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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 1996
[ ] 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
--------------------------
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.)
350 EAST PLUMERIA DRIVE, 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 $36,752,223 as of March
14, 1997.
The number of outstanding shares of the registrant's Common Stock as
of March 14, 1997 was 15,892,853.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENTS
Compression Labs, Incorporated (CLI or the Company), incorporated in
California in December 1976 and reincorporated in Delaware in October 1987, is
a leader in the development, manufacture and marketing of visual communication
systems based on Compressed Digital Video (CDV) technology. CLI'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. CLI's strategy is to use its expertise in CDV
technology to enhance its position in videoconferencing and to monitor new
markets such as the desktop and personal video markets.
CLI's group and desktop videoconferencing systems permit users at
different locations to conduct full-color, motion videoconferences ranging from
two-way informal meetings between individuals to formal meetings between large
groups at multiple locations. CLI's present families of videoconferencing
systems include Rembrandt II/VP and Radiance videoconferencing systems, the
eclipse family of mid-range videoconferencing systems, and the CLI Desktop
Video family. Videoconferencing systems operate worldwide over a broad range of
transmission speeds from 56 kilobits per second (kbps) to 2.048 megabits per
second (mbps) for the Rembrandt and Radiance Systems, 768 kbps for the eclipse,
and 384 kbps for the desktop. All of CLI's current videoconferencing systems
comply with the International Telecommunication Union-Telecommunication
(ITU-T) H.320 videoconferencing standard, and most also provide
customer-selectable proprietary algorithms. The videoconferencing market has
grown as a result of improvements in the price/performance of videoconferencing
systems, decreases in transmission costs and increased availability of switched
digital transmission services. However, there can be no assurance that this
market growth will continue in the future.
INDUSTRY BACKGROUND
Over the past two decades, the advent of CDV technology has enabled
the development of cost effective products for the growing videoconferencing
market, increasing productivity and decreasing costs by enhancing the
effectiveness of business, education and government communication.
Effectiveness in today's fast-paced business environment demands
accurate and timely exchange of information by individuals and groups, often at
distant locations. Telephones and facsimile machines have become essential
business tools by providing communication in convenient and inexpensive
formats. In many situations, however, information cannot be transferred
effectively by telephone or in writing, and more natural face-to-face
communication is necessary. A substantial portion of business travel today is
undertaken in order to permit such face-to-face communication. CLI believes
that the utilization of visual communication systems, such as videoconferencing
systems, has enhanced productivity by allowing meaningful and timely
face-to-face contact and has lowered costs by reducing business travel.
The concept of visual communications was introduced in 1964 at the New
York World's Fair when AT&T Corporation exhibited a prototype of its
picturephone. At that time, however, videoconferencing was commercially
impractical because transmitting uncompressed video signals was prohibitively
expensive for business users. In the late 1970s, the first video compression
system, called a "codec" (coder-decoder), was introduced. The market acceptance
of early videoconferencing systems was limited because of high hardware and
transmission costs and the limited availability of transmission facilities. The
first companies to adopt videoconferencing utilized dedicated private networks
established expressly for videoconferencing.
Significant progress was made in the early 1980s in addressing many of
the problems associated with early videoconferencing efforts. A major advance
in transmission cost reduction was achieved by CLI with the introduction in
1982 of a codec which provided the first economical means to communicate
effectively over standard networks at a transmission rate (bandwidth) of 1.544
mbps, the standard T1 transmission rate, a reduction of approximately 60:1 from
the
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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 by competition among telecommunication
carriers and technologies such as fiber optics, the cost of transmission
services has continued to decrease significantly. During this same period, the
availability of private networks and switched services increased dramatically.
Switched digital transmission services are now available in most United States
metropolitan areas. Advances in CDV 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 CDV technology and the increasing
availability of public switched services at bandwidths up to 384 kbps had
resulted in increased user acceptance of videoconferencing.
Collectively, the dramatic decreases in transmission costs, the
increased availability of switched digital services for both domestic and
international networks, the improvements in picture quality and the adoption of
worldwide standards have made global videoconferencing at various bandwidths
increasingly practical and cost effective. Many of these factors have also
created opportunities for application of CDV technology in the developing
desktop and personal video markets.
CLI STRATEGY
CLI is a leader in video compression technology and believes that its
large worldwide installed base of videoconferencing systems affords CLI
significant competitive advantages. CLI's strategy is to strengthen its
position as a leading supplier of a full range of high performance value group
and desktop videoconferencing systems. CLI'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. CLI believes supplying a full
range of products to satisfy a customer's complete video communication needs
will be important to its future success.
Compliance with Industry Standards
CLI believes that the adoption of industry standards has expanded the
worldwide videoconferencing market by allowing systems from different
manufacturers to communicate with one another. The Rembrandt II/VP, Radiance,
eclipse, and CLI Desktop Video product families all conform with the ITU-T
H.320 and T.120 videoconferencing standard that allows communication with CLI
and other vendors' products through industry standard communication modes.
Where standards do not exist, CLI has innovated to provide their customers with
additional value through proprietary implementations.
CLI TECHNOLOGY
CLI has been a leader in the evolution of CDV technology for
videoconferencing. Since the inception of this market, CLI's development
efforts are primarily directed at achieving greater levels of compression,
improving picture and sound quality and system functionality, continuing to
reduce system costs, and supporting and improving industry standards. CLI's
continued success in its chosen markets is dependent in part on the results of
its ongoing technology and product development efforts.
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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.
In 1987, CLI introduced a new proprietary algorithm called Cosine
Transform Extended (CTX) which achieved transmission rates as low as 56 kbps by
adding motion compensation to the techniques pioneered in earlier codecs.
Motion compensation was an advancement in interframe techniques that allowed
detection and coding of the portions of the picture which are in motion.
In 1991, CLI announced the CTX Plus algorithm which significantly
improved picture resolution and increased frame rates at transmission rates of
384 kbps and above, thereby providing near-broadcast image quality. CLI's
Radiance and Rembrandt II/VP families of large group videoconferencing products
incorporate the CTX and CTX Plus algorithms, as well as the ITU-T H.261
standard. The eclipse gold models fully comply with the most recent ITU-T
standards and have transmission speeds ranging from 56 kbps to 2.048 mbps.
DCT technology has been the basis of all CLI products since 1982. The
DCT technology has been adopted as the foundation of the ITU-T H.261 video
standard, as well as the evolving MPEG standards for broadcast, cable and
desktop applications, and Joint Photographic Experts Group (JPEG) standard for
still image compression. CLI 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, CLI also continues to develop methods for pre- and post-processing
video signals utilizing techniques such as motion adaptive scene filtering in
order to improve performance of systems utilizing either industry standard or
proprietary algorithms.
CLI designs application specific integrated circuits (ASICs) for its
products and cooperates with certain semiconductor vendors who are developing
semiconductor chips which CLI believes are important to its business. Both
activities are directed at reducing costs, enhancing performance, and
increasing flexibility in CLI'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. CLI's videoconferencing systems offer
two-way, full-color, motion videoconferencing at various bandwidths ranging
from 56 kbps to 2.048 mbps. These systems enable the user to transmit
compressed video, audio, data and graphics over digital telecommunications
channels. System users can transmit the compressed signals over terrestrial,
satellite or microwave networks. CLI's video-conferencing products are used
in point-to-point or multipoint videoconferences. In a point-to-point
videoconference, audio
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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 CLI'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 CLI began shipping in the second
half of 1991, incorporates CLI'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 CLI's older products, and support the ITU-T
H.261 standard. CLI believes that its proprietary algorithms (CTX at lower
bandwidths and CTX Plus at bandwidths of 384 kbps and above) provide picture
quality superior to the ITU-T H.261 standard. The Rembrandt II/VP list prices
range from $38,000 to $48,500, excluding options.
Radiance Group Videoconferencing Systems
CLI's Radiance large group videoconferencing systems, first shipped in
January 1994, are complete, prepackaged large group systems which achieve up to
30 frames per second (fps) and 480 lines of resolution at bandwidths ranging
from 56 kbps to 2.048 mbps. These systems come fully assembled for easy
installation, use, and maintenance, and utilize a tabletop touchpanel based on
CLI's Self-Guide user interface, which provides intuitive control via menus and
icons to guide the user. Radiance systems are interoperable with CLI's
Rembrandt II/VP codec, eclipse mid-range group systems, and CLI Desktop Video
products worldwide, as well as with other codecs that meet ITU-T H.320
standards. The Radiance list prices range from $52,400 to $77,900, excluding
options.
eclipse Group Videoconferencing Systems
CLI's eclipse mid-range group videoconferencing systems, the first
product of which was introduced in early 1993, are complete, full-featured
videoconferencing systems priced as low as $26,400. The codec is housed in an
Intel Corporation (Intel) standard personal computer chassis with both a hard
disk and 3 1/2 inch floppy disk for software updates. The eclipse systems also
include an advanced, industry standard audio system with tabletop microphones,
full-duplex capability and integrated echo cancellation, which uses as little
as 16 kbps of the 112/128 kbps bandwidth for audio. The eclipse comes with
high-quality video, capable of communicating using the ITU-T H.320 industry
standard or provides backward compatibility to other CLI systems using CLI's
CTX proprietary algorithm for communicating with older CLI systems. The eclipse
offers as standard features an auto-focus camera with pan/tilt/zoom
capabilities, easy-to-use presets, a choice of built-in line interfaces for
virtually every type of network, multipoint readiness, picture-in-picture, and
CLI's Self-Guide user interface. In 1995, the eclipse product family was
expanded to include a variety of models ranging from table top to dual monitor
systems. These eclipse 8200 models were fully compliant with ITU-T standards
and offer full common intermediate format (FCIF) resolution, integrated network
interface supporting highly-affordable transmission speeds up to 112/128 kbps,
wideband audio up to 7 kHz, enhanced video from customized VLSI circuits
specifically designed for pre- and post-processing, far-end camera control,
high-resolution graphics, 27-inch monitors, wireless Self-Guide remote control
unit, a pan/tilt/zoom automatic-focus camera, and a variety of auxiliary
document cameras. The eclipse 8300 models included the same features as the
eclipse 8200 with the additional capability of transmission speeds up to 768
kbps. In April 1996, CLI further expanded the eclipse product line with the
introduction of the eclipse gold product family. These recently introduced
models, which replaced the 8200 and 8300 models, offer features identical to
the eclipse 8300 with the option of improved video quality at 30 frames per
second, transmission rates of up to 768 kbps and a T.120 multimedia gateway.
T.120 is an evolving series of standards from the ITU-T that are aimed at
facilitating "audio-graphic", multimedia conferencing for collaborative
working meetings and distance learning applications. Available as options on
eclipse are: multipoint chair control, dual monitors, the automatic focus
SuperGraphicCam document camera and an inverse multiplexer. eclipse gold list
prices begin at $26,400 and through bundled configurations can range up to
$48,400, excluding options.
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CLI Desktop Video Systems
In January 1996, CLI announced a CLI Desktop Video family of products to run on
PCs powered by Intel's Pentium(TM)1 microprocessor under Microsoft Windows
versions 3.1 and 95. This family of products initially includes two models: CLI
Desktop Video 1000 and CLI Desktop Video 2000. CLI Desktop Video products are
kits consisting of a fixed digital camera, a single codec board incorporating
an integrated services digital network basic rate interface, a telephone
handset, and a choice of data collaboration software, including Intel's
ProShare(TM)1 Premier data collaboration software. In the future, the product
line will also support DataBeam's FarSite(TM)2 data collaboration software. The
CLI Desktop Video 1000 and 2000 models are capable of transmission speeds
ranging from 56 kbps to 384 kbps. CLI Desktop Video list prices range from
$1,795 for level solutions up to $4,995 for a bundled solution with a Pentium
PC.
Multipoint Control Units
CLI also offers the Multipoint 2 Control Unit (MCU), a device that
allows people at multiple locations to participate in a fully interactive
videoconference. During a multipoint videoconference, the MCU acts as an audio
bridge and a controller, switching among different sites so participants can
see the person who is speaking and hear all other participants in the
conference. This switching can be voice-activated or manually controlled. The
MCU is compliant with the international multipoint videoconferencing standards
established by the ITU-T and is compatible with videoconferencing systems from
any manufacturer who supports those international standards. In addition, MCUs
are compatible with the large installed base of CLI Rembrandt II/VP and other
codecs with compatible audio and communications configurations. List prices for
MCUs range from approximately $19,995 for a 4-user unit to approximately
$200,000 for a large system usable in a headquarters location, depending on the
number of ports and options required.
SALES AND MARKETING
CLI 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. CLI 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 CLI'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 CLI's future revenue
growth. See "Risk Factors - Appearance of Viability," " - Product
Development and Rapid Technological Change," and " - Highly Competitive
Industry."
CLI believes that at least 35% of CLI's revenues from
videoconferencing products in 1995 and 1996 were achieved through indirect
channels, which include resellers and co-marketers (collectively, Resellers).
To that end, CLI has entered into a strategic co-marketing agreement with
Lucent Technologies (formerly AT&T Corporation). These co-marketers provide
sales leads and customer prospects for direct customer sales by CLI's domestic
sales force. In addition, CLI has a number of Reseller agreements in the United
States with companies including Norstan, Inc., Pacific Bell, and Williams
Telecommunications, Inc. These Resellers sell CLI's videoconferencing products
directly to end-users.
Internationally, CLI markets its videoconferencing products in most countries
outside the United States through distributors. CLI is attempting to increase
its new customer base by expanding its distribution channels. CLI's products
are distributed in over 50 countries outside the United States under
distribution agreements and arrangements with over 30 companies, including
Internet Video Communications in the United Kingdom, Telecom Video Systems in
France, Deutsch Telekom in Germany, SOEI Tsusho Company, Ltd. in Japan, Daewoo
in Korea, Teledata in Southeast Asia, and Keytech S.A. in Argentina. Agreements
with these distributors generally provide for pricing and volume discounts,
order lead times, designation of a specific geographic territory and other
terms and conditions. Distributors typically order products only upon receipt
of an order from an end-user customer and generally provide local customer
support, including installation and maintenance. In 1993, CLI opened its
first international sales offices in Brussels, Belgium and Beijing, People's
Republic
- ------------------------
1 (TM)Pentium and (TM)ProShare are trademarks of Intel Corporation
2 (TM)FarSite is a trademark of DataBeam Corporation
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of China. CLI recently closed the Brussels sales office and has entered into an
agreement with Multimedia and Teleconferencing Systems, Limited located in
Berkshire, United Kingdom to manage CLI's international sales operations in
Europe, Africa, the Middle East and India. In 1995 and 1996, revenue from
non-United States customers represented 22% and 21%, respectively, of total
revenues. See Note 11 of Notes to Consolidated Financial Statements in Item 8.
See "Risk Factors - International Sales."
CLI believes that the availability of demonstration systems and
financing programs significantly enhances its direct sales and marketing
efforts. CLI provides videoconferencing equipment to customers and potential
customers on a short-term loan or monthly rental basis in order to allow
hands-on use of the equipment.
As of February 1997, CLI had 120 direct sales, marketing and customer
support personnel domestically and in three foreign countries.
CUSTOMER SERVICE AND SUPPORT
CLI 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 CLI to
provide the appropriate level of service for CLI'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 CLI's
Technical Support Center personnel to cost-effectively service its products
without requiring on-site service visits. To further augment CLI's service
capabilities, CLI signed an agreement in late 1995 with Lucent Technologies
under which Lucent Technologies will supply technicians who will provide
installation and service for designated CLI videoconferences customers
throughout the United States. See "Risk Factors - Appearance of Viability."
CLI 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. CLI offers a variety of
maintenance plans to accommodate the various maintenance requirements in the
marketplace. Service revenue as a percentage of total revenue was 6.8% in 1994,
10.3% in 1995 and 14.7% in 1996.
CLI generally warrants its products to be free of defects in materials
and workmanship for periods ranging from three months to fourteen months from
date of shipment or twelve months from date of installation, depending on the
product. To date, defective product returns have not been material.
CUSTOMERS
CLI's products have been sold to organizations in such diverse
industries as aerospace, banking, communications, education, electronics, food
and consumer products, and pharmaceuticals, as well as in government and
telemedicine. In 1994, 1995 and 1996, there was no single customer that
accounted for greater than 10% of total revenues. In 1994, 1995 and 1996, sales
to international customers represented approximately 18%, 22%, and 21%,
respectively, of CLI's total revenues.
RESEARCH AND DEVELOPMENT
Since its inception, CLI has recognized that a strong technical base
is essential to its long-term success and has made a substantial investment in
research and development. CLI's total research and development expenditures in
1994, 1995 and 1996, aggregated $15.1 million, $14.8 million and $14.5 million,
respectively. Research and development expenditures consisted of research and
development expense, cost of revenues related to research and development
contracts and capitalized
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software development costs as summarized in the table in "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Research and Development Expense."
The videoconferencing market is characterized by rapid and significant change
in technology and user needs, requiring substantial product development
expenditures. These changes have resulted in frequent product introductions
characterized by better picture quality at lower bandwidths and reduced prices.
CLI's ongoing videoconferencing research and development efforts are focused on
continued improvements in its CDV technology, product developments and product
enhancements. CLI'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 CLI's product development efforts will be successful. See
"Risk Factors - Product Development and Rapid Technological Change."
COMPETITION
CLI 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.
CLI believes that the principal competitive factor in the
videoconferencing market is the ability to provide easy-to-use, cost effective,
enterprise-wide videoconferencing solutions. Performance, price, picture
quality, audio quality, bandwidth flexibility, network compatibility, standards
compliance, reliability, ease of use and diversity of features are important
product features; distribution and customer support are also important service
factors. While the relative importance of these factors varies from customer to
customer, CLI believes that it is competitive in each of these areas.
