company's continuing operations.
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(R) II/VP and Radiance(TM)
videoconferencing systems, the eclipse family of mid-range videoconferencing
systems, and the CLI Desktop Video family. The Rembrandt II/VP and Radiance
videoconferencing systems operate worldwide over a broad range of transmission
speeds from 56 kilobits per second (kbps) to 2.048 megabits per second (mbps).
The eclipse mid-range videoconferencing systems and CLI desktop video products
operate worldwide over readily available public switched digital networks at
speeds up to 384 kbps. All of CLI's current videoconferencing systems are
compliant with the International Telecommunication Union Telecommunication
Standardizations Sector (TSS) H.320 videoconferencing standard, and most also
provide customer-selectable proprietary algorithms. The Company has grown as a
result of improvements in the price/performance of its videoconferencing
systems, decreases in transmission costs and increased availability of switched
digital transmission services. However, there can be no assurance that this
revenue growth will continue in the future.
In November 1991, the Company introduced the SpectrumSaver(TM), the
industry's first compressed digital product for the satellite broadcast video
market. The SpectrumSaver allows simultaneous transmission of as many as 15
channels on a single satellite transponder, reducing costs and increasing
programming availability for applications such as business television, distance
learning and satellite news gathering. Through a number of industry-related
partnerships and alliances, CLI had been moving into other broadcast
applications: direct broadcast satellite services, which deliver hundreds of
channels of entertainment and information directly to homes through the use of
satellite dishes; video-on- demand, offering dial-up access to movies, live
sports, and other entertainment over copper or fiber-optic telephone lines or
coaxial cable, cable head-end applications that supply programming to
distribution sites, and traditional commercial television broadcast
applications. To ensure broad compatibility worldwide, the products used for
these services are based on MPEG-1 and MPEG-2 video and audio standards from the
Moving Picture Experts Group (MPEG). This technology is used in the broadcast
products division, now part of the Company's discontinued operations.
CLI has concentrated on developing enhancements to the MPEG-based
Magnitude(TM) product family which will differentiate these products from other
standards-based products. In 1996, CLI was granted a patent for statistical
multiplexing of multiple MPEG-compressed video signals, allowing multiple
MPEG-video signals to share the entire bandwidth of the transmission channel by
dynamically allocating more bandwidth to the signals that are more difficult to
encode. This results in improved picture quality and allows higher compression
ratios. This technology is used in the broadcast products division, now part of
the Company's discontinued operations.
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(TM)CDV, Radiance, SpectrumSaver, and Magnitude are trademarks of Compression
Labs, Incorporated.
(R)Rembrandt is a registered trademark of Compression Labs, Incorporated
This Form 10-K also contains the trademarks of other companies.
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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 communication.
Decision making in today's competitive 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 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.
Since the mid-1980s, driven primarily by competition among
telecommunication carriers, 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.
While CDV technology has found significant application in two-way
business communication for more than a decade, this technology has only recently
begun to be implemented to reduce the transmission cost and improve the
availability and audio and video quality of one-way broadcast video programming.
Until recently, almost all television broadcasts relied on analog technology,
which requires substantial transmission capacity, or bandwidth. Digitizing and
compressing video and audio signals reduces the amount of data which must be
transmitted in order to achieve desired quality, thus allowing broadcasters to
transmit high quality video and audio television programs on a telephone line or
to simultaneously transmit a number of programs over a satellite transponder or
coaxial or fiber-optic cable. Digitization and compression of video improves
picture and sound quality by eliminating noise and distortion typical in
transmission of analog signals, and allows video programming to be stored
economically on video servers, where it is readily accessible. These technical
and economic advantages of CDV compared to traditional analog technology are
important factors underlying the acceptance of CLI's SpectrumSaver broadcast
products for business use. The Company's Magnitude product line of high-quality,
MPEG-based encoders and decoders is currently being used for digital broadcast
utilizing satellite, cable, and telephone network-based transmission for the
home entertainment and education markets.
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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 premium quality
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 will further the
expansion of 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
TSS H.320 videoconferencing standard that allows communication with CLI and
other vendors' products through industry standard communication modes. The group
system families provide a user-selectable option that allows enhanced video when
communicating with other CLI systems through the Company's proprietary
communication modes.
CLI TECHNOLOGY
CLI has been a leader in the evolution of digital video compression
technology for videoconferencing and broadcast products since the inception of
these markets. 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.
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 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.
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In 1987, CLI introduced a product 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 1990, CLI introduced a new proprietary algorithm called Cosine
Transform Extended (CTX(TM)), a further enhancement of the DCT technology which
improved picture quality and motion handling techniques. In 1991, CLI announced
the CTX Plus(TM) 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 TSS H.261 standard. The eclipse 8200, 8300
and gold models are fully compliant with the most recent TSS standards, and have
transmission speeds ranging from 56 kbps to 384 kbps.
DCT technology has been the basis of all CLI products since 1982. The
DCT technology has been adapted as the foundation of the international H.261
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 detelecine,
statistical multiplexing, conditional access, and 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 video, audio,
data and graphics over digital channels. System users can transmit the
compressed signals over terrestrial, satellite or microwave networks. CLI's
videoconferencing 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 codecs 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 H.261 standard. The Rembrandt II/VP list prices range from
$35,000 to $48,500, excluding options.
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(TM)CTX and CTX Plus are trademarks of Compression Labs, Incorporated
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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(TM) user interface,
which provides intuitive control via menus and icons to guide the user. Radiance
systems are interoperable with CLI's Rembrandt II/VP codecs, eclipse mid-range
group systems, and CLI Desktop Video products worldwide, as well as with other
codecs that meet TSS 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, introduced in early 1993, are
complete, full-featured videoconferencing systems priced as low as $14,900. The
codec is housed in an Intel 486 personal computer chassis with both a hard disk
and 3-1/2 inch floppy disk for software updates. eclipse also includes 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 with other manufacturers' systems using the TSS H.320
industry standard or providing superior video quality using CLI's CTX
proprietary algorithm for communicating with other 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 new eclipse 8200 models are fully compliant with TSS 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, the wireless Self-Guide remote
control unit, a pan/tilt/zoom automatic-focus camera, and a variety of auxiliary
document cameras. The eclipse 8300 models include the same features as the
eclipse 8200 with the additional capability of transmission speeds up to 384
kbps. In April 1996, CLI further expanded the eclipse product line with the
introduction of the eclipse gold . This recently introduced model offers
features identical to the eclipse 8300 with the addition of improved video
quality at 30 fps and a T.120 multimedia gateway. T.120 is an evolving series of
standards from the ITU that are aimed at facilitating "audio-graphic",
multimedia conferencing for collaborative working meetings and distance learning
applications. Available as options on the newer lines of eclipse are: multipoint
chair control, dual monitors, the automatic focus SuperCam document camera and
an inverse multiplexer. eclipse list prices range from $14,900 to $47,900,
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 Corporation's
(Intel) Pentium(TM) microprocessor under Microsoft Windows versions 3.1 and 95.
This family of products will initially include 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 will also support
DataBeam's FarSite(TM) 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 $1,495 to $2,195, excluding
options.
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 TSS, 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 codecs with appropriate audio and
communications configurations. List prices for MCUs range from approximately
$26,500 for a 3-user unit to approximately $89,500 for a large system usable in
a headquarters location, depending on the number of ports and options required.
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(TM)Pentium, and (TM)ProShare are trademarks of Intel Corporation
(TM)FarSite is a trademark of DataBeam Corporation
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BROADCAST PRODUCTS
The Company offers the SpectrumSaver digital broadcast television
system for business television, distance learning, satellite news gathering and
cable applications. SpectrumSaver digitizes and compresses a full-motion analog
television signal so it can be transmitted using a fraction of the bandwidth
required by standard analog systems. SpectrumSaver encoders range in price from
$65,000 to $85,000 and receivers from $2,600 to under $1,700, depending on
quantity purchased. Typical systems employ many receivers per encoder. The
SpectrumSaver product line is included in the Company's discontinued operations.
In 1994, the Company introduced the Magnitude family of CLI broadcast
video products. Magnitude, an MPEG-2-based Compressed Digital Video product
family for the delivery of entertainment and information services over
telephone, cable and satellite networks, is aimed at providing high quality
broadcasting for a variety of business and home entertainment applications. The
system reduces bandwidth required to transmit video by six to sixty times
depending on the complexity of the program content and the transmission method.
CLI is supplying Magnitude encoders to a unit of GM Hughes Electronics through
an agreement with Thomson Consumer Electronics for the DIRECTV(R) satellite
entertainment service. The Company has also sold Magnitude products to customers
in Argentina, Australia, China, India, Japan, Namibia, Russia, and Taiwan. The
Magnitude product line is included in the Company's discontinued operations.
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.
In 1995 approximately 35 percent 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 strategic co-marketing agreements or arrangements with
AT&T and MCI Communications. 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 Bell Atlantic, Norstan, Inc.,
TIE/communications, Inter-Tel Equipment Corporation, Pacific Bell, and Williams
Telecommunications, Inc. (WilTel). These Resellers sell the Company's
videoconferencing products directly to end-users. The Company has also entered
into distributor agreements with companies such as MicroAge Inc., and
Sprint/North Supply.
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., J S TELECOM, a subsidiary of Bosch
Telekom in France, Deutsch Telekom in Germany and worldwide, SOEI Tsusho
Company, Ltd. in Japan, Samsung in Korea, Teledata in Southeast Asia, and
Keytech S.A. in South America. 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, China. In 1995, revenue from non-U.S.
customers represented 22% of videoconferencing revenues. See Note 10 of Notes to
Consolidated Financial Statements.
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.
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(R)DIRECTV is a registered trademark of Hughes Electronics Corporation.
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<PAGE> 8
The Company primarily distributes its broadcast products through
value-added resellers, which include satellite transponder owners, full service
integrators, systems integrators and broadcast programmers who can provide the
end-user with a complete, installed digital satellite system. The Company has
agreements in effect with Westcott Communications, AT&T, Electronic Data Systems
Corporation, Keytech S.A., Radiation Systems Incorporated, National
Technological University, Vitacom, and others.
As of February 29, 1996, the Company had 158 direct sales, marketing
and customer support personnel located in 22 offices in 14 states, plus 3
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
AT&T under which AT&T will supply technicians who will provide installation and
service for designated CLI videoconferencing customers throughout the United
States.
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 accounted for 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.
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CUSTOMERS
The Company's products have been sold to organizations in such diverse
industries as aerospace, banking, communications, broadcasting, education,
electronics, food and consumer products, and pharmaceuticals, as well as in
government. In 1995 and 1994, 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 1995, 1994
and 1993, sales to international customers represented approximately 22%, 18%
and 13%, respectively, of the Company's total revenues.
The following is a selected list of those customers who have placed
orders with the Company over the past two fiscal years:
<TABLE>
<CAPTION>
AEROSPACE EDUCATION GOVERNMENT
- --------- --------- ----------
<S> <C> <C>
Hughes Aircraft Company Duke University NASA
Lockheed Corporation Eastern Washington State China Railway Import & Export
Loral Corporation University Sichuan Provincial Import Corp.
Martin Marietta Corporation Texas Tech University State of Florida
Rockwell International Corporation University of California State of Hawaii
University of Hawaii State of Kansas
BANKING & FINANCE University of Idaho State of Washington
- ----------------- University of Massachusetts U.S. Department of Defense
Bank of America Corporation University of Missouri U.S. Department of Energy
Citibank, N.A. University of Nevada, Reno U.S. Federal Emergency Management
Citicorp University of Pennsylvania Agency (FEMA)
Mastercard International, Inc. University of Texas U.S. General Accounting Office (GAO)
VISA Inc. University of Washington U.S. General Services Administration
Vermont Technical College (GSA)
Washington State University
TELECOMMUNICATIONS
- ------------------
Ameritech Services, Inc.
American Telephone & Telegraph ELECTRONICS PHARMACEUTICAL & HEALTH CARE
Bell Atlantic ----------- ----------------------------
Bell Canada Advanced Micro Devices, Inc. Glaxo Burroughs Wellcome
Bell South Services, Inc. Boeing Computer Services Columbia-HCA Healthcare Corp
Comtelca Harris Corporation Empire Blue Cross/Blue Shield
Deutsche Telekom AG Hewlett-Packard Company Harvard Community Health Plan
GTE Government Systems IBM Corporation Pharmacy Corp. of America
Hughes Network Systems Mentor Graphics Corporation Schering-Plough Corporation
JS TELECOM MicroAge, Inc. UT Medical Branch at Galveston
MCI Telecommunications Corp. Micron Technology, Inc. Warner Lambert
Mitre Corporation National Semiconductor
NYNEX Corporation Novell Corporation OTHER
Nevada Bell Samsung Electronics Corporation, -----
Norstan Communications Ltd. Alcoa Fujikara Ltd.
Pacific Bell Unisys Corporation Boston Consulting Group
Southern Bell Westinghouse Electric Corporation Consolidated Edison
Sprint/North Supply KPMG Peat Marwick
TIE/communications McKinsey & Co. Inc.
Williams Telecommunications, Inc. FOOD/CONSUMER PRODUCTS Pacific Gas & Electric
---------------------- Toyota Motor Sales USA
Black & Decker VF Corporation
The Coca-Cola Company
Kimberly Clark Corporation
Nabisco Brands, Incorporated
Nestle USA
Nordstrom
Phillips Van Heusen
Williams Sonoma
</TABLE>
There can be no assurances that any of the customers listed above will
continue to purchase the Company's products in the future.