The videoconferencing industry is intensely competitive. CLI currently
competes with numerous vendors of videoconferencing equipment including
PictureTel Corporation (PictureTel), Sony Corporation (Sony), VTEL Corporation
(VTEL), General Plessey Telecommunications (GPT), Canvas Visual Communications
(formerly known as British Telecom), Nippon Electric Corporation (NEC),
Panasonic, Ltd. (Panasonic), Mitsubishi, Ltd. (Mitsubishi), Fujitsu, Ltd.
(Fujitsu), Intel and literally dozens of other companies offering desktop
videoconferencing solutions. Many of these competitors have significantly
greater technical and financial resources than CLI and also enjoy greater
brand-awareness among customers. CLI also expects other competitors to enter
the marketplace as demand for videoconferencing equipment continues its rapid
rate of growth. In particular, CLI expects increased competition from Japanese
manufacturers, such as NEC and Sony that are now making substantial investments
in order to enter the market. In addition, Intel has recently introduced a new
version of its Pentium processor, known as MMX(TM)1, that improves the ability
of PCs to provide for video conferencing, which is expected to result in
increased competition as consumers are offered the choice of economical desktop
video conferencing on their PCs as an alternative to CLI's systems. CLI
believes that its ability to compete will depend on a number of factors,
including the amount of financial resources available to CLI, success and
timing of new product developments by CLI and its competitors, product
performance, price and quality, breadth of distribution and customer support.
There can be no assurance that CLI will be able to compete successfully with
respect to these factors. If CLI 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 CLI's
results of operations.
In December 1990, the ITU-T adopted a worldwide videoconferencing
standard, commonly referred to as H.261 or px64, for transmitting video images
over digital networks at data transmission rates ranging from 64 kbps to 2.048
mbps. This standard has become a part of the ITU-T standards, an evolving set
of standards which permit interoperability among videoconferencing systems from
different vendors. Although acceptance of the ITU-T standards is expected to
increase demand for videoconferencing products in general, the widespread
acceptance of these standards and other related emerging international
standards may make the advantage of CLI's proprietary technology less
significant. In particular, the emergence of industry standards may lower
barriers to entry and result in increased price competition. See "Risk Factors
- - Highly Competitive Industry."
- -------------------
1 (TM)MMX is a trademark of Intel Corporation
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MANUFACTURING
CLI's manufacturing organization performs materials planning,
production scheduling, mechanical assembly, board testing, system integration,
burn-in, and final system testing of videoconferencing codec and integrated
systems. The organization performs quality assurance testing on selected
purchased parts, board assemblies and finished products during the course of
the manufacturing process. Some components are purchased through a small number
of selected component distributors who provide completed assemblies for printed
circuit boards. The parts which come in kits are drop-shipped from the
component distributor directly to selected subcontract assembly houses. Some
components are purchased directly from various manufacturers and are assembled
and tested at CLI. Some videoconferencing equipment is purchased in its
entirety from suppliers and shipped to CLI where it may be integrated and
tested to customer specifications.
CLI uses many standard parts and components for its products. Several
of the critical components used in CLI's products, including certain custom and
programmable semiconductors, such as the Video Processor, are currently
available only from single or limited sources. In addition, CLI relies on a few
vendors to turnkey manufacture certain of its products. CLI has executed master
purchase agreements with some of the suppliers of these sole or limited source
components. CLI purchases the remainder of these sole or limited source
components pursuant to purchase orders placed from time to time in the ordinary
course of business and has no guaranteed supply arrangements with these sole or
limited source suppliers. Therefore, these suppliers are not obligated to
supply products to CLI for any specific period, in any specific quantity or at
any specific price, except as may be provided in a particular purchase order.
Although CLI expects that these suppliers will continue to meet its
requirements for the components, there can be no assurance that they will do
so. Certain suppliers, due to CLI's shortages in available cash, have put CLI
on a cash or prepay basis and/or required CLI to provide security for their
risk in procuring components or reserving manufacturing time, and there is a
risk that suppliers will discontinue their relationship with CLI. In addition,
certain suppliers already have terminated their relationships with CLI. An
interruption or reduction in supply of any key components, excessive rework
costs associated with defective components or process errors, or a failure to
continually decrease vendor prices can adversely affect CLI's operating results
and damage customer relationships. See "Risk Factors - Dependence on Key
Vendors."
QUALITY
CLI has a quality function with a Quality Council assigned to oversee
the implementation of a Total Quality Management (TQM) process and culture
throughout CLI. A cross-functional TQM council has been organized to support
and manage process quality improvement teams which focus on continuous
improvement of CLI's various products and processes used throughout CLI. CLI
has been granted the International Organization for Standardization 9001
certification for its videoconferencing products operations.
PATENTS AND TRADEMARKS
CLI currently holds six United States patents relating to video
compression, five of which are jointly held by Charger Industries,
Incorporated, a subsidiary of General Instrument Corporation, following the
sale of CLI's broadcast products division in June 1996. The patents cover CLI's
scene-adaptive coding and DCT techniques and expire between the year 2000 and
the year 2004. These techniques, together with the DXC, CTX and CTX Plus
algorithms, serve as the basis of CLI's videoconferencing product lines. CLI
also holds three United States patents relating to facsimile compression.
There can be no assurance that CLI's current patents will be upheld as
valid. Although CLI 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. CLI also utilizes nondisclosure
agreements and internal secrecy procedures.
CLI believes that its products, trademarks and other proprietary
rights do not infringe on the proprietary rights of third parties. From time
to time, however, CLI has received communications from third parties asserting
that features or content
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<PAGE> 10
of certain of its products may infringe intellectual property rights of such
parties. To date, no such claims have had an adverse effect on CLI'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 CLI with
respect to current or future products or that any such assertion may not
require CLI to enter into royalty arrangements or result in costly litigation.
For example, Datapoint Corporation has filed suit claiming that certain of
CLI'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 CLI's business, operating results and financial
condition.
EMPLOYEES
CLI's success depends to a large extent on the skill and competence of
its employees. There can be no assurance that CLI will be able to continue to
attract, retain and motivate competent employees.
As of February 28, 1997, CLI employed 317 people full-time in its
operations, including 87 in manufacturing, 79 in engineering, research and
development, 120 in sales and marketing and 31 in administration. In addition,
CLI also employs a number of temporary employees. CLI has also had substantial
layoffs and experienced high turnover among its management and executive
officers. None of CLI's employees are represented by a collective bargaining
agreement. CLI believes its relationship with its employees is good. See "Risk
Factors - Reliance on Key Personnel."
DISCONTINUED OPERATIONS AND RESTRUCTURING
On November 30, 1995, CLI adopted a strategic plan to discontinue the
operation comprising the broadcast products division. This division
manufactured and sold broadcast video products to commercial end-users.
Additionally, in the first quarter of 1996, CLI 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, CLI also
reduced its permanent and temporary workforce by approximately 90 people in
March 1996 and identified a number of offices that would be closed. Severance
and other expenses associated with this action were reflected in the results of
the first quarter of 1996. In the fourth quarter of 1996, management recorded an
additional loss on disposal of the broadcast products division of $6,689,000, or
$.43 per share, due primarily to accounts receivable associated with the
broadcast products division for which payment experience has been less than
previously estimated. See Note 2 of Notes to Consolidated Financial Statements
in Item 8.
PENDING MERGER AGREEMENT
On January 6, 1997, the Company entered into an Agreement and Plan of
Merger and Reorganization (Merger) with VTEL Corporation (VTEL), a designer,
manufacturer and marketer of multi-media conferencing systems, and VTEL-Sub,
Inc. (Merger Sub), a wholly owned subsidiary of VTEL organized solely for the
purpose of facilitating the Merger. Upon consummation of the Merger and the
transactions associated therewith, Merger Sub will merge with the Company, and
the Company will continue as the surviving company and a wholly owned
subsidiary of VTEL. See Note 15 of Notes to Consolidated Financial Statements
in Item 8.
RISK FACTORS
Net Loss
CLI has experienced losses from continuing operations in eleven of the
last twelve fiscal quarters and in each of the last five full fiscal years
beginning with 1992. CLI sustained a net loss of $57.6 million and $20.4
million in 1995 and 1996, respectively. In 1994 CLI had net income of $0.1
million. There also can be no assurance that CLI will be able to achieve a
profit in 1997 or in subsequent quarters and years. In the future, CLI's
ability to achieve and sustain profitable operations
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<PAGE> 11
will depend upon a number of factors, including CLI's ability to control costs;
CLI's ability to generate sufficient cash from operations or obtain additional
funds to fund its operating expenses; CLI's ability to develop innovative and
cost-competitive new products and to bring those products to market in a timely
manner; competitive factors such as new product introductions, product
enhancements and aggressive marketing and pricing practices; general economic
conditions; and other factors. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Negative Cash Flow/Limited Working Capital
CLI's history of operating losses and product development activity has
required significant cash funding. As of December 31, 1996, CLI had working
capital of $8.7 million. CLI anticipates that existing cash and lines of
credit, together with other sources of liquidity such as private or public
offerings, equipment lease lines and bank credit lines, will be sufficient to
meet cash requirements through the fourth quarter of 1997. CLI will need to
significantly reduce operating expenses and/or significantly increase revenue
in order to finance its working capital needs with cash generated by
operations, and there can be no assurance that it will be able to do so.
CLI expects that it will require significant additional financing to
support its future operations. There can be no assurance that any such
additional financing will be available to CLI on a timely basis or, if
available, will be on acceptable terms. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources."
In October 1996, CLI obtained $7.0 million through a private sale to
purchasers of Series C Convertible Preferred Stock. Under the purchase
agreement with the purchasers, CLI may issue to such purchasers up to an
additional $13.0 million of CLI preferred stock in two separate installments by
the fourth quarter of 1997, if certain conditions are met. The right to
additional funding under such purchase agreement will terminate upon
consummation of the Merger with VTEL. See Note 15 of Notes to Consolidated
Financial Statements in Item 8.
Should CLI be unable to sell additional preferred stock to such
purchasers or should additional funding be required, there can be no assurance
that such funding will be available on acceptable terms as and when required by
CLI.
Potential Dilution From Additional Financing
CLI may be required or may choose to sell equity securities to obtain
financing in the future, including the sale of additional CLI preferred stock
to certain investors. If CLI sells additional equity securities, investors
holding CLI Common Stock may incur additional dilution. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital Resources."
Appearance Of Viability
CLI sells relatively low volume, high unit dollar complex capital
equipment systems typically requiring ongoing service requirements. CLI's
existing and potential customers have expressed concern regarding CLI's ability
to maintain itself as a going concern over the next several years in relation
to meeting their future technology needs and ongoing service requirements.
These concerns could negatively impact CLI's ability to obtain future orders.
Fluctuations In Quarterly Performance
CLI has experienced substantial fluctuation in operating results.
CLI'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 CLI's products are complex capital equipment systems and/or
involve significant equipment deployment; as such, these products typically
involve long order and sales cycles. Additionally, CLI's revenues have
typically occurred predominantly in the third month of each fiscal quarter. CLI
believes that this is due in some part to the timing of the capital equipment
budget procedures of its customers. Accordingly, CLI'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. CLI'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
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<PAGE> 12
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 CLI or its competitors, increased competition and reductions
in average selling prices.
High Levels Of Inventory And Accounts Receivable
The concentration of customer orders in the third month of each
quarter, together with relatively long manufacturing lead times, have required
CLI to maintain high levels of inventory in order to deliver products on a
timely basis. CLI also maintains equipment in inventory to provide
demonstration systems to customers or potential customers on a short-term loan
basis or on a monthly rental basis. Due to the rapid rate of change in CLI's
industry, a large inventory poses the risk of inventory obsolescence or delay
in realization of manufacturing cost improvements, either of which could have a
material adverse effect on CLI's financial results. In addition, CLI's accounts
receivable, net were $29.2 million at December 31, 1996. CLI expects accounts
receivable and inventory balances to fluctuate in the future. Among other
things, introduction of new products requires the purchase and accumulation of
significant amounts of inventory prior to the realization of revenue from the
new products. Accordingly, CLI has in place a number of ongoing and planned
measures to manage both inventories and accounts receivable; however, there can
be no assurance that CLI 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. CLI continues to finance accounts
receivable and inventories through public and private offerings of equity
securities and bank credit lines. There can be no assurance that CLI 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. CLI's future success will depend to a large
extent on its ability to maintain its competitive technological position and to
continue to develop, on a cost effective and timely basis, technologically
advanced products that meet changing user needs, including the development of a
next generation group videoconferencing system. There can be no assurance that
CLI'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 CLI or its competitors may
also pose the risk of inventory obsolescence. See " - Negative Cash
Flow/Limited Working Capital" and "Business - Research and Development."
Highly Competitive Industry
The videoconferencing industry is intensely competitive. CLI currently
competes with numerous vendors of videoconferencing equipment including
PictureTel, Sony, VTEL, GPT, Canvas Visual Communications, NEC, Panasonic,
Mitsubishi, Fujitsu, Intel and literally dozens of other companies offering
desktop videoconferencing solutions. Many of these competitors have
significantly greater technical and financial resources than CLI and also enjoy
greater brand-awareness among customers. CLI also expects other competitors to
enter the marketplace as demand for videoconferencing equipment continues its
rapid rate of growth. In particular, CLI expects increased competition from
Japanese manufacturers, such as NEC and Sony, that are now making substantial
investments in order to enter the market. In addition, Intel has recently
introduced a new version of its Pentium processor, known as MMX(TM), that
improves ability of PCs to provide for video conferencing, which is expected to
result in increased competition as consumers are offered the choice of
economical desktop video conferencing on their PCs as an alternative to CLI's
systems. CLI believes that its ability to compete will depend on a number of
factors, including the amount of financial resources available to CLI, success
and timing of new product developments by CLI and its competitors, product
performance, price and quality, breadth of distribution and customer support.
There can be no assurance that CLI will be able to compete successfully with
respect to these factors. If CLI 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 CLI's
results of operations. See "Business - Competition."
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<PAGE> 13
Dependence On Key Vendors
Several of the critical components used in CLI's products, including
certain custom and programmable semiconductors, such as the Video Processor,
are currently available only from single or limited sources. In addition, CLI
relies on a few vendors to turnkey manufacture certain of its products. CLI has
executed master purchase agreements with some of the suppliers of these sole or
limited source components. CLI purchases the remainder of these sole or limited
source components pursuant to purchase orders placed from time to time in the
ordinary course of business and has no guaranteed supply arrangements with
these sole or limited source suppliers. Therefore, these suppliers are not
obligated to supply products to CLI for any specific period, in any specific
quantity or at any specific price, except as may be provided in a particular
purchase order. Although CLI expects that these suppliers will continue to meet
its requirements for the components, there can be no assurance that they will
do so. Certain suppliers, due to CLI's shortages in available cash, have put
CLI on a cash or prepay basis and/or required CLI to provide security for their
risk in procuring components or reserving manufacturing time, and there is a
risk that suppliers will discontinue their relationship with CLI. In addition,
certain suppliers already have terminated their relationships with CLI. An
interruption or reduction in supply of any key components, excessive rework
costs associated with defective components or process errors, or a failure to
continually decrease vendor prices can adversely affect CLI's operating results
and damage customer relationships. See "Business - Manufacturing."
Reliance On Key Personnel
The success of CLI depends to a large extent on a small number of key
technical and managerial personnel, the loss of one or more of whom could have
a material adverse effect on the business of CLI and in part on its ability to
continue to attract, retain and motivate additional highly skilled personnel,
who are in great demand. CLI has experienced high turnover among its executive
officers within the past year, including its Chief Executive Officer, its
Executive Vice President, its Chief Financial Officer and several of its Vice
Presidents. CLI has also had substantial layoffs. Because of CLI's financial
difficulties, it has become increasingly difficult for it to hire new employees
and retain key management and current employees. CLI has implemented a
retention program for certain key employees in an effort to retain key
personnel. Additionally, T. Gary Trimm, President and Chief Executive Officer
of CLI, has an employment contract with CLI that provides incentives to him to
remain at CLI but allows him to terminate his employment at any time. CLI does
not carry any key person life insurance with respect to any of its personnel.
In addition, it is a condition to future issuances of preferred stock to the
purchasers of CLI Class C Preferred Stock that Mr. Trimm remain President and
Chief Executive Officer of CLI.
Volatility Of Stock Price
CLI's Common Stock has historically been subject to substantial price
volatility, particularly as a result of announcements of new products by CLI or
its competitors, quarter-to-quarter variations in the financial results of CLI
or its competitors and changes in earnings estimates by industry analysts. In
addition, the stock market has experienced, and continues to experience, price
and volume fluctuations which have affected the market price of many technology
companies in particular and which have often been unrelated to the operating
performance of these companies. These broad market fluctuations, as well as
general economic and political conditions, may adversely affect the market
price of the Common Stock.
Such stock price volatility for the Common Stock has in the past
provoked securities litigation, and future volatility could provoke litigation
in the future that could divert substantial management resources and have an
adverse effect on CLI's results of operations.
International Sales
CLI expects that international sales, particularly sales to the
People's Republic of China, will represent between 15% to 20% of its future net
sales and that it will be subject to the normal risks of international sales
such as longer payment cycles, export controls and other governmental
regulations and, in some countries, a lesser degree of intellectual property
protection as compared to that provided under the laws of the United States.
International sales are subject to certain inherent risks including tariffs,
embargoes and other trade barriers, staffing and operating foreign sales and
service operations and collecting accounts receivable. CLI is also subject to
risks associated with regulations relating to the import and export of
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<PAGE> 14
high technology products. CLI cannot predict whether quotas, duties, taxes or
other charges or restrictions upon the importation or exportation of CLI's
products in the future will be implemented by the United States or any other
country, especially in relation to the People's Republic of China. In such
event, CLI's operating results could be materially or adversely affected.
Additionally, fluctuations in exchange rates could affect demand for CLI's
products. If for any reason exchange or price controls or other restrictions on
foreign currencies are imposed, CLI's business, operating results and financial
condition could be adversely affected. See "Business - Sales and Marketing."
Legal Proceedings
CLI is currently engaged in several legal proceedings. Such legal
proceedings are a drain on CLI's working capital and management's time. There
can be no assurance that CLI's legal proceedings can be settled quickly or
result in a favorable outcome to CLI. Continuation of such legal proceedings
for an extended period of time could have an adverse effect upon CLI's working
capital and management's ability to concentrate on the business of CLI. In
addition, unfavorable outcomes in any one or several such legal proceedings
could have a material adverse effect on CLI. See "Legal Proceedings."
Possible Delisting Of Common Stock From NASDAQ National Market
CLI's Common Stock is listed on the NASDAQ National Market, and CLI is
required to continue to meet the continued listing requirements for the NASDAQ
National Market. Failure to meet the continued listing requirements in the
future could subject CLI's Common Stock to delisting. CLI's Common Stock could
be delisted from the NASDAQ National Market if CLI fails to maintain capital
and surplus of $1.0 million. Because of the substantial losses experienced by
CLI in 1996, any significant loss experienced in the future could cause CLI to
have insufficient capital and surplus for continued listing on the NASDAQ
National Market. CLI's Common Stock is also subject to delisting in the event
that the price of the Common Stock drops below $1.00 per share for 10
consecutive trading days (the last reported sales price for the Common Stock on
the NASDAQ National Market on March 14, 1997 was $2.3125 per share). Because of
the substantial increase in the number of tradable shares of Common Stock
registered recently and to be registered in the future if additional shares of
convertible preferred stock and warrants to purchase Common Stock are issued to
the purchasers of CLI's Class C Preferred Stock (see "Management Discussion and
Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources"), there could be downward pressure on the trading price of
the Common Stock, which could cause CLI to fail to meet the minimum bid price
requirement for the NASDAQ National Market. If CLI's Common Stock is delisted,
there can be no assurance that CLI will meet the requirements for initial
inclusion in the future, particularly the $3.00 minimum per share bid
requirement. In addition, NASDAQ has proposed increasing the requirements for
the initial listing of securities and for the maintenance of such listing on
the NASDAQ National Market and the NASDAQ SmallCap Market which, if adopted,
could make it more difficult for CLI to maintain the listing of its Common
Stock with NASDAQ or meet the requirements for initial inclusion. Trading in
the listed securities after delisting would be conducted on the NASDAQ SmallCap
Market or in the over-the-counter market in what are commonly referred to as
the "pink sheets." As a result, investors may find it more difficult to dispose
of, or to obtain accurate quotations as to the value of, CLI's securities. It
is a condition to the future issuances of preferred stock to the purchasers of
CLI's Class C Preferred Stock that CLI's Common Stock is listed on the NASDAQ
National Market or the NASDAQ SmallCap Market and has not been suspended from
listing for more than a day or to permit the dissemination of material
information. See " - Volatility of Stock Price."
Effect Of Antitakeover Provisions Of Delaware Law And CLI's Charter Documents
Certain provisions of Delaware law and the charter documents of CLI
may have the effect of delaying, deferring or preventing changes in control or
management of CLI. CLI is subject to the provisions of Section 203 of the
Delaware General Corporation Law, which has the effect of restricting changes
in control of a company. In addition, CLI's Board of Directors is divided into
three separate classes. CLI's Board has authority to issue up to 4,000,000
shares of preferred stock, less shares of issued and outstanding Series C
Preferred Stock, and to fix the rights, preferences, privileges and
restrictions, including voting rights, of such shares without any further vote
or action by its stockholders. CLI also has a Preferred Share Rights Plan
(Rights Plan). The effect of certain provisions of CLI's Certificate of
Incorporation, CLI Rights Plan and the application of Delaware General
Corporation Law Section 203 could discourage certain types of transactions
involving an actual or potential change in control of CLI, including
transactions in which the holders of Common Stock might otherwise receive a
premium for their shares over then current prices, and may limit the ability
of such stockholders to cause or
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approve transactions which they may deem to be in their best interests, all of
which could have an adverse effect on the market price of the Common Stock.
ITEM 2. PROPERTIES
CLI currently occupies 142,700 square feet of office and
manufacturing space in a modern industrial park in San Jose, California under a
lease which expires in December 2001, and occupies a warehouse facility
measuring 26,400 square feet which expires in June 2000. CLI also leases sales
offices in various locations on a short-term basis. CLI believes that its
facilities are suitable for its videoconferencing business. CLI also believes
it can locate and occupy additional facilities as they are needed.
ITEM 3. LEGAL PROCEEDINGS
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 could assert that
the Company is infringing the patents in suit, or whether Datapoint's patents
are invalid in light of the prior art. On April 24, 1996, a Special Master
submitted a report which rejected some of the positions taken by CLI in the
motion.
The Court on September 16, 1996, adopted the report of the Special
Master that the claims of the patents in suit be construed in a manner
favorable to the plaintiff, and a trial date of February 3, 1997, has been
scheduled. The parties at the request of the Court filed status reports
indicating that additional time will be required to prepare for trial. On
October 7, 1996, the Company filed motions to certify for appeal to the Federal
Circuit on the issue of claim construction and to stay discovery, which were
denied on December 3, 1996. On December 20, 1996, the parties filed an Agreed
Motion for Continuance requesting that the Court reset the case for trial. On
December 23, 1996, the Court granted the motion and reset the case for trial on
June 16, 1997. The parties have engaged in settlement discussions although, as
discussed below, such discussions have led to further litigation.
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 should not have a
material adverse impact on the Company's consolidated financial position or
results of operations.
On January 22, 1997, Datapoint initiated a lawsuit against VTEL
and CLI in the Supreme Court for the County of New York alleging, among other
things, that on December 30, 1996 CLI agreed to settle Datapoint's patent
infringement action pending against CLI in the United States District Court for
the Northern District of Texas in exchange for a payment and a license of
Datapoint patented technology to CLI. Although no settlement agreement or
license agreement was entered into and CLI denies it ever agreed to settle the
pending patent infringement action, Datapoint maintains it reasonably expected
that a settlement agreement and license agreement would be entered into with
CLI and maintains that VTEL has willfully and intentionally interfered and
prevented Datapoint from obtaining the settlement and license that Datapoint
sought. Datapoint also asserts that VTEL's actions amounted to a prima facie
tort. Datapoint seeks from VTEL an amount equal to the benefit that it would
have received from CLI under the alleged settlement agreement and license
agreement, as well as punitive damages of at least $3 million.
Datapoint also has asserted in the New York lawsuit a cause of
action against CLI for fraud based on allegations that it was deceived by
misrepresentations made by CLI in connection with the alleged settlement and
license negotiations. Specifically, Datapoint maintains that it would not have
agreed to the terms of the alleged license agreement covering its
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patented technology had it known of the Merger since VTEL's license from
Datapoint of the same technology would preclude Datapoint from obtaining future
royalties from CLI on sales of products that allegedly infringed Datapoint's
patent. Datapoint seeks unspecified money damages from CLI based on the alleged
fraud and additional punitive damages of $3 million.
CLI maintains that it never agreed to settle the pending
infringement action, and therefore there was not any agreement. Because no
agreements were ever entered into, VTEL maintains that it cannot be liable for
allegedly interfering with a non-existent agreement, or in any case agreements
whose existence were unknown to VTEL. Because no agreements were ever entered
into, CLI maintains that it cannot be liable for defrauding Datapoint in
entering into a non-existent license agreement. VTEL and CLI have removed the
action to the United States District Court for the South District of New York
and intend to vigorously defend the claims. Datapoint has filed a motion to
remand the lawsuit to the New York State Supreme Court.
General
In the normal course of business, CLI receives and makes inquiries
with regard to other possible patent infringement. Where deemed advisable, CLI
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 CLI's consolidated financial
position or results of operations.
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, 1996.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
CLI'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,
1996.
<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
1996
----
First Quarter $ 9.25 $5.25
Second Quarter $ 8.25 $4.50
Third Quarter $ 7.88 $4.88
Fourth Quarter $ 6.75 $3.50
</TABLE>
CLI has never paid any cash dividends on its Common Stock. The Company is
obligated to pay a cumulative dividend of 4% per annum, payable quarterly on
its Series C Cumulative Preferred Stock. The Company does not intend to pay any
cash dividends in the foreseeable future on its Common Stock. The Company's
current line of credit with Greyrock Business Credit (Greyrock) prohibits the
payment of dividends. Greyrock, however, gave its consent to the Company to
enter into a financing agreement with the purchasers of Series C Cumulative
Preferred Stock that provides for cumulative dividends. See Notes 7 and 9 of
Notes to Consolidated Financial Statements in Item 8.
At December 31, 1996, there were 872 stockholders of record.
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ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------------
1992 1993 1994 1995 1996
--------- -------- -------- --------- ---------
(In thousands, except per share amounts and employees)
<S> <C> <C> <C> <C> <C>
Operating results (a) (b):
Revenue $ 95,031 $ 95,095 $114,958 $112,979 $ 87,882
Gross margin $ 27,278 $ 28,128 $ 44,054 $ 33,620 $ 37,994
Net loss from continuing operations $ (3,418) $(12,184) $ (4,878) $ 21,040) $(13,671)
Net income (loss) $ (3,283) $ (3,483) $ 107 $ 57,582) $(20,360)
Net Income (loss) per share:
Net loss from continuing operations $ (0.30) $ (1.04) $ (0.32) $ (1.37) $ (1.03)
Net income (loss) $ (0.29) $ (0.30) $ 0.01 $ (3.76) $ (1.46)
Cash dividends (c) $ - $ - $ - $ - $ -
Weighted average common shares and
common share equivalents 11,283 11,666 15,160 15,304 15,680
Year end financial data:
Working capital $ 31,902 $ 52,017 $ 53,820 $ 15,259 $ 8,680
Total assets $ 94,736 $124,922 $131,651 $104,753 $ 60,650
Short-term debt including current portion
of capital lease obligation $ 9,960 $ 9,280 $ 10,553 $ 13,958 $ 10,804
Long-term debt including capital
lease obligations $ - $ 1,016 $ 494 $ 985 $ -
Redeemable convertible preferred stock $ - $ 13,758 $ - $ - $ 6,277
Stockholders' equity $ 56,877 $ 67,579 $ 86,962 $ 35,674 $ 17,359
Employees 354 434 549 535 337
</TABLE>
(a) In November 1995, CLI decided to discontinue the operations of the
broadcast products division (BPG). Therefore, operating results for
BPG are classified as discontinued operations on CLI's Consolidated
Statements of Operations. See Note 2 of Notes to Consolidated
Financial Statements in Item 8.
(b) In the fourth quarter of 1996, management revised the expected loss on
disposal of the broadcast products division and recorded an
additional charge of $6,689,000. See Note 2 of Notes to Consolidated
Financial Statements in Item 8.
(c) CLI has never paid any cash dividends on its Common Stock. The Company
is obligated to pay a cumulative dividend of 4% per annum, payable
quarterly on its Series C Cumulative Preferred Stock. The Company does
not intend to pay any cash dividends in the foreseeable future on its
Common Stock. The Company's current line of credit with Greyrock
Business Credit (Greyrock) prohibits the payment of dividends.
Greyrock, however, gave its consent to the Company to enter into a
financing agreement with the purchasers of Series C Cumulative
Preferred Stock that provides for cumulative dividends. See Notes 7
and 9 of Notes to Consolidated Financial Statements in Item 8.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial
Condition and Results of Operations 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 under "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 in Item 8.
16
<PAGE> 18
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>
1994 1995 1996
---- ---- ----
<S> <C> <C> <C>
Revenues 100% 100% 100%
Cost of revenues 62% 70% 57%
Gross margin 38% 30% 43%
Selling, general and administrative 33% 38% 42%
Research and development 9% 9% 15%
Net loss from continuing operations (4%) (19%) (16%)
Income (loss) from discontinued operations 4% (32%) (8%)
Net income (loss) 0% (51%) (23%)
</TABLE>
REVENUES
Revenues were $87.9 million, $113.0 million and $115.0 million in
1996, 1995 and 1994, respectively. Revenues decreased 22% in 1996 and 2% in
1995 from the respective prior years. The decrease in revenues for 1996 was due
primarily to a decrease in videoconferencing unit shipments, partially offset
by increased service revenue. The decrease in revenues for 1995 from the
preceding year was primarily due to a decrease in videoconferencing unit
volume, partially offset by higher average selling prices in the
videoconferencing market and increased service revenue. Codec shipments were
1,676 in 1996 and 2,322 in 1995, or a decrease of 28% and 11% from the prior
year, respectively.
International revenues decreased to $18.7 million or 21% of revenues
in 1996, compared to $24.3 million or 22% of revenues in 1995 and $21.2 million
or 18% of revenues in 1994. The decrease in international revenues in 1996
compared to 1995 resulted primarily from the decrease in codec shipments. The
increase in international revenues in 1995 compared to 1994 resulted primarily
from growth of sales in China and other Far East locations. CLI does not
presently engage in foreign currency transactions and does not have any
significant assets located outside the United States. Therefore, CLI is not
directly affected by foreign currency exchange rate fluctuations.
GROSS MARGIN
Gross margin as a percentage of sales was 43%, 38%, and 30% in 1996,
1995 and 1994, respectively. The increase in gross margin on product sales in
1996 was primarily due to a change in product mix to include a greater
proportion of higher margin Radiance and eclipse group videoconferencing
systems and to reduced manufacturing costs. 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 CLI's decision to
restructure its videoconferencing division, and included reductions in the
carrying values of certain assets, primarily inventory and capitalized
software. See Note 2 of Notes to Consolidated Financial Statements in Item 8.
CLI 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, CLI anticipates that gross margin on revenues will
continue to be subject to fluctuations caused by the introduction of new
products, changes in product mix and variations in manufacturing costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were 42%, 38% and 33% of
revenues in 1996, 1995 and 1994, respectively. The increase as a percentage of
revenues in 1996 compared to 1995 was primarily due to a decrease in revenues,
$1.7 million of additional expenses resulting from CLI's decision to
restructure its videoconferencing division, and additional marketing costs
related to new products to be introduced in 1997. The additional expenses
consisted primarily of
17
<PAGE> 19
severance and related costs associated with headcount reductions in the first
quarter of 1996. The increase as a percentage of revenues in 1995 compared to
1994 was primarily due to $4.1 million of additional expenses in the fourth
quarter of 1995 resulting from CLI's decision to restructure its
videoconferencing division. These expenses relate to provisions for doubtful
accounts and reductions in the carrying values of certain demonstration
equipment and assets related to service activities. See Note 2 of Notes to
Consolidated Financial Statements in Item 8.
CLI anticipates that selling, general and administrative expenses will
generally increase with increases in the level of revenues but may vary from
period to period as a percentage of revenues.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expenditures consist 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>
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Research and development expense $10.2 $10.0 $12.9
Capitalized software development cost 3.9 4.8 1.6
Cost of revenues related to research and
development contracts 1.0 - -
----- ------ -----
Total research and development expenditures $15.1 $14.8 $14.5
===== ===== =====
</TABLE>
Research and development expense was 15% of revenues in 1996 and 9% of
revenues in 1995 and 1994. The increase as a percentage of revenues in 1996
compared to 1995 was due principally to decreased revenues, as well as an
increase in the portion of engineering spending that was dedicated to research
and development instead of capitalized software activity. Capitalized software
development costs decreased in 1996 due to reduced activity on developing
software. Capitalized software development cost increased in 1995 in relation
to 1994 due to increased activity on new software for more complex and
feature-rich videoconferencing products.
CLI expects that the level of research and development expenses as a
percentage of revenues will fluctuate due to varying levels of research and
development activities, external funding, and amounts capitalized in
conjunction with software development activities.
INTEREST INCOME AND INTEREST EXPENSE
Interest income was $0.0 million, $0.1 million and $0.2 million in
1996, 1995 and 1994, respectively. The decrease from year to year is
principally due to a reduction of funds available for investment. Interest
expense decreased to $1.0 million in 1996 compared to $1.1 million in 1995.
This reduction is primarily due to decreased average borrowings resulting from
the payment of term loans in connection with the sale of discontinued
operations and the payment of short-term debt in connection with the sale of
preferred stock by the Company. This reduction was partially offset by higher
average interest rates. The $0.3 million increase in interest expense in 1995
compared to 1994 reflects higher average borrowings and interest rates from the
preceding year. See Notes 2 and 9 of Notes to Consolidated Financial Statements
in Item 8.
INCOME TAXES
At December 31, 1996, CLI had a net operating loss carryforward for
federal income tax purposes of approximately $89 million, of which $23
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, 1996, CLI had a federal general business credit carryforward of
approximately $2 million. The federal net operating loss and tax credit
carryforwards expire primarily in the years 1999 through 2011. The Company had
a California net operating loss carryforward of approximately $20 million
expiring primarily in 2001.
18
<PAGE> 20
DISCONTINUED OPERATIONS
In the fourth quarter of 1995, CLI adopted a plan to discontinue
operations of its broadcast products division and refocus its efforts and
resources on developing and marketing videoconferencing products. In the first
quarter of 1996, CLI decided to restructure the videoconferencing division
which resulted in adjustments that were recorded as of December 31, 1995 to
carrying values of assets that were impacted - primarily inventories,
capitalized software and accounts receivable. In conjunction with this action,
CLI also reduced its workforce in the first quarter of 1996 and identified a
number of offices that would be closed. Severance and other expenses associated
with this action were reflected in the first quarter of 1996. In June 1996, CLI
completed the sale of certain assets of its broadcast products division. In the
fourth quarter of 1996, management revised the amount of loss associated with
disposing the broadcast products division and recorded an additional charge of
$6,689,000, primarily due to receivables associated with the broadcast products
division for which collection experience has been less than previously
estimated. See Note 2 of Notes to Consolidated Financial Statements in Item 8.