-8-
<PAGE> 10
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 1995, 1994 and 1993 aggregated $14.8 million, $15.1 million, and
$13.4 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 as summarized
in the table below (in millions):
<TABLE>
<CAPTION>
Years ended
December 31,
----------------------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Research and development expense $ 10.0 $ 10.2 $ 10.5
Cost of revenues related to research and development
contracts -- 1.0 --
Capitalized software development costs 4.8 3.9 2.9
------ ------ ------
Total research and development expenditures $ 14.8 $ 15.1 $ 13.4
====== ====== ======
</TABLE>
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.
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 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. At lower bandwidths, the Company believes that PictureTel
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 Mitsubishi Ltd., Nippon Electric Corporation, Sony
Corporation, Hitachi Limited and Fujitsu Ltd. 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 TSS 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 TSS standards, an evolving set of
standards which permit interoperability among videoconferencing systems from
different vendors. Although acceptance of the TSS standards is expected to
increase demand for videoconferencing products in general, the 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.
-9-
<PAGE> 11
MANUFACTURING
The Company has structured manufacturing as two separate organizations:
one focused on videoconferencing products and the other focused on broadcast
products.
Videoconferencing Products
The videoconferencing products manufacturing organization performs
materials planning, production scheduling, mechanical assembly, board testing,
system integration, burn-in, and final system testing of videoconferencing
codecs and integrated systems and broadcast encoders. 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
kitted parts 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.
Broadcast Products
The broadcast products manufacturing organization performs assessment,
evaluation, qualification, selection, scheduling, management and support of its
selected turnkey high-volume manufacturing subcontractors. Turnkey manufacturers
provide substantial materials planning, procurement, component testing,
mechanical assembly, board testing, applicable system integration, burn-in and
final system testing of the Company's broadcast receivers/decoders products.
There can be no assurance that the Company will be able to develop or contract
for manufacturing capabilities with the necessary volume, quality or price on
acceptable terms. As noted above, in November 1995 the Company adopted a plan to
discontinue operations of its broadcast products division by the end of 1996.
Supplier Relationships
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 MPEG-2 chipset
supplied by C-Cube Microsystems, are currently available only from single or
limited sources. In addition, the Company relies on a few key vendors for
sourcing or turnkey manufacturing of certain 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 for the
videoconferencing products and broadcast and cable products. While the Company
has experienced few material disruptions in supply to date, 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. 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.
QUALITY
CLI has established 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 eight U.S. patents relating to video
compression. The patents cover CLI's scene-adaptive coding and DCT techniques
and expire between November, 1998 and the year 2014. These techniques, together
with the DXC, CTX and CTX Plus algorithms, serve as the basis of the Company's
videoconferencing product lines. In 1996, CLI was granted a patent for
statistical multiplexing of multiple compressed video signals which the Company
believes may be important for certain digital broadcast applications. The
Company also holds two U.S. patents relating to facsimile compression.
-10-
<PAGE> 12
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.
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 February 29, 1996, the Company employed 439 people full-time in
its continuing operations, including 129 in manufacturing, 94 in engineering,
research and development, 158 in sales and marketing and 58 in administration.
As of February 29, 1996, the Company employed 100 people full-time in its
broadcast division, which is reported as a discontinued operation. In addition,
the Company also employs a number of temporary employees. None of the Company's
employees are represented by a collective bargaining agreement. The Company
believes its relationship with its employees is good.
DISCONTINUED OPERATIONS AND RESTRUCTURING
On November 30, 1995, the Company adopted a strategic plan to
discontinue the operation comprising the broadcast products division. This
division generally manufactures and sells broadcast video products to commercial
end-users. See Note 2 in the Notes to Consolidated Financial Statements.
Additionally, 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 permanent and temporary workforce by approximately
90 people in March of 1996 and identified a number of offices that would be
closed. Severance and other expenses associated with this action will be
reflected in the results of the first quarter of 1996.
RISK FACTORS
The following are among the risk factors that should be carefully
considered in evaluating the Company and its business.
Net Loss / Fluctuations in Quarterly Performance
The Company has experienced, and may continue to experience,
significant fluctuations in operating results due to a variety of factors. 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. There
is no assurance that the Company will be able to achieve a profit in 1996 or
in subsequent quarters and years.
-11-
<PAGE> 13
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; and as such,
these products typically involve long sales and order cycles. Additionally, the
Company's revenues have 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. The Company is not certain
of the other reasons for the occurrence of a large portion of its sales in the
third month of each fiscal quarter. 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 and the
Company's growth, 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 an adverse effect on the Company's
financial results. In addition, the Company's accounts receivable were $46.8
million, net at December 31, 1995. 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. 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.
Highly Competitive Industry
Competition in the video communications markets is intense. In the
videoconferencing market, the Company's primary competitors are PictureTel
Corporation, General Plessey Telecommunications, British Telecom and VTEL
Corporation, and the Company expects other competitors to enter the
videoconferencing market. Some of these competitors have significantly greater
technical and financial resources than the Company. In particular, the Company
expects competition from Japanese manufacturers, including Mitsubishi Ltd.,
Nippon Electric Corporation, Sony Corporation, Hitachi Limited and Fujitsu Ltd.
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.
-12-
<PAGE> 14
Reliance on Key Personnel
The success of the Company depends to a large extent on a small number
of key senior technical and managerial personnel, the loss of one or more of
whom could have a material adverse effect on the business of the Company.
Typically these individuals do not have employment contracts with the Company.
The Company believes that its future success will depend in part on its ability
to continue to attract, retain and motivate additional highly skilled personnel,
who are in great demand.
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.
ITEM 2. PROPERTIES
The Company currently occupies 243,100 square feet of office and
manufacturing space in a modern industrial park in San Jose, California under
three leases, one for 74,000 square feet which expires in September 1997,
another for 142,700 square feet which expires in December 2001, and a third
lease for a warehouse facility measuring 26,400 square feet which expires in
June 1997. The Company has an option to extend these leases for periods of
between two years and five years beyond the specified term. The Company also
leases sales offices in various locations on a short-term basis. These leases
are for periods of up to ten years. The Company believes that its facilities are
suitable for its videoconferencing and broadcast and cable divisions, but may be
too large if the broadcast division is sold and relocated. The Company also
believes it can locate and occupy additional facilities as they are needed.
ITEM 3. LEGAL PROCEEDINGS
CIT GROUP/OSUERF
On August 24, 1993, the Company filed a complaint against Oklahoma
State University Education and Research Fund, 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 and FLI separately moved for
summary judgment against the Company seeking damages in the amount of $2
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.
By order dated December 20, 1995, the consolidated actions were
reassigned to the Honorable Charles A. Legge. A case management conference was
held before Judge Legge on January 19, 1996, at which time the matter was set
for jury trial to being November 4, 1996. Discovery will close June 30, 1996.
The Company will vigorously defend the claims stated against it by CIT,
and believes that it has meritorious defenses. However, there can be no
assurance that the Company will prevail or obtain indemnity for any recovery
from OSUERF. If any of CIT's claims were to be decided adversely to the Company,
the Company would be liable to pay monetary damages to CIT. The Company believes
that the ultimate resolution of this matter will not have a material adverse
impact on the Company's consolidated financial position.
-13-
<PAGE> 15
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 has now been fully briefed and the parties are
awaiting an order from the Court of Appeal setting oral argument. Pending the
outcome of the appeal, CLI and SWBT have stipulated that the Oklahoma federal
court action will be placed in administrative closure. An order placing the
matter in administrative closure was entered on October 20, 1995.
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. Briefing on the motion is complete and the motion is
under submission to a special master to prepare a report to the District Court
concerning the motion.
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.
JABIL CIRCUITS, INC.
To fulfill a purchase order from Philips Consumer Electronics Company
(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 has 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 are outside the
cancellation and reschedule windows. The Company has initiated and is engaged in
negotiations 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. Philips has not responded to CLI's claim letter. The Company
believes that the ultimate resolution of this matter will not have a material
adverse impact on the Company's consolidated financial position.
PHILIPS CONSUMER ELECTRONICS COMPANY
The Company entered into a Joint Development and Marketing Agreement
(JDMA) with Philips dated January 12, 1994, for the supply of certain decoder
units discussed in the Jabil matter above. 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
-14-
<PAGE> 16
disposition of rights and monies owed under the amendment and license
agreement. The Company believes that the ultimate resolution of this matter will
not have a material adverse impact on the Company's consolidated financial
position.
CORPORATE COMPUTER SERVICES, INC.
By letter dated October 23, 1995, Corporate Computer Services, Inc.
(CCS), through its counsel, has asserted that the Company is using proprietary
technology of CCS without a license and is willfully misappropriating CCS'
copyrights. The Company, in a letter from its counsel dated November 6, 1995,
vigorously refuted CCS' assertions. The Company also tendered a payment with
respect to past due royalties plus interest pursuant to the terms of the MUSICAM
License Agreement with CCS. The Company and CCS are now in the process of
exploring the possibility of a future license arrangement. 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 seeks $682,425
in compensatory damages, plus attorneys' fees provided by contract. Since the
filing of its complaint, Mueller/Shields has served notice of its application
for a writ of attachment and has scheduled a hearing for its application on
April 26, 1996. The Company and Mueller/Shields have been discussing a possible
resolution. Those negotiations continue. The Company's response to the complaint
is due April 17, 1996 and its opposition to the application for writ of
attachment is due April 19, 1996. If any of Mueller/Shields' claims were to be
decided adversely to the Company, the Company would be liable to pay monetary
damages to Mueller/Shields. The Company believes that the ultimate resolution of
this matter will not have a material impact on the Company's consolidated
financial position.
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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the
quarter ended December 31, 1995.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
The information required by this item is incorporated by reference to
page 23 of Registrant's Annual Report to security holders to be furnished to the
Commission pursuant to Rule 14a-3(b) in connection with the 1996 Annual Meeting
which is attached hereto as Exhibit 13.1 (the "Annual Report").
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is incorporated by reference to
page 5 of the Annual Report, which is attached hereto as Exhibit 13.1.
-15-
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The information required by this item is incorporated by reference to
pages 7 through 9 of the Annual Report attached hereto as Exhibit 13.1.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of the Company, including the
notes thereto and quarterly information (unaudited) are incorporated herein by
reference to page 6, and pages 10 through 22 of the Annual Report attached
hereto as Exhibit 13.1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The sections entitled "Nomination and Election of Directors" and
"Management" appearing on pages 2 through 5 in the Registrant's Proxy Statement
to be filed with the Securities and Exchange Commission are incorporated herein
by reference.
ITEM 11. EXECUTIVE COMPENSATION
The section entitled "Executive Compensation" appearing on pages 19
through 24 in the Registrant's Proxy Statement to be filed with the Securities
and Exchange Commission is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The section entitled "Security Ownership of Officers, Directors and
Principal Stockholders" appearing on pages 17 through 18 in the Registrant's
Proxy Statement to be filed with the Securities and Exchange Commission is
incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
-16-
<PAGE> 18
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
The following documents are filed as a part of this Report:
Index to Financial Statements
(a)(1). The following consolidated financial statements of Compression
Labs, Incorporated are included pursuant to Item 8:
<TABLE>
<CAPTION>
Page in Form 10-K
-----------------
<S> <C>
Consolidated Statements of Operations for each of the years in the three-year
period ended December 31, 1995............................................ *
Consolidated Balance Sheets as of December 31, 1995 and 1994 ............. *
Consolidated Statements of Stockholders' Equity for each of the years
in the three-year period ended December 31, 1995 ......................... *
Consolidated Statements of Cash Flows for each of the years in the
three-year period ended December 31, 1995 ................................ *
Notes to Consolidated Financial Statements ............................... *
Independent Auditor's Report.............................................. *
</TABLE>
*These items have been incorporated by reference as indicated under
Item 8 of this Report.
Index to Financial Statement Schedules
(a)(2). The following financial statement schedules of Compression
Labs, Incorporated for each of the years in the three-year
period ended December 31, 1995 are included pursuant to Item
8:
<TABLE>
<CAPTION>
Page in Form 10-K
-----------------
<S> <C>
Independent Auditors' Report on Schedule .............................. S-1
Schedule II Valuation and Qualifying Accounts ....................... S-2
</TABLE>
Schedules not listed above have been omitted because they are not
applicable or are not required or the information required to be set forth
therein is included in the Financial Statements or notes thereto.
-17-
<PAGE> 19
(a)(3). Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
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)
10.1 1980 Stock Option Plan, as amended (the ISO Plan). (21)
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. (4)
10.3 1984 Employee Stock Purchase Plan, as amended (the 1984 Purchase Plan). (21)
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. (4)
10.5 1984 Supplemental Stock Option Plan, as amended (the Supplemental Plan). (21)
10.6 Forms 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. (5)
10.7 Individual Stock Option grant covering the option granted to Arthur G. Anderson on December 21,
1984. (4)
10.8 Lease Agreement, dated as of January 16, 1987, covering the Company's principal executive offices
and manufacturing facility. (2)
10.9 Sublease Agreement, dated December 6, 1990, covering the Company's additional principal executive
offices. (6)
10.10 Letter Agreement, dated January 27, 1992, with Bank of the West, covering line of credit and
equipment lease line. (7)
10.11 Perquisite Plan. (8)
10.12 Commitment letters from United States Portfolio Leasing, Inc. (USPL) and General Electric Capital
Corporation (GECC) dated September 12, 1989 and September 29, 1989, respectively. (9)
10.13 Program Agreement dated as of December 19, 1989 between CLI and PaineWebber R&D Partners II,
L.P. (10)*
</TABLE>
- ------------------------
* Confidential treatment requested for portions of this agreement.