NET INCOME (LOSS)
The net loss from continuing operations was $13.7 million, $21.0
million and $4.9 million in 1996, 1995 and 1994, respectively. The loss in 1996
was primarily due to lower revenues, partially offset by improved gross margins
on videoconferencing product sales, $1.7 million of additional expenses
resulting from CLI's decision to restructure its videoconferencing division and
a one-time charge of $0.6 million in settlements of litigation. 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.
FACTORS AFFECTING FUTURE RESULTS
CLI 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 CLI will be successful in its efforts. In the future, CLI'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 CLI or its
competitors, pricing pressures, and changes in general economic conditions.
Historically, a significant portion of CLI's shipments have been made in the
last month of each quarter. As a result, a shortfall in revenue compared to
expectation may not evidence itself until late in the quarter. Additionally,
the timing of expenditures for research and development activities and sales
and marketing programs, as well as the timing of orders by major customers, may
cause operating results to fluctuate between quarters and between years.
LIQUIDITY AND CAPITAL RESOURCES
CLI's operating and product development activities have required
significant cash. CLI has used internally generated funds, public and private
offerings of common stock and preferred stock, sale and leaseback arrangements,
and bank credit lines to finance its growth since 1983. In 1996 cash used in
operations was $17.8 million compared to cash generated by operations of $7.3
million in 1995. This increase in cash used in operations was primarily due to
the paydown of accounts payable and other liabilities, increased net loss, and
lower depreciation and amortization, partially offset by a decrease in accounts
receivable and inventories, as well as the reduction in carrying value of
assets related to CLI's discontinued operations. In 1995, the cash generated by
operations was the result of the net loss which was offset primarily by
depreciation and amortization, reductions in inventories and net assets of
discontinued operations and increases in accounts payables and accrued
liabilities. Capital expenditures were $3.4 million in 1996 and $7.2 million in
1995, 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 1997 compared to 1996.
19
<PAGE> 21
Net cash generated by investing activities was $5.6 million for 1996
compared to net cash used in investing activities of $16.0 million for 1995.
This change is due primarily to cash generated from the sale of assets related
to CLI's discontinued operations, as well as lower levels of spending related
to property, equipment and intangible assets, as well as decreased
capitalization of software. Net cash generated by financing activities was $4.4
million for 1996 and $10.0 million for 1995. This change is due primarily to
lower sales of common stock and payments made to reduce collateralized
borrowings and line of credit, which were partially offset by the sales of
preferred stock. See Notes 7 and 9 of Notes to Consolidated Financial
Statements in Item 8.
As of December 31, 1996, CLI had cash and cash equivalents totaling
$4.8 million. CLI has a line of credit, which expires on June 30, 1997, in the
amount of $15.0 million, of which $10.8 million was outstanding at December 31,
1996. See Note 7 of Notes to Consolidated Financial Statements in Item 8.
Working capital was $8.7 million at December 31, 1996, compared to $15.3
million at December 31, 1995.
In October 1996, CLI obtained $7.0 million through a private sale of
Series C Preferred Stock to an institutional investor. Under the purchase
agreement with the institutional investor, CLI may issue to the institutional
investor up to an additional $13.0 million worth of convertible preferred stock
of CLI in two separate installments by the fourth quarter 1997, if certain
closing conditions are met, including those described in "Risk Factors -
Reliance on Key Personnel" and " - Possible Delisting of Common Stock from
NASDAQ National Market."
CLI anticipates that existing cash, lines of credit, and the future
sales of convertible preferred stock, together with sources of additional
liquidity, such as private or public offerings, sale and leaseback
arrangements, equipment lease lines and bank credit lines, will be sufficient
to meet cash requirements through the fourth quarter of 1997. Should additional
funding be required, however, there can be no assurance that such funding will
be available on acceptable terms as and when required by CLI.
20
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Compression Labs, Incorporated:
We have audited the accompanying consolidated balance sheets of Compression
Labs, Incorporated and subsidiaries (the Company) as of December 31, 1995 and
1996, 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, 1996. 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.
As discussed in Note 15 in the accompanying consolidated financial statements,
on January 6, 1997, the Company entered into an Agreement and Plan of Merger
and Reorganization with VTEL Corporation.
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 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
San Jose, California
March 10, 1997
21
<PAGE> 23
COMPRESSION LABS, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------
1994 1995 1996
----------- ----------- ----------
<S> <C> <C> <C>
Revenues
Product $ 107,193 $ 101,299 $ 74,995
Services 7,765 11,680 12,887
----------- ----------- ----------
114,958 112,979 87,882
----------- ----------- ----------
Cost of revenues
Product 68,898 76,644 47,193
Services 2,006 2,715 2,695
----------- ----------- ----------
70,904 79,359 49,888
----------- ----------- ----------
Gross margin 44,054 33,620 37,994
Operating expenses
Selling, general and administrative 38,153 42,761 37,210
Research and development 10,158 9,974 12,949
Settlements of litigation - 897 554
----------- ----------- ----------
Total operating expenses 48,311 53,632 50,713
----------- ----------- ----------
Operating loss from continuing operations (4,257) (20,012) (12,719)
----------- ----------- ----------
Interest income 177 114 21
Interest expense (798) (1,142) (973)
----------- ----------- ----------
Net loss from continuing operations (4,878) (21,040) (13,671)
Discontinued operations
Income (loss) from operations 4,985 (1,941) -
Loss on disposal - (34,601) (6,689)
----------- ----------- ----------
Net income (loss) from discontinued operations 4,985 (36,542) (6,689)
----------- ----------- ---------
Net income (loss) $ 107 $ (57,582) $ (20,360)
=========== =========== ==========
Computation of earnings (loss) per share:
Net (loss) from continuing operations $ (4,878) $ (21,040) $ (13,671)
Deemed preferred stock dividends related to conversion
discount - - (2,527)
----------- ----------- ----------
Adjusted net loss from continuing operations (4,878) (21,040) (16,198)
Discontinued operations 4,985 (36,542) (6,689)
----------- ----------- ----------
Earnings (loss) applicable to common stock $ 107 $ (57,582) $ (22,887)
=========== =========== ==========
Earnings (loss) per share:
Continuing operations $ (0.32) $ (1.37) $ (1.03)
Net income (loss) from discontinued operations 0.33 (2.39) (0.43)
----------- ----------- ----------
Net income (loss) per share $ 0.01 $ (3.76) $ (1.46)
=========== =========== ==========
Weighted average common shares and common share
equivalents outstanding 15,160 15,304 15,680
=========== =========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
22
<PAGE> 24
COMPRESSION LABS, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(In thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
----------------------------
1995 1996
---------- ----------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 12,638 $ 4,803
Accounts receivable, less allowance for doubtful accounts of
$10,028 in 1995 and $11,461 in 1996 46,798 29,218
Inventories 22,821 10,157
Other current assets 1,096 1,516
---------- ----------
Total current assets 83,353 45,694
---------- ----------
Property and equipment
Furniture and fixtures 9,551 8,429
Machinery and equipment 25,802 24,000
Equipment under capital lease 2,090 -
---------- ----------
37,443 32,429
Accumulated depreciation and amortization (20,171) (21,324)
--------- ----------
17,272 11,105
Capitalized software, net 3,828 3,541
Other assets 300 310
---------- ----------
Total assets $ 104,753 $ 60,650
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Short-term debt $ 13,452 $ 10,804
Current portion of capital lease obligations 506 -
Accounts payable 26,169 11,301
Accrued liabilities 21,689 8,983
Deferred revenue 6,278 5,926
---------- ----------
Total current liabilities 68,094 37,014
---------- ----------
Long-term debt and capital lease obligations 985 -
Redeemable, convertible preferred stock
Series C, $.001 par value; 350,000 shares authorized; shares issued and
outstanding: none in 1995 and 350,000 in 1996
(liquidation preference of $7,053) - 6,277
Stockholders' equity
Preferred stock -
Undesignated preferred stock, $.001 par value; 3,650,000 shares
authorized; none issued and outstanding - -
Common stock -
$.001 par value; 25,153,658 shares authorized; shares issued
and outstanding: 15,491,475 in 1995 and 15,865,496 in 1996 15 16
Warrants to acquire common stock - 575
Additional paid-in capital 120,696 122,165
Accumulated deficit (85,037) (105,397)
--------- ----------
Total stockholders' equity 35,674 17,359
---------- ----------
Total liabilities and stockholders' equity $ 104,753 $ 60,650
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
23
<PAGE> 25
COMPRESSION LABS, INCORPORATED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands)
<TABLE>
<CAPTION>
Common Stock Warrants Additional
------------------- to Acquire Paid-in Accumulated
Shares Amount Common Capital Deficit Total
------- --------- ---------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 12,745 $ 13 $ 95,128 $ - $(27,562) $ 67,579
Exercises of common stock options,
including income tax benefit of $900 163 - 2,173 - - 2,173
Sale of common stock to employees 100 - 844 - - 844
Sale of common stock to investors, net of
issuance costs of $27 148 - 1,973 - - 1,973
Conversion of preferred stock to common stock 1,435 2 13,756 - - 13,758
Issuance of common stock under warrants 65 - 528 - - 528
Net income - - - - 107 107
------- ------ -------- --------- --------- ---------
Balances at December 31, 1994 14,656 15 114,402 - (27,455) 86,962
Exercises of common stock options 138 - 545 - - 545
Sale of common stock to employees 100 - 677 - - 677
Sale of common stock to investors, net of
issuance costs of $90 565 - 4,823 - - 4,823
Issuance of common stock under warrants 32 - 249 - - 249
Net loss - - - - (57,582) (57,582)
------- ------ -------- --------- --------- ---------
Balances at December 31, 1995 15,491 15 120,696 - (85,037) 35,674
Exercises of common stock options 293 1 1,097 - - 1,098
Sale of common stock to employees 75 - 327 - - 327
Issuance of common stock under warrants 6 - 45 - - 45
Warrants issued in connection with
private placement - - - 575 - 575
Net loss - - - - (20,360) (20,360)
------- ------ -------- ---------- --------- ---------
Balances at December 31, 1996 15,865 $ 16 $122,165 $ 575 $(105,397) $ 17,359
======= ====== ======== ========== ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
24
<PAGE> 26
COMPRESSION LABS, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities
Net income (loss) $ 107 $ (57,582) $ (20,360)
Non-cash expenses included in operations -
Depreciation and amortization 11,104 17,237 7,239
Changes in operating assets and liabilities -
Accounts receivable (8,702) 2,681 4,449
Inventories (2,381) 11,306 1,805
Other current assets 1,639 1,657 (457)
Accounts payable (4,614) 6,129 (14,868)
Accrued liabilities 352 15,327 (12,965)
Deferred revenue 4,615 (962) (352)
Discontinued operations (1,400) 11,503 17,673
--------- --------- ---------
Net cash generated by (used in) operations 720 7,296 (17,836)
--------- --------- ---------
Cash flows from investing activities
Net proceeds from the sale of discontinued operations - - 10,528
Property and equipment additions (9,434) (7,235) (3,403)
Increase in capitalized software (6,702) (9,371) (1,556)
Decrease (increase) in other assets 853 586 (10)
--------- --------- ---------
Net cash generated by (used in) investing activities (15,283) (16,020) 5,559
--------- --------- ---------
Cash flows from financing activities
Sales of Series C preferred stock and warrants, net - - 6,852
Sales of common stock, net 4,618 6,294 1,470
Payments of capital lease obligations (359) (840) (549)
Collateralized borrowings (payments) - 1,597 (1,340)
Borrowings (payments) under line of credit agreements 1,110 2,992 (1,991)
--------- --------- ---------
Net cash generated by financing activities 5,369 10,043 4,442
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents (9,194) 1,319 (7,835)
Cash and cash equivalents at beginning of period 20,513 11,319 12,638
--------- --------- ---------
Cash and cash equivalents at end of period $ 11,319 $ 12,638 $ 4,803
========= ========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE> 27
COMPRESSION LABS, INCORPORATED
Notes to Consolidated Financial Statements
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
and 1996 that fully offsets its gross deferred tax assets due to the
Company's historical losses and management's belief that, based on
currently available evidence, it is more likely than not that the
Company will not generate sufficient taxable income to realize any or
all of the deferred tax assets.
Earnings per Share
Earnings (loss) per share is computed by dividing earnings
(loss) applicable to common stock by the weighted average number of
common shares and dilutive common equivalents shares outstanding during
each period presented. Earnings (loss) applicable to common stock in
1996 is computed by adding to the net loss from continuing operations a
charge for the deemed preferred stock dividend related to the 20%
conversion discount on the Series C Preferred Stock measured at the
date of original issuance of the preferred stock. (See Note 9.) The
impact of the deemed dividend was to increase the 1996 loss from
continuing operations per share and net loss per share by $0.16. This
treatment is in accordance with recently published views of the Staff
of the Securities and Exchange Commission. Common equivalent shares
consist of stock options and warrants that are computed using the
treasury stock method.
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.
26
<PAGE> 28
COMPRESSION LABS, INCORPORATED
Notes to Consolidated Financial Statements -- (Continued)
Property and Equipment
Property and equipment are stated at cost. Equipment acquired
under capital lease obligations is stated at the lower of fair value
or the present value of future minimum lease payments at the inception
of the lease. Depreciation and amortization are provided over the
estimated useful lives of the assets or over the life of the lease, if
shorter, using the straight-line method. Field spares are amortized
over the estimated life of the related product.
The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of, effective January
1, 1996. SFAS No. 121 requires long-lived assets to be evaluated for
impairment whenever events or changes in circumstances indicate that
the carrying value of an asset may not be recoverable. The adoption of
SFAS No. 121 did not have a material impact on the Company's
consolidated results of operations.
Capitalized Software
The Company capitalizes software development costs in
accordance with SFAS No. 86. Amortization of capitalized software
begins upon initial product shipment. Software development costs are
amortized (a) over the estimated life of the related product, generally
thirty-six months, using the 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.
Stock-Based Compensation Plans
Prior to January 1, 1996, the Company accounted for its
stock-based compensation plans using the intrinsic value method in
accordance with Accounting Principles Board Opinion (APB) No. 25,
Accounting for Stock Issued to Employees, and its related
interpretations. Under this method compensation expense is recognized
for employee stock arrangements when the fair market value of the
stock exceeds the exercise price at the date of grant. On January 1,
1996, the Company adopted SFAS No. 123, Accounting for Stock-Based
Compensation, which permits entities to recognize as expense over the
vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, SFAS No. 123 also allows entities to continue to
apply the provisions of APB No. 25 and provide proforma net income and
proforma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair-value-based
method defined in SFAS No. 123 had been applied. The Company has
elected to continue to apply the provisions of APB No. 25 and provide
the proforma disclosure provisions of SFAS No. 123.
Reclassifications
Certain previously reported amounts in the 1994 and 1995
consolidated financial statements have been reclassified to conform
with the 1996 presentation.
2. DISCONTINUED OPERATIONS AND RESTRUCTURING
During November 1995, the Company adopted a strategic plan to
discontinue operations of its broadcast products division. This
division generally manufactured and sold broadcast video products to
commercial end-users. The results for the division have been accounted
for as discontinued operations in accordance with APB No. 30, and the
consolidated financial statements have been presented to reflect the
discontinuation of the division.
On June 27, 1996, the Company completed the sale of certain
assets of its broadcast products division to Charger Industries
(Charger), a subsidiary of General Instrument Corporation, in exchange
for $12.5 million in cash (subject to post-closing adjustments) and
the assumption of $2.0 million in liabilities. Charger assumed past
warranty obligations associated with the product family covered by the
sale. With the exception of the accounts receivable, the Company
disposed of the remaining assets of the division to a separate buyer.
The components of net assets of discontinued operations included in
the Consolidated Balance Sheets at December 31, 1995 and 1996 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Accounts receivable, net $14,929 $ 1,798
Inventories 10,859 -
Property and equipment, net 4,174 -
Capitalized software - -
Other assets 38 -
------- -------
$30,000 $ 1,798
======= =======
</TABLE>
27
<PAGE> 29
COMPRESSION LABS, INCORPORATED
Notes to Consolidated Financial Statements -- (Continued)
Revenues from the discontinued division were approximately
$42,029,000, $36,974,000, and $11,201,000 for the years ended December
31, 1994, 1995 and 1996, respectively. The amounts recorded for
discontinued operations on the 1995 Consolidated Statement of
Operations included management's best estimate of the net proceeds
expected to be realized on the sale of the assets of the division and
the provisions for expected losses to be incurred, including a
provision for future operating losses of $1,290,000 expected to be
incurred during the phase-out period of the broadcast products
division. In the fourth quarter of 1996, management revised the amount
of loss on disposal of the broadcast products division due primarily
to receivables associated with the broadcast products division for
which collection experiences was less than originally anticipated.
In the first quarter of 1996, the Company decided to
restructure the videoconferencing division in order to seek
profitability and growth. This resulted in adjustments that were
recorded as of December 31, 1995 to carrying values of assets that
were impacted - primarily inventories, capitalized software and
accounts receivable. In conjunction with this action, the Company also
reduced its workforce in the first quarter of 1996 and identified a
number of offices that would be closed. Severance and other expenses
associated with this action were reflected in the first quarter of
1996.
3. UNBILLED RESEARCH AND DEVELOPMENT CONTRACT RECEIVABLES
At December 31, 1995 and 1996, the Company had $2,221,000 and
$0, respectively, of net unbilled receivables relating to research and
development contracts, of which $1,634,000 and $0 at December 31, 1995
and 1996, respectively, relates to contracts entered into with Thomson
Consumer Electronics, Inc. These receivables are generally billable
either in quarterly installments or upon the delivery of specified
items.
4. INVENTORIES
Inventories at December 31, 1995 and 1996 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Raw materials $ 2,189 $ 2,465
Work in process 3,858 1,923
Finished products
Products on hand 13,488 4,443
Products under rental and loan agreements 3,286 1,326
-------- --------
$ 22,821 $ 10,157
======== ========
</TABLE>
5. CAPITALIZED SOFTWARE
Internal software development costs capitalized by the Company
were $6,645,000 in 1994, $9,276,000 in 1995 and $1,556,000 in 1996. In
addition, the Company purchased software of $57,000 in 1994, $95,000
in 1995 and $0 in 1996. Amortization of capitalized software
development costs and purchased software was $5,120,000 in 1994,
$17,411,000 in 1995 and $1,843,000 in 1996. For the year ended
December 31, 1995, total amortization included $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 1996, capitalized software, net
of accumulated amortization, was $3,828,000 (including $22,000 of
purchased software) and $3,541,000 (including $0 of purchased
software), respectively.
6. ACCRUED LIABILITIES
Accrued liabilities at December 31, 1995 and 1996 are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Employee compensation $ 3,202 $ 3,722
Accrued expenses, discontinued operations 13,887 100
Other accrued expenses, continuing operations 4,600 5,161
-------- --------
$ 21,689 $ 8,983
======== ========
</TABLE>
7. BANK LINE OF CREDIT AND LONG-TERM DEBT
Bank Line of Credit
The Company had a $15,000,000 revolving credit facility bearing
interest at the bank's prime rate plus 1%. The line of credit
agreement was secured by substantially all of the Company's assets.
Under the credit agreement, the Company was required to meet certain
financial covenants involving capital spending levels and debt ratio
and could not
28
<PAGE> 30
COMPRESSION LABS, INCORPORATED
Notes to Consolidated Financial Statements -- (Continued)
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. In June 1996, this
credit facility was terminated.
In June 1996, the Company obtained a $15,000,000 revolving
credit facility with a bank that bears interest at the highest London
Interbank Offered Rate (LIBOR), which was 5.44% for February 1997,
plus 4.81%, which expires on June 30, 1997. The line of credit
agreement is secured by substantially all of the Company's assets.
Under the credit agreement, the Company may not declare or make any
cash or stock dividends. The bank, however, gave its consent to the
Company to enter into a financing agreement to sell preferred
stock that provides for cumulative dividends. (See Note 9.) At
December 31, 1996, the balance outstanding under this line of
credit was $10,804,000.
Term Loans
In 1995, the Company entered into long-term agreements for
$2,172,000 bearing interest at rates from 10.76% to 11.48% over
thirty-six and forty-eight months. At December 31, 1995, the balances
outstanding under these loans were $1,597,000. These loans, which were
secured by specific capital assets, were paid off in conjunction with
the sale of discontinued operations. (See Note 2.)
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.
Approximate future minimum lease payments under these leases at
December 31, 1996 are as follows (in thousands):
<TABLE>
<CAPTION>
Operating
Year Leases
---- --------
<S> <C>
1997 $ 2,011
1998 2,020
1999 1,841
2000 1,635
2001 1,574
Thereafter 104
--------
$ 9,185
========
</TABLE>
Total operating lease expense was approximately $2,760,000 in
1994, $3,364,000 in 1995 and $3,274,000 in 1996. Accumulated
depreciation of equipment under capital leases was $1,489,000 and $0
at December 31, 1995 and 1996, respectively. Depreciation expense on
equipment under capital leases was $693,000 in 1994, $739,000 in 1995
and $234,000 in 1996.
Contingencies
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 could
assert that the Company is infringing the patents in suit, or whether
Datapoint's patents are invalid in light of the prior art. On April
24, 1996, a Special Master submitted a report which rejected some of
the positions taken by CLI in the motion.
The Court on September 16, 1996, adopted the report of the
Special Master that the claims of the patents in suit be construed in
a manner favorable to the plaintiff, and a trial date of February 3,
1997, has been scheduled. The parties at the request of the Court
filed status reports indicating that additional time will be required
to prepare for trial. On October 7, 1996, the Company filed motions to
certify for appeal to the Federal Circuit on the issue of claim
construction and to stay discovery, which were denied on December 3,
1996. On December 20, 1996, the parties filed an Agreed Motion for
Continuance requesting that the Court reset the case for trial. On
December 23, 1996, the Court granted the motion and reset the case for
trial on June 16, 1997. The parties have engaged in settlement
discussions although, as discussed below, such discussions have led to
further litigation.
29
<PAGE> 31
COMPRESSION LABS, INCORPORATED
Notes to Consolidated Financial Statements -- (Continued)
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 should not have a material adverse impact on
the Company's consolidated financial position or results of
operations.
On January 22, 1997, Datapoint initiated a lawsuit against
VTEL and CLI in the Supreme Court for the County of New York alleging,
among other things, that on December 30, 1996 CLI agreed to settle
Datapoint's patent infringement action pending against CLI in the
United States District Court for the Northern District of Texas in
exchange for a payment and a license of Datapoint patented technology
to CLI. Although no settlement agreement or license agreement was
entered into and CLI denies it ever agreed to settle the pending
patent infringement action, Datapoint maintains it reasonably expected
that a settlement agreement and license agreement would be entered
into with CLI and maintains that VTEL has willfully and intentionally
interfered and prevented Datapoint from obtaining the settlement and
license that Datapoint sought. Datapoint also asserts that VTEL's
actions amounted to a prima facie tort. Datapoint seeks from VTEL an
amount equal to the benefit that it would have received from CLI under
the alleged settlement agreement and license agreement, as well as
punitive damages of at least $3 million.
Datapoint also has asserted in the New York lawsuit a cause of
action against CLI for fraud based on allegations that it was deceived
by misrepresentations made by CLI in connection with the alleged
settlement and license negotiations. Specifically, Datapoint maintains
that it would not have agreed to the terms of the alleged license
agreement covering its patented technology had it known of the Merger
since VTEL's license from Datapoint of the same technology would
preclude Datapoint from obtaining future royalties from CLI on sales
of products that allegedly infringed Datapoint's patent. Datapoint
seeks unspecified money damages from CLI based on the alleged fraud
and additional punitive damages of $3 million.
CLI maintains that it never agreed to settle the pending
infringement action, and therefore there was not any agreement.
Because no agreements were ever entered into, VTEL maintains that it
cannot be liable for allegedly interfering with a non-existent
agreement, or in any case agreements whose existence were unknown to
VTEL. Because no agreements were ever entered into, CLI maintains that
it cannot be liable for defrauding Datapoint in entering into a
non-existent license agreement. VTEL and CLI have removed the action
to the United States District Court for the South District of New York
and intend to vigorously defend the claims. Datapoint has filed a
motion to remand the lawsuit to the New York State Supreme Court.
In the normal course of business, CLI receives and makes
inquiries with regard to other possible patent infringement. Where
deemed advisable, CLI 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 CLI's consolidated financial position or
results of operations.
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance
of 4,000,000 shares of undesignated preferred stock at $.001 par
value. On February 1, 1993, Thomson Consumer Electronics S.A. (TCE)
purchased 14,900 shares of redeemable Series B convertible preferred
stock, par value $.001 for $1,000 per share. The Company received
$13,758,000 net of commissions and issuance costs. Each Series B
convertible preferred share was convertible into 96.3 shares, or a
total of 1,434,900 shares, of the common stock of the Company at
$10.384 per share, and carried equivalent voting rights to common
stock on an "as if converted" basis. In 1994 TCE converted 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. There were no outstanding shares at December 31, 1995
or 1996.
On October 24, 1996, the Company entered into a purchase
agreement (the Agreement) with an institutional investor for the
private placement of up to 1 million shares of the Company's
convertible preferred stock, $.001 par value, at $20 per share stated
value, and warrants to purchase up to 450,000 shares of the Company's
common stock. The Company is required to register for resale the
common stock underlying the preferred stock and warrants subject to
the Agreement.
Pursuant to the Agreement, the preferred stock is issuable in
three installments at the Company's option through approximately
December 31, 1997, with each installment being between 180 to 210 days
apart. The preferred stock is non-voting and senior to other
securities in right of payment of the $20 stated value per share and
related unpaid dividends. The dividends are cumulative, accrue at 4%
per year on the stated value, without interest, and payable quarterly
in cash (at the option of the Company) or shares of common stock. Each
preferred share is also convertible
30
<PAGE> 32
COMPRESSION LABS, INCORPORATED
Notes to Consolidated Financial Statements -- (Continued)
into shares of common stock at a ratio equal to the stated value plus
unpaid dividends divided by the conversion price, as defined. The
conversion price, among other things, is dependent on the average
market price, as defined, of the common stock on the preferred stock
issue date and the date the conversion option is exercised. The
preferred shares become convertible at the option of the holder the
earlier of (1) 90 days after the original issue date of the preferred
shares or (2) the effective date of the registration statement
required by the Agreement. Once the registration statement becomes
effective, the preferred shares are convertible at the option of the
Company one year after the original issue date of the preferred
shares.
The convertible preferred stock is redeemable after October 25,
1996, in whole or in part, at the option of the Company at varying
redemption prices ranging from 115% to 125% of the average per share
common stock market value for the five trading days immediately
preceding the date of the redemption notice. In the event that at any
time prior to October 25, 1999, the trading in the shares of common
stock is suspended on the NASDAQ National Market, the convertible
preferred stock is redeemable at the option of the purchaser.
The Agreement also provides for the issuance of warrants to
purchase 375,000 shares of common stock under the first installment
and 75,000 shares of common stock if issued under the second
installment. Warrants issued under the first installment are
exercisable at any time and expire after five years, with those issued
under the second installment expiring after four years. The exercise
price for the warrants is dependent upon a percentage of the average
market price within five days of the issue date.
On October 25, 1996, the Company completed an initial
placement of 350,000 shares of Class C Preferred Stock and received
approximately $7.0 million before certain issuance costs, pursuant to
the Agreement. The conversion price of Class C Preferred Stock is the
lower of $4.225 per share or 80% of the average per share market value
for the five days preceding the conversion date. The warrants to
purchase 375,000 shares of common stock expire in October 2001 and are
exercisable at $5.70 per share. In addition, it is a condition to
future issuances of preferred stock to the purchasers of CLI Class C
Preferred Stock that Mr. Trimm, the current President and Chief
Executive Officer of CLI, remain in such positions.
10. STOCKHOLDERS' EQUITY
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 (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.
Stock Option Plans and Stock Purchase Plan
Under the Company's stock option plans, options to purchase
shares of common stock may be granted to employees, directors and
consultants at not less than the fair market value at the date of
grant, as determined by the Board of Directors, in the case of
Incentive Stock Options (ISOs) as defined by the Internal Revenue Code
of 1986, as amended, and at not less than 85% of fair market value at
the date of grant in the case of options other than ISOs. Options
typically vest at six-month intervals over a period of four years and
expire after ten years. In the event of employee termination, the
Company has the right to cancel any vested options not exercised
within 90 days of the termination date. Canceled options are returned
to the option plans and are available for future grants.
In November 1994, the Company agreed to exchange outstanding
options to purchase the Company's common stock held by non-officer
employees for an equal number of options with an exercise price of
$7.63, the then-current fair market value of the Company's common
stock. In return, participating employees who chose to exchange their
options agreed to vesting schedules for the new options which were
delayed compared to vesting schedules for the original options.
Options covering a total of 671,727 shares were exchanged under this
program. The effect of such 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 canceled. No officer of the Company was allowed
to participate in this exchange.
At December 31, 1996, the Company had 4,423,721 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 and 1996, outstanding options to purchase the Company's common
stock had a weighted average exercise price of $8.73 and $8.00,
respectively, and 496,240 and 621,862 shares, respectively,
31
<PAGE> 33
COMPRESSION LABS, INCORPORATED
Notes to Consolidated Financial Statements -- (Continued)
were available for future grant under all options and purchase plans.
At December 31, 1994, 1995 and 1996, outstanding options under the
employee stock option plans were exercisable for 2,048,341, 2,277,507
and 1,874,360 shares at a weighted-average exercise price of $9.88,
$9.71 and $9.55 per share, respectively.
Options under the employee option plans have been granted,
exercised and canceled as follows:
<TABLE>
<CAPTION>
Number of Shares Option Price per Share Weighted Average Price
---------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1993 3,329,834 $2.88 to $27.13 $11.25
Granted in 1994 1,378,562 * $6.50 to $13.38 9.24
Exercised in 1994 (163,456) $2.88 to $11.25 7.57
Canceled in 1994 (970,582)* $6.50 to $27.13 14.01
---------- ------------------ ------
Outstanding at December 31, 1994 3,574,358 $2.88 to $20.50 9.90
Granted in 1995 1,098,510 $7.19 to $10.25 8.13
Exercised in 1995 (138,357) $2.88 to $ 9.00 3.94
Canceled in 1995 (840,058) $5.38 to $19.63 11.15
---------- ------------------ ------
Outstanding at December 31, 1995 3,694,453 $2.88 to $20.50 9.31
Granted in 1996 1,629,280 $4.06 to $ 8.13 5.38
Exercised in 1996 (293,275) $2.88 to $ 7.63 3.74
Canceled in 1996 (1,229,724) $2.88 to $20.50 9.91
---------- ------------------ ------
Outstanding at December 31, 1996 3,800,734 $2.88 to $20.00 $ 7.86
========== ================== ======
</TABLE>
* Includes 671,727 shares exchanged under the above-mentioned program.
As discussed in Note 1, the Company continues to account for
its stock-based compensation plans using the intrinsic value method in
accordance with APB No. 25, Accounting for Stock Issued to Employees
and its related interpretations. Compensation expense has been
recognized in the consolidated financial statements for employee stock
arrangements when the fair market value of the stock exceeds the
exercise price at the date of grant.
SFAS No. 123, Accounting for Stock-Based Compensation, requires
the disclosure of pro forma net income and earnings per share had the
Company adopted the fair value method as of the beginning of fiscal
1995. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradable, fully transferable options without vesting restrictions,
which significantly differ from the Company's stock option awards.
These models also require subjective assumptions, including future
stock price volatility and expected time to exercise, which greatly
affect the calculated values. The Company's calculations were made
using the Black-Scholes option pricing model with the following
weighted-average assumptions: expected life, 5 years; stock volatility,
45.3% in 1995 and 1996; risk free interest rates, 6.0% in 1995 and
6.12% in 1996; and no dividends during the expected term. The Company's
calculations are based on a single option valuation approach, and
forfeitures are recognized as they occur. If the computed fair values
of the 1996 awards had been amortized to expense over the vesting
period of the awards, pro forma net loss would have been $58,549,000
($3.83 per share) in 1995 and $22,283,000 ($1.42 per share, not
including impact of deemed paid dividend of $0.16 per share discussued
in Note 1 ) in 1996. However, the impact of outstanding nonvested stock
options granted prior to 1995 has been excluded from the pro forma
calculation; accordingly, the 1995 and 1996 pro forma adjustments are
not indicative of future period pro forma adjustments, when the
calculation will apply to all applicable stock options.
The following table summarizes information about stock options
outstanding at December 31, 1996:
32
<PAGE> 34
COMPRESSION LABS, INCORPORATED
Notes to Consolidated Financial Statements -- (Continued)
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------------- -----------------------------
Weighted
Average Weighted Weighted
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise Prices as of 12/31/96 Life Price as of 12/31/96 Price
------------------ -------------- ----------- --------- -------------- --------
<S> <C> <C> <C> <C> <C>
$ 2.88 to $4.06 102,979 3.97 $ 3.44 71,179 $ 3.16
$ 5.00 to $5.00 575,530 9.54 $ 5.00 26,369 $ 5.00
$ 5.11 to $5.11 400,863 9.43 $ 5.11 50,501 $ 5.11
$ 5.38 to $5.88 458,374 7.63 $ 5.72 144,132 $ 5.45
$ 6.00 to $7.25 416,822 8.25 $ 7.00 186,354 $ 7.07
$ 7.31 to $7.63 426,090 6.79 $ 7.51 227,737 $ 7.56
$ 7.75 to $9.00 474,082 6.84 $ 8.34 379,431 $ 8.35
$ 9.06 to 11.25 554,844 5.44 $ 10.56 435,505 $ 10.87
$ 11.50 to 19.63 341,150 6.68 $ 14.82 304,152 $ 14.99
$ 20.00 to 20.00 50,000 4.69 $ 20.00 50,000 $ 20.00
---------------- ---------- ----- ------- ---------- -------
$ 2.88 to 20.00 3,800,734 7.44 $ 7.86 1,874,360 $ 9.55
</TABLE>
Under the Director's Stock Option Plan, options to purchase
common stock have been granted. At December 31, 1994, 1995 and 1996,
options to purchase 90,000, 106,000 and 149,000 were outstanding,
respectively, at a weighted average exercise price of $13.75, $13.15
and $11.70 per share, respectively. Options to purchase 30,000 shares
(at $12.63 per share), 16,000 shares (at $9.75 per share) and 43,000
shares (at $8.13 per share) of common stock were granted during 1994,
1995 and 1996, respectively. At December 31, 1994, 1995 and 1996,
45,000, 72,668 and 121,000 options were exercisable at a weighted
average exercise price per share of $15.31, $14.16 and $12.23,
respectively. In accordance with SFAS 123, the options granted in 1995
and 1996 have been valued at an average of $3.92 and $2.61 per share,
respectively.