-18-
<PAGE> 20
<TABLE>
<S> <C>
10.14 Purchase Agreement dated as of December 19, 1989 between CLI and PaineWebber R&D Partners II,
L.P. (10)*
10.15 Joint Development Agreement dated as of April 13, 1991, between Compression Labs, Incorporated
and Integrated Information Technology. (11)*
10.16 Amended and Restated 1992 Non-Employee Directors' Stock Option Plan (the Directors' Plan) and Form
of Grant used in connection therewith. (21)
10.17 Amendment No. 1 To Program Agreement between the Company and PaineWebber R&D Partners II,
L.P., dated as of March 30, 1992. (12)*
10.18 Amendment No. 1 To Joint Venture and Purchase Option Agreement between the Company and
PaineWebber R&D Partners II, L.P., dated as of March 30, 1992. (12)*
10.19 Amendment No. 1 To Development Agreement between the Company and PaineWebber R&D Partners
II, L.P., dated as of March 30, 1992. (12)*
10.20 Amendment No. 2 To Program Agreement between the Company and PaineWebber R&D Partners II,
L.P., dated as of October 16, 1992. (12)*
10.21 Amendment No. 2 to Development Agreement between the Company and PaineWebber R&D Partners
II, L.P., dated as of October 16, 1992. (12)*
10.22 First Amendment to Loan and Security Agreement, entered into as of January 1, 1992, by and between
Compression Labs, Incorporated and Bank of the West. (12)
10.23 Second Amendment to Loan and Security Agreement, entered into as of May 1, 1992, by and between
Compression Labs, Incorporated and Bank of the West. (12)
10.24 Third Amendment to Loan and Security Agreement, entered into as of October 1, 1992, by and
between Compression Labs, Incorporated and Bank of the West. (12)
10.25 Letter Agreement, dated October 26, 1992, with Bank of the West, covering net investable balances in
its deposit accounts. (12)
10.26 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. (12)
10.27 Convertible Preferred Stock Purchase Agreement by and between Compression Labs, Incorporated and
Thomson Consumer Electronics S.A., dated January 29, 1993. (13)
10.28 Strategic Cooperation Agreement, by and between Compression Labs, Incorporated and Thomson
Consumer Electronics S.A., dated January 29, 1993. (13)
10.29 Amended and Restated Rights Agreement by and between Compression Labs, Incorporated and The
First National Bank of Boston, dated January 29, 1993. (13)
10.30 Fourth Amendment to Loan and Security Agreement, entered into as of March 25, 1993, by and
between Compression Labs, Incorporated and Bank of the West. (14)
10.31 Fifth Amendment to Loan and Security Agreement, entered into as of April 30, 1993, by and between
Compression Labs, Incorporated and Bank of the West. (14)
10.32 Letter of Commitment entered into as of August 13, 1993, by and between Compression Labs,
Incorporated and Bank of the West. (15)
</TABLE>
- -------------------------
* Confidential treatment requested for portions of this agreement.
-19-
<PAGE> 21
<TABLE>
<S> <C>
10.33 Sixth Amendment and Special Facilities Rider to Loan and Security Agreement, entered into as of
September 28, 1993, by and between Compression Labs, Incorporated and Bank of the West. (16)
10.34 Investment Agreement by and between Compression Labs, Incorporated and Fletcher Capital Markets,
Inc., dated October 20, 1993. (17)
10.35 Common Stock Purchase Agreement by and between Compression Labs, Incorporated and Intel
Corporation, dated May 5, 1994. (19)
10.36 Credit Agreement entered into as of June 30, 1994, by and between Compression Labs, Incorporated
and Bank of America National Trust and Savings Association. (20)
10.37 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. (22)
10.38 Waiver and First Amendment to Credit Agreement, entered into as of November 23, 1994, by and
between Compression Labs, Incorporated and Bank of America National Trust and Savings
Association. (22)
10.39 Second Amendment to Credit Agreement and Partial Release of Collateral, entered into as of May 12,
1995, by and between Compression Labs, Incorporated and Bank of America National Trust and
Savings Association. (23)
10.40 Waiver and Third Amendment to Credit Agreement, entered into as of May 12, 1995, by and between
Compression Labs, Incorporated and Bank of America National Trust and Savings Association. (23)
10.41 Fourth Amendment to Credit Agreement, entered into as of June
23, 1995, by and between Compression Labs, Incorporated and
Bank of America National Trust and Savings Association. (25)
10.42 Investment Agreement by and between Compression Labs, Incorporated and Fletcher Asset
Management, Inc., dated as of June 16, 1995. (21)
10.43 Loan and Security Agreement, entered into as of August 21, 1995, by and between Compression Labs,
Incorporated and BankAmerica Business Credit, Inc. (24)
10.44 Consulting and Separation Agreement with John E. Tyson dated February 16, 1996.
10.45 Consulting and Separation Agreement with Robert Silver dated November 29, 1995.
10.46 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.
13.1 Registrant's Annual Report to Stockholders for the year ended December 31, 1995, pages 5 through 23.
21.1 Subsidiaries of the Company. (8)
23.1 Consent of Independent Auditors.
24.1 Power of Attorney. Reference is made to Page 23.
27.1 Article 5 of Regulation S-X, Financial Data Schedules for Compression Labs, Incorporated for the
Year Ending December 31, 1995.
</TABLE>
- -------------------------
(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.
-20-
<PAGE> 22
(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 an Annual Report on Form 10-K filed for the year
ended March 29, 1985 (Commission File No. 0-13218) and incorporated
herein by reference.
(5) Filed as an exhibit to a Registration Statement on Form S-8 filed On
March 5, 1985 (Registration No. 2-96228) and incorporated herein by
reference.
(6) 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.
(7) Filed as an exhibit to an Annual Report on Form 10-K filed for the year
ended December 31, 1991 (Commission File No. 0-13218) and incorporated
herein by reference.
(8) 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.
(9) Filed as an exhibit to a Quarterly Report on Form 10-Q filed on
November 10, 1989 (Commission File No. 0-13218) 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, 1989 (Commission File No. 0-13218) and incorporated
herein by reference.
(11) Filed as an exhibit to a Quarterly Report on Form 10-Q filed on May 15,
1991 (Commission File No. 0-13218) and incorporated herein by
reference.
(12) 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.
(13) Filed as an exhibit to a Current Report on Form 8-K filed February 1,
1993 (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, 1993 (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, 1993 (Commission File No. 0-13218) and
incorporated herein by reference.
(16) Filed as an exhibit to a quarterly report on Form 10-Q for the
quarterly period ended September 30, 1993 (Commission File No. 0-13218)
and incorporated herein by reference.
(17) Filed as an exhibit to a report on Form 8-K dated October 20, 1993
(Commission File No. 0-13218) and incorporated herein by reference.
(18) Management contract or compensatory plan or arrangement.
(19) Filed as an exhibit to a report on Form 8-K dated May 5, 1994
(Commission File No. 0-13218) and incorporated herein by reference.
(20) Filed as an exhibit to a quarterly report on Form 10-Q for the
quarterly period ended June 30, 1994 (Commission File No. 0-13218) and
incorporated herein by reference.
(21) Filed as an exhibit to previous filing (Commission File No. 0-13218).
(22) 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.
(23) Filed as an exhibit to a quarterly report on Form 10-Q for the
quarterly period ended March 30, 1995 (Commission File No. 0-13218) and
incorporated herein by reference.
(24) 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.
(25) Filed as an exhibit to a quarterly report on Form 10-Q for the
quarterly period ended June 30, 1995 (Commission File No. 0-13218) and
incorporated herein by reference.
-21-
<PAGE> 23
(b) Reports on Form 8-K
Current Report on Form 8-K - None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
COMPRESSION LABS, INCORPORATED
BY /s/ Michael E. Seifert
-----------------------------------------
Michael E. Seifert
Vice President, Finance and Chief
Accounting Officer
April 15, 1996
-22-
<PAGE> 24
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints T. Gary Trimm and Michael E. Seifert, and
each of them, as his true and lawful attorneys-in-fact and agents, 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 to this report,
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 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 his substitute or substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ T. Gary Trimm President and Chief Executive Officer April 15, 1996
- ----------------------------- (Principal Executive Officer)
T. Gary Trimm
/s/ Michael E. Seifert Vice President, Finance and April 15, 1996
- ----------------------------- Chief Accounting Officer,
Michael E. Seifert (Principal Accounting Officer)
/a/ Arthur G. Anderson Chairman of the Board April 15, 1996
- -----------------------------
Arthur G. Anderson
/s/ Robert J. Casale Director April 15, 1996
- -----------------------------
Robert J. Casale
/s/ Robert B. Liepold Director April 15, 1996
- -----------------------------
Robert B. Liepold
/s/ David A. Wegmann Director April 15, 1996
- -----------------------------
David A. Wegmann
</TABLE>
-23-
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Compression Labs, Incorporated:
Under date of March 13, 1996, we reported on the consolidated balance sheets of
Compression Labs, Incorporated as of December 31, 1995 and 1994, 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, as contained
in the 1995 annual report to stockholders. These consolidated financial
statements and our report thereon are incorporated by reference in the December
31, 1995 annual report on Form 10-K of Compression Labs, Incorporated. In
connection with our audit of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule as listed under item 14(a)(2). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits.
In our opinion, such 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.
KPMG Peat Marwick LLP
San Jose, California
March 13, 1996
S-1
<PAGE> 26
SCHEDULE II
COMPRESSION LABS, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
For the Years ended December 31, 1995, 1994 and 1993
(In thousands)
<TABLE>
<CAPTION>
Balance at Additions
Begin- Charged to Balance
ning 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 doubtful 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 doubtful 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.
S-2
<PAGE> 1
EXHIBIT 10.44
SEPARATION AND CONSULTING AGREEMENT
THIS SEPARATION AND CONSULTING AGREEMENT (the "Agreement") is made and
entered into this 16th day of February, 1996 between JOHN E. TYSON ("Mr. Tyson")
and COMPRESSION LABS, INC., a Delaware corporation (the "Company").
W I T N E S S E T H
WHEREAS, Mr. Tyson has tendered his resignation as Chief Executive Officer
of the Company and all other positions he may hold with the Company, and wishes
to enter into a consulting relationship with the Company; and
WHEREAS, the Company has accepted Mr. Tyson's resignation as Chief
Executive Officer of the Company and all other positions he may hold with the
Company, and wishes to provide Mr. Tyson with certain benefits in consideration
of his service to the Company and the promises and covenants of Mr. Tyson as
contained herein.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, it is agreed by and between the parties hereto as follows:
1. RESIGNATION. Mr. Tyson has tendered and the Company has accepted Mr.
Tyson's resignation as Chief Executive Officer of the Company and all other
positions he may hold with the Company, effective February 20, 1996 ("Separation
Date").
2. ACCRUED SALARY AND PAID TIME OFF. The Company will pay Mr. Tyson all
accrued salary, and all accrued and unused paid time off earned prior to the
Separation Date, subject to standard payroll deductions and withholdings. Mr.
Tyson is entitled to this payment regardless of whether he signs this Agreement.
3. EXPENSE REIMBURSEMENT. Within thirty (30) business days of the
Separation Date, Mr. Tyson will submit his final documented expense
reimbursement statement reflecting all business expenses he incurred through the
Separation Date, if any, for which he seeks reimbursement. The Company shall
reimburse Mr. Tyson's expenses pursuant to Company policy and regular business
practice.
4. CONSULTING AGREEMENT. Mr. Tyson shall serve as a consultant to the
Company under the terms specified below. The consulting relationship shall
commence on the date of the Separation Date and continue through February 20,
1998 (the "Consulting Period").
(A) CONSULTING SERVICES. Mr. Tyson agrees to 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 utilize
his expertise and creative talents in performing these services. Mr. Tyson
agrees to make himself available to perform such consulting services throughout
the Consulting Period, up to a maximum of twenty (20) hours per month for the
first six (6) months of the Consulting Period and ten (10) hours per month for
the remaining eighteen (18) months of the Consulting Period. In order to assist
the delivery of Mr. Tyson's consulting services, the Company agrees to provide
Mr. Tyson with satisfactory office facilities and clerical support, and to
reimburse Mr. Tyson's reasonable expenses as a consultant.
(B) CONSULTING FEES AND BENEFITS.
(1) CONSULTING FEES. During the Consulting Period, Mr. Tyson shall
receive twenty-four thousand dollars and no cents ($24,000.00) per month
("Consulting Fees").
(2) 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 Mr. Tyson a Form 1099 with respect to
Mr. Tyson's Consulting Fees. Mr. Tyson acknowledges that he will be
entirely
1
<PAGE> 2
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.