Through the Company's 1984 Employee Stock Purchase Plan,
eligible employees of the Company may purchase common stock at 85% of
the fair market value of the stock at the beginning or end of each
offering period (calendar quarter), whichever is lower. Each
participant may contribute up to 15% of total compensation toward
purchase of shares. Shares have been issued under the plan as follows:
<TABLE>
<CAPTION>
Year Number of Shares Price per Share Average Price per Share
---- ---------------- --------------- -----------------------
<S> <C> <C> <C>
1994 99,588 $6.80 to $10.09 $8.47
1995 99,547 $5.31 to $ 8.29 $6.80
1996 74,822 $4.30 to $ 5.63 $4.87
</TABLE>
Under SFAS 123, compensation cost is recognized for the fair
value of the employee's purchase rights, which are estimated using the
Black-Scholes model with the following assumptions for 1995 and 1996,
respectively: an expected life of three months for both years,
expected volatility of 45.3% and 45.3%, risk-free interest rates of
6.0% and 6.12%, and no dividends during the expected term. The
weighted-average fair value of those purchase rights granted in 1995
and 1996 was $2.08 and $1.44, respectively.
Warrants
In 1989 and 1992, the Company issued warrants to purchase a
total of 890,000 shares of the Company's common stock at $7.50 per
share to PaineWebber R&D Partner II, L.P. as part of a research and
development contract. At December 31, 1994, 1995 and 1996 warrants for
584,607 shares, 551,940 shares and 0 shares, respectively, were
outstanding and exercisable under these warrants. On October 25, 1996,
the Company also issued warrants to purchase 375,000 of common stock
pursuant to the initial placement of 350,000 shares of Class C
preferred stock. (See Note 9.)
11. REVENUE
International revenue, principally from customers located in
East Asia, Australia and Western Europe, was approximately $21,159,000
or 18%, $24,331,000 or 22% and $18,744,000 or 21% of revenues in 1994,
1995 and 1996, respectively. No single customer accounted for greater
than 10% of revenues in 1994, 1995 or 1996.
12. INCOME TAXES
As of December 31, 1996, the Company had net operating loss
carryforwards for federal income tax purposes of approximately
$89 million, of which $23 million 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
33
<PAGE> 35
COMPRESSION LABS, INCORPORATED
Notes to Consolidated Financial Statements -- (Continued)
realized. As of December 31, 1996, the Company had a federal general
business credit carryforward of approximately $2 million. The federal
net operating loss and tax credit carryforwards expire primarily in
the years 1999 through 2011. The Company had a California net
operating loss carryforward of approximately $20 million expiring
primarily in 2001.
The tax effects of temporary differences that give rise to
significant portions of deferred tax assets and liabilities are as
follows (in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------
1995 1996
-------- -------
<S> <C> <C>
Deferred tax assets:
Accounts receivable, principally due to the allowance for
doubtful accounts $ 4,466 $ 4,050
Inventories, principally due to the allowance for obsolete
inventories and additional costs inventoried for tax purposes 4,672 2,550
Property and equipment, principally due to differences
in depreciation 6,683 4,500
Capitalized research and development expenses 3,394 2,850
Accrued expenses, not currently deductible 9,423 2,550
Deferred revenue 738 2,550
Tax credit carryforwards 2,291 2,000
Net operating loss carryforwards 15,959 33,000
-------- --------
47,626 54,050
Less: valuation allowance (44,441) (52,600)
-------- --------
Net deferred tax assets 3,185 1,450
-------- --------
Deferred tax liabilities:
Capitalized software (1,279) (1,450)
Long-term contract revenue (1,906) -
-------- --------
(3,185) (1,450)
-------- --------
Net deferred tax asset (liability) $ - $ -
======== ========
</TABLE>
The valuation allowance for deferred tax assets as of December
31, 1996 was $52,600,000. 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. The Plan and
Reorganization described in Note 15 would likely result in an ownership
change. The Company has not determined the effect of the ownership
change on its tax loss and credit carryforwards.
Federal and California 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.
13. SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The Company paid no federal income taxes during the years
ended December 31, 1994, 1995 or 1996. Interest payments were
$798,000, $1,142,000 and $973,000 for the years ended December 31,
1994, 1995 and 1996, respectively. The Company purchased property and
equipment through capital lease obligations totaling $0, $147,000 and
$0 for the years ended December 31, 1994, 1995 and 1996, respectively.
In 1994, additional paid-in capital increased $13,758,000 from
the conversion of 14,900 shares of Series B convertible preferred
stock into 1,434,900 shares of the Company's common stock.
(See Note 9.)
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<PAGE> 36
COMPRESSION LABS, INCORPORATED
Notes to Consolidated Financial Statements -- (Continued)
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
--------- --------- --------- ---------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C>
1996
- ----
Revenues $ 20,021 $ 25,014 $ 20,577 $ 22,270
Cost of revenues 11,107 14,171 10,955 13,655
--------- --------- --------- --------
Gross margin 8,914 10,843 9,622 8,615
Total operating expenses 14,907 10,378 10,973 14,455
--------- --------- --------- --------
Net income (loss) from operations (5,993) 465 (1,351) (5,840)
Interest, net (212) (190) (259) (291)
--------- --------- --------- --------
Net income (loss) from continuing operations (6,205) 275 (1,610) (6,131)
Discontinued operations
Loss on disposal - - - (6,689)
--------- --------- --------- --------
Net loss from discontinued operations - - - (6,689)
--------- --------- --------- --------
Net income (loss) $ (6,205) $ 275 $ (1,610) $(12,820)
========= ========= ========= ========
Net income (loss) per share
Net income (loss) from continuing operations $ (0.40) $ 0.02 $ (0.10) $ (0.55)
Net loss from discontinued operations - - - (0.42)
--------- --------- --------- --------
Net income (loss) per share $ (0.40) $ 0.02 $ (0.10) $ (0.97)
========= ========= ========= ========
Weighted average common shares and common
share equivalents outstanding 15,526 15,806 15,774 15,865
========= ========= ========= ========
1995
- ----
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)
Total operating expenses 12,746 12,242 12,042 16,602
--------- --------- --------- --------
Net income (loss) from operations (2,418) (482) 107 (17,219)
Interest, net expense (209) (337) (216) (266)
--------- --------- --------- --------
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 loss from discontinued operations 535 921 (82) (37,916)
--------- --------- --------- --------
Net income (loss) $ (2,092) $ 102 $ (191) $(55,401)
========= ========= ========= ========
Net income (loss) per share
Net income (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>
35
<PAGE> 37
COMPRESSION LABS INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Concluded)
15. SUBSEQUENT EVENT
On January 6, 1997, the Company entered into an Agreement and
Plan of Merger and Reorganization (Merger) with VTEL Corporation
(VTEL), a designer, manufacturer and marketer of multi-media
conferencing systems, and VTEL-Sub, Inc. (Merger Sub), a wholly owned
subsidiary of VTEL organized solely for the purpose of facilitating the
Merger. Upon consummation of the Merger and the transactions associated
therewith, Merger Sub will merge with the Company, and the Company will
continue as the surviving company and a wholly owned subsidiary of
VTEL. In the Merger, each share of the Company's common stock shall be
converted into the right to receive .46 of one fully paid and
nonassessable share of VTEL common stock, par value $.01 per share
(VTEL common stock). Each share of the Company's Series C preferred
stock shall be converted into the right to receive 3.15 fully paid and
nonassessable shares of VTEL common stock. Furthermore, the right to
additional funding under the preferred stock Agreement will terminate
upon consummation of the Merger with VTEL.
In the Merger, each option to purchase the Company's common
stock shall be converted into the right to purchase .46 shares of VTEL
common stock at a price equal to the original option price divided by
.46. The Merger also provides that each outstanding warrant to
purchase the Company's common stock will become a warrant to purchase
VTEL common stock on the same terms as set forth in the original
warrant and for that number of VTEL common shares as the holder would
have been entitled to receive had the holder exercised the original
warrant immediately prior to the Effective Time of the Merger.
The Merger is subject to the separate majority approval by the
stockholders of the Company and VTEL and certain other conditions,
including the receipt of opinions that the Merger may be accounted for
as a pooling of interest and qualify as a tax-free exchange. Under
certain conditions, if the Merger is terminated at any time prior to
its consummation, the Company is to pay VTEL a termination fee of $3.5
million plus expenses incurred by VTEL pursuant to the Merger.
As a requirement of VTEL to enter into the Merger, the Company
and VTEL entered into a Stock Option Agreement, dated January 6, 1997,
pursuant to which the Company granted VTEL an option to purchase
3,120,500 common shares of the Company at a price of $4.6575 per share
(the Option). VTEL may exercise the Option only upon the occurrence of
certain events described therein. At the request of the holder of the
Option, under certain circumstances, the Company will repurchase,
pursuant to a formula price set out in the Stock Option Agreement, the
Option and any common shares of the Company purchased upon the
exercise of the Option.
36
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
During 1995 and 1996 the Company neither changed its accountants
nor reported a disagreement on any matters of accounting principles or
practices or financial statement disclosure.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The officers and directors of the Company and their ages as of
March 14, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE PRESENT POSITION WITH CLI
---- --- -------------------------
<S> <C> <C>
T. Gary Trimm 49 President, Chief Executive Officer, Principal
Financial Officer and Director
Dr. Wen H. Chen 58 Executive Vice President, Research and
Development and Chief Scientist
Ted S. Augustine 56 Executive Vice President and General Manager
Dr. Arthur G. Anderson (1) (2) 70 Director, Chairman of the Board
Robert J. Casale (1) (2) 60 Director
Robert B. Liepold (1) (2) 71 Director
David A. Wegmann (1) (2) 50 Director
</TABLE>
_____________
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
Mr. Trimm has been President, Chief Executive Officer and a member of
the Board of Directors since February 1996 and Principal Financial Officer
since April 1996. From February 1995 to February 1996, he was Senior Vice
President and President, Broadcast Products Group of CLI. From March 1994 to
February 1995, he was President of the North American Division of
Scientific-Atlanta, Inc. ("S-A"), which supplies advanced analog and digital
video systems to the cable and telephone industry. From January 1990 To March
1994, he held the position of President of the Subscriber Systems Division at
S-A, where he had general management responsibility for S-A's analog and
digital settop business. From April 1988 to March 1990, Mr. Trimm held other
senior management positions at S-A, including President of the Spectral
Dynamics Division.
Dr. Chen has been Executive Vice President, Research and Development,
and Chief Scientist since October 1996. He served as Senior Vice President,
Research and Chief Scientist of CLI from September 1989 until October 1996.
Mr. Augustine has been Executive Vice President and General Manager
since January 1997. He served as Vice President, Sales and Marketing from
October 1996 through January 1997, and has served as Vice President, Worldwide
Sales, Videoconferencing Products of CLI from December 1993 until October 1996.
From January 1987 to December 1993 he was Vice President, North American Sales,
Videoconferencing Products.
Dr. Anderson has served as a member of the Board of Directors of CLI
since August 1984 and is currently serving as Chairman of the Board. He is a
consultant on science and engineering management and a member of the National
Academy of Engineering. Dr. Anderson held various positions with International
Business Machines Corporation ("IBM") from 1951 to June 1984, including
Director of Research, General Products Division President, Group Executive and
Vice President. He retired from IBM in June 1984.
Mr. Casale has served as a member of the Board of Directors of CLI
since October 1986. He is currently Group President of the Brokerage
Information Services Group of Automatic Data Processing, Inc., a provider of
computer and data
37
<PAGE> 39
processing services. From 1986 to 1987 he served as a Managing Director for the
Mergers and Acquisitions Division of Kidder Peabody & Co., Incorporated, a
securities brokerage and investment banking firm. Mr. Casale is also a director
of Provident Mutual Life Insurance Co. and Quantum Corporation.
Mr. Liepold has served as a member of the Board of Directors of CLI
since May 1988. Since 1984, he has served as President of Robert B. Liepold,
Inc., an advisor to senior corporate management for strategic planning,
marketing and organization. He has served as President of KCWB, a television
station in Kansas City, Missouri, since 1996.
Mr. Wegmann has served as a member of the Board of Directors of CLI
since May 1981. He has been a private investor since 1988. Mr. Wegmann is also
a director of MMI Medical, Inc., Innoserve Technologies, Inc. and Plantronics.
ITEM 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
CLI pays each non-employee director (a person that is elected as a
director of CLI or an affiliate of CLI and who is not otherwise employed by CLI
or an affiliate of CLI) fees consisting of $5,000 annually plus $750 for each
Board of Directors meeting and for each Audit, Executive and Compensation
Committee meeting attended. Non-employee directors are also eligible for
reimbursement in accordance with Company policy for their expenses incurred in
connection with attending meetings of the Board of Directors and the Audit,
Executive and Compensation Committee.
Each non-employee director is also entitled to receive annual
non-discretionary annual stock options grants under CLI's 1992 Non-Employee
Directors' Stock Option Plan (Directors' Plan). Only non-employee directors of
CLI or an affiliate of CLI (as defined in the Code) are eligible to receive
options under the Directors' Plan. Options granted under the Directors' Plan
are intended by CLI not to qualify as incentive stock options under the Code.
38
<PAGE> 40
COMPENSATION OF EXECUTIVE OFFICERS
The following table shows for the fiscal years ended December 31, 1996,
1995 and 1994, compensation paid by CLI, including salary, bonuses, stock
options, and certain other compensation, to its current Chief Executive Officer
and each of its four other most highly compensated executive officers at
December 31, 1996, including two former officers and one former chief executive
officer (the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-term
Compensation
Annual Compensation Awards (2)
----------------------------- -------------
Securities
Bonus and Underlying All Other
Salary Commissions (1) Options/SARs Compensation (3)
Name and Principal Position Year ($) ($) (#) ($)
------------------------------------- ------ --------- ----------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
T. Gary Trimm 1996 250,000 100,000 250,000 -
President, Chief Executive Officer 1995 201,924 150,000 250,000 -
Principal Financial Officer 1994 - - - -
and Director (4)
Dr. Wen H. Chen 1996 197,370 - 40,000 -
Senior Vice President, Engineering, 1995 197,370 - 10,000 7,591
Research and Chief Scientist 1994 198,775 - 15,000 11,387
Ted S. Augustine 1996 172,000 - 40,000 -
Executive Vice President and 1995 156,000 29,796 7,000 12,000
General Manager 1994 156,767 14,016 7,500 -
Larry L. Enterline 1996 108,654 100,000 225,000 177,688
Executive Vice President (5) 1995 - - - -
1994 - - - -
Anthony Pilarinos 1996 180,831 - 15,000 20,769
Former Vice President of Operations 1995 183,600 - 15,000 -
1994 179,835 15,000 - -
Paul P. Romeo 1996 145,000 - 27,500 -
Former Vice President of Operations 1995 130,861 - 10,000 -
1994 125,000 - 7,500 -
Michael E. Selfert 1996 121,885 - 50,000 -
Vice President and Chief Accounting 1995 112,500 - 7,750 -
Officer 1994 106,000 - 12,700 -
John E. Tyson 1996 39,425 - 247,448
Former President, Chief Executive 1995 280,000 - 50,000 30,962
Officer and Chairman of the Board (6) 1994 244,500 - 40,000 95,442
</TABLE>
__________________________
(1) Amounts shown for 1996 consist of bonuses of $100,000 each to Messrs.
Trimm and Enterline. Amounts shown for 1995 consist of a bonus to Mr.
Trimm of $150,000 and commission to Mr. Augustine of $29,796. Amounts
shown for 1994 consist of a commission to Mr. Augustine of $14,016 and
a bonus to Mr. Pilarinos of $15,000.
(2) CLI has no stock appreciation rights (SARs).
(3) Amounts shown for 1996 consist of payments of $177,688 to Mr. Enterline as
a management consultant prior to his joining CLI in July 1996 as Executive
Vice President, payments of $247,448 to Mr. Tyson as a consultant
subsequent to his resignation as President, Chief Executive Officer and
Chairman of the Board in February 1996, and payment to Mr. Pilarinos of
$20,769 in lieu of accrued and unused paid time off.
(4) Mr. Trimm joined CLI in February 1995 as President, Broadcast Products.
Since February 1996, Mr. Trimm has been President, Chief Executive
Officer and a member of the Board of Directors.
39
<PAGE> 41
(5) Mr. Enterline joined CLI in July 1996 as Executive Vice President. From
January 1996 to July 1996, Mr. Enterline was a management consultant to
CLI. Mr. Enterline voluntarily resigned in January 1997. As part of his
employment agreement, Mr. Enterline is entitled to receive from the date
of his resignation his base salary for a period of 52 weeks as long as he
does not enter into an activity in competition with CLI or solicit CLI's
employees.
(6) Mr. Tyson resigned as President, Chief Executive Officer and Chairman of
the Board in February 1996. Mr. Tyson has currently entered into a
consulting relationship with CLI, at a rate that approximates Mr. Tyson's
1995 base annual salary, that will continue through February 1998. As
part of the separation and consulting agreement, Mr. Tyson's stock
options continued to vest during the consulting period and became fully
vested in August 1996. In addition, CLI has agreed to permit Mr. Tyson to
exercise his stock options, except for certain stock options granted in
1988 and 1989, no later than the end of their full ten-year term, or
March 1, 2001, whichever occurs first.
EMPLOYMENT CONTRACTS
In July 1996, CLI entered into employment agreements with each of T.
Gary Trimm, President and Chief Executive Officer of CLI, and Larry L.
Enterline, Executive Vice President of CLI (collectively, the "Executives").
The employment agreements between CLI and each of the Executives provide for an
annual salary to each of the Executives of $250,000 and an annual bonus. In
addition CLI's employment agreement with Mr. Trimm provided for the grant of an
option to purchase 170,000 shares of Common Stock. CLI's employment agreement
with Mr. Enterline provided for the grant of an option to purchase 150,000
shares of Common Stock and provided that an option to purchase 75,000 shares of
Common Stock previously granted by the Board to Mr. Enterline, become effective
at an exercise price equal to the market price of the Common Stock as of the
date of Mr. Enterline's employment agreement.