(3) HEALTH INSURANCE COVERAGE. To the extent permitted by the
Consolidated Omnibus Budget Reconciliation Act of 1985 ("COBRA") and by the
Company's group health insurance policies, Mr. Tyson and his covered
dependents will be eligible to continue their health insurance benefits at
their own expense, and later, to convert to an individual policy if they
wish. Mr. Tyson and his covered dependents will be provided with a separate
notice of their COBRA rights. If Mr. Tyson elects COBRA continuation, the
Company agrees to pay (i) Mr. Tyson and his covered dependents' COBRA
continuation premiums for the eighteen (18)-month COBRA period and (ii) Mr.
Tyson an amount equal to such COBRA continuation premiums for the remainder
of the Consulting Period; provided, however, that the Company's obligation
to make such payments shall cease immediately if Mr. Tyson becomes eligible
for other health insurance benefits at the expense of a new employer. Mr.
Tyson agrees to notify a duly authorized officer of the Company, in
writing, immediately upon acceptance of any employment which provides
health insurance benefits. This paragraph provides only for the Company's
payment of COBRA continuation premiums for the periods specified above.
This paragraph is not intended to affect, nor does it affect, the rights of
Mr. Tyson, or Mr. Tyson's covered dependents under any applicable law with
respect to health insurance continuation coverage.
(4) STOCK OPTIONS. Mr. Tyson's stock options to acquire common stock
of the Company which are outstanding as of the Separation Date (the "Stock
Options") 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. Notwithstanding the foregoing sentence,
all of Mr. Tyson's Stock Options shall become fully vested on August 20,
1996, or upon Mr. Tyson's death or permanent mental or physical disability
before that date. In addition, except for the Stock Options granted to Mr.
Tyson on May 20, 1988 and April 27, 1989, the Company agrees to extend the
term of Mr. Tyson's Stock Options beyond the three (3)-month exercise
period following the Separation Date in order to permit Mr. Tyson to
exercise his Stock Options no later than the end of their full ten
(10)-year term or March 1, 2001, whichever occurs first. The provisions of
this Agreement which affect Mr. Tyson's Stock Option agreements shall be
treated as amendments to such agreements. Mr. Tyson acknowledges that by
virtue of receiving an extension of the exercise period, his Incentive
Stock Options may no longer be treated as such, but instead may be treated
for tax purposes as if they were Non-Qualified Stock Options.
(5) OTHER COMPENSATION. Except as expressly provided herein, Mr.
Tyson acknowledges that he will not receive (nor is he entitled to) any
additional compensation, severance or benefits (including, but not limited
to, life insurance and disability insurance). Provided, however, that
nothing herein shall impair Mr. Tyson's rights under the Company's existing
benefit plans.
(C) LIMITATIONS ON AUTHORITY. Mr. Tyson shall have no responsibilities or
authority as a consultant to the Company other than as provided for above. Mr.
Tyson hereby agrees not to 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.
5. DEATH OF MR. TYSON. In the event that Mr. Tyson dies or becomes
permanently physically or mentally disabled during the Consulting Period, and
provided the Consulting Period has not been terminated as a result of paragraph
7 of this Agreement, any Consulting Fees unpaid at that date shall be paid to
Mr. Tyson's Beneficiary or representative. The Beneficiary and the Company may,
by written agreement entered into after Mr. Tyson's death, agree to an
acceleration of such payments. In the event Mr. Tyson dies or becomes
permanently physically or mentally disabled either during or after the
Consulting Period and provided the Consulting Period has not been terminated as
a result of paragraph 7 of this Agreement, any Stock Options may be exercised by
Mr. Tyson's Beneficiary or representative. Beneficiary means such person or
persons designated by Mr. Tyson to receive any Consulting Fees and/or exercise
his Stock Options in accordance with this paragraph 5. The designation of the
Beneficiary shall be made in a writing signed by
2
<PAGE> 3
Mr. Tyson and in a form acceptable to the Company. Mr. Tyson may revoke and
redesignate the Beneficiary at any time and from time to time up to the date of
Mr. Tyson's death.
6. OTHER WORK ACTIVITIES. Throughout the Consulting Period, Mr. Tyson
retains the right to engage in employment, consulting, or other work
relationships in addition to his work for the Company. The Company will make
reasonable arrangements to enable Mr. Tyson to perform his work for the Company
at such times and in such a manner so that it will not interfere with other
activities in which he may engage. In order to protect the trade secrets and
confidential and proprietary information of the Company, Mr. Tyson agrees that,
during the Consulting Period, he will not obtain employment, perform work for
any business entity, or engage in any other work activity which is in
competition, or is preparing to compete, with the Company ("Competitive
Activity"). For purposes of this paragraph, employment, performing work for a
business entity or engaging in a work activity shall be considered in
competition with the Company if such employment or work is in a business in
which the Company is actively involved both on the Separation Date and at the
time Mr. Tyson obtains such employment, performs such work for a business entity
or engages in such other work activity and (ii) businesses in which the Company
plans to engage as of the Separation Date, but only if Mr. Tyson was actively
involved in developing the strategic plans to engage in such business. For
purposes of this paragraph, 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 paragraph. Mr. Tyson agrees to notify the Company, in writing,
at least ten (10) business days prior to engaging in any work for any business
purpose other than work for the Company. In the event that Mr. Tyson is informed
by the Company that any such work constitutes Competitive Activity, and he
subsequently engages in such Competitive Activity, the Consulting Period shall
end immediately in accordance with paragraph 7. The Company shall not seek to
recover any fees or benefits provided to Mr. Tyson prior to his engagement in
Competitive Activity, and such Competitive Activity shall not be considered a
breach of this Agreement. For purposes of this paragraph, Mr. Tyson's
involvement in a joint venture between Loral Corporation, CableVision, Ltd. and
Continental Satellite Corporation (or any affiliates of the foregoing),
including but not limited to business television or distance clearing
applications, shall not be considered Competitive Activity, but only as to such
opportunity that Mr. Tyson has previously disclosed to the Company's Board of
Directors. The Company acknowledges that the Board of Directors has already
considered and declined to participate in said joint venture, and has approved
Mr. Tyson's involvement in said joint venture.
7. EARLY TERMINATION OF CONSULTING PERIOD. If, during the Consulting
Period, Mr. Tyson (i) voluntarily terminates his consulting relationship with
the Company upon notifying the Company, in writing, at least ten (10) business
days in advance, (ii) does not reasonably cooperate with the reasonable requests
of the Company in performing his consulting services, or (iii) engages in
Competitive Activity as defined in paragraph 6, the Consulting Period shall
terminate immediately. Upon such early termination of the Consulting Period
(except in the event of Mr. Tyson's death or permanent physical or mental
disability in accordance with paragraph 5), the Company's obligation to pay Mr.
Tyson any further Consulting Fees and Mr. Tyson's COBRA continuation premiums
and Mr. Tyson's vesting in his Stock Options shall cease immediately and Mr.
Tyson's ability to exercise his Stock Options shall terminate three (3) months
following the date of such early termination of the Consulting Period. The
Consulting Period shall not expire prior to the expiration of its term for any
reason other than a reason set forth in this paragraph 7.
8. ATTORNEY'S FEES. The Company agrees to pay Mr. Tyson's attorney's fees
relating to this Agreement, up to a maximum of five thousand dollars ($5,000).
9. MITIGATION. Except as otherwise specifically provided herein, Mr.
Tyson shall not be required to mitigate damages or the amount of any payment
provided under this Agreement by seeking other employment or otherwise, nor
shall the amount of any payment provided for under this Agreement be reduced by
any compensation earned by Mr. Tyson as a result of employment by another
employer or by retirement benefits after the Separation Date, or otherwise.
10. BEST PAYMENT PROVISION. In the event that any payment and the value
of any benefit received or to be received by Mr. Tyson would result in all or a
portion of such payment to be subject to excise tax under
3
<PAGE> 4
Section 4999 of the Internal Revenue Code, then Mr. Tyson's payment shall be
either (i) the full payment or (ii) such lesser amount which would result in no
portion of the payment being subject to excise tax under Section 4999 of the
Internal Revenue Code, whichever of the foregoing amounts, taking into account
the applicable Federal, state, and local employment taxes, income taxes, and the
excise tax imposed by Section 4999 of the Internal Revenue Code, results in the
receipt by Mr. Tyson, on an after-tax basis, of the greatest amount of the
payment notwithstanding that all or some portion of the payment may be taxable
under Section 4999 of the Internal Revenue Code. All determinations required to
be made under this Paragraph shall be made by KPMG Peat Marwick or any other
nationally recognized accounting firm which is the Company's outside auditor at
the time of such determination, which firm must be reasonably acceptable to
executive (the "Accounting Firm"). The Company shall cause the Accounting Firm
to provide detailed supporting calculations of its determinations to the Company
and Mr. Tyson. Notice must be given to the Accounting Firm within fifteen (15)
business days after an event entitling Mr. Tyson to a payment under this
Agreement. All fees and expenses of the Accounting Firm shall be borne solely by
the Company. The accounting Firm's determinations must be made with substantial
authority (within the meaning of Section 6662 of the Internal Revenue Code).
11. NONSOLICITATION. Mr. Tyson agrees that during the Consulting Period,
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.
12. COMPANY PROPERTY. Within seven (7) days of the Separation Date, Mr.
Tyson agrees to return to the Company all Company documents (and all copies
thereof) and other Company property in his possession, or his control,
including, but not limited to, Company files, notes, drawings, records, business
plans and forecasts, financial information, specifications, computer-recorded
information, tangible property, credit cards, entry cards, identification badges
and keys; and, any materials of any kind which contain or embody any proprietary
or confidential material of the Company (and all reproductions thereof). Mr.
Tyson agrees that, as of the Separation Date, he will neither use nor possess
Company property, except such property which any officer or the Board
specifically authorizes him to use or possess for the sole purpose of performing
his duties under this Agreement. Mr. Tyson further agrees that he will return
all property provided to him pursuant to the preceding sentence, upon completion
of the specific project for which he was authorized to possess such property or
on the Separation Date, whichever first occurs.
13. PROPRIETARY INFORMATION OBLIGATIONS. Mr. Tyson hereby agrees to be
bound throughout the Consulting Period by the terms of his Proprietary
Information and Inventions Agreement ("Proprietary Information Agreement"),
attached hereto as Exhibit A, certain obligations under which continue after the
termination of the Consulting Period, as specified in the Proprietary
Information Agreement. However, inventions which he may make during this period
without reference to proprietary information of the Company, and which are not
derived from such information, shall remain Mr. Tyson's sole property.
14. NONDISPARAGEMENT. Mr. Tyson and the Company agree that neither party
will at any time disparage the other in any manner likely to be harmful to the
other party, its business reputation, or the personal or business reputation of
its directors, shareholders, and employees, provided that each party shall
respond accurately and fully to any question, inquiry, or request for
information when required by legal process.
15. CONFIDENTIALITY. The provisions of this Agreement shall be held in
strictest confidence by Mr. Tyson and the Company and shall not be publicized or
disclosed in any manner whatsoever. Notwithstanding the prohibition in the
preceding sentence: (i) Mr. Tyson may disclose this Agreement, in confidence, to
his immediate family; (ii) the parties may disclose this Agreement in confidence
to their respective attorneys, accountants, auditors, tax preparers, and
financial advisors; (iii) the Company may disclose this Agreement as necessary
to fulfill standard or legally required corporate reporting or disclosure
requirements; and (iv) the parties may disclose this Agreement insofar as such
disclosure may be necessary to enforce its terms or as otherwise required by
law. In particular (and without limitation), Mr. Tyson agrees not to discuss
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this Agreement with present or former Company employees or other personnel,
except to the extent necessary to explain his consulting relationship with the
Company or to carry out his duties under this Agreement.
16. RELEASE OF CLAIMS. Except as otherwise set forth in this Agreement,
Mr. Tyson hereby releases, acquits and forever discharges the Company, its
officers, directors, agents, attorneys, servants, employees, shareholders,
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 out
of or in any way related to agreements, events, acts or conduct at any time
prior to and including the execution date hereof, including but not limited to:
any and all such claims and demands directly or indirectly arising out of or in
any way connected with Mr. Tyson's employment with the Company or the
termination of that employment; claims or demands related to salary, bonuses,
commissions, stock, stock options, or any other ownership interests in the
Company, vacation pay, fringe benefits, expense reimbursements, sabbatical
benefits, severance benefits, or any other form of compensation; claims pursuant
to any federal, state or local law or cause of action including, but not limited
to, the federal Civil Rights Act of 1964, as amended; the federal Age
Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal
Americans with Disabilities Act of 1990; the California Fair Employment and
Housing Act, as amended; tort law; contract law; wrongful discharge;
discrimination; fraud; defamation; emotional distress; and breach of the implied
covenant of good faith and fair dealing; provided, however, that nothing in this
paragraph shall be construed in any way to release the Company from its
obligation to indemnify Mr. Tyson pursuant to the Company's Indemnification
Agreement.
17. ADEA WAIVER. Mr. Tyson acknowledges that he is knowingly and
voluntarily waiving and releasing any rights he may have under the ADEA. He also
acknowledges that the consideration given for the waiver in the above paragraph
is in addition to anything of value to which he was already entitled. He further
acknowledges that he has been advised by this writing that: (i) his waiver and
release do not apply to any claims that may arise after he signs this Agreement;
(ii) he has the right to consult with an attorney prior to executing this
Agreement; (iii) he has twenty-one (21) days within which to consider this
Agreement (although he may choose to voluntarily execute this Agreement
earlier); (iv) he has seven (7) days following the execution of this Agreement
to revoke the Agreement; and (v) this Agreement shall not be effective until the
date upon which the revocation period has expired, which shall be the eighth day
after this Agreement is executed by Mr. Tyson, provided that the Company has
also signed the Agreement by that date.
18. SECTION 1542 WAIVER. Mr. Tyson acknowledges that he has read and
understands Section 1542 of the Civil Code of the State of California 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.
Mr. Tyson hereby expressly waives and relinquishes all rights and benefits under
that section and any law or legal principle of similar effect in any
jurisdiction with respect to the release granted in this Agreement.
19. NO ADMISSIONS. It is understood and agreed by Mr. Tyson and the
Company that this Agreement represents a compromise settlement of various
matters, and that the promises and payments in consideration of this Agreement
shall not be construed to be an admission of any liability or obligation by
either party to the other party or to any other person.
20. AMENDMENT OF THIS AGREEMENT. This Agreement may be changed only upon
the mutual written consent of the Company and Mr. Tyson. The written consent of
the Company to a change of this Agreement must be signed by the Company's Chief
Financial Officer, after such change has been approved by the Compensation
Committee of the Company's Board of Directors.
21. NOTICES. Any notices provided hereunder must be in writing and such
notices or any other written communication shall be deemed effective upon the
earlier of personal delivery (including personal delivery by telex or facsimile)
or the third day after mailing by first class mail, to the Company at its
primary office location and to Mr. Tyson at his address as listed in the
Company's payroll records. Any payments made by
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the Company to Mr. Tyson under the terms of this Agreement shall be delivered to
Mr. Tyson either in person or at his address as listed in the Company's payroll
records.
22. 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.
23. 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.
24. COMPLETE AGREEMENT. This Agreement, including Exhibits A and B and
the applicable option agreements as amended hereby, constitutes the entire
agreement between Mr. Tyson and the Company and it is the complete, final, and
exclusive embodiment of their agreement with regard to this subject matter. It
is entered into without reliance on any promise or representation, written or
oral, other than those expressly contained herein. 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.
25. COUNTERPARTS. This Agreement may be executed in separate
counterparts, any one of which need not contain signatures of more than one
party, but all of which taken together will constitute one and the same
Agreement.
26. HEADINGS. The headings of the paragraphs hereof are inserted for
convenience only and shall not be deemed to constitute a part hereof nor to
affect the meaning thereof.
27. SUCCESSORS AND ASSIGNS. This Agreement is intended to bind and inure
to the benefit of and be enforceable by Mr. Tyson and the Company, and their
respective successors, assigns, heirs, executors and administrators, except that
Mr. Tyson 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.
28. ATTORNEY FEES. If either party hereto brings any action to enforce
his or its rights hereunder, the prevailing party in any such action shall be
entitled to recover his or its reasonable attorneys' fees and costs incurred in
connection with such action.
29. ARBITRATION. In order to ensure rapid and economical resolution of
any dispute which may arise under this Agreement, Mr. Tyson and the Company
agree that any and all disputes or controversies, arising from or regarding the
interpretation, performance, enforcement or termination of this Agreement shall
be resolved by final and binding arbitration under the procedures set forth in
the Arbitration Procedure attached hereto as Exhibit B and the then existing
Judicial Arbitration and Mediation Services Rules, Inc. ("JAMS") of Practice and
Procedure or the rules of practice and procedure of any successor entity to JAMS
(except insofar as they are inconsistent with the procedures set forth in the
enclosed Arbitration Procedure).
BY ENTERING INTO THIS AGREEMENT, THE COMPANY AND MR. TYSON ACKNOWLEDGE THAT THEY
ARE WAIVING THEIR RIGHT TO JURY TRIAL OF ANY DISPUTE COVERED BY THIS AGREEMENT.
30. CHOICE OF LAW. This Agreement shall be deemed to have been entered
into and shall be construed and enforced in accordance with the laws of the
State of California as applied to contracts made and to be performed entirely
within California.
31. CONSTRUCTION OF AGREEMENT. In the event of a conflict between the
text of the Agreement and any summary, description or other information
regarding the Agreement, the text of the Agreement shall control.
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IN WITNESS WHEREOF, the parties have executed this Agreement on the day and
year written above.
<TABLE>
<S> <C>
COMPRESSION LABS, INC., JOHN E. TYSON
A DELAWARE CORPORATION
By: /s/ William A. Berry
/s/ John E. Tyson
Title:
</TABLE>
Exhibit A: Proprietary Information and Inventions Agreement
Exhibit B: Arbitration Procedure
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EXHIBIT A
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
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<PAGE> 9
EXHIBIT B
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 Santa Clara County, California,
by a mutually acceptable retired judge from the panel of Judicial Arbitration
and Mediation Services, Inc. or any entity performing the same type of services
that succeeds to its business ("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 of JAMS shall designate the arbitrator.
5. 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.
6. 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 prearbitration discovery shall be permitted.
7. 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.
8. 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).
9. 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. Except as provided in
the John Tyson Compensation and Benefit Continuation Agreement, each party shall
pay its own attorneys' fees, witness fees and other expenses incurred for its
own benefit.
10. 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.
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EXHIBIT 10.45
SEPARATION AND RELEASE AGREEMENT
THIS SEPARATION AND RELEASE AGREEMENT ("Agreement") is made and entered
into by and between ROBERT SILVER ("Mr. Silver") and COMPRESSION LABS, INC. (the
"Company"), as of the Effective Date described in paragraph fourteen (14)
herein.
W I T NE S S E T H
WHEREAS, Mr. Silver has tendered his resignation as Vice President of Sales
and Marketing and all other positions he may hold with the Company in
consideration of the promises and covenants contained herein;
WHEREAS, the Company has accepted Mr. Silver's resignation as Vice
President of Sales and Marketing and wishes to provide Mr. Silver with certain
benefits in consideration of his service to the Company and the promises and
covenants of Mr. Silver as contained herein;
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained herein, it is hereby agreed by and between the parties hereto as
follows:
1. RESIGNATION. Mr. Silver has tendered, and the Company has accepted,
Mr. Silver's resignation as Vice President of Sales and Marketing and all other
positions he may hold with the Company, effective December 1, 1995 ("Transition
Date").
2. TRANSITION PERIOD. To aid Mr. Silver in his employment transition, the
Company will continue to employ Mr. Silver from the Transition Date through and
including May 15, 1996 (the "Separation Date"). The time period beginning on the
day after the Transition Date and ending on the Separation Date shall be
referred to as the Transition Period.
(A) DUTIES. During the Transition Period, Mr. Silver shall be
responsible for transition activities as assigned by the Company's Chief
Executive Officer ("CEO"), and shall report to the Company's Vice President
of Human Resources. Mr. Silver agrees that throughout the Transition Period
he will continue to be bound by the Company's employment policies,
procedures and practices.
(B) COMPENSATION AND BENEFITS. During the Transition Period: (i) the
Company will continue to pay Mr. Silver his base salary in effect as of the
Transition Date; (ii) Mr. Silver shall be entitled to continue his
participation in the Company's group health insurance plans in which he was
participating as of the Transition Date; and, (iii) within three (3) days
of the Transition Date, the Company will pay Mr. Silver all accrued, but
unused paid time off, subject to standard payroll deductions and
withholdings. Except as expressly provided herein, Mr. Silver acknowledges
that he will not receive (nor is he entitled to) any additional
compensation or benefits (including, but not limited to, life insurance and
disability insurance) during the Transition Period.
(C) NONCOMPETITION. Mr. Silver agrees that throughout the Transition
Period, he will not, without the Company's prior written approval, directly
or indirectly engage or prepare to engage in any activity in competition
with the Company, or accept employment, provide services to, or establish a
business relationship with a business or individual engaged in or preparing
to engage in competition with the Company.
3. ACCRUED SALARY. Within three (3) days after the Separation Date, the
Company will pay Mr. Silver all accrued salary, subject to standard payroll
deductions and withholdings.
4. ADDITIONAL PAYMENTS AND BENEFITS. The Company has no policy or
procedure requiring payment of any severance benefits. However, if on or about
the Separation Date, Mr. Silver signs the release attached
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hereto as Exhibit B (the "Release Agreement"), the Company will provide Mr.
Silver with the following as part of this Agreement:
(A) SEVERANCE PAYMENTS. Within ten (10) days of the Release Effective
Date as defined in Exhibit B, the Company will, as severance, pay Mr.
Silver two (2) weeks of his base salary in effect on the Transition Date,
subject to standard payroll deductions and withholdings.
(B) HEALTH INSURANCE. Any health insurance coverage provided by the
Company in effect on the Separation Date shall continue through May 31,
1996. Thereafter, to the extent permitted by law and by the Company's group
health insurance plans, Mr. Silver will be eligible 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.
(C) NON-RECOVERABLE DRAW. The Company will forgive any amount of Mr.
Silver's draw in excess of commissions, if any, still outstanding on the
Transition Date.
(D) COMMISSIONS. The Company will pay Mr. Silver his commissions
earned through the Transition Date. All such commissions will be paid in
the ordinary course of business, according to standard Company practice.
(E) OTHER BENEFITS. Except as expressly provided herein, Mr. Silver
acknowledges that he will not receive (nor is he entitled to) any
additional compensation, severance or benefits (including, but not limited
to, life insurance and disability insurance).
5. EXPENSE REIMBURSEMENT. Within five (5) business days after the
Effective Date of this Agreement, Mr. Silver will submit his final documented
expense reimbursement statement reflecting all business expenses he incurred
through the Effective Date, if any, for which he seeks reimbursement. The
Company shall reimburse Mr. Silver's expenses pursuant to Company policy and
regular business practice. The Company shall not reimburse Mr. Silver for any
expenses incurred after the Effective Date, except in the event such expenses
are approved in advance by the CEO.
6. STOCK OPTION EXERCISE. Mr. Silver acknowledges that the vesting of all
of his shares under his stock option will cease on the Transition Date. He shall
be entitled to exercise his vested shares, if any, within ninety (90) days of
the Transition Date in accordance with the terms of the applicable stock option
plan and stock option grant(s).
7. NONSOLICITATION. Mr. Silver agrees that for one (1) year after the
Transition Date, 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.
8. COMPANY PROPERTY. Within three (3) days after the Separation Date, Mr.
Silver agrees to return to the Company all Company documents (and all copies
thereof) and other Company property in his possession, or his control,
including, but not limited to, Company files, notes, drawings, records, business
plans and forecasts, financial information, specifications, computer-recorded
information, tangible property, credit cards, entry cards, identification badges
and keys; and, any materials of any kind which contain or embody any proprietary
or confidential material of the Company (and all reproductions thereof).
9. PROPRIETARY INFORMATION OBLIGATIONS. Mr. Silver acknowledges that he
continues to be bound by the terms of his Proprietary Information and Inventions
Agreement, a copy of which is attached hereto as Exhibit A.
10. ASSISTANCE WITH LITIGATION. Mr. Silver agrees to assist the Company
and its attorneys with their defense and/or prosecution of legal actions
including, but not limited to, any claim or action brought against the Company
in which Mr. Silver may have relevant information. Mr. Silver's assistance may
include testimony at a deposition and/or trial, informal interviews and other
reasonable activities, as may be requested. The Company will pay any and all
attorneys fees incurred in connection with such assistance. The Company
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will also reimburse Mr. Silver for all reasonable out-of-pocket costs incurred
in connection with any such assistance upon his submittal of documentation of
such costs.
11. NONDISPARAGEMENT. Mr. Silver and the Company agree that neither party
will at any time disparage the other in any manner likely to be harmful to the
other party, its business reputation, or the personal or business reputation of
its directors, shareholders, and employees, provided that each party shall
respond accurately and fully to any question, inquiry, or request for
information when required by legal process, and within a reasonable time prior
to making any such response shall provide notice to the other party of such
process.
12. CONFIDENTIALITY. The provisions of this Agreement shall be held in
strictest confidence by Mr. Silver and the Company and shall not be publicized
or disclosed in any manner whatsoever. Notwithstanding the prohibition in the
preceding sentence: (a) Mr. Silver may disclose this Agreement, in confidence,
to his immediate family; (b) the parties may disclose this Agreement in
confidence to their respective attorneys, accountants, auditors, tax preparers,
and financial advisors; (c) the Company may disclose this Agreement as necessary
to fulfill standard or legally required corporate reporting or disclosure
requirements; and (d) the parties may disclose this Agreement insofar as such
disclosure may be necessary to enforce its terms or as otherwise required by
law. In particular (and without limitation), Mr. Silver agrees not to discuss
this Agreement with any present or former employees, consultants, independent
contractors or other personnel of the Company.