If CLI terminates the employment of either of the Executives without
"Cause" (as defined in the employment agreements), or if either of the
Executives voluntarily terminates his employment with "Good Reason" (as defined
in the employment agreements), CLI shall continue to pay such Executive his
base salary for a period of 52 weeks (the "Severance Period"). CLI shall
discontinue such payments if such Executive enters into an activity in
competition with CLI or solicits CLI's employees. Following the Severance
Period, such Executive shall serve as a consultant to CLI for a period of up to
three (3) years. During such consulting period, CLI will pay such Executive a
monthly fee equal to the greater of $500 or $125 per hour of consulting
services performed during such month, and any options to purchase Common Stock
held by such Executive will continue to vest.
STOCK OPTION PLANS
Stock Option Plan and Supplemental Stock Option. In March 1996, the
Board amended the Combined 1980 Stock Plan and 1984 Supplemental Stock Option
Plan (the "Option Plans") and reserved 8,000,000 shares for issuance under the
Option Plans and the 1984 Employee Stock Purchase Plan. The Option Plans
provide for grants of incentive stock options to employees (including officers
and employee directors) and nonstatutory stock options, to employees (including
officers), directors and consultants of CLI. The Option Plans are administered
by the Compensation Committee, which determines recipients and types of awards
to be granted, including the exercise price, number of shares subject to the
award and the exercisability thereof. The Board may not grant options to
purchase more than 400,000 shares per calendar year to an individual employee,
consultant or director.
The term of a stock option granted under the Option Plans generally
may not exceed 10 years. The exercise price of options granted under the Option
Plans is determined by the Board of Directors but, in the case of an incentive
stock option, cannot be less than 100% of the fair market value of the Common
Stock on the date of grant or, in the case of 10% stockholders, not less than
110% of the fair market value of the Common Stock on the date of grant, and in
the case of a nonqualified stock option, cannot be less than 85% of the fair
market value of the Common Stock on the date of grant. Options granted under
the Option Plans to new employees and consultants generally will vest at the
rate of 1/4 of the shares subject to option on the first anniversary of the
date of hire and 1/48th of such shares monthly thereafter. No option may be
transferred by the optionee other than by will or the laws of descent or
distribution or, in certain limited instances, pursuant to a qualified domestic
relations order. An optionee whose relationship with CLI or any related
corporation ceases for any reason (other than by death or disability) may
exercise options in the three-month period following such cessation (unless
40
<PAGE> 42
such options terminate or expire sooner by their terms) or in such longer
period as may be determined by the Board of Directors.
Shares subject to options which have lapsed or terminated may again be
subject to options granted under the Option Plans. Furthermore, the Board of
Directors may offer to exchange new options for existing options, with the
shares subject to the existing options again becoming available for grant under
the Option Plans. In the event of a decline in the value of CLI's Common Stock,
the Board of Directors has the authority to offer optionees the opportunity to
replace outstanding higher price options with new lower priced options.
In the event of merger or consolidation involving CLI in which CLI is
not the surviving corporation, reverse merger, or liquidation or sale of
substantially all of the assets of CLI, all outstanding awards under the Option
Plans shall either be assumed or substituted by the surviving entity or such
awards will continue in full force and effect. If the surviving entity
determines not to assume or substitute such awards, the time during which such
awards may be exercised shall be accelerated and the awards terminated if not
exercised prior to the merger or consolidation.
As of December 31, 1996, there were 3,800,734 outstanding options under
the Option Plans. The Option Plans will terminate in 1999, unless terminated
sooner by the Board of Directors. See Note 10 of Notes to Consolidated Financial
Statements.
Employee Stock Purchase Plan. In March 1996, the Board amended the
1984 Employee Stock Purchase Plan (the "Purchase Plan") to increase the number
of shares of Common Stock reserved under the Purchase Plan to 8,000,000 shares
of Common Stock combined with the Option Plans. The Purchase Plan is intended
to qualify as an employee stock purchase plan within the meaning of Section 423
of the Code. Under the Purchase Plan, the Board of Directors may authorize
participation by eligible employees, including officers, in periodic offerings.
Currently the Board has authorized continuous offerings coinciding with CLI's
fiscal quarters.
Employees are eligible to participate if they are employed by CLI, or
an affiliate of CLI designated by the Board of Directors, for at least 20 hours
per week and are employed by CLI or a subsidiary of CLI designated by the Board
for at least five months per calendar year. However, if an employee would own
more than 5% of CLI's Common Stock after participating in the Purchase Plan,
such employee shall not be eligible for the Purchase Plan. Employees who
participate in an offering can have up to 15% of their earnings withheld
pursuant to the Purchase Plan. The amount withheld will then be used to
purchase shares of the Common Stock on specified dates determined by the Board
of Directors. The price of Common Stock purchased under the Purchase Plan will
be equal to 85% of the lower of the fair market value of the Common Stock on
the commencement date of each offering period or the last day of each offering
period. Employees may end their participation in the offering at any time
during the offering period. Participation ends automatically on termination of
employment with CLI.
In the event of a merger or consolidation involving CLI in which CLI
is not the surviving corporation, reverse merger, or liquidation or sale of
substantially all of the assets of CLI, or certain changes in the beneficial
ownership of CLI's securities representing at least a 50% change of such
ownership, the Board of Directors has discretion to provide that each right to
purchase Common Stock will be assumed or an equivalent right substituted by the
successor corporation; the Board may shorten the offering period and provide
for all sums collected by payroll deductions to be applied to purchase stock
immediately prior to such merger or other transaction.
The Purchase Plan will terminate in December 1999. The Board has the
authority to amend or terminate the Purchase Plan, subject to the limitation
that no such action may adversely affect any outstanding rights to purchase
Common Stock.
1992 Non-Employee Directors' Stock Option Plan. In March 1996, the
Board amended the 1992 Non-Employee Directors' Stock Plan (the "Directors'
Plan") which provides for the automatic grant of options to purchase shares of
Common Stock to non-employee directors of CLI in order to increase the number
of shares reserved under the Directors' Plan to 168,000 shares of CLI's Common
Stock. The Directors' Plan is administered by the Board of Directors, unless
the Board delegates administration to a committee comprised of members of the
Board.
41
<PAGE> 43
Pursuant to the terms of the Directors' Plan, each director of CLI,
not otherwise employed by CLI, automatically will be granted an option to
purchase 6,000 shares of Common Stock upon election as a director. Finally,
each director who continues to serve as a non-employee director will be granted
an additional option to purchase 6,000 shares of Common Stock on each
anniversary of the date of his or her initial grant. The options granted under
the Directors' Plan shall vest in six equal biannual installments commencing on
the date six months after the date of grant of option.
In the event of a merger or consolidation involving CLI in which CLI
is not the surviving corporation, reverse merger, liquidation or sale of
substantially all of the assets of CLI, or certain changes in the beneficial
ownership of CLI's securities representing at least a 50% change of such
ownership, then options outstanding under the Directors' Plan will
automatically become fully vested and will terminate if not exercised or
assumed by any surviving corporation prior to such event.
No option granted under the Directors' Plan may be exercised after the
expiration of ten years from the date it was granted. The exercise price of
options under the Directors' Plan will equal the fair market value of the
Common Stock on the date of grant. The Directors' Plan will terminate March
2002, unless earlier terminated by the Board.
42
<PAGE> 44
STOCK OPTION GRANTS AND EXERCISES
The following tables show for the fiscal year ended December 31, 1996
certain information regarding options granted to, exercised by and held at year
end by the Named Executive Officers:
<TABLE>
<CAPTION>
OPTION GRANTS IN 1996 Potential Realizable
Individualized Grants Value At Assumed Annual
--------------------------------------------------------------- Rates of Stock Price
Number of Appreciation for
Securities % of Total Option Term (3)
Underlying Options to Employees Price Expiration --------------------------
Name Granted (1) in 1996 (2) ($/Share) Date 5% ($) 10% ($)
------------------- ------------------ ------------ --------- ---------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
T. Gary Trimm 80,000 4.9% 5.109 04/16/06 257,042 651,394
T. Gary Trimm 170,000 10.4% 5.000 07/17/06 534,560 1,354,681
Dr. Wen H. Chen 40,000 2.5% 5.875 06/21/06 147,790 374,529
Ted S. Augustine 40,000 2.5% 5.875 06/21/06 147,790 374,529
Larry L. Enterline 25,000 1.5% 5.109 04/16/06 80,326 203,561
Larry L. Enterline 200,000 12.3% 5.000 07/17/06 628,895 1,593,742
Anthony Pilarinos 15,000 1.0% 5.109 04/16/06 48,195 122,136
Paul P. Romeo 7,500 .5% 5.109 04/16/06 24,098 61,068
Paul P. Romeo 20,000 1.2% 5.875 07/17/06 62,889 159,374
Michael E. Seifert 10,000 .6% 5.109 04/16/06 32,130 81,424
Michael E. Seifert 40,000 2.5% 5.875 06/21/06 125,779 318,748
John E. Tyson - - - - - -
- --------------------------
</TABLE>
(1) Options generally vest in equal installments every six months over a
four-year period beginning on the date six months after the date of
grant. The options will fully vest upon a change of control, as defined
in CLI's option plans, unless the acquiring company assumes the options
or substitutes similar options. The Board of Directors may reprice the
options under the terms of CLI's option plans.
(2) Based on total of 1,629,280 options granted to all employees in 1996.
(3) The potential realizable value is calculated based on the term of the
option at its time of grant (10 years). It is calculated by assuming that
the stock price on the date of grant appreciates at the indicated annual
rate, compounded annually for the entire term of the option and that the
option is exercised and sold on the last day of its term for the
appreciated stock price. No gain to the optionee is possible unless the
stock price increases over the option term.
AGGREGATED OPTION EXERCISES IN 1996 AND DECEMBER 31, 1996 OPTION VALUES
<TABLE>
<CAPTION>
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options at Options at
December 31, December 31,
Acquired on 1996 1996 ($)
Exercise Value Exercisable/ Exercisable/
Name (#) Realized ($) (1) Unexercisable Unexercisable (2)
------------------- ------------ ---------------- ------------------ -----------------
<S> <C> <C> <C> <C>
T. Gary Trimm - 0 - - 0 - 145,714/354,286 -0- / -0-
Dr. Wen H. Chen - 0 - - 0 256,438/51,562 1,260/ -0-
Ted S. Augustine - 0 - - 0 - 124,021/50,541 -0- / -0-
Larry L. Enterline - 0 - - 0 - 50,268/324,732 -0- / -0-
Anthony Pilarinos - 0 - - 0 - 50,625/39,375 -0- / -0-
Paul P. Romeo - 0 - - 0 - 96,064/37,686 6,098/ -0-
Michael E. Seifert - 0 - - 0 - 10,606/59,844 -0- / -0-
John E. Tyson 104,000 224,302 260,000/ -0- -0- / -0-
- --------------------------
</TABLE>
(1) Value realized is based on the fair market value of CLI's Common Stock on
the date of exercise minus the exercise price and does not necessarily
indicate that the optionee sold such stock.
(2) Based on the closing price on December 31, 1996 of the Common Stock on
the Nasdaq National Market of $3.8125 per share.
43
<PAGE> 45
(2) Based on the closing price on December 31, 1996 of the Common Stock on the
Nasdaq National Market of $3.8125 per share.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of CLI's class of voting securities as of March 14, 1997 by (i) all
those known by CLI to be beneficial owners of more than 5% of its voting
securities, (ii) all directors, (iii) each of the "Named Executive Officers"
and (iv) all officers and directors of CLI as a group.
<TABLE>
<CAPTION>
Shares Beneficially
Owned (1), (2)
-----------------------------
Name and Address of Beneficial Owner Number Percent
------------------------------------ ---------- ----------
<S> <C> <C>
Infinity Investors Limited (2)
27 Wellington Road
Cork, Ireland 4,282,692 21.2%
Heartland Advisors, Inc.
790 North Milwaukee Street
Milwaukee, WI 53202 1,068,600 6.7%
Thomson Consumer Electronics, S.A.
9, place de Vosges, La Defense 5
Courbevoie, Cedex 66
92050 Paris La Defense, France 883,599 5.6%
Dr. Arthur G. Anderson (3) 121,617 *
Ted S. Augustine (3) 129,574 *
Robert J. Casale (3) 73,167 *
Dr. Wen H. Chen (3) 267,515 1.7%
Larry L. Enterline (3) 78,393 *
Robert B. Liepold (3) 86,667 *
Anthony Pilarinos (3) 50,625 *
Paul P. Romeo (3) 103,128 *
Michael E. Seifert(3) 13,693 *
T. Gary Trimm (3) 205,536 1.3%
John E. Tyson (3) 346,449 2.1%
David A. Wegmann (3) 73,667 *
All executive officers and directors as
a group (15 persons) (3) 1,642,255 9.4%
</TABLE>
* Less than 1%
__________________________
(1) This table is based upon information supplied by officers, directors and
principal stockholders and Schedules 13Gs filed with the Securities and
Exchange Commission (SEC). Unless otherwise indicated in the footnotes to
this table and subject to community property laws where applicable, CLI
believes that each of the stockholders named in this table has sole
voting and investment power with respect to the shares indicated as
beneficially owned. Applicable percentages are based on 15,892,853 shares
of Common Stock outstanding on March 14, 1997.
(2) The number of shares of Common Stock considered beneficially owned by
Infinity upon the assumed conversion of 350,000 shares of Series C
Preferred Stock is based upon a conversion formula using the average
closing bid price of
44
<PAGE> 46
the Common Stock for the 5 trading days immediately preceding March 14,
1997. The number of shares considered beneficially owned also includes
the assumed conversion of warrants to purchase 375,000 shares of Common
Stock.
(3) Includes shares that certain executive officers, directors and former
executive officers of CLI have the right to acquire within 60 days after
March 14, 1997 pursuant to exercise of outstanding options as follows: Ted
S. Augustine, 126,645 shares; Dr. Arthur G. Anderson, 95,667 shares;
Robert J. Casale, 71,667 shares; Dr. Wen H. Chen, 263,000 shares; Robert
B. Liepold, 86,667 shares; Anthony Pilarinos, 50,625; Paul P. Romeo,
100,001 shares; Michael E. Seifert, 13,419 shares; T. Gary Trimm,
205,536 shares; John E. Tyson, 260,000 shares; David A. Wegmann,
71,667 shares; and all executive officers and directors as a group,
1,498,762 shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
45
<PAGE> 47
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:
(a)(1) Financial Statements
The Consolidated Financial Statements, Notes thereto, and Independent
Accountants' Report thereon are included in Part II, Item 8 of this report.
(a)(2) Index to Financial Statement Schedules
The following financial statement schedules of Compression Labs,
Incorporated for each of the years in the three year period ended December 31,
1996 are included pursuant to Item 8:
Page in Form 10-K
-----------------
Independent Auditors' Report on Schedule S-1
Schedule II Valuation and Qualifying Accounts S-2
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 Consolidated Financial Statements or notes thereto.
(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)
4.5 Certificate of Determination of Preferences of Series A Junior
Participating Preferred Stock. (4)
4.6 Registration Rights Agreement dated October 24, 1996 among the
Company, Infinity Investors, Ltd. and Seacrest Capital
Limited. (5)
4.7 Certificate of Designation of Series C Convertible Preferred
Stock.(5)
10.1 1980 Stock Option Plan, as amended (the ISO Plan). (6)
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. (7)
10.3 1984 Employee Stock Purchase Plan, as amended (the 1984
Purchase Plan). (6)
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. (8)
10.5 1984 Supplemental Stock Option Plan, as amended (the
Supplemental Plan). (6)
10.6 Form of Supplemental Stock Option Plan and Early Exercise Stock
Purchase agreement used in connection with the issuance and
exercise of options under the Supplemental Plan. (7)
10.7 Lease Agreement, dated as of January 16, 1987, covering the
Company's principal executive offices and manufacturing
facility. (2)
10.8 Sublease Agreement, dated December 6, 1990, covering the
Company's additional principal executive offices. (9)
10.9 Perquisite Plan. (10)
</TABLE>
46
<PAGE> 48
<TABLE>
<S> <C>
10.10 Amended and Restated 1992 Non-Employee Directors' Stock Option
Plan (the Directors' Plan) and Form of Grant used in connection
therewith. (6)
10.11 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. (11)
10.12 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. (6)
10.13 Amended and Restated Rights Agreement by and between
Compression Labs, Incorporated and The First National Bank of
Boston, dated January 29, 1993. (4)
10.14 Investment Agreement by and between Compression Labs,
Incorporated and Fletcher Asset Management, Inc., dated as of
June 16, 1995. (6)
10.15 Loan and Security Agreement, entered into as of August 21,
1995, by and between Compression Labs, Incorporated and
BankAmerica Business Credit, Inc. (12)
10.16 Consulting and Separation Agreement with John E. Tyson dated
February 16, 1996. (13)
10.17 Consulting and Separation Agreement with Robert Silver dated
November 29, 1995. (13)
10.18 Waiver and First Amendment to Credit Agreement, entered into as
of April 11, 1996, by and between Compression Labs,
Incorporated and BankAmerica Business Credit, Inc. (13)
10.19 Waiver and Second Amendment to Credit Agreement, entered into
as of May 17, 1996, by and between Compression Labs,
Incorporated and BankAmerica Business Credit, Inc.(14)
10.20 Termination Agreement, dated June 4, 1996, between Compression
Labs, Incorporated and BankAmerica Business Credit, Inc.(15)
10.21 Loan and Security Agreement between the Company and Greyrock
Business Credit, a Nations Bank Company.(15)
10.22 Asset Purchase Agreement between the Company and Charger
Industries, Inc. dated June 7, 1996.(16)
10.23 Second Amendment to Amended Lease, dated June 20, 1996, by and
between The Equitable Life Assurance Society of the United
States and Compression Labs, Incorporated. (17)
10.24 Employment Agreement with T. Gary Trimm dated July 17, 1996.
(17)
10.25 Employment Agreement with Larry L. Enterline dated July 17,
1996. (17)
10.26 Convertible Preferred Stock Purchase Agreement dated October
24, 1996 among the Company, Infinity Investors, Ltd. and
Seacrest Capital Limited.(4)
10.27 First Amendment to Lease, dated September 3, 1996, by and
between AMB Western Properties Fund-1, and Compression Labs,
Incorporated.