13. RELEASE OF CLAIMS. Except as otherwise set forth in this Agreement,
Mr. Silver hereby releases, acquits and forever discharges the Company, its
officers, directors, agents, attorneys, servants, employees, shareholders,
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 out
of or in any way related to agreements, events, acts or conduct at any time
prior to and including the execution date hereof, including but not limited to:
any and all such claims and demands directly or indirectly arising out of or in
any way connected with Mr. Silver's employment with the Company or the
termination of that employment; claims or demands related to salary, bonuses,
draws, commissions, stock, stock options, or any other ownership interests in
the Company, vacation pay, fringe benefits, expense reimbursements, sabbatical
benefits, severance benefits, or any other form of compensation; claims pursuant
to any federal, state or local law or cause of action including, but not limited
to, the federal Civil Rights Act of 1964, as amended; the federal Age
Discrimination in Employment Act of 1967, as amended ("ADEA"); the federal
Americans with Disabilities Act of 1990; the California Fair Employment and
Housing Act, as amended; tort law; contract law; wrongful discharge;
discrimination; fraud; defamation; harassment; emotional distress; and breach of
the implied covenant of good faith and fair dealing.
14. ADEA WAIVER. Mr. Silver acknowledges that he is knowingly and
voluntarily waiving and releasing any rights he may have under the ADEA. He also
acknowledges that the consideration given for the waiver in the above paragraph
is in addition to anything of value to which he was already entitled. He further
acknowledges that he has been advised by this writing, as required by the ADEA
that: (a) his waiver and release do not apply to any claims that may arise after
the Effective Date of this Agreement; (b) he has been advised to consult with an
attorney prior to executing this Agreement; (c) he has twenty-one (21) days
within which to consider this Agreement (although he may choose to voluntarily
execute this Agreement earlier); (d) he has seven (7) days following the
execution of this Agreement to revoke the Agreement; (e) this Agreement shall
not be effective until the date upon which the revocation period has expired,
which shall be the eighth day after this Agreement is executed by Mr. Silver,
provided that the Company has also signed the Agreement by that date ("Effective
Date").
15. SECTION 1542 WAIVER. Mr. Silver acknowledges that he has read and
understands Section 1542 of the Civil Code of the State of California 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.
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Mr. Silver hereby expressly waives and relinquishes all rights and benefits
under that section and any law or legal principle of similar effect in any
jurisdiction with respect to the release of unknown and unsuspected claims
granted in this Agreement.
16. LIQUIDATED DAMAGES. Both Mr. Silver and the Company agree that it
would be impracticable and extremely difficult to ascertain the amount of actual
damages caused by material breach of the nondisparagement or confidentiality
provisions set forth in paragraphs 11 and 12 of this Agreement, respectively.
Therefore, Mr. Silver and the Company agree that, in the event it is
established, pursuant to the Dispute Resolution provision (paragraph 18), that
Mr. Silver has violated such provisions, Mr. Silver shall pay to the Company, as
liquidated damages, ten (10) thousand dollars ($10,000) for each breach. Mr.
Silver and the Company further agree that this liquidated damages provision
represents reasonable compensation for the loss which would be incurred by the
Company due to any such breach. Mr. Silver also agrees that nothing in this
section is intended to limit the Company's right to obtain injunctive and other
relief as may be appropriate.
17. NO ADMISSIONS. It is understood and agreed by Mr. Silver and the
Company that this Agreement represents a compromise settlement of various
matters, and that the promises and payments in consideration of this Agreement
shall not be construed to be an admission of any liability or obligation by
either party to the other party or to any other person.
18. DISPUTE RESOLUTION. Unless otherwise prohibited by law or specified
below, all disputes, claims, and causes of action, in law or equity, arising
from or relating to this Agreement or its enforcement, performance, breach, or
interpretation shall be resolved solely and exclusively by final and binding
arbitration through Judicial Arbitration & Mediation Services/Endispute, Inc.
("JAMS") under the then existing JAMS arbitration rules. However, nothing in
this section is intended to prevent either party from obtaining injunctive
relief in court to prevent irreparable harm pending the conclusion of any such
arbitration.
19. ENTIRE AGREEMENT. This Agreement, including Exhibits A and B,
constitutes the complete, final and exclusive embodiment of the entire agreement
between Mr. Silver and the Company with regard to the subject matter hereof. It
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 Mr. Silver 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.
20. SUCCESSORS AND ASSIGNS. This Agreement shall bind the heirs, personal
representatives, successors, assigns, executors, and administrators of each
party, and inure to the benefit of each party, its heirs, successors and
assigns.
21. WARRANTIES. Mr. Silver warrants and represents that there are no
liens or claims of lien or assignments in law or equity or otherwise on or
against any of the claims or causes of action released herein, and, further,
that Mr. Silver is fully entitled and duly authorized to give this complete and
final general release and discharge.
22. APPLICABLE LAW. This Agreement shall be deemed to have been entered
into and shall be construed and enforced in accordance with the laws of the
State of California as applied to contracts made and to be performed entirely
within California.
23. 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.
24. SECTION HEADINGS. The section and paragraph headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
25. 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.
4
<PAGE> 5
IN WITNESS WHEREOF, the parties have duly authorized and caused this
Agreement to be executed as follows:
<TABLE>
<S> <C>
ROBERT SILVER, COMPRESSION LABS, INC.,
an individual a corporation
/s/ Robert Silver By: /s/ Keith Copeland
Robert Silver Keith Copeland
Vice President, Human Resources
Date: November 29, Date: November 29,
1995 1995
</TABLE>
5
<PAGE> 6
EXHIBIT A
PROPRIETARY INFORMATION AND INVENTIONS AGREEMENT
6
<PAGE> 7
EXHIBIT B
RELEASE AGREEMENT
In consideration for the severance payments and benefits the Company will
pay me under paragraph 4 of the foregoing Agreement, to which I am not otherwise
entitled, I hereby release and forever discharge the Company, its officers,
directors, agents, attorneys, employees, stockholders, 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 out of or in any
way related to agreements, events, acts or conduct during the Transition Period,
including but not limited to: all such claims or demands directly or indirectly
arising out of my employment or the termination of my employment, claims or
demands related to salary, bonuses, draws, commissions, stock, stock options, or
any other ownership interests in the Company, vacation pay, fringe benefits,
expense reimbursements, severance pay, sabbatical benefits or any other form of
compensation; claims pursuant to any federal, state or local law or cause of
action including, but not limited to, the federal Civil Rights Act of 1964, as
amended; the California Fair Employment and Housing Act, as amended; the federal
Americans with Disabilities Act of 1990; the federal Age Discrimination in
Employment Act of 1967, as amended ("ADEA"); other discrimination claims; tort
law; contract law; wrongful discharge; harassment; emotional distress; and
breach of the implied covenant of good faith and fair dealing.
I acknowledge that I am knowingly and voluntarily waiving and releasing any
rights I may have under the ADEA. I also acknowledge that the consideration
given for the waiver in the above paragraph is in addition to anything of value
to which I was already entitled. I further acknowledges that I have been advised
by this writing, as required by the ADEA that: (a) my waiver and release do not
apply to any claims that may arise after the Release Effective Date of this
Release Agreement; (b) I have been advised to consult with an attorney prior to
executing this Release Agreement; (c) I have twenty-one (21) days within which
to consider this Release Agreement (although I may choose to voluntarily execute
this Release Agreement earlier); (d) I have seven (7) days following the
execution of this Release Agreement to revoke the Release Agreement; (e) this
Release Agreement shall not be effective until the date upon which the
revocation period has expired, which shall be the eighth day after this Release
Agreement is executed by me, provided that the Company has also signed the
Agreement by that date ("Release Effective Date").
I acknowledge that I have read and understand Section 1542 of the Civil
Code of the State of California 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 similar law of any
jurisdiction with respect to the release for unknown and unsuspected claims I am
granting in this Release.
Date: , 1996 By:
Robert Silver
7
<PAGE> 1
[Bank of America LOGO]
April 11, 1996
William A. Berry, Sr. VP & CFO
Compression Labs, Inc.
2860 Junction Ave.,
San Jose, Calif. 95134
Dear Bill,
The requested waiver (ref: your letter dated 3/15/96) of the 12/31/95 FYE Debt
to Tangible Net Worth covenant default has been approved by BankAmerica Business
Credit, Inc. In consideration for giving this waiver the advance rate on the
revolving line of credit will be reduced from 80% to 70% effective April 30,
1996.
Please also note that under the terms of the Loan and Security Agreement Section
3.1 (c) the interest rate charged on any portion on the outstanding loan will
increase from Reference Rate plus 1.0% to Reference Rate plus 1.5%. This is
retroactive to October 1, 1995, the beginning of the quarter in which the losses
occurred.
Your concurrence is requested.
Yours Sincerely
/s/ Francesca M. Gastil
- ---------------------------------
Francesca M. Gastil
Senior Account Executive
BankAmerica Business Credit, Inc.
/s/ William A. Berry Sr. VP
- ---------------------------------
William A. Berry Sr. VP
Compression Labs, Inc.
<PAGE> 1
SELECTED CONSOLIDATED FINANCIAL DATA
COMPRESSION LABS, INCORPORATED
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except per share amounts and number of employees) 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS (a)
Revenues $ 112,979 $ 114,958 $ 95,095 $ 95,031 $ 61,331
Gross margin $ 33,620 $ 44,054 $ 28,128 $ 27,278 $ 22,352
Special charges (b) $ - $ - $ - $ - $ 17,317
Net loss from continuing operations $ (21,040) $ (4,878) $ (12,184) $ (3,418) $ (17,895)
Net income (loss) $ (57,582) $ 107 $ (3,483) $ (3,283) $ (15,102)
Net income (loss) per share:
Net loss from continuing operations $ (1.37) $ (0.32) $ (1.04) $ (0.30) $ (1.84)
Net income (loss) $ (3.76) $ 0.01 $ (0.30) $ (0.29) $ (1.55)
Cash dividends (c) $ - $ - $ - $ - $ -
Weighted average common shares and
common share equivalents outstanding 15,304 15,160 11,666 11,283 9,728
========= ========= ========= ========= =========
YEAR END FINANCIAL DATA
Working capital $ 15,259 $ 53,820 $ 52,017 $ 31,902 $ 42,675
Total assets $ 104,753 $ 131,651 $ 124,922 $ 94,736 $ 82,535
Short-term debt including current portion of
capital lease obligations $ 13,958 $ 10,553 $ 9,280 $ 9,960 $ 50
Long-term debt including capital lease obligations $ 985 $ 494 $ 1,016 $ - $ 2
Redeemable convertible preferred stock $ - $ - $ 13,758 $ - $ -
Stockholders' equity $ 35,674 $ 86,962 $ 67,579 $ 56,877 $ 57,904
========= ========= ========= ========= =========
Employees 535 549 434 354 331
========= ========= ========= ========= =========
</TABLE>
(a) In November 1995, Compression Labs, Incorporated (the Company) decided to
discontinue the operations of the broadcast products division (BPG). Therefore,
operating results for BPG are classified as discontinued operations on the
Company's Consolidated Statements of Operations and prior periods have been
restated accordingly.
(b) In 1991, the Company recorded special charges to reflect changes in the
Company's business, primarily for product restructuring write downs and
relocation of the Company's manufacturing facility.
(c) Under the terms of a revolving credit facility with a bank, the Company may
not declare or make any cash or stock dividends.
5
<PAGE> 2
SELECTED QUARTERLY CONSOLIDATED
FINANCIAL DATA
COMPRESSION LABS, INCORPORATED
<TABLE>
<CAPTION>
1995
-----------------------------------------------------
First Second Third Fourth
(Unaudited - in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 27,857 $ 29,923 $ 28,444 $ 26,755
Cost of revenues 17,529 18,163 16,295 27,372
-------- -------- -------- --------
GROSS MARGIN 10,328 11,760 12,149 (617)
OPERATING EXPENSES
Selling, general and administrative 9,428 10,106 9,665 13,562
Research and development 2,421 2,136 2,377 3,040
Settlement of litigation 897 - - -
-------- -------- -------- --------
12,746 12,242 12,042 16,602
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS (2,418) (482) 107 (17,219)
Interest income 6 3 93 12
Interest expense (215) (340) (309) (278)
-------- -------- -------- --------
Net loss from continuing operations (2,627) (819) (109) (17,485)
-------- -------- -------- --------
Discontinued operations
Income (loss) from operations 535 921 (82) (3,315)
Loss on disposal - - - (34,601)
-------- -------- -------- --------
Net income (loss) from discontinued operations 535 921 (82) (37,916)
-------- -------- -------- --------
NET INCOME (LOSS) $ (2,092) $ 102 $ (191) $(55,401)
======== ======== ======== ========
Net income (loss) per share
Net loss from continuing operations (0.18) (0.05) (0.01) (1.13)
Net income (loss) from discontinued operations 0.04 0.06 - (2.45)
-------- -------- -------- --------
NET INCOME (LOSS) PER SHARE $ (0.14) $ 0.01 $ (0.01) $ (3.58)
======== ======== ======== ========
Weighted average common shares and common share equivalents outstanding 14,667 15,505 15,265 15,463
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------
First Second Third Fourth
(Unaudited - in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 25,058 $ 30,253 $ 30,323 $ 29,324
Cost of revenues 15,507 18,527 18,934 17,936
-------- -------- -------- --------
GROSS MARGIN 9,551 11,726 11,389 11,388
OPERATING EXPENSES
Selling, general and administrative 8,731 9,465 10,313 9,644
Research and development 2,350 2,584 2,696 2,528
-------- -------- -------- --------
11,081 12,049 13,009 12,172
-------- -------- -------- --------
LOSS FROM OPERATIONS (1,530) (323) (1,620) (784)
Interest income 93 41 25 18
Interest expense (214) (200) (159) (225)
-------- -------- -------- --------
Net loss from continuing operations (1,651) (482) (1,754) (991)
Net income from discontinued operations 1,679 1,050 764 1,492
-------- -------- -------- --------
NET INCOME (LOSS) $ 28 $ 568 $ (990) $ 501
======== ======== ======== ========
Net income (loss) per share
Net loss from continuing operations (0.11) (0.03) (0.12) (0.07)
Net income from discontinued operations 0.11 0.07 0.05 0.10
-------- -------- -------- --------
NET INCOME (LOSS) PER SHARE $ - $ 0.04 $ (0.07) $ 0.03
======== ======== ======== ========
Weighted average common shares and common share equivalents outstanding 15,392 15,280 14,549 15,000
======== ======== ======== ========
</TABLE>
6
<PAGE> 3
MANAGEMENT'S DICUSSION AND ANALYSIS
COMPRESSION LABS, INCORPORATED
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Management's Discussion and Analysis of Financial Condition and Results
of Operations and other parts of this Annual Report to Stockholders contain
forward-looking statements that involve risks and uncertainties. The
Company's actual results may differ significantly from the results
discussed in the forward-looking statements. Factors that might cause such
a difference include, but are not limited to, those discussed in the
Company's Form 10-K for the year ended December 31, 1995 under the caption
"Business."
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 DECEMBER 31,
1995 1994 1993
--------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues 100% 100% 100%
Cost of revenues 70% 62% 70%
Gross margin 30% 38% 30%
Selling, general and administrative 38% 33% 31%
Research and development 9% 9% 11%
Net loss from continuing operations (19%) (4%) (13%)
Income (loss) from discontinued operations (32%) 4% 9%
Net income (loss) (51%) 0% (4%)
</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.
International revenues increased to $24.3 million or 22% of revenues from
continuing operations 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. 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 videoconferencing division, and included reductions in the
carrying values of certain assets, primarily inventory and capitalized
software. See Note 13 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. 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.
7
<PAGE> 4
MANAGEMENT'S DICUSSION AND ANALYSIS
COMPRESSION LABS, INCORPORATED
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 resulting from the Company's decision to
restructure its videoconferencing division. These expenses relate to allowance
for doubtful accounts and reductions in the carrying values of certain
demonstration equipment and assets related to service activities. See Note 13 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. The Company anticipates that
selling, general and administrative expenses will generally increase with
increases in revenues, but may vary from quarter to quarter and year to year as
a percentage of revenues.
RESEARCH AND DEVELOPMENT EXPENSE
The Company's total research and development expenditures in 1995, 1994 and 1993
aggregated $14.8 million, $15.1 million and $13.4 million, respectively.
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>
1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Research and development expense $ 10.0 $ 10.2 $ 10.5
Capitalized software development costs 4.8 3.9 2.9
Cost of revenues related to research and development contracts - 1.0 -
------- ------- -------
Total research and development expenditures from continuing operations $ 14.8 $ 15.1 $ 13.4
======= ======= =======
</TABLE>
Research and development expense was 9% of revenues in 1995 and 1994, and 11% of
revenues in 1993. 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
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. The Company expects research and development expense
as a percentage of revenues to fluctuate, due in part to changes in the levels
of research and development activities, as well as changes in the levels of
external funding for research and development and amounts capitalized in
conjunction with software development.
INTEREST INCOME AND 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.
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. See Note 2 of
Notes to Consolidated Financial Statements. The Company has held discussions
with various companies regarding the possible sale of the broadcast products
division. No definitive agreement has been reached, nor can there be any
assurances that an agreement with terms acceptable to the Company will
ultimately be reached.
8
<PAGE> 5
MANAGEMENT'S DICUSSION AND ANALYSIS
COMPRESSION LABS, INCORPORATED
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.
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 revenues compared to
expectations 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 quarterly and annually.
LIQUIDITY AND CAPITAL RESOURCES
The Company has used internally generated funds, public and private offerings of
common 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. The Company anticipates that the amount of capital expenditures will
decrease in 1996 compared to 1995.
At December 31, 1995, the Company had cash and cash equivalents totaling $12.6
million. The Company has a line of credit, which expires on August 21, 1996, in
the amount of $15.0 million, of which $12.8 million was outstanding at December
31, 1995. The Company believes it has the ability to either renew this line upon
its expiration or obtain alternative financing. See Note 7 of Notes to
Consolidated Financial Statements. Working capital was $15.3 million and $53.8
million at December 31, 1995 and 1994, respectively.
Given the size and importance of its accounts receivable, the Company has
implemented a number of ongoing and planned measures designed to reduce the
levels of accounts receivable relative to revenues, including increased
collection efforts and improved accounts receivable controls. The Company also
has a number of inventory management programs, including increasing component
procurement by turnkey manufacturers, decreasing manufacturing cycle time
through increased production flexibility and automation, smoothing shipment
cycles, reducing component costs through volume purchasing and competitive
bidding, and improving controls. However, there can be no assurance that the
Company will be able to reduce or maintain its accounts receivable or inventory
levels in the future. The Company regularly assesses accounts receivable in
terms of collectability and inventories in light of technology changes and
market conditions, and reduces the carrying value of these assets as considered
appropriate.
The Company's operating and product development activities have required
significant cash. The Company anticipates that existing cash and lines of
credit, 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 1996. In July
1995, the Company raised approximately $4.9 million in net proceeds through a
registered direct sale of common stock. 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.
9
<PAGE> 6
CONSOLIDATED STATEMENTS OF OPERATIONS
COMPRESSION LABS, INCORPORATED
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands, except per share amounts) 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES $ 112,979 $ 114,958 $ 95,095
Cost of revenues 79,359 70,904 66,967
--------- --------- ---------
GROSS MARGIN 33,620 44,054 28,128
OPERATING EXPENSES:
Selling, general and administrative 42,761 38,153 29,646
Research and development 9,974 10,158 10,452
Settlement of litigation 897 - -
--------- --------- ---------
53,632 48,311 40,098
--------- --------- ---------
NET LOSS FROM OPERATIONS (20,012) (4,257) (11,970)
Interest income 114 177 620
Interest expense (1,142) (798) (834)
--------- --------- ---------
Net loss from continuing operations (21,040) (4,878) (12,184)
--------- --------- ---------
Discontinued operations:
Income (loss) from operations (1,941) 4,985 8,701
Loss on disposal (34,601) - -
--------- --------- ---------
Net income (loss) from discontinued operations (36,542) 4,985 8,701
--------- --------- ---------
NET INCOME (LOSS) $ (57,582) $ 107 $ (3,483)
========= ========= =========
Net income (loss) per share:
Net loss from continuing operations (1.37) (0.32) (1.04)
Net income (loss) from discontinued operations (2.39) 0.33 0.74
--------- --------- ---------
NET INCOME (LOSS) PER SHARE $ (3.76) $ 0.01 $ (0.30)
========= ========= =========
Weighted average common shares and common share equivalents outstanding 15,304 15,160 11,666
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
10
<PAGE> 7
CONSOLIDATED BALANCE SHEETS
COMPRESSION LABS, INCORPORATED
<TABLE>
<CAPTION>
December 31,
(In thousands, except share amounts) 1995 1994
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 12,638 $ 11,319
Accounts receivable, less allowance for doubtful accounts of
$10,028 in 1995 and $1,992 in 1994 46,798 54,470
Inventories 22,821 29,511
Other current assets 1,096 2,715
--------- ---------
Total current assets 83,353 98,015
--------- ---------
PROPERTY AND EQUIPMENT
Furniture and fixtures 9,551 5,273
Machinery and equipment 25,802 32,675
Equipment under capital leases 2,090 2,185
--------- ---------
37,443 40,133
Accumulated depreciation and amortization (20,171) (19,251)
--------- ---------
17,272 20,882
CAPITALIZED SOFTWARE, NET 3,828 11,868
OTHER ASSETS 300 886
--------- ---------
TOTAL ASSETS $ 104,753 $ 131,651
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Short-term debt $ 13,452 $ 9,803
Current portion of capital lease obligations 506 750
Accounts payable 26,169 20,040
Accrued liabilities 21,689 6,362
Deferred revenue 6,278 7,240
--------- ---------
Total current liabilities 68,094 44,195
--------- ---------
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS 985 494
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: 15,491,475 in 1995 and 14,655,745 in 1994 15 15
Additional paid-in capital 120,696 114,402
Accumulated deficit (85,037) (27,455)
--------- ---------
Total stockholders' equity 35,674 86,962
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 104,753 $ 131,651
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
11
<PAGE> 8
CONSOLIDATED STATEMENTS OF
STOCKHOLDERS' EQUITY
COMPRESSION LABS, INCORPORATED
<TABLE>
<CAPTION>
Common Stock Additional
--------------------- Paid-in Accumulated
(In thousands) 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
Net 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, net 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
Net 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, net 65 - 528 - 528
Net income - - - 107 107
------ --- -------- -------- --------
BALANCES AT DECEMBER 31, 1994 14,656 15 114,402 (27,455) 86,962
Net 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, net 32 - 249 - 249
Net loss - - - (57,582) (57,582)
------ --- -------- -------- --------
BALANCES AT DECEMBER 31, 1995 15,491 $15 $120,696 $(85,037) $ 35,674
====== === ======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
12
<PAGE> 9
CONSOLIDATED STATEMENTS OF CASH FLOWS
COMPRESSION LABS, INCORPORATED
<TABLE>
<CAPTION>
Years ended December 31,
(In thousands) 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(57,582) $ 107 $ (3,483)
Non-cash expenses included in operations-
Depreciation and amortization 17,237 11,104 9,330
Changes in certain assets and liabilities-
Accounts receivable 2,681 (8,702) (212)
Inventories 11,306 (2,381) (1,664)
Other current assets 1,657 1,639 (1,198)
Accounts payable 6,129 (4,614) 4,168
Accrued liabilities 15,327 352 336
Deferred revenue (962) 4,615 886
Discontinued operations 11,503 (1,400) (14,519)
-------- -------- --------
Net cash generated by (used in) operations 7,296 720 (6,356)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Property and equipment additions (7,235) (9,434) (8,271)
Increase in capitalized software (9,371) (6,702) (4,999)
Decrease in other assets 586 853 260
-------- -------- --------
Net cash used in investing activities (16,020) (15,283) (13,010)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Sales of Series B preferred stock, net - - 13,758
Sales of common stock, net 6,294 4,618 14,185
Payments of capital lease obligations (840) (359) (224)
Collateralized borrowings 1,597 - -
(Payments) borrowings under line of credit agreements 2,992 1,110 (1,257)
-------- -------- --------
Net cash generated by financing activities 10,043 5,369 26,462
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,319 (9,194) 7,096
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 11,319 20,513 13,417
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 12,638 $ 11,319 $ 20,513
======== ======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
13
<PAGE> 10
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
COMPRESSION LABS, INCORPORATED
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.
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.
The Company has a valuation allowance as of December 31, 1995 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, as applicable, using the straight-line method. Field
spares are amortized over the estimated life of the related product.
14
<PAGE> 11
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
COMPRESSION LABS, INCORPORATED
CAPITALIZED SOFTWARE
The Company capitalizes software development costs in accordance with Statement
of Financial Accounting Standards (SFAS) No. 86. Amortization of capitalized
software development costs 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 straight-line 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 long-term debt and capital leases is not estimated,
but reflects the contractual present value owed to non-related parties.
RECENT ACCOUNTING PRONOUNCEMENTS
In March 1995, the Financial Accounting Standards Board issued SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed of. SFAS No. 121 becomes effective for fiscal years beginning after
December 15, 1995. The Company is currently assessing the impact of SFAS No. 121
on the Company's consolidated financial statements.
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. SFAS No. 123 is not expected to have a material effect on the
Company's consolidated results of operations or financial position.
RECLASSIFICATIONS
Certain previously reported amounts in the 1994 and 1993 consolidated financial
statements and notes have been reclassified to conform with the 1995
presentation.
2. DISCONTINUED OPERATIONS
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 prior years' consolidated financial statements
have been restated to reflect the discontinuation of the division.
The Company has held discussions with various companies regarding the possible
sale of the broadcast products division. No definitive agreement has been
reached, nor can there be any assurances that an agreement with terms acceptable
to the Company will ultimately be reached. The components of net assets of
discontinued operations included in the Consolidated Balance Sheets at December
31, 1995 and 1994 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
- ----------------------------------------------------------------------------
<S> <C> <C>
Accounts receivable, net $14,929 $19,920
Inventories 10,859 6,243
Property and equipment, net 4,174 3,288
Capitalized software - 3,916
Other assets 38 -
------- -------
$30,000 $33,367
======= =======
</TABLE>
15
<PAGE> 12
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
COMPRESSION LABS, INCORPORATED
Revenues from the discontinued division were approximately $36,974,000,
$42,029,000 and $46,232,000 for the years ended December 31, 1995, 1994 and
1993, respectively. Included in the amount of discontinued operations on
the Consolidated Statement of Operations is 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 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. The amounts
the Company will ultimately realize could differ materially from the
estimates used in arriving at the loss on discontinued operations.