11.1 Statement re computation of Net Income (Loss) Per Share.
21.1 Subsidiaries of the Company. (9)
23.1 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney. Reference is made to Page 49.
27 Article 5 of Regulation S-X, Financial Data Schedules for
Compression Labs, Incorporated for the Year Ended December 31,
1996.
</TABLE>
47
<PAGE> 49
(1) Filed as an exhibit to a Registration Statement on Form S-8 filed on
November 29, 1989 (Registration No. 33-32366) and incorporated herein
by reference.
(2) Filed as an exhibit to an Annual Report on Form 10-K filed on April
14, 1988 (Commission File No. 0-13218) and incorporated herein by
reference.
(3) Filed as an exhibit to a Registration Statement on Form S-3 filed on
April 5, 1993 and incorporated herein by reference.
(4) Filed as an exhibit to a Current Report on Form 8-K filed on February
1, 1993 (Commission File No. 0-13218) and incorporated herein by
reference.
(5) Filed as an exhibit to a Current Report on Form 8-K filed on November
1, 1996 (Commission File No. 0-13218) and incorporated herein by
reference.
(6) 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.
(7) Filed as an exhibit to a Registration Statement on Form S-8 filed June
6, 1994 (file No. 33-79790) and incorporated herein by reference.
(8) Filed as an exhibit to a Registration Statement on Form S-8 filed on
March 29, 1985 (Registration No. 2-9628) and incorporated herein by
reference.
(9) 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.
(10) 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.
(11) 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.
(12) Filed as an exhibit to a quarterly report on Form 10-Q for the
quarterly period ended September 30, 1995 (Commission File No.
0-13218) and incorporated herein by reference.
(13) Filed as an exhibit to an Annual Report on Form 10-K filed for the
year ended December 31, 1995 (Commission File No. 0-13218) and
incorporated herein by reference.
(14) Filed as an exhibit to a Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996 (Commission File No. 0-13218)
and incorporated herein by reference.
(15) Filed as an exhibit to a Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996 (Commission File No. 0-13218) and
incorporated herein by reference.
(16) Filed as an exhibit to a Current Report on Form 8-K filed on June 14,
1996 (Commission File No. 0-13218) and incorporated herein be
reference.
(17) Filed as an exhibit to a Registration Statement on Form S-1 filed on
November 25, 1996 and incorporated herein by reference.
(18) Filed as an exhibit to a Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1996 (Commission File No.
0-13218) and incorporated herein by reference.
(b) Reports on Form 8-K
The following report on Form 8-K was filed by the Company during the period
from September 28, 1996, through and including December 31, 1996:
<TABLE>
<CAPTION>
Date of Report Item Reported
----------------- -------------
<S> <C>
October 26, 1996 Item 5 - Other Events
Item 7 - Financial Statement and Exhibits
</TABLE>
48
<PAGE> 50
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/ T. GARY TRIMM
---------------------------------
(T. Gary Trimm)
President and
Chief Executive Officer
March 24, 1997
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints T. Gary Trimm as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place, and stead, in any and all capacities, to sign
any and all amendments 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 attorney-in-fact and agent 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 attorney-in-fact and agent 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>
<S> <C>
SIGNATURE TITLE DATE
- ---------------------------------- ----------------------------------- ---------------
/s/ T. GARY TRIMM President, Chief Executive Officer March 24, 1997
- ---------------------------------- and Director
(T. Gary Trimm) (Principal Executive Officer and
Finance Officer)
Director March __, 1997
- ----------------------------------
(Arthur G. Anderson)
/s/ ROBERT J. CASALE Director March 24, 1997
- ----------------------------------
(Robert J. Casale)
/s/ ROBERT B. LIEPOLD Director March 25, 1997
- ----------------------------------
(Robert B. Liepold)
/s/ DAVID A. WEGMANN Director March 24, 1997
- ----------------------------------
(David A. Wegmann)
</TABLE>
49
<PAGE> 51
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
Compression Labs, Incorporated:
Under date of March 10, 1997, we reported on the consolidated balance sheets of
Compression Labs, Incorporated and subsidiaries as of December 31, 1995 and
1996, 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, 1996 included herein. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule in the Form 10-K as listed in the
index 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 audit.
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.
/s/ KPMG Peat Marwick LLP
San Jose, California
March 10, 1997
S-1
<PAGE> 52
SCHEDULE II
COMPRESSION LABS, INCORPORATED
VALUATION AND QUALIFYING ACCOUNTS
For the Years ended December 31, 1996, 1995 and 1994
(In thousands)
<TABLE>
<CAPTION>
Additions
Balance at Charged to
Beginning Costs and Balance at
of Period Expenses Deductions End of Period
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1996:
Deducted from asset accounts -
Allowance for doubtful accounts $ 10,028 $ 4,573 $(3,140) (1) $ 11,461
Product warranty liability $ 575 $ (158) $ (290) (2) $ 127
Product upgrades $ 60 $ - $ (60) (3) $ -
- -----------------------------------------------------------------------------------------------------------------
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
- -----------------------------------------------------------------------------------------------------------------
</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> 53
EXHIBIT INDEX
Exhibit
Number Description
------- -----------
3.1 Restated Certificate of Incorporation of Registrant, as
amended. (1)
3.2 Bylaws, as amended. (2)
4.1 Warrant, dated as of December 19, 1989, between the Company and
PaineWebber R&D Partners, II, L.P. (3)
4.2 Amendment No. 1 to Warrant, dated as of October 16, 1992,
between the Company and PaineWebber R&D Partners II, L.P. (3)
4.3 Form of Warrant Certificate. (3)
4.4 Form of Common Stock Certificate. (3)
4.5 Certificate of Determination of Preferences of Series A Junior
Participating Preferred Stock. (4)
4.6 Registration Rights Agreement dated October 24, 1996 among the
Company, Infinity Investors, Ltd. and Seacrest Capital
Limited. (5)
4.7 Certificate of Designation of Series C Convertible Preferred
Stock.(5)
10.1 1980 Stock Option Plan, as amended (the ISO Plan). (6)
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. (7)
10.3 1984 Employee Stock Purchase Plan, as amended (the 1984
Purchase Plan). (6)
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. (8)
10.5 1984 Supplemental Stock Option Plan, as amended (the
Supplemental Plan). (6)
10.6 Form of Supplemental Stock Option Plan and Early Exercise Stock
Purchase agreement used in connection with the issuance and
exercise of options under the Supplemental Plan. (7)
10.7 Lease Agreement, dated as of January 16, 1987, covering the
Company's principal executive offices and manufacturing
facility. (2)
10.8 Sublease Agreement, dated December 6, 1990, covering the
Company's additional principal executive offices. (9)
10.9 Perquisite Plan. (10)
<PAGE> 54
10.10 Amended and Restated 1992 Non-Employee Directors' Stock Option
Plan (the Directors' Plan) and Form of Grant used in connection
therewith. (6)
10.11 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. (11)
10.12 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. (6)
10.13 Amended and Restated Rights Agreement by and between
Compression Labs, Incorporated and The First National Bank of
Boston, dated January 29, 1993. (4)
10.14 Investment Agreement by and between Compression Labs,
Incorporated and Fletcher Asset Management, Inc., dated as of
June 16, 1995. (6)
10.15 Loan and Security Agreement, entered into as of August 21,
1995, by and between Compression Labs, Incorporated and
BankAmerica Business Credit, Inc. (12)
10.16 Consulting and Separation Agreement with John E. Tyson dated
February 16, 1996. (13)
10.17 Consulting and Separation Agreement with Robert Silver dated
November 29, 1995. (13)
10.18 Waiver and First Amendment to Credit Agreement, entered into as
of April 11, 1996, by and between Compression Labs,
Incorporated and BankAmerica Business Credit, Inc. (13)
10.19 Waiver and Second Amendment to Credit Agreement, entered into
as of May 17, 1996, by and between Compression Labs,
Incorporated and BankAmerica Business Credit, Inc.(14)
10.20 Termination Agreement, dated June 4, 1996, between Compression
Labs, Incorporated and BankAmerica Business Credit, Inc.(15)
10.21 Loan and Security Agreement between the Company and Greyrock
Business Credit, a Nations Bank Company.(15)
10.22 Asset Purchase Agreement between the Company and Charger
Industries, Inc. dated June 7, 1996.(16)
10.23 Second Amendment to Amended Lease, dated June 20, 1996, by and
between The Equitable Life Assurance Society of the United
States and Compression Labs, Incorporated. (17)
10.24 Employment Agreement with T. Gary Trimm dated July 17, 1996.
(17)
10.25 Employment Agreement with Larry L. Enterline dated July 17,
1996. (17)
10.26 Convertible Preferred Stock Purchase Agreement dated October
24, 1996 among the Company, Infinity Investors, Ltd. and
Seacrest Capital Limited.(4)
10.27 First Amendment to Lease, dated September 3, 1996, by and
between AMB Western Properties Fund-1, and Compression Labs,
Incorporated.
11.1 Statement recomputation of Net Income (Loss) Per Share.
21.1 Subsidiaries of the Company. (9)
23.1 Consent of KPMG Peat Marwick LLP.
24.1 Power of Attorney. Reference is made to Page 49.
27 Article 5 of Regulation S-X, Financial Data Schedules for
Compression Labs, Incorporated for the Year Ended December 31,
1996.
<PAGE> 55
(1) Filed as an exhibit to a Registration Statement on Form S-8 filed on
November 29, 1989 (Registration No. 33-32366) and incorporated herein
by reference.
(2) Filed as an exhibit to an Annual Report on Form 10-K filed on April
14, 1988 (Commission File No. 0-13218) and incorporated herein by
reference.
(3) Filed as an exhibit to a Registration Statement on Form S-3 filed on
April 5, 1993 and incorporated herein by reference.
(4) Filed as an exhibit to a Current Report on Form 8-K filed on February
1, 1993 (Commission File No. 0-13218) and incorporated herein by
reference.
(5) Filed as an exhibit to a Current Report on Form 8-K filed on November
1, 1996 (Commission File No. 0-13218) and incorporated herein by
reference.
(6) 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.
(7) Filed as an exhibit to a Registration Statement on Form S-8 filed June
6, 1994 (file No. 33-79790) and incorporated herein by reference.
(8) Filed as an exhibit to a Registration Statement on Form S-8 filed on
March 29, 1985 (Registration No. 2-9628) and incorporated herein by
reference.
(9) 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.
(10) 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.
(11) 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.
(12) Filed as an exhibit to a quarterly report on Form 10-Q for the
quarterly period ended September 30, 1995 (Commission File No.
0-13218) and incorporated herein by reference.
(13) Filed as an exhibit to an Annual Report on Form 10-K filed for the
year ended December 31, 1995 (Commission File No. 0-13218) and
incorporated herein by reference.
(14) Filed as an exhibit to a Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1996 (Commission File No. 0-13218)
and incorporated herein by reference.
(15) Filed as an exhibit to a Quarterly Report on Form 10-Q for the
quarterly period ended June 30, 1996 (Commission File No. 0-13218) and
incorporated herein by reference.
(16) Filed as an exhibit to a Current Report on Form 8-K filed on June 14,
1996 (Commission File No. 0-13218) and incorporated herein be
reference.
(17) Filed as an exhibit to a Registration Statement on Form S-1 filed on
November 25, 1996 and incorporated herein by reference.
(18) Filed as an exhibit to a Quarterly Report on Form 10-Q for the
quarterly period ended September 30, 1996 (Commission File No.
0-13218) and incorporated herein by reference.
(b) Reports on Form 8-K
The following report on Form 8-K was filed by the Company during the period
from September 28, 1996, through and including December 31, 1996:
Date of Report Item Reported
----------------- -------------
October 26, 1996 Item 5 - Other Events
Item 7 - Financial Statement and Exhibits
<PAGE> 1
EXHIBIT 10.27
FIRST AMENDMENT TO LEASE
THIS FIRST AMENDMENT TO LEASE is dated for reference purposes only as
September 3, 1996, and is part of that Lease dated June 14, 1994 together with
the Summary of Basic Lease Terms, thereto (collectively, the "Lease") by and
between AMB WESTERN PROPERTIES FUND - I, a California limited partnership
("Landlord"), and COMPRESSION LABS, INC., a Delaware corporation ("Tenant"), and
is made with reference to the following facts:
A. The premises currently leased by Tenant pursuant to the Lease
consists of 26,451 rentable square feet commonly known as 326 Charcot Avenue,
City of San Jose, California.
B. The Lease Term for said Premises currently expires on June 30,
1997.
C. Tenant and Landlord have agreed to extend the Term of the Lease.
NOW, THEREFORE, Landlord and Tenant hereby agree that the Summary of
Basic Lease Terms is amended as follows:
1. Lease Term: Section J is hereby amended to provide that
the Lease Term shall be extended through and including June 30, 2000.
2. Base Monthly Rent: Commencing July 1, 1997, Section K
is hereby amended to provide for the Base Monthly Rent as follows:
July 1, 1997 through and including June 30, 2000: $11,109.42 per month
3. Security Deposit: Section M is hereby amended to
provide for an increase in the Security Deposit of $3,570.46 which Tenant has
provided Landlord upon signature hereon, for a total of $11,109.00.
4. Landlords Address: Section Q is amended to provide that
Landlord's address for notices shall be:
AMB Institutional Realty Advisors
505 Montgomery Street
5th Floor
San Francisco, Ca 94111
5. Retained Real Estate Brokers: Tenant warrants that it
has not had any dealings with any real estate brokers or salesmen or incurred
any obligations for the payment of real estate brokerage commissions or finder's
fees which would be earned or due and payable by reason of the execution of this
Lease Amendment, except Cornish & Carey Commercial Real Estate. Tenant will
defend (with counsel reasonably acceptable to Landlord) and indemnify Landlord
against any claims or awards of brokerage fees or commissions or finder's fees
which are made against or incurred by Landlord on account of any breach of the
foregoing warranty.
6. Interior Improvements: Tenants accepts the Premises in
their "as is" condition without any obligation for Landlord to provide any
interior improvements, or allowances. Landlord has not made any warranties or
representations other than those contained in the original Lease dated July 14,
1994.
<PAGE> 2
Page Two
7. Except as expressly set forth in this Amendment, all
terms and conditions of the Lease remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have executed this First
Amendment to be effective as of the date first set forth above.
LANDLORD: TENANT:
AMB WESTERN PROPERTIES FUND - I COMPRESSION LABS, INC.,
a California limited partnership a Delaware corporation
By: AMB Institutional Realty Advisors, Inc.
a California corporation, By:
its General Partner -----------------------------
[Please provide Name]
By: Title:
---------------------------- --------------------------
John L. Rossi [Please provide Title]
Vice President
Date: Date:
-------------------------- --------------------------
<PAGE> 1
EXHIBIT 11.1
COMPRESSION LABS, INCORPORATED
STATEMENT REGARDING COMPUTATION OF
NET INCOME (LOSS) PER SHARE
Year Ended December 31, 1996
(In thousands, except per share amounts)
<TABLE>
<S> <C>
Net loss from continuing operations $(13,671)
Deemed preferred stock dividends related to
conversion discount (2,527)
--------
Adjusted net loss from continuing operations $(16,198)
========
Weighted average of common stock outstanding 15,680
--------
Shares used in per share computation 15,680
--------
Net loss per share from continuing operations $ (1.03)
========
Net loss from discontinued operations $ (6,689)
Weighted average of common stock outstanding 15,680
--------
Shares used in per share computation 15,680
--------
Net loss per share from discontinued operations $ (0.43)
========
Net loss per share from continuing operations $ (1.03)
Net loss per share from discontinued operations (0.43)
--------
Net loss per share $ (1.46)
========
</TABLE>
<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, 33-09217, 33-17283, 33-24383, 33-32366, 33-40405, 33-61349,
33-70950, 33-70860, 33-79790 and 333-20613) on Form S-8 of Compression Labs,
Incorporated of our reports dated March 10, 1997, relating to the consolidated
balance sheets of Compression Labs, Incorporated as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1996, and the related schedule which reports appear in the 1996
annual report on Form 10-K of Compression Labs, Incorporated.
/s/ KMPG Peat Marwick LLP
San Jose, California
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 4,803
<SECURITIES> 0
<RECEIVABLES> 40,679
<ALLOWANCES> 11,461
<INVENTORY> 10,157
<CURRENT-ASSETS> 45,694
<PP&E> 32,429
<DEPRECIATION> 21,324
<TOTAL-ASSETS> 60,650
<CURRENT-LIABILITIES> 37,014
<BONDS> 0
0
6,277
<COMMON> 16
<OTHER-SE> 17,343
<TOTAL-LIABILITY-AND-EQUITY> 60,650
<SALES> 74,995
<TOTAL-REVENUES> 87,882
<CGS> 47,193
<TOTAL-COSTS> 49,888
<OTHER-EXPENSES> 50,713
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 973
<INCOME-PRETAX> (13,671)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,671)
<DISCONTINUED> (6,689)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,360)
<EPS-PRIMARY> (1.46)
<EPS-DILUTED> (1.46)
</TABLE>