3. UNBILLED RESEARCH AND DEVELOPMENT CONTRACT RECEIVABLES
At December 31, 1995, the Company had $3,519,000 of unbilled receivables
relating to research and development contracts, of which $2,932,000 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 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C>
Raw materials $ 2,189 $ 7,521
Work-in-process 3,858 4,293
Finished products
Products on hand 13,488 13,151
Products under rental and loan agreements 3,286 4,546
------- -------
$22,821 $29,511
======= =======
</TABLE>
5. CAPITALIZED SOFTWARE
The Company capitalized $9,276,000 of internal software development costs
during 1995, $6,645,000 in 1994 and $4,874,000 in 1993. In addition, the
Company purchased software of $95,000 in 1995, $57,000 in 1994 and $125,000
in 1993. Amortization of capitalized software development costs and
purchased software was $17,411,000 in 1995, $5,120,000 in 1994 and
$4,049,000 in 1993. In 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,
1995 and 1994, capitalized software, net of accumulated amortization, was
$3,828,000 (including $22,000 of purchased software) and $11,868,000
(including $192,000 of purchased software), respectively.
6. ACCRUED LIABILITIES
Accrued liabilities are summarized as follows (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
- ------------------------------------------------------------------------
<S> <C> <C>
Employee compensation $ 3,202 $ 3,205
Accrued expenses, discontinued operations 13,887 --
Other accrued expenses, continuing operations 4,600 3,157
------- -------
$21,689 $ 6,362
======= =======
</TABLE>
7. BANK LINE OF CREDIT AND LONG-TERM DEBT
BANK LINE OF CREDIT
The Company has a $15,000,000 revolving credit facility that bears interest
at the bank's prime rate (currently 8.50%) plus one percent, that expires
on August 21, 1996. The Company believes it can renew this line upon its
expiration. The line of credit agreement is secured by substantially all of
the Company's assets. Under the credit agreement, the Company is required
to meet certain financial covenants involving capital spending levels and
debt ratio, and may 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, 1995 and 1994. At
December 31, 1995, the balance outstanding under the line of credit was
$12,795,000.
16
<PAGE> 13
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
COMPRESSION LABS, INCORPORATED
TERM LOANS
In 1995, the Company entered into long-term loan agreements for $2,172,000
that bear interest rates from 10.76% to 11.48% over thirty-six and
forty-eight months. These loans are secured by specific capital assets. At
December 31, 1995, the balances outstanding under these loans were
$1,597,000. Required principal payments over the next three years are
$657,000, $735,000 and $205,000, respectively.
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 which expire in
June 2000. Approximate future minimum lease payments under these leases are
as follows (in thousands):
<TABLE>
<CAPTION>
Capital Operating
Year Leases Leases
-------------------------------------------------------------
<C> <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 $3,364,000 in 1995,
$2,760,000 in 1994 and $3,307,000 in 1993. Accumulated depreciation of
equipment under capital leases totalled $1,489,000 and $943,000 at December
31, 1995 and 1994, respectively. Depreciation expense on equipment under
capital leases was $739,000 in 1995, $693,000 in 1994 and $250,000 in 1993.
CONTINGENCIES
On August 24, 1993, the Company filed a complaint against Oklahoma State
University Education and Research Fund, Inc. (OSUERF) in United Stated
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 a 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 and FLI separately moved for summary judgment against
the Company seeking damages in the amount of $2 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.
By order dated December 20, 1995, the consolidated actions were reassigned
to the Honorable Charles A. Legge. A case management conference was held
before Judge Legge on January 19, 1996, at which time the matter was set
for jury trial to begin November 4, 1996. Discovery will close June 30,
1996.
The Company will vigorously defend the claims stated against it by CIT, and
believes that it has meritorious defenses. However, there can be no
assurance that the Company will prevail or obtain indemnity for any
recovery from OSUERF. If any of CIT's claims were to be decided adversely
to the Company, the Company would be liable to pay monetary damages to CIT.
The Company believes that the ultimate resolution of this matter will not
have a material adverse impact on the Company's consolidated financial
position.
17
<PAGE> 14
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
COMPRESSION LABS, INCORPORATED
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 has now been fully briefed and the
parties are awaiting an order from the Court of Appeal setting oral
argument. Pending the outcome of the appeal, CLI and SWBT have stipulated
that the Oklahoma federal court action will be placed in administrative
closure. An order placing the matter in administrative closure was entered
on October 20, 1995.
In a complaint filed December 20, 1993, in United States District Court in
Dallas, Texas, Datapoint Corporation (Datapoint) alleged that the Company
had infringed two United States patents owned by Datapoint and relating to
videoconferencing 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. Briefing
on the motion is complete and the motion is under submission to a special
master to prepare a report to the District Court concerning the motion.
The Company will vigorously defend the claims stated against it and
believes that it has meritorious defenses; 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.
To fulfill a purchase order from Philips Consumer Electronics Company
(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 has cancelled its purchase order
with Jabil. By letter dated January 11, 1996, Jabil has demanded that the
Company issue a purchase order for approximately $6,500,000 for the
components which are outside the cancellation and reschedule windows. The
Company initiated and engaged in negotiations 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. The Company
has made a claim against Philips for damages associated with the Jabil
inventory. Philips has not responded to the Company's claim letter. The
Company believes that the ultimate resolution of this matter will not have
a material adverse impact on the Company's consolidated financial position.
The Company entered into a Joint Development and Marketing Agreement (JDMA)
with Philips dated January 12, 1994, for the supply of certain decoder
units discussed in the Jabil matter above. By amendment to the JDMA on May
24, 1995, Philips agreed to pay the Company $2,600,000 for all intellectual
property jointly developed under the JDMA. In a related license agreement
of May 12, 1995, the Company agreed to pay Philips $5,600,000 for a license
under background patents and other intellectual property. Philips owes the
Company $1,300,000 under the amendment, $900,000 of which was due December
29, 1995. The Company owes Philips $3,300,000 under the license agreement,
$2,100,000 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. The Company believes that the
ultimate resolution of this matter will not have a material adverse impact
on the Company's consolidated financial position.
18
<PAGE> 15
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
COMPRESSION LABS, INCORPORATED
By letter dated October 23, 1995, Corporate Computer Services, Inc. (CCS),
through its counsel, asserted that the Company is using proprietary
technology of CCS without a license and is willfully misappropriating CCS'
copyrights. The Company, in a letter from its counsel dated November 6,
1995, vigorously refuted CCS' assertions. The Company also tendered a
payment for past due royalties plus interest pursuant to the terms of the
MUSICAM License Agreement with CCS. The Company and CCS are now in the
process of exploring the possibility of a future license agreement. The
Company believes that the ultimate resolution of this matter will not have
a material adverse impact on the Company's consolidated financial position.
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 impact on the
Company's consolidated financial position or results of operations.
9. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of 4,000,000
shares of undesignated preferred stock at $.001 par value. There were no
outstanding preferred shares at December 31, 1995.
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 its shares of Series B convertible preferred stock into 1,434,900
shares of the Company's common stock. In addition, TCE has the right to add
one board member to the Company's Board of Directors under certain
circumstances.
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.
PREFERRED SHARE PURCHASE RIGHTS PLAN
In 1991, the Company adopted a Preferred Share Purchase 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. Cancelled options are
returned to the option plans and are available for future grants.
19
<PAGE> 16
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
COMPRESSION LABS, INCORPORATED
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 exchange 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 cancelled. No officer of the Company was
allowed to participate in this exchange.
At December 31, 1995, the Company had 4,190,693 shares 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, outstanding options to
purchase the Company's common stock had a weighted average option price of
$8.73, and 496,240 shares were available for future grant under all option
and purchase plans. At December 31, 1995 and 1994, outstanding options
under the employees stock option plans were exercisable for 2,277,507 and
2,048,341 shares, respectively.
Options under the employee option plans have been granted, exercised and
cancelled 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
Cancelled 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
Cancelled 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
Cancelled in 1995 (840,058) $5.38 to $19.63
--------- ---------------
OUTSTANDING AT DECEMBER 31, 1995 3,694,453 $2.88 to $20.50
========= ===============
</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, 1995 and 1994, warrants for 551,940 shares and
584,607 shares, respectively, were outstanding and exercisable under these
warrants.
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
quarters), 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>
1995 99,547 $5.31 to $ 8.29 $6.80
1994 99,588 $6.80 to $10.09 $8.47
1993 99,645 $8.71 to $11.37 $9.80
</TABLE>
10. REVENUE
International revenue, principally from customers located in East Asia,
Australia and Western Europe, was approximately $24,331,000 or 22%,
$21,159,000 or 18% and $12,396,000 or 13% of revenues in 1995, 1994 and
1993, respectively. No single customer accounted for greater than 10% of
revenues in 1995 and 1994. In 1993, sales to two customers accounted for
17% and 10% of revenues, respectively.
20
<PAGE> 17
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
COMPRESSION LABS, INCORPORATED
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>
Years ended December 31,
1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to the allowance for doubtful accounts $ 4,466 $ 863
Inventories, principally due to the allowance for obsolete inventories and additional
costs inventoried for tax purposes 4,672 1,949
Property and equipment, principally due to differences in depreciation 6,683 3,925
Capitalized research and development expenses 3,394 2,380
Accrued expenses, not currently deductible 9,423 1,227
Deferred revenue 738 931
Tax credit carryforwards 2,291 2,708
Net operating loss carryforwards 15,959 14,486
Other - 20
-------- --------
47,626 28,489
Less: valuation allowance (44,441) (22,250)
-------- --------
Net deferred tax assets 3,185 6,239
-------- --------
Deferred tax liabilities:
Capitalized software (1,279) (4,121)
Long-term contract revenue (1,906) (1,218)
-------- --------
(3,185) (5,339)
-------- --------
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.
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, 1995, 1994 and 1993. Interest payments were $1,142,000, $798,000 and
$846,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. The Company purchased property and equipment through capital
lease obligations totaling $147,000, $0 and $1,817,000 in 1995, 1994 and
1993, 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.
21
<PAGE> 18
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
COMPRESSION LABS, INCORPORATED
13. SUBSEQUENT EVENT
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 will be reflected in the results
of the first quarter of 1996.
INDEPENDENT AUDITOR'S REPORT
THE STOCKHOLDERS AND BOARD OF DIRECTORS OF COMPRESSION LABS, INCORPORATED:
We have audited the accompanying consolidated balance sheets of Compression
Labs, Incorporated and subsidiaries as of December 31, 1995 and 1994, 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, 1995 and
1994, 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.
KPMG Peat Marwick LLP
San Jose, California
March 13, 1996
22
<PAGE> 19
STOCKHOLDERS' INFORMATION
COMPRESSION LABS, INCORPORATED
MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's common stock is traded in the over-the-counter market under
the Nasdaq National Market symbol CLIX. The following table sets forth
the range of high and low trading prices during each quarter for the two
years ended December 31, 1995.
<TABLE>
<CAPTION>
High Low
-----------------------------------------
<S> <C> <C>
1995
First Quarter $10.00 $ 7.00
Second Quarter $11.38 $ 8.13
Third Quarter $11.38 $ 7.50
Fourth Quarter $ 8.13 $ 6.00
====== ======
1994
First Quarter $16.13 $10.75
Second Quarter $13.63 $ 9.50
Third Quarter $13.00 $ 8.75
Fourth Quarter $10.38 $ 6.63
====== ======
</TABLE>
The Company has never paid any cash dividends on its common stock. The
Company presently intends to retain any earnings for use in its business
and is currently restricted from declaring or paying any cash or stock
dividends. At December 31, 1995, there were 997 stockholders of record.
23
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Stockholders and Board of Directors
Compression Labs, Incorporated:
We consent to incorporation by reference in the Registration Statements
(Nos. 2-92695, 2-96228, 33-32366, 33-40405, 33-61349, 33-70860, 33-70950 and
33-79790) on Form S-8 of Compression Labs, Incorporated and the Registration
Statements (Nos. 33-79044 and 33-72048) on Form S-3 of Compression Labs,
Incorporated of our report dated March 13, 1996 relating to the consolidated
balance sheets of Compression Labs, Incorporated as of December 31, 1995 and
1994, 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, which appears in the Compression Labs, Incorporated 1995
annual report to stockholders and is incorporated by reference in the
December 31, 1995 annual report on Form 10-K of Compression Labs, Incorporated
and our report dated March 13, 1996, on the related consolidated financial
statement schedule which appears in the annual report on Form 10-K.
KPMG Peat Marwick LLP
San Jose, California
April 11, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 12,638
<SECURITIES> 0
<RECEIVABLES> 56,826
<ALLOWANCES> 10,028
<INVENTORY> 22,821
<CURRENT-ASSETS> 83,353
<PP&E> 37,443
<DEPRECIATION> 20,171
<TOTAL-ASSETS> 104,753
<CURRENT-LIABILITIES> 68,094
<BONDS> 0
0
0
<COMMON> 15
<OTHER-SE> 120,696
<TOTAL-LIABILITY-AND-EQUITY> 104,753
<SALES> 112,979
<TOTAL-REVENUES> 112,979
<CGS> 79,359
<TOTAL-COSTS> 79,359
<OTHER-EXPENSES> 53,632
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,142
<INCOME-PRETAX> (57,582)
<INCOME-TAX> 0
<INCOME-CONTINUING> (21,040)
<DISCONTINUED> (36,542)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57,582)
<EPS-PRIMARY> (3.76)
<EPS-DILUTED> (3.76)
</TABLE>
